Aurobindo Pharma Ltd.:: IndiaNivesh

Aurobindo Pharma Ltd (APL) is an integrated pharmaceuticals company with major
focus on exports. Predominantly being the API supplier, company has increased
its revenue contribution from formulation business by more than 60% in the last
5-6 years. Apart from majorly focused in USA formulation & API business, company
has healthy presence in Europe & African markets also. In Africa, APL is focused in
ARV formulations.
Investment Rationale
Expect healthy revenue growth from US market given ramp up in
existing products & new launches:
We expect Aurobindo’s US business to report healthy revenue growth of ~28%CAGR
over FY12-15E given strong pipeline of the company i.e ~171 ANDAs are awaiting
approvals out of cumulative 262 filings. Key positives going forward would be
company’s filings & approvals in complex products including injectables from
AuroMedicis, where company has launched ~5 products including Ampicillin,
Ampicillin + Sulbactam & Piperacillin + Tazobactom. Company expect this business
to ramp up post USFDA approval of unit IV, where company has filed 21 ANDAs &
has received 2 ANDAs approvals. Management expects injectable business to
contribute ~ $10-12 million in FY13E & ~$30 million in FY14E. Another 25-30 ANDA
filings from unit IV & Myriad facility’s ANDAs approvals in 2015-16 would propel
the growth going forwards.
Additionally, AuroLife (US based Subsidiary) has launched schedule III controlled
Substance i.e Hydrocodone Bitartrate+ Acetaminophen in US market in Q2FY13.
The company expects to launch 3-4 more controlled release launches in near term.
Aurolife has filed 18 ANDAs with USFDA & likely to file another 4-5 products. Annual
approval of 20-25 ANDAs & recent launches like Pioglitazone, Escitalopram,
Modafinil, Clopidogril, Seroquel & Montelukast would improve company’s base
business going forward.

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Company likely to reach ~$1.5 billion turnover by FY15E.
We expect company to achieve ~$1.5 billion revenue by the end of FY15E from
current level of ~$1 billion in FY12, which translate at conservative 15.2% CAGR
against Management guidance of achieving ~$2 billion by the end of FY16E. Our
conservative approach is mainly due to uncertainty looming over unit VI clearance
from USFDA & lower growth in Europe & ROW business. While, inline with

management guidance, we expect ARV business & dossier income growth to be
subdued.
Accordingly, we expect company’s total formulation business (excluding Dossier
income) to grow at 19% CAGR & API business at 10.5% CAGR over FY12E-15E. For
ARV formulations, management has guided to participate in high margin tenders
rather than focusing on top line.


Margins are likely to be in healthy range going forward:
Due to import alert for Unit VI of the company in FY11, company’s EBITDA margins
(adjusting for dossier income) declined to 12% level in FY12 from 17-18% level in
FY10 & FY11. Since than continuous efforts & increase in contribution from
formulations, particularly from US market, company’s EBITDA margins has turned
back to 15-16% level in the previous two quarters.


Resolution of USFDA issue for unit VI, if any, would be positive surprise:
Aurobindo Pharma’s formulation Cephalosporin unit VI was inspected in Sep 2012,
which was having import alert from USFDA since Dec 2010, linked with certain cGMP
issues. Before import alert, this unit was contributing ~$35 million revenue (~4% of
total revenue of FY10). Post inspection in Sep 2012, company was awaiting response
from USFDA.Recently, company announced that it has received EIR for the same,
which basically means, inspection conclusion report & according to USFDA this report
may have three kinds of conclusions, a) NIA – No Indication Indicated b) CI- Correction
Indicated c) RTC- Referred to Centre. Currently, in our model, we have not build up
any revenue contribution from unit VI, however any positive out-come for the same
would be positive surprise of ~$15-20 mn annual revenue from the same unit.


Our Take & Valuations
We are of the view that company’s operational efficiencies are likely to improve
going forward from here onwards mainly on the back of positive measures taken by
management in the past, incremental revenue growth from US business, increase
in asset turnover linked with higher capacity utilization which would lead to
improvement in ROCE.
At CMP of Rs 165, the stock is trading at P/E multiple of 9.4x of FY13E & 8.4x of
FY14E earnings estimates. Earlier at market price of Rs 113 (for details refer
“Management Meet Update” released as on 9th April 2012) we had recommend
buy on the stock with target price of Rs 150 & further upgraded to Rs 196, which
has been achieved in Dec 2012. However, due to negative news flow like, seize of
~96 acres of land of Aurobindo’s Research Centre and fixed deposit of Rs 30 million
by ED in connection to a case related to AP based politician & delay in unit VI
clearance from USFDA, the stock has corrected from ~Rs 200 level to current level.
We believe that current price correction is over done. In our opinion the stock is
offering a good entry point. From current level of Rs 165, the stock has upside
potential of ~19%. Hence, we revise our rating from Hold to BUY with the target
price of Rs 196 (valuing at 10x of FY14E).