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Aurobindo Pharma (ARBN.BO)
Licensing Income Drives Big Beat; Core Strong
Big earnings beat — 3Q net income was c32% higher than expected, driven
primarily by higher licensing income. At the same time, core biz remains strong,
with growing traction in all key markets, gradually rising capacity utilization &
improving product mix. We expect these trends to continue. Consistent delivery
over the last 6-8 quarters and attractive valuations (10xFY12E EPS) make it an
attractive re-rating candidate in our view. Remains a Top Pick.
Growth momentum continues — Formulations sales (+ 53% YoY) grew across
markets: US (+48% YoY, +11% QoQ), EU (+36% YoY, -21% QoQ), RoW (+72%
YoY, +17% QoQ) & ARVs (+16% YoY, +12% QoQ). API sales growth was muted
(+9% YoY, +1% QoQ) in line with strategy to focus on formulations. The recent
commissioning of Unit VII/SEZ has eased capacity constraints, as reflected in the
strong sequential growth. Licensing income (+33% YoY) also buoyed top line.
EBIDTA margin improving — EBIDTA margin (excluding licensing income)
dipped c61bps YoY due to unabsorbed overheads at the SEZ (turned marginally
profitable this quarter) but improved c395 bps QoQ on higher capacity utilization &
better mix. We expect operating leverage benefits to continue.
Strong growth in PAT — Adjusted for forex & EO items, PAT grew 33% YoY &
58% QoQ despite higher tax rate (+509bps YoY). Interest cost dipped 41% QoQ,
as 2Q included redemption premium (cRs35m) on unconverted Aug’10 FCCBs.
Other data points / trends — a) Capacity utilization at the recently commissioned
SEZ (Unit VII) is at c10%. It is marginally profitable now; b) Effective tax rate to dip
a bit in 4Q & further in FY12, as utilization levels at the SEZ picks up; c) ARBN no
longer provides granularity on sales to specific partners – sales to Pfizer for
emerging markets to commence in the next few months; d) Filings in key markets:
USA (ANDAs – 15 in 3Q, 200 cumulative; DMFs – 7 in 3Q, 154 cumulative), EU
dossiers - 54 in 3Q, 906 cumulative; e) Divested stake in Aurobindo (Datong)
Biopharma, China & Cephazone Pharma LLC, USA.
Aurobindo Pharma
Valuation
We value Aurobindo using a sum of the parts approach. Given that pharma is a
growth sector, we use P/E as our primary method to value the base business of
pharma companies. We value Aurobindo’s core earnings on 14x 12m forward
FDEPS - a 30% discount to the target multiple of 20x that we use for sector
leaders such as Cipla and DRL. We believe that the discount is justified at this
point, given the possibility of equity dilution (to redeem FCCBs in case they do
not get converted), risk of an appreciating rupee (c20-25% net exposure) and
higher customer concentration (the Pfizer deal). At 14x Mar ‘12E EPS we value
Aurobindo’s core business at Rs1550/sh. We also value Aurobindo’s dossier
licensing income at 5x. We believe the lower multiple captures the fact that this
income stream may not be recurring, at current levels, over the longer term. At
5x Mar'12 estimates, we value Aurobindo’s dossier licensing income at
Rs80/sh. Cumulatively, we arrive at our target price of Rs1630/sh.
Risks
We rate Aurobindo Medium Risk as opposed to the Low Risk assigned by our
quantitative risk-rating system, which tracks 260-day historical share price
volatility. We maintain Medium Risk as the recent run-up in the stock and
convertible bonds maturing in May 2011 could prove to be a technical overhang
if the stock continues to rise. Key downside risks that could impede the stock
from reaching our target price include (1) Fresh equity dilution if FCCBs do not
get converted; (2) Execution hiccups in the supply deal with Pfizer; (3) Currency
Risk - an appreciating INR would be structurally negative.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aurobindo Pharma (ARBN.BO)
Licensing Income Drives Big Beat; Core Strong
Big earnings beat — 3Q net income was c32% higher than expected, driven
primarily by higher licensing income. At the same time, core biz remains strong,
with growing traction in all key markets, gradually rising capacity utilization &
improving product mix. We expect these trends to continue. Consistent delivery
over the last 6-8 quarters and attractive valuations (10xFY12E EPS) make it an
attractive re-rating candidate in our view. Remains a Top Pick.
Growth momentum continues — Formulations sales (+ 53% YoY) grew across
markets: US (+48% YoY, +11% QoQ), EU (+36% YoY, -21% QoQ), RoW (+72%
YoY, +17% QoQ) & ARVs (+16% YoY, +12% QoQ). API sales growth was muted
(+9% YoY, +1% QoQ) in line with strategy to focus on formulations. The recent
commissioning of Unit VII/SEZ has eased capacity constraints, as reflected in the
strong sequential growth. Licensing income (+33% YoY) also buoyed top line.
EBIDTA margin improving — EBIDTA margin (excluding licensing income)
dipped c61bps YoY due to unabsorbed overheads at the SEZ (turned marginally
profitable this quarter) but improved c395 bps QoQ on higher capacity utilization &
better mix. We expect operating leverage benefits to continue.
Strong growth in PAT — Adjusted for forex & EO items, PAT grew 33% YoY &
58% QoQ despite higher tax rate (+509bps YoY). Interest cost dipped 41% QoQ,
as 2Q included redemption premium (cRs35m) on unconverted Aug’10 FCCBs.
Other data points / trends — a) Capacity utilization at the recently commissioned
SEZ (Unit VII) is at c10%. It is marginally profitable now; b) Effective tax rate to dip
a bit in 4Q & further in FY12, as utilization levels at the SEZ picks up; c) ARBN no
longer provides granularity on sales to specific partners – sales to Pfizer for
emerging markets to commence in the next few months; d) Filings in key markets:
USA (ANDAs – 15 in 3Q, 200 cumulative; DMFs – 7 in 3Q, 154 cumulative), EU
dossiers - 54 in 3Q, 906 cumulative; e) Divested stake in Aurobindo (Datong)
Biopharma, China & Cephazone Pharma LLC, USA.
Aurobindo Pharma
Valuation
We value Aurobindo using a sum of the parts approach. Given that pharma is a
growth sector, we use P/E as our primary method to value the base business of
pharma companies. We value Aurobindo’s core earnings on 14x 12m forward
FDEPS - a 30% discount to the target multiple of 20x that we use for sector
leaders such as Cipla and DRL. We believe that the discount is justified at this
point, given the possibility of equity dilution (to redeem FCCBs in case they do
not get converted), risk of an appreciating rupee (c20-25% net exposure) and
higher customer concentration (the Pfizer deal). At 14x Mar ‘12E EPS we value
Aurobindo’s core business at Rs1550/sh. We also value Aurobindo’s dossier
licensing income at 5x. We believe the lower multiple captures the fact that this
income stream may not be recurring, at current levels, over the longer term. At
5x Mar'12 estimates, we value Aurobindo’s dossier licensing income at
Rs80/sh. Cumulatively, we arrive at our target price of Rs1630/sh.
Risks
We rate Aurobindo Medium Risk as opposed to the Low Risk assigned by our
quantitative risk-rating system, which tracks 260-day historical share price
volatility. We maintain Medium Risk as the recent run-up in the stock and
convertible bonds maturing in May 2011 could prove to be a technical overhang
if the stock continues to rise. Key downside risks that could impede the stock
from reaching our target price include (1) Fresh equity dilution if FCCBs do not
get converted; (2) Execution hiccups in the supply deal with Pfizer; (3) Currency
Risk - an appreciating INR would be structurally negative.
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