Aurobindo Pharma- There Is More Value Here :: Citi

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Aurobindo Pharma (ARBN.BO)
There Is More Value Here; Raise TP to Rs1,630/sh
 Good 2Q; stronger 2H ahead — Good traction in all markets & easing of capacity
constraints led to a solid 2Q (in line/ahead of our/Street estimates). We see
momentum picking up in 2H (forecast adj. PAT growth of c60% YoY), as
utilization at the recently commissioned SEZ picks up. We lower FY11E EPS by 8%
(mainly higher tax rate) & raise TP to Rs1,630 (roll over to Mar’12E). Remains a
Top Pick.




 Good growth in all markets — Sales grew 26% YoY, with every biz doing well.
Besides underlying demand, easing of capacity constraints (on commissioning of
Unit VII/SEZ) helped. Every market saw good growth: US (+29% YoY, +37% QoQ),
EU (+55% YoY, +16% QoQ), RoW (+40% YoY, +14% QoQ) & ARVs (+49% YoY,
+17% QoQ). API sales grew at a more sedate 7% YoY.
 EBIDTA margin improving — EBIDTA margin dipped c60bps YoY (to 22.8%) due
to overheads at the SEZ & recently acquired US facility. But rising utilization at the
former & better mix (higher share of formulations) led to a 423bps QoQ rise.
Unlike most pharma cos, ARBN reports all (incl operating) forex gains/losses
below EBIDTA. Adjusted for this, 1H EBIDTA margin is higher by c190bps.
 Steady growth in profits — Adjusted for all forex gains, PAT grew 15% YoY & 31%
QoQ. Interest cost remained flat YoY (at cRs190m), despite providing cRs35m as
redemption premium (US$2.2m worth of Aug’10 bonds). Tax rate was lower on a
YoY basis but not as much as we expected due to timing of SEZ revenues –
reflected in the c8% cut of our FY11E EPS.
 More value — We introduce FY13 estimates & forecast 22% EPS CAGR over FY10-
13E. Despite the 50% rise over the last 5 months (outperformed the BSE Sensex
by 26% & Citi Pharma Coverage Universe by 23%), valuations are attractive at
c10xFY12E FDEPS. Strong earnings growth in 2H and potential deals with Big
Pharma companies are key catalysts.