Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Operating leverage and dossier income drives 33% PAT growth
Aurobindo Pharma’s (ARBP) Q3FY11 numbers were ahead of our estimates led
by positive operating leverage from higher revenues and dossier income (32%
Y-o-Y) and lower fixed costs. PAT at INR 1.92 bn (31% Y-o-Y), was 26% higher
than our estimate of INR 1.5 bn led by robust revenue growth (30% Y-o-Y) and
better-than-expected EBITDA margin performance (26.8% versus estimated
22.5%). Core EBIDTA margin (Ex-dossier income) expanded 20 bps Y-o-Y to
18.6% (90bps Q-o-Q), despite 360 bps contraction in gross margins, driven by
lower fixed overheads.
Higher growth in formulation business
Net sales (ex-dossier) grew 30% Y-o-Y to INR 10.7 bn (in line), driven by strong
growth in formulation business. Formulations grew 53% Y-o-Y led by higher
growth in a) US (48% Y-o-Y and 11% Q-o-Q) b) Europe (36% Y-o-Y) c) ARV
(64% Y-o-Y) and d) ROW (72% Y-o-Y). This all round performance attributes to
unlocking of capacity constraint with commencement of SEZ Unit III operations
(35% capacity) and higher contribution from supplies to partners. Dossier
income, at INR 1.2 bn (10% of sales), was higher than expected as ARBP has
signed third licensing deal (undisclosed) and also had incremental contribution
from PFE for extending the supply contract to other regions.
Raising FY11/12E earnings 7/13%; on course to USD 2 bn by FY15E
We are revising up our earnings estimates by 7-13% for FY11-12E, factoring in
strong operating performance and ramp-up in revenue from licensing deals with
PFE and other innovators. We have increased our revenue estimates by 6% in
FY12 to incorporate higher dossier income and higher sales from supply
contracts. However, we reduce core EBIDTA margins (ex-dossier) by 80-60 bps
to factor in initial overhead cost of the new injectable facility (likely to commence
in H2 FY12). We believe with positive operating and financial leverage, ARBP is
now in a better position to leverage its extensive manufacturing facilities.
Outlook and valuations: Going strong; maintain ‘BUY’
ARBP will see strong growth trajectory (from Q3FY11) with higher ramp-up from
PFE deal and SEZ operations. Moreover, ARBP provides good visibility in terms of
consistent revenue CAGR of 20% over medium term (on track to attain USD 2
bn sales by FY15). We, thus, increase our TP to INR 1,738 (INR 1,500 earlier),
valuing ARBP at 14X FY12 adj. EPS. We re-iterate our ‘BUY/Outperformer’
rating on the stock. ARBP is one of our top picks in mid-cap space.
PAT growth driven by strong operating performance and dossier income
ARBP reported strong operating Q3FY11 performance with higher core operating margins
and strong revenue growth. Further, higher milestone income from licensing deals
incrementally benefited net profit. While net revenues grew 30% Y-o-Y to INR 10.7 bn,
adjusted PAT was up 31% Y-o-Y to INR 1.92 bn. Revenue growth was driven by 53%
growth in formulations business, and higher operating leverage and dossier income
coupled with lower fixed overheads driving company’s operating performance.
EBITDA for the quarter increased 32% Y-o-Y to INR 3.2 bn (est. INR 2.6 bn) with
EBITDA margins of 26.8% (up 30bps Y-o-Y). Despite 360 bps contraction in gross
margins, core EBIDTA margins (ex-dossier income) expanded 20 bps to 18.6% (90bps
Q-o-Q) driven by lower-than-estimated fixed overheads, as other expenses and
employee costs declined 290bps and 90bps, respectively. We expect EBITDA margins to
expand from 17.9% in FY11 to 20.9% in FY13E, driven by higher ramp-up in supply
contracts with PFE and other MNCs and increased capacity utilization at SEZ.
Adjusted PAT growth of 31% to INR 1.92 bn was 26% higher than our expectation of
INR 1.52 bn, led by robust revenue growth (up 30% Y-o-Y) and strong operating
margins performance. This was despite the fact ARBP had lower other income (-41% Yo-
Y) and higher tax provision (42% Y-o-Y). During the quarter the company had
reported forex gains of INR 40.8 mn versus INR 248 mn in Q3FY10. Reported PAT for the
quarter grew 10% Y-o-Y to INR 1.8 bn. Adjusted EPS for 9m FY11 is INR 73.7, 18%
Y-o-Y.
All round performance of formulation business aided strong revenue growth
Net sales (ex-dossier income) grew 30% Y-o-Y to INR 10.7 bn (in line), driven by all
round performance of the formulation business. 53% growth in formulations led by: (a)
US (up 48% Y-o-Y to INR 3.3 bn; up 11% Q-o-Q) due to commencement of operations
at SEZ; (b) Europe (up 36% to INR 677mn); (c) ARV formulations (up 64% to INR 1.74
bn); and (d) ROW markets (up 74% to INR 734 mn; up 17% Q-o-Q). The excellent
growth across regions was on account of unlocking of capacity constraint, with SEZ Unit
III commencing operations (c 35% capacity) and higher contribution from supplies to
partners. Formulation contribution has soared from 45% to 53% in Q3FY11. Dossier
income at INR 1.2 bn (up 33%; c10% of sales) was higher than expected as the
company has signed third licensing deal (name not disclosed) and incremental
contribution from PFE for extending the supply contract to other regions.
Raising FY11/12E earnings 7/13%; on course to attain USD 2 bn by FY15E
We are revising up our earnings estimates by 7-13% for FY11-12E to INR 100 and INR
124.2, respectively. We have increased our revenue projection by 6% on account of: (i)
higher dossier income; and (ii) increased contribution from supply contracts. However,
we have taken 80bps and 60bps contraction in EBIDTA margins (ex-dossier) to factor in
initial overhead cost of the new injectibles facility (likely to commence in H2FY12E). With
operating and financial leverage coming into play, we believe ARBP is now in a much
better position to leverage its extensive manufacturing infrastructure, going forward. The
company is well on track to attain USD 2 bn revenue by FY15E (20% CAGR over FY10-
15E), driven by strong contribution from formulation business and ramp-up in supply
contracts.
Outlook and valuations: Going strong; maintain ‘BUY’
We increase our TP to INR 1,738 (from INR 1,500), valuing ARBP at 14x adjusted FY12E
EPS. The company will have strong growth trajectory Q3FY11 onwards on account of
incremental contribution from PFE deal and commencement of operations at SEZ. We are
of the view that ARBP provides good visibility in terms of consistent revenue CAGR of
20% over the next few years. We re-iterate our ‘BUY’ recommendation and ‘Sector
Outperformer' rating on the stock. Though we do believe that FCCB redemption in May
2011 will cap the stock price movement in the short term, we are positive on the longterm
prospects of the company. ARBP is one of our top picks in the mid-cap space.
Company Description
Founded in 1986 by Mr. P.V. Ramaprasad Reddy and Mr. K. Nithyananda Reddy, first
generation entrepreneurs, ARBP is a fully integrated pharma company with global
operations in formulations and APIs. With a product portfolio of more than 300 products,
ARBP today has one of the deepest portfolios for regulated markets amongst Indian
companies. Revenues and profits have posted 23% and 70% CAGR during FY06-10,
respectively. ARBP’s focus on exports and formulations is bearing fruit. The share of
exports have increased from 59% in FY04 to 70% in FY10, having posted 26% CAGR to
INR 22.4 bn in FY10.
Investment Theme
We reiterate our view and believe ARBP has long term growth visibility, led by expected
ramp up from Pfizer deal to Europe and ROW markets and incremental upsides from
other deals. These deals are strategic in nature and add medium term support to
valuations. We expect operating margins to expand in FY11 and FY12 from higher
operating leverage. We believe ARBP valuations are cheap, and incremental ramp–up in
Pfizer sales and margins upsides in medium term will help narrow the gap with other
generic peers.
Key Risks
FCCB redemption: FCCB 2-3 redemption (USD 200 mn including premium) concerns
have receded post recent stock price performance. However, we have assumed a likely
redemption scenario rather than conversion to equity at current prices. We note that
ARBP has not provisioned for FCCB premium on books, preferring to treat these as
contingent liabilities. Hence, in a likely scenario of FCCB redemption in FY12, the entire
FCCB premium (estimated at USD 65 mn for FCCB 2/3) will need to be provisioned. This
would have a material impact on reported earnings for these years. ARBP will likely
redeem FCCBs by a mixture of internal cash accruals (USD 125 mn) and fresh debt
raised (USD 70-75 mn from ECB recently issued). ARBP has converted USD 51.5 mn of
USD 53.6 mn FCCBs due in August 2010 and redeemed US 2.1 mn remaining on the
FCCB-1 lot.
Currency risks: ARBP does not follow an active hedging policy, preferring to follow a
natural hedge on its exports with its imports. INR appreciation had a positive impact on
translation and revaluation of net assets. This is particularly relevant for the forex loans
(especially FCCBs) that have seen a forex translation gain of INR 1 bn in FY10 (versus
loss of INR 2.5 bn when the INR depreciated 14% in FY09). Forex risks are also relevant
for fixed price tender contracts (ARBP’s ARV business and India formulation business),
where price bids are typically in forex currency and an INR appreciation could prove
detrimental to the thin margins prevalent in the business. The ARV formulation business
contributed 14% to total FY10 (ex operating income) revenues.
Execution risk and logistics delay to PFE deal: At peak sales, we believe the PFE
contract could become crucial to ARBP’s revenues. We note that such a large ramp up
could suffer from execution issues including logistical delays and pricing issues, which
may impact ARBP’s performance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Operating leverage and dossier income drives 33% PAT growth
Aurobindo Pharma’s (ARBP) Q3FY11 numbers were ahead of our estimates led
by positive operating leverage from higher revenues and dossier income (32%
Y-o-Y) and lower fixed costs. PAT at INR 1.92 bn (31% Y-o-Y), was 26% higher
than our estimate of INR 1.5 bn led by robust revenue growth (30% Y-o-Y) and
better-than-expected EBITDA margin performance (26.8% versus estimated
22.5%). Core EBIDTA margin (Ex-dossier income) expanded 20 bps Y-o-Y to
18.6% (90bps Q-o-Q), despite 360 bps contraction in gross margins, driven by
lower fixed overheads.
Higher growth in formulation business
Net sales (ex-dossier) grew 30% Y-o-Y to INR 10.7 bn (in line), driven by strong
growth in formulation business. Formulations grew 53% Y-o-Y led by higher
growth in a) US (48% Y-o-Y and 11% Q-o-Q) b) Europe (36% Y-o-Y) c) ARV
(64% Y-o-Y) and d) ROW (72% Y-o-Y). This all round performance attributes to
unlocking of capacity constraint with commencement of SEZ Unit III operations
(35% capacity) and higher contribution from supplies to partners. Dossier
income, at INR 1.2 bn (10% of sales), was higher than expected as ARBP has
signed third licensing deal (undisclosed) and also had incremental contribution
from PFE for extending the supply contract to other regions.
Raising FY11/12E earnings 7/13%; on course to USD 2 bn by FY15E
We are revising up our earnings estimates by 7-13% for FY11-12E, factoring in
strong operating performance and ramp-up in revenue from licensing deals with
PFE and other innovators. We have increased our revenue estimates by 6% in
FY12 to incorporate higher dossier income and higher sales from supply
contracts. However, we reduce core EBIDTA margins (ex-dossier) by 80-60 bps
to factor in initial overhead cost of the new injectable facility (likely to commence
in H2 FY12). We believe with positive operating and financial leverage, ARBP is
now in a better position to leverage its extensive manufacturing facilities.
Outlook and valuations: Going strong; maintain ‘BUY’
ARBP will see strong growth trajectory (from Q3FY11) with higher ramp-up from
PFE deal and SEZ operations. Moreover, ARBP provides good visibility in terms of
consistent revenue CAGR of 20% over medium term (on track to attain USD 2
bn sales by FY15). We, thus, increase our TP to INR 1,738 (INR 1,500 earlier),
valuing ARBP at 14X FY12 adj. EPS. We re-iterate our ‘BUY/Outperformer’
rating on the stock. ARBP is one of our top picks in mid-cap space.
PAT growth driven by strong operating performance and dossier income
ARBP reported strong operating Q3FY11 performance with higher core operating margins
and strong revenue growth. Further, higher milestone income from licensing deals
incrementally benefited net profit. While net revenues grew 30% Y-o-Y to INR 10.7 bn,
adjusted PAT was up 31% Y-o-Y to INR 1.92 bn. Revenue growth was driven by 53%
growth in formulations business, and higher operating leverage and dossier income
coupled with lower fixed overheads driving company’s operating performance.
EBITDA for the quarter increased 32% Y-o-Y to INR 3.2 bn (est. INR 2.6 bn) with
EBITDA margins of 26.8% (up 30bps Y-o-Y). Despite 360 bps contraction in gross
margins, core EBIDTA margins (ex-dossier income) expanded 20 bps to 18.6% (90bps
Q-o-Q) driven by lower-than-estimated fixed overheads, as other expenses and
employee costs declined 290bps and 90bps, respectively. We expect EBITDA margins to
expand from 17.9% in FY11 to 20.9% in FY13E, driven by higher ramp-up in supply
contracts with PFE and other MNCs and increased capacity utilization at SEZ.
Adjusted PAT growth of 31% to INR 1.92 bn was 26% higher than our expectation of
INR 1.52 bn, led by robust revenue growth (up 30% Y-o-Y) and strong operating
margins performance. This was despite the fact ARBP had lower other income (-41% Yo-
Y) and higher tax provision (42% Y-o-Y). During the quarter the company had
reported forex gains of INR 40.8 mn versus INR 248 mn in Q3FY10. Reported PAT for the
quarter grew 10% Y-o-Y to INR 1.8 bn. Adjusted EPS for 9m FY11 is INR 73.7, 18%
Y-o-Y.
All round performance of formulation business aided strong revenue growth
Net sales (ex-dossier income) grew 30% Y-o-Y to INR 10.7 bn (in line), driven by all
round performance of the formulation business. 53% growth in formulations led by: (a)
US (up 48% Y-o-Y to INR 3.3 bn; up 11% Q-o-Q) due to commencement of operations
at SEZ; (b) Europe (up 36% to INR 677mn); (c) ARV formulations (up 64% to INR 1.74
bn); and (d) ROW markets (up 74% to INR 734 mn; up 17% Q-o-Q). The excellent
growth across regions was on account of unlocking of capacity constraint, with SEZ Unit
III commencing operations (c 35% capacity) and higher contribution from supplies to
partners. Formulation contribution has soared from 45% to 53% in Q3FY11. Dossier
income at INR 1.2 bn (up 33%; c10% of sales) was higher than expected as the
company has signed third licensing deal (name not disclosed) and incremental
contribution from PFE for extending the supply contract to other regions.
Raising FY11/12E earnings 7/13%; on course to attain USD 2 bn by FY15E
We are revising up our earnings estimates by 7-13% for FY11-12E to INR 100 and INR
124.2, respectively. We have increased our revenue projection by 6% on account of: (i)
higher dossier income; and (ii) increased contribution from supply contracts. However,
we have taken 80bps and 60bps contraction in EBIDTA margins (ex-dossier) to factor in
initial overhead cost of the new injectibles facility (likely to commence in H2FY12E). With
operating and financial leverage coming into play, we believe ARBP is now in a much
better position to leverage its extensive manufacturing infrastructure, going forward. The
company is well on track to attain USD 2 bn revenue by FY15E (20% CAGR over FY10-
15E), driven by strong contribution from formulation business and ramp-up in supply
contracts.
Outlook and valuations: Going strong; maintain ‘BUY’
We increase our TP to INR 1,738 (from INR 1,500), valuing ARBP at 14x adjusted FY12E
EPS. The company will have strong growth trajectory Q3FY11 onwards on account of
incremental contribution from PFE deal and commencement of operations at SEZ. We are
of the view that ARBP provides good visibility in terms of consistent revenue CAGR of
20% over the next few years. We re-iterate our ‘BUY’ recommendation and ‘Sector
Outperformer' rating on the stock. Though we do believe that FCCB redemption in May
2011 will cap the stock price movement in the short term, we are positive on the longterm
prospects of the company. ARBP is one of our top picks in the mid-cap space.
Company Description
Founded in 1986 by Mr. P.V. Ramaprasad Reddy and Mr. K. Nithyananda Reddy, first
generation entrepreneurs, ARBP is a fully integrated pharma company with global
operations in formulations and APIs. With a product portfolio of more than 300 products,
ARBP today has one of the deepest portfolios for regulated markets amongst Indian
companies. Revenues and profits have posted 23% and 70% CAGR during FY06-10,
respectively. ARBP’s focus on exports and formulations is bearing fruit. The share of
exports have increased from 59% in FY04 to 70% in FY10, having posted 26% CAGR to
INR 22.4 bn in FY10.
Investment Theme
We reiterate our view and believe ARBP has long term growth visibility, led by expected
ramp up from Pfizer deal to Europe and ROW markets and incremental upsides from
other deals. These deals are strategic in nature and add medium term support to
valuations. We expect operating margins to expand in FY11 and FY12 from higher
operating leverage. We believe ARBP valuations are cheap, and incremental ramp–up in
Pfizer sales and margins upsides in medium term will help narrow the gap with other
generic peers.
Key Risks
FCCB redemption: FCCB 2-3 redemption (USD 200 mn including premium) concerns
have receded post recent stock price performance. However, we have assumed a likely
redemption scenario rather than conversion to equity at current prices. We note that
ARBP has not provisioned for FCCB premium on books, preferring to treat these as
contingent liabilities. Hence, in a likely scenario of FCCB redemption in FY12, the entire
FCCB premium (estimated at USD 65 mn for FCCB 2/3) will need to be provisioned. This
would have a material impact on reported earnings for these years. ARBP will likely
redeem FCCBs by a mixture of internal cash accruals (USD 125 mn) and fresh debt
raised (USD 70-75 mn from ECB recently issued). ARBP has converted USD 51.5 mn of
USD 53.6 mn FCCBs due in August 2010 and redeemed US 2.1 mn remaining on the
FCCB-1 lot.
Currency risks: ARBP does not follow an active hedging policy, preferring to follow a
natural hedge on its exports with its imports. INR appreciation had a positive impact on
translation and revaluation of net assets. This is particularly relevant for the forex loans
(especially FCCBs) that have seen a forex translation gain of INR 1 bn in FY10 (versus
loss of INR 2.5 bn when the INR depreciated 14% in FY09). Forex risks are also relevant
for fixed price tender contracts (ARBP’s ARV business and India formulation business),
where price bids are typically in forex currency and an INR appreciation could prove
detrimental to the thin margins prevalent in the business. The ARV formulation business
contributed 14% to total FY10 (ex operating income) revenues.
Execution risk and logistics delay to PFE deal: At peak sales, we believe the PFE
contract could become crucial to ARBP’s revenues. We note that such a large ramp up
could suffer from execution issues including logistical delays and pricing issues, which
may impact ARBP’s performance.
No comments:
Post a Comment