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Aurobindo Pharma Ltd
Execution begins, capacity issues resolved; Reiterate Buy
Aurobindo Pharma’s (ARBP) Q2FY11 results were ahead of our estimates.
Importantly, the company addressed issues on capacity constraints for the US
market during the quarter—this enabled ARBP to report sales of US$ 66mn
from this market and thus break the stagnated US$ 45-50mn run-rate of the last
five quarters. A strong product basket and partnership deals (Pfizer/Astra) have
been strong positives for ARBP; however, limited ramp-up in the US market has
been a major overhang on the stock. With this issue now resolved, we see a
possible re-rating of the stock; our view derives strength from the expansion in
valuation multiples of companies like Cadila Healthcare (CDH) on account of
strong delivery. We restate a BUY on ARBP with a revised target price of
Rs 1,690/Sep ’11 (Rs 1,260/Mar ’11 earlier) as we roll six months forward,
upgrade our earnings estimates and assign a higher target multiple to the stock.
US business moves to the next phase: ARBP has a strong product basket for the
US market—185 cumulative ANDA filings, 97 final approvals and 88 pending
approval. In addition to its own business, it has another revenue source through a
deal with Pfizer. Till Q1FY11, revenues for the US business were stagnated due
to capacity constraints. However, with ARBP moving its products to a new
facility, revenues surged to US$ 66mn in Q2FY11 and will continue to grow in
the coming quarters.
Strong numbers for Q2FY11: ARBP reported strong growth across business
segments (US/EU/ARV) in Q2FY11. Overall, it clocked a 24% YoY growth in
revenues. While a YoY contraction of 211bps in the EBITDA margin was largely
expected (on higher staff costs, other expenses), the company reported a recovery
on sequential basis. Adj. PAT increased by 14%YoY.
Earnings revision: We upgrade our core earnings estimates by 6%/5% for
FY11E/FY12E to reflect the revenue growth in the US market.
Target price revised to Rs 1,690; Maintain BUY: We had earlier valued ARBP at
a target PER of 14x—at a 35% discount to the sector lead due to a) execution
disappointments b) the partially commoditised nature of its business model and
c) balance sheet issues. With this quarter’s numbers, the concerns on execution
should start receding, which we consider a re-rating catalyst for the stock. Thus
we believe that the discount to the sector lead should narrow down, going
ahead. Hence, we upgrade the target PE multiple for ARBP’s core earnings from
14x (35% discount) to 16x (25% discount). In addition, strong growth in
formulation sales will help lower exposure to the commoditised part of the
business (35% in FY12E vs. 54% in FY09), though the produces will be gradual.
We roll forward our valuations by six months to get a revised target price of Rs
1,690 (from Rs 1,260 earlier). BUY.
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