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AUROBINDO PHARMA - BUY
Target Price: Rs. 1630; Upside: +20%; Investment Period: 6M
Aurobindo Pharma Ltd (APL) started as a pure API supplier has now scaled
its business to focus more on formulations. The company has a strong
presence in the antibiotic space especially in the segments of penicillin
and cephalosporins and the anti-retroviral segment. After establishing a
presence in the semi regulated markets, the company began to venture
into the regulated markets of US and Europe and these are expected to
become key growth drivers going forward. Till date, it has commercialized
over 200 API’s and 300 formulation products with 15 manufacturing
facilities across the globe approved by USFDA and other regulators.
Paradigm shift from API to Formulations
Aurobindo has shifted its focus of its business operations of API’s or commoditybased
businesses to a more value-added product portfolio with formulations. The
formulations business now commands 58% of revenues with higher margins as
compared to 10% a few years ago.
Tie Up with leading MNC’S
The company has made tie-ups with leading players (Pfizer and AstraZeneca) in
the global market to leverage on its cost efficiency with strong product filings. The
deals are primarily in the CNS and CVS segment to provide solid dosage and
sterile products. These deals provide significant revenue visibility.
VALUATION
At the current price of Rs. 1355, the stock is trading at just 14.23x and
12.89x times of our estimated FY11E & FY12E earning. We thus
recommend a “BUY” with a target price of Rs. 1630.
Focus on formulations
Aurobindo has shifted its focused from the commodity-based businesses to a
more value-added product portfolio. The formulations business now
commands 58 per cent of revenues compared to 10 per cent a few years ago.
Going forward, we expect that the formulations will contribute 70-75 per cent
to the total revenues and maximum API’s will be used for conversion into high
margin formulations in the coming years. Thus company’s transformation
from a pure generics play to value added generics will be margin accretive for
the company.
Capacity Expansion will ensure volume growth
It has added two more formulations facilities in FY10 where one is acquired
and the other is in SEZ. The plant is expected to manufacture general
injectable range of formulation products from these facilities. The SEZ unit –
VII has already got operational and the other facility is expected to start
commercial production in FY12. It had invested around Rs 1000 cr in the past
five years to build up the formulation capacities.
Currently, it owns around 16 manufacturing facilities of which 14 are in India
and 1 each in US & China. Capacity Utilization in most of the formulation
facilities is below 30% and in future the increase in number of orders will lead
to higher capacity utilization, thus strengthening the operating margins.
Deals with MNC is a key trigger
Aurobindo entered into a licensing & supply agreement with Pfizer to sell
over 100 oral & sterile products in US, EU & ROW markets. It also entered
into licensing and supply agreements with AstraZeneca, one of the world’s
leading bio pharmaceutical company, to supply around solid dosage and
sterile products for Emerging Markets primarily in CNS and CVS segment.
Going ahead, deal with Pfizer and AstraZencea is expected to gain traction
with more products contributing to the company's revenues from H2 FY 11.
New Product Approvals
Medicines Control Council (MCC) of South Africa has granted 23
registrations to manufacture and market products in there. With this
Aurobindo now has a total of 91 registrations and 48 products approved by
the MCC which are likely to be launched during this fiscal.
Growth in ARV Segment
In the ARV segment, it is appropriately positioned in the global market,
having 29 ARV ANDA approvals from USFDA of which 8 are final approvals
& 21 tentative. It actively participates in different global tenders including the
PEPFAR (accounting for around 80% of the ARV revenues), Clinton
Foundation & WHO. Earlier, company’s existing ARV facilities were fully
utilized for the high yielding regulated markets and now with the
commercialization of new SEZ facility, we believe strong traction in revenues
from this segment.
US Business will be a key growth driver
The US business would become a key growth driver for the company. In the
last four years, revenues from US business has grown at a CAGR of 95%
primarily driven by number of product launches in Anti-Biotics (Amoxicillin),
Anti-Diabetic (Metformin), CVS (Simvastatin), CNS (Citalopram, Paroxetine,
Sertraline) etc. Its top 10 products rank in top 5 by market share in their own
areas in US.
Despite a late entrant, its products are achieving higher penetration in the
competitive US market. It had made a total of 151 DMF’s & 185 ANDA
filings with USFDA. It received approvals for 128 products (98 final and 30
tentative approvals) and 70 products are launched. This indicates the
revenue visibility. Further, to boost the sales, it had acquired a manufacturing
facility in New Jersey which will enable them to participate in US government
business.
Foray into CRAMS Segment
In March, it forays into CRAMS segment to bank upon the opportunities from
various drug patent expiries. The division named Aurosource for CRAMS
segment will offer services to the global players. The company’s entry into
CRAMS will strengthen its clientele base and it will able to take advantages
of various issues face by MNC’s such as shrinking pipelines, patents expiry
and government measures to reduce health budgets.
Attractive Dividend Pay-out
Aurobindo has been rewarding its shareholder by offering regular dividend
since its inception. In FY09 and FY10, it pays dividend of 90% and 100%.
With good earnings visibility, we believe the management of Aurobindo
would continue to reward its shareholders with higher dividend pay-out.
KEY CONCERNS:
Domestic Presence
Unlike its peers, the company is not a strong dominant player in the
domestic market. Most of the peers derive 20-40% revenues from
domestic branded formulations whereas most of its domestic revenues
come from API segment.
Currency Risk Fluctuation
Currency exchange rates could undergo change and can reduce earnings
as Indian Rupee gaining strength. But the risk will be mitigated to some
extent as company do consistent hedging.
Delay in supply agreements
The company is expecting around 15-18% of its revenues from the supply
agreements i.e. from Pfizer and AstraZeneca in FY12. Hence, any delay
in the supply agreements could hold the revenues in the near time period.
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