Aurobindo Pharma- Above estimates; Raise target price: Emkay

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Aurobindo Pharma

Above estimates; Raise target price

BUY

CMP: Rs1,343                                        Target Price: Rs1,581

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n     Aurobindo’s Q2FY11 performance was above estimates with a) Revenues at Rs10.4bn (up 24%), b) EBITDA at Rs2.5bn (up 23%), and c) APAT at Rs1.22bn (up 14%)

n     Strong revenue growth was driven by 38% growth in formulation business, higher dossier income (Rs699mn vs. Rs400mn) and ramp-up in SEZ facility (full impact in Q3FY11)

n     APAT (excl forex gain of Rs762mn), was up 14% to Rs1.22bn

n     On account of strong performance, raise target price to Rs1,581 (earlier Rs1,242); Maintain Buy

All round growth in formulations and dossier income drive the top line

growth

Aurobindo’s Q2FY11 results were above our expectations. While net revenues grew

24% YoY to Rs10.4bn, profit was up 92% to Rs2bn (including forex gain of Rs762mn).

Top line growth was driven by 38% growth in formulations led by a) US (up 29% to

Rs3bn), due to commencement of operations at SEZ, b) Europe (up 55% to Rs860mn),

c) ARV formulations (up 49% to Rs1.7bn), and d) RoW markets (up 40% to Rs625mn).

The excellent growth across regions was on account of unlocking of capacity constraint,

with SEZ Unit III commencing its operations. Dossier income (includes licensing income

from AstraZeneca) at Rs699mn was higher than expected. Income from dossiers posted

good growth of 74% to Rs699mn and contributed 6% to the overall sales. EBITDA for

the quarter was up by 23% to Rs2.5bn largely driven by robust top line growth of 26%

(including dossier income). This was in spite of contraction in gross margins by 208bps

and 27% YoY increase in total expenditures. Adjusted PAT growth of 35% to Rs1.4bn

was in spite of a) lower other income (down 17%), and b) higher interest outgo (includes

Rs35mn YTM paid on redemption of Aug’10 FCCBs). This quarter, the company

reported forex gains of Rs762mn (Rs210mn on account of restatement of FCCBs and

Rs552mn of operational gains).

High fixed overheads impacted operating performance

Operating margins for the quarter declined by 60bps to 22.8% mainly because of increase

in fixed overheads from the unit at SEZ and New Jersey. However, commencement of

operations of SEZ unit led to 423bps QoQ expansion in EBITDA margins. Higher employee

cost (up 36% YoY) was on account of annual increments and festival bonuses this quarter.

Adjusting for one-offs (such as the increment and bonus), EBITDA margins would have

witnessed YoY expansion of 200bps.

APAT at Rs1.4bn is above our expectation

Despite lower other income (down 17% YoY) and higher interest outgo (up 6% YoY), APAT

was above our expectations at Rs1.4bn (we expected Rs1.1bn). Higher interest cost was

due to non-recurring amount of Rs35mn paid on redemption of Aug2010 FCCB. The

company has incurred forex gain of Rs546mn (net of tax) vs. forex loss of Rs36mn in

Q2FY11. Out of this, Rs210mn is MTM gains and Rs552mn is from operations. Adjusted

EPS stood at Rs24.7 for the quarter and Rs40.7 for H1FY11 (reported EPS of Rs50). Going

ahead, we believe net profit to grow at 21% CAGR to Rs6.6bn over FY10-12E, clocking an

EPS of Rs113 in FY12E.

H2FY11 likely to be stronger than H1FY11

We believe H2FY11 will be robust than H1FY11 on account of a) first full quarter impact of

operations at its Hyderabad SEZ facility, and b) higher revenue contribution from supply

agreements with Pfizer and other innovators (product ramp-up from the Pfizer contract has

already commenced. The SEZ facility has the capacity to manufacture 6bn tablets per

annum (can be increased up to 18bn tablets with minimum incremental capex). We expect

the capacity utilization to increase to 45-50% by the end of FY11E from the current levels of

30%. Increased product ramp-up from the Pfizer deal will further lead the utilization levels to

increase by FY12. Further savings in tax will lead to incremental earnings. With operating

and financial leverage coming into play, we believe that Aurobindo is now in a much better

position to leverage its extensive manufacturing infrastructure, going forward.

Revise target price upwards to Rs1581; Re-iterate Buy

During H1FY11, the company has clocked adjusted EPS of Rs40.7 (reported EPS of

Rs50.1) against our full estimation of Rs93.3 in FY11E. We continue to maintain our

earning estimates of Rs93.3 and Rs112.9 for FY11E and FY12E respectively. We believe

that this quarter performance is encouraging and expect the company to improve its

earnings trajectory from next quarter onwards on account of incremental contribution from

the Pfizer deal and commencement of operations at Unit III (Hyderabad SEZ). We are of

the view that Aurobindo provides good visibility in terms of consistent CAGR growth of 19%

over next few years. We raise our target price on the stock to Rs1581 (Rs 1,242 earlier),

valuing at 14x adjusted FY12E EPS. At CMP, the stock trades at 14.4xFY11E and

11.9xFY12E EPS. Re-iterate Buy.