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Aurobindo Pharma – 2QFY2011 Result Update
Angel Broking recommends a Neutral on Aurobindo Pharma.
Aurobindo Pharma (APL) reported strong numbers for 2QFY2011 driven by the
US and ARV formulation segment. OPM expanded sequentially by 262bp to
17.7% as the company has started witnessing gradual pick up in the newly
commenced facilities, viz. the SEZ and NJ, which eased the margin pressure. As
a result, net profit (ex-forex) gained by 14.3% yoy. Owing to fair valuations we
recommend Neutral on the stock.
Strong quarter driven by US and ARV formulation segments: APL reported strong
23.8% growth in net sales to `1,043 (`842cr). As expected, the traction in net
sales was driven by the US and ARV formulation segments. The US formulation
segment grew by a healthy 28.8% yoy to `296cr (`229cr). The ARV formulation
segment clocked 48.5% yoy growth to `172cr (`116cr). The company reported
213bp decline in OPM to 17.7% (19.8%) yoy, though it expanded sequentially by
262bp on the back of increase in capacity utilisation at its newly commenced
facilities - SEZ and NJ. Excluding forex, net profit grew 14.3% to `122cr (`107cr)
driven by revenue growth, OPM expansion and higher dossier income.
Outlook and Valuation: Net sales are estimated to log CAGR of 15.6% to
`4,506cr over FY2010-12 on the back of supply agreements, the US (ex-Pfizer)
and the ARV formulation contracts. We expect APL’s recurring earnings
(excluding other operating income) to post CAGR of 29.1% over FY2010-12 to
`506cr on the back of sales growth and OPM expansion. On the bourses, in the
last one month the stock has spurted 20% and is currently trading at fair
valuations of 14x FY2012E EPS (core businesses, ex- dossier income). Hence, we
recommend Neutral on the stock.
Recommendation Rationale
Supply agreements to drive growth: On the global filings front (ANDAs and
dossiers), APL has increased its filing dramatically from 313 in FY2008 to
1,171 in FY2010, as it proposes to scale up from SSP and Cephs to NPNC
products. Further, the transformation from being a pure API supplier to
becoming a formidable formulations player has increased its cost efficiencies,
as 90% of its formulation is now backward integrated. Thus, to leverage on its
cost efficiency and strong product filings, APL entered into long-term supply
agreements with Pfizer (March 2009) and AstraZeneca (September 2010),
which provides significant revenue visibility going ahead. The company is also
in discussion with other MNCs for more supply agreements. Overall, we
expect revenues from the supply agreements to increase 3x over FY2010-12
from `227cr to `644cr.
US and ARV formulation segment key drivers for base business: APL’s
business, excluding the supply agreements, would primarily be driven by the
US and the ARV segment on the formulation front. APL has been an
aggressive filer in the US market with 169 ANDAs filed with 113 approvals
received till FY2010. Among the players, APL is the third largest ANDA filer.
APL has aggressively filed in the last three years and is now geared to reap
benefits, even though most of the filings are for highly competitive products.
APL expects to file 15-20 ANDAs in FY2011 and FY2012. Going ahead,
during the next three years in the US with US $70bn going off-patent, one of
the highest in history, we believe that APL is well placed to tap this opportunity.
We expect the base business (ex-Pfizer) to post a CAGR of 36.0% over
FY2010-12 and contribute US $268mn by FY2012 with revenue per product
increasing to US $2.6mn from US $2.3mn in FY2010 as the company moves
towards the high-revenue generating NPNC and injectable (SSP and Cephs)
products.
APL is one of the largest generic suppliers under the ARV contracts with 35%
market share. APL enjoys high market share as it is fully integrated in all its
products apart from having a larger product basket. Overall, we expect the
ARV segment to post CAGR of 11.1% over FY2010-12 to `612cr with the
PEPFAR allocation for generic ARVs expected to increase
Outlook and Valuation
Net sales are estimated to log CAGR of 15.6% to `4,506cr over FY2010-12
on the back of supply agreements, the US (ex-Pfizer) and the ARV formulation
contracts. We expect APL’s recurring earnings (excluding other operating
income) to post CAGR of 29.1% over FY2010-12 to `506cr on the back of
sales growth and OPM expansion. We estimate OPM to increase by 206bp to
20.4% during the mentioned period. On the bourses, in the last one month
the stock has spurted 20% and is currently trading at fair valuations of 14x
FY2012E EPS (core businesses, ex- dossier income). Hence, we recommend
Neutral on the stock.
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