Aurobindo Pharma - Buy Entering the big league:: Angel Broking

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Aurobindo Pharma - Buy
Entering the big league
Aurobindo Pharma (APL), over the years, has transformed itself
from being a low-margin API player to a high-margin
formulation player. Consequently, APL's FY2012 OPM and RoE
are on par with top Indian generic peers. Concerns on the debt
front are also receding and the company's net debt/equity ratio
is expected to improve to 0.6x in FY2012 from 1.1x in FY2010.
We expect net sales and recurring profit (excluding other
operating income) to post a CAGR of 15.6% and 29.1%
respectively, over FY2010-12. The stock is currently trading at
13.6x FY2011E and 10.3x FY2012E earnings, which is at 50%
discount to the top Indian generic peers and unwarranted due
to the improving business mix owing to which we believe that
the stock is poised for re-rating. We Initiate Coverage on the
stock, with a Buy recommendation and SOTP Target Price of
`1,330.
Supply agreements to drive growth: To leverage on its cost
efficiency and strong product filings, APL entered into supply
agreements with Pfizer and AstraZeneca, which provides
significant revenue visibility. Under the Pfizer contract, APL would
supply more than 100 products post full commercialisation of
the contract and cover various geographies. In FY2010, APL
scaled up supply with 23 products to the US and clocked
revenues of US $48mn. Under its supply agreement with
AstraZeneca, APL would be supplying several solid dosage and
sterile products to the emerging markets covering therapeutic
segments such as anti-infective, CVS and CNS. APL is also in
talks with other MNCs for more supply agreements. Revenues
from the supply agreements are set to rise 3x over FY2010-12
from `227cr to `644cr.
US and ARV formulation segments to be key drivers for base
business: APL has commercialised 61 products in the US with
the top-10 products contributing nearly 60% of its revenues in
FY2010. The company primarily targets day-1 launches in the
US. APL's US base business (ex-Pfizer) is expected to post CAGR
of 36.0% over FY2010-12 to US $268mn with revenue per
product increasing to US $2.6mn from US $2.3mn. On ARV
front, we expect revenues to log CAGR of 11.1% to `612cr
over FY2010-12 as APL would continue to be the largest supplier
under the PEPFAR contract with a market share of 35%. APL
enjoys high market share as it is fully integrated in all its products
apart from having a larger product basket.


Valuation: We have valued APL on a SOTP basis. The base
business has been valued at 14x FY2012E core earnings (`90.2/
share), which is at 33% discount (on the back of low presence
in the high-margin domestic formulation business) to the top
Indian generic players and fetches `1,263/share. We have
assigned a higher multiple to APL's core business compared to
the multiple assigned by street and its historical average, as we
believe that the concerns about higher contribution of the API
business is unwarranted given that the company's FY2012 OPM
and RoE are on par with top Indian generic peers and are
likely to sustain going forward.
APL has also seen a substantial spurt in other operating income
on the back of dossier income primarily under the Pfizer
agreement and sale of dossiers in Europe. Other operating
income constituted nearly 31.9% of PBT in FY2010. However,
we have assigned a lower multiple as there is lack of clarity
regarding the time-line of the recurring nature of the dossier
income. We have valued other operating income at 7x 50% of
FY2012E income (`9.5/share) and ascribed `67/share.