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Partnering for Growth
Business Snapshot– Aurobindo Pharma is an Indian pharma company
targeting global generics, primarily through partnerships with global pharma
companies. It has traditionally had a strong presence in the cephalosporin
and ARV segments but has expanded its product basket recently. It is fully
integrated and owns one of largest manufacturing bases (14 plants) and
portfolios of products amongst Indian companies. It has two large licensing
& supply arrangements with Pfizer (multiple markets) & Astra (emerging
markets) & is in negotiations for more such tie ups.
Latest Quarterly Performance – Good traction in all markets & easing of
capacity constraints led to a solid 2Q, with sales growing 26% YoY. Besides
underlying demand, easing of capacity constraints on commissioning of Unit
VII/ SEZ has helped. Rising utilization at the SEZ & better mix (higher share of
formulations) led to a 423bps QoQ rise in EBITDA. Adjusted for all forex gains/
losses, 1H EBIDTA margin is higher by c190bps and PAT grew 15% YoY &
31% QoQ. We see momentum picking up in 2H (forecast adj. PAT growth of
c60% YoY), as utilization at the recently commissioned SEZ picks up.
Key Catalysts / Issues – a) News flows on licensing and supply deals with
global pharma companies – buzz of an imminent deal with Pfizer for
Japanese & Korean markets; b) Scale up in supplies to Pfizer & Astra under
existing deals; c) Earnings momentum – expect a strong 2H as full benefits
of recently commissioned SEZ reflects in financials; d) FCCBs redeemable in
May 2011 – one tranche could start getting converted to equity above 1300
levels & act as a technical overhang for the stock.
Valuations: set for a re-rating – Aurobindo Pharma is poised for an extended
phase of strong earnings growth and improving profitability, as it reaps the
benefits of its extensive investments in product portfolio & backend
infrastructure. Supply deals with Pfizer and Astra address concerns of low
capacity utilization & provide a steady stream of revenues. The stock
currently trades at c10xFY12E FDEPS (discount of c50% to its large cap
peers), despite the sharp run up over the last 6 months – still very attractive
in our view.
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