Aurobindo Pharma Buy Target Price: Rs137 :: Centrum

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Aurobindo Pharma

Buy

Target Price: Rs137

CMP: Rs109

Upside: 26.1%

Margins under pressure

Aurobindo Pharma’s (APL) Q4FY12 results were lower than our expectations in revenues and margin. The company reported 3%YoY sales growth due to the decline in formulation revenues.  APL’s EBIDTA margin declined by 710bps YoY from 18.9% to 11.8% due to the increase in overall costs. The company’s other income grew by 212%YoY from Rs19mn to Rs59mn. APL’s tax rate has gone up from 21.7% to 32.3% of PBT. Net profit declined by 15%YoY from Rs1.28bn to Rs1.08bn. APL’s unit VI is awaiting US FDA inspection in Q2FY13. The company’s two other units are also due for US FDA inspection in the near future. With a strong product pipeline for the US market and regulatory filings, the company is poised for good growth in the future. We have retained Buy rating for the scrip with a target price of Rs137 (based on 7x FY14E EPS of Rs19.6).

m  Marginal revenue growth: During the quarter, the formulation business (53% of revenues) declined by 3%YoY from Rs6.70bn to Rs6.49bn. API business (47% revenues) grew by 18%YoY from Rs4.83bn to Rs5.70bn.

m  Margin under pressure: APL reported 710bps drop in EBIDTA margin from 18.9% to 11.8% due to the increase in overall costs. The company’s material cost increased by 290bps from 51.0% to 53.9% of revenues due to the increase in cost of imported raw materials, depreciation of rupee and the change in product mix. Personnel cost increased by 210bps from 9.6% to 11.7% of revenues. Other expenses grew by 210bps from 20.5% to 22.6%.

m  Sharp fall in dossier income: For FY12, APL’s dossier income declined by 77%YoY from Rs2,556mn to Rs599mn. As the sale of dossiers is a high margin business, this partially resulted in the fall in EBIDTA margin from 21.9% in FY11 to 13.2% in FY12.

m  Strong product pipeline for US: APL has filed 239 ANDAs with US FDA, of which 147 have been approved. The company has filed 160 DMFs with US FDA. It has filed 1,647 formulation dossiers and 1,994 DMFs for other markets. We expect these products to drive the future growth of the company.

m  Attractive valuations, Reiterate Buy: We expect APL to report good growth in the US market due to its strong product pipeline of 239 ANDAs and its leading position in the ARV segment. We have revised our EPS estimates downwards by 30% for FY13 and 25% for FY14. At the CMP of Rs109, the stock trades at 8.5x FY13E EPS of Rs12.8 and 5.5x FY14E EPS of Rs19.6. We reiterate Buy rating for the scrip with a target price of Rs137 (based on 7x FY14 earnings).

Thanks & Regards, 

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