Emkay :: Buy Aurobindo Pharma - Continual improvement with multiple drivers

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Aurobindo Pharma

Continual improvement with multiple drivers

BUY

CMP: Rs 1,175                                       Target Price: Rs 1,581

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n     Aurobindo reported another strong quarter with a) Revenues at Rs11.9bn (est. Rs11.5bn), b) EBITDA at Rs3.2bn (est. Rs2.6bn), and c) PAT at Rs1.8bn (est. Rs1.5bn)

n     Strong revenue growth was driven by 52% growth in formulation business, higher dossier income (Rs1204mn vs. Rs800mn) and ramp-up in SEZ facility

n     Management has guided for dossier income of Rs2.6bn for FY11

n     On account of continual improvement in performance, maintain target price of Rs1,581 with Buy rating

Strong growth in formulations and higher dossier income drive the top

line growth

Aurobindo’s Q3FY11 results were above our expectations. While net revenues grew

30% YoY to Rs11.9bn, profit was up 26% to Rs1.8bn (excluding forex gain of Rs41mn).

Top line growth was driven by 52% growth in formulations led by a) US (up 48% to

Rs3.3bn), due to commencement of operations at SEZ, b) Europe (up 36% to

Rs677mn), c) ARV formulations (up 64% to Rs1.7bn), and d) RoW markets (up 63% to

Rs693mn). The excellent growth across regions was on account of unlocking of

capacity constraint, with SEZ Unit III commencing its operations. Dossier income

(includes licensing income largely from Pfizer) at Rs1204mn was higher than expected.

Income from dossiers posted good growth of 33% and contributed 10% to the overall

sales (6% in Q2FY11). EBITDA for the quarter was up by 28% to Rs3.2bn largely driven

by robust top line growth of 30% (including dossier income). This was in spite of

contraction in gross margins by 300bps and 39% YoY increase in material cost.

Adjusted PAT growth of 26% to Rs1.8bn was on account of a) higher other income (up

59%), and b) lower interest outgo (down 10% YoY). This quarter, the company reported

forex gains of Rs41mn versus gain of Rs248mn in Q3FY10.

Higher dossier income and operating leverage improved operating

profitability

Operating margins for the quarter stood at a healthy 27% on account of higher dossier

income and benefits of operating leverage coming into play. Q3FY11 was the first full

quarter to witness the benefits from commencement of operations at SEZ. Strong EBITDA

margins at 27% were in spite of decline in gross margins by 300bps YoY. Commencement

of operations of SEZ unit led to 395bps QoQ expansion in EBITDA margins.

APAT at Rs1.8bn is above our expectation

APAT growth of 26% YoY was led by a) strong operating performance, b) higher other

income (up 59% YoY), and c) lower interest outgo (down 10% YoY). Lower interest outgo

was due to repayment of debt this quarter. The net debt as on Dec 31st stands at Rs2.1bn.

The company incurred forex gain of Rs41mn this quarter versus gains of Rs248mn in

Q3FY10. Adjusted EPS stood at Rs31.7 for the quarter and Rs72.4 for 9MFY11 (reported

EPS of Rs75.3). Going ahead, we believe net profit to grow at 21% CAGR to Rs6.6bn over

FY10-12E, clocking an EPS of Rs113 in FY12E.

Another strong quarter; Valuations attractive - Reiterate Buy

During 9MFY11, the company has clocked adjusted EPS of Rs72.4 against our full

estimation of Rs93.3 in FY11E. We continue to maintain our earning estimates of Rs93.3

and Rs112.9 for FY11E and FY12E respectively. We believe that this quarter performance

is encouraging and expect the company to improve its earnings trajectory gradually on

account of incremental contribution from the Pfizer deal and commencement of operations

at Unit III (Hyderabad SEZ). Increased product ramp-up from the Pfizer deal will further lead

the utilization levels at the SEZ to increase by FY12E. Further, savings in tax will lead to

incremental earnings. With operating and financial leverage coming into play, we believe

that Aurobindo is now in a much better position to leverage its extensive manufacturing

infrastructure, going forward. Aurobindo provides good visibility in terms of consistent

revenue CAGR growth of 19% over next few years. We maintain our target price on the

stock at Rs1581, valuing at 14x adjusted FY12E EPS. At CMP, the stock trades at attractive

valuations of 12.6xFY11E and 10.4xFY12E EPS. Re-iterate Buy.