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Aurobindo (ARBN.BO): Add to C-Buy; TP to Rs313 (33% upside)
Quality and momentum of transformation undervalued:
We add Aurobindo to our Conviction Buy List with a new 12-month TPof
Rs313, yielding potential upside of 33%. We believe that Aurobindo is
transitioning rapidly from a low-margin API player to a formulations
company with improving quality of revenues. It offers exposure, at
attractive valuations, to the increasing demand for global pharma to tie
up with low-cost Indian drug manufacturers. We now forecast sales
CAGR of 19% over FY10-FY13E and raise our EPS estimates by 3%-
39% over FY11E-FY13E to reflect our improved business outlook.
Catalyst
Visibility into growth from US formulations: We believe that US
will be the key growth driver for Aurobindo driven by an expanding
generic product basket, new forays into branded formulations as
evidenced by recent FDA approvals for blockbuster drugs and
partnership agreements with global pharma. We forecast industryleading
US sales CAGR of 31% over FY10-FY13E.
Increasing utilization to boost margins: We believe Aurobindo’s
margin profile will reset to a higher trajectory on the back of a ramp
up in capacity utilization and increased captive consumption of APIs
for its faster growing formulations business. Consequently, we
forecast a 250 bp EBIT margin expansion over FY11E-FY13E.
China divestment boosts profitability: Aurobindo recently
announced the divestiture of its 80.5% stake in its Chinese API
subsidiary. We believe that the transaction makes strategic sense
and will boost Aurobindo’s margins since the subsidiary was
incurring losses.
Potential partnerships: In our view, Aurobindo still has enough
capacity and regulatory approvals (one of the largest basket of
filings) to attract potential partners, to tap its manufacturing
capability and capacity. Any such partnerships could significantly
change the outlook for the company.
Valuation
Our new 12-month TP of Rs313 (from Rs309) is based on the
Director’s Cut framework, on the back of our raised revenue and
earnings forecast. Our target price implies a P/E of 12.7X which is at
an 18% discount to the India pharma sector at 15.5X.
Still at a steep discount to the historical average: The stock
currently trades at 9.6X on FY2012E EPS of Rs24.60. Despite a 700%
rise in stock price over the last two years, it is trading at a 34%
discount to its 5-year historical average and a 39% discount to the
Indian pharma sector. We expect the valuation gap to narrow as
Aurobindo transforms into a full-fledged formulation company.
Key risks
Failure to redeem FCCBs (up for redemption in 2QFY12), delay in
utilization ramp-up.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy list
Asia Pacific Conviction Buy list
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aurobindo (ARBN.BO): Add to C-Buy; TP to Rs313 (33% upside)
Quality and momentum of transformation undervalued:
We add Aurobindo to our Conviction Buy List with a new 12-month TPof
Rs313, yielding potential upside of 33%. We believe that Aurobindo is
transitioning rapidly from a low-margin API player to a formulations
company with improving quality of revenues. It offers exposure, at
attractive valuations, to the increasing demand for global pharma to tie
up with low-cost Indian drug manufacturers. We now forecast sales
CAGR of 19% over FY10-FY13E and raise our EPS estimates by 3%-
39% over FY11E-FY13E to reflect our improved business outlook.
Catalyst
Visibility into growth from US formulations: We believe that US
will be the key growth driver for Aurobindo driven by an expanding
generic product basket, new forays into branded formulations as
evidenced by recent FDA approvals for blockbuster drugs and
partnership agreements with global pharma. We forecast industryleading
US sales CAGR of 31% over FY10-FY13E.
Increasing utilization to boost margins: We believe Aurobindo’s
margin profile will reset to a higher trajectory on the back of a ramp
up in capacity utilization and increased captive consumption of APIs
for its faster growing formulations business. Consequently, we
forecast a 250 bp EBIT margin expansion over FY11E-FY13E.
China divestment boosts profitability: Aurobindo recently
announced the divestiture of its 80.5% stake in its Chinese API
subsidiary. We believe that the transaction makes strategic sense
and will boost Aurobindo’s margins since the subsidiary was
incurring losses.
Potential partnerships: In our view, Aurobindo still has enough
capacity and regulatory approvals (one of the largest basket of
filings) to attract potential partners, to tap its manufacturing
capability and capacity. Any such partnerships could significantly
change the outlook for the company.
Valuation
Our new 12-month TP of Rs313 (from Rs309) is based on the
Director’s Cut framework, on the back of our raised revenue and
earnings forecast. Our target price implies a P/E of 12.7X which is at
an 18% discount to the India pharma sector at 15.5X.
Still at a steep discount to the historical average: The stock
currently trades at 9.6X on FY2012E EPS of Rs24.60. Despite a 700%
rise in stock price over the last two years, it is trading at a 34%
discount to its 5-year historical average and a 39% discount to the
Indian pharma sector. We expect the valuation gap to narrow as
Aurobindo transforms into a full-fledged formulation company.
Key risks
Failure to redeem FCCBs (up for redemption in 2QFY12), delay in
utilization ramp-up.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy list
Asia Pacific Conviction Buy list
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