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Superior operating performance of core business
Aurobindo Pharma (ARBP) reported strong Q2FY11 operating performance.
Adjusted net profit at INR 1.4 bn, excluding forex gain of INR 760 mn, was 23%
higher than our estimate of INR 1.14 bn, led by higher core operating margins and
milestone income. EBITDA margin (ex-milestones) of 17.7% (15.1% in Q1FY11)
was higher than our estimate of 16.4%, led by positive operating leverage from
higher revenues and lower-than-estimated fixed costs. Net sales (ex-milestone) at
INR 10.4 bn were 7% higher than our estimates of INR 9.7 bn, driven by healthy
growth in US formulations and ARV sales. ARBP redeemed balance USD 2 mn of
FCCBs due in August 2010, resulting in a charge of INR 30-40 mn interest outflow
(not built in our estimates).
Strong growth momentum in formulations business
Net sales (ex-milestone income) grew 24% Y-o-Y, to INR 10.4 bn, driven by
healthy growth in formulations business. US formulations sales depicted strong
growth of 29% Y-o-Y (versus 15% Y-o-Y estimated) as ARBP benefitted from full
production at new SEZ facility. ARV sales grew 49% Y-o-Y, to INR 1.7 bn. EU sales
(up 55% Y-o-Y) momentum is expected to sustain and include sales form Pfizer
supplies during the quarter. Overall formulations sales mix in total sales has
increased to 58% versus 51% in Q2FY10. Milestone income of INR 699 mn was
higher than estimate of INR 400 mn and includes licensing income from AZN
deal (undisclosed), not factored in our estimates.
Increasing estimates to factor in higher formulation sales
We are increasing our PBT estimates by 6% for FY11-12 to factor in higher
US/ARV sales, offset by lower gross margins and lower fixed costs. We now
expect EBITDA margins (ex milestones) to increase by ~50bps in FY11 (flat
earlier). We continue to factor in redemption for remaining USD 140 mn FCCBs
in May 2011 (USD 200 mn including premium), but highlight that ARBP has
adequate cover in ECB loans to cover likely shortfall (~USD 70-75 mn).
Outlook and valuations: Positive; maintain ‘BUY’
We increase our TP to INR 1,500 (INR 1,250 earlier), valuing ARBP at 14X
adjusted FY12 EPS. Our positive view on ARBP is predicated on strong mediumterm
support to margins (due to operating leverage) and growth visibility due to
ramp up from the PFE deal in Europe and ROW markets. Current stock
performance also reduces FCCB redemption concerns, which is a positive. We
maintain ‘BUY/Sector Outperformer’ recommendation on the stock.
Q2FY11 results depict strong operating performance
ARBP reported strong operating Q2FY11 performance with higher core operating margins
and strong revenue growth. Further, higher milestone income from licensing deals
incrementally benefited net profit.
Net sales (ex-milestone), at INR 10.4 bn, grew 24% Y-o-Y and were 7% higher than our
estimates of INR 9.7 bn, driven by healthy growth in formulations business. Formulations
sales grew 38% Y-o-Y, to INR 6.15 bn versus our estimate of INR 5.5 bn, led by higher
growth in US formulations and ARV sales. US formulations sales grew 29% Y-o-Y (versus
estimated 15% Y-o-Y), with increased ramp-up in Pfizer revenues and commencement of
SEZ supplies, in our view. Pfizer sales have picked-up sequentially, with supplies
commencing to Europe in Q2FY11, while ROW supplies are expected to commence by
H2FY11, as per the company. ARV sales grew 49% Y-o-Y, to INR 1.7 bn, higher than our
estimate of INR 1.5 bn.
EU sales growth remained strong (up 55% Y-o-Y to INR 860 mn). APBP expects growth
momentum to sustain in EU for balance quarter at similar run rate. Overall formulations
sales mix in total sales has increased to 58% versus 51% in Q2FY10, in line with our
expectations. Milestone income of INR 699 mn was higher than estimate of INR 400 mn
and includes licensing income from AZN deal, not disclosed and not factored in our
estimates. ARBP expects milestone payments of INR 1.5-1.6 bn for FY11 against total
milestones of INR 1.1 bn received in H1FY11.
EBITDA margins (ex-milestone) on net sales, at 17.7%, were higher than our estimate of
16.4% (higher than 15.1% in Q1FY11), despite lower gross margins. This
outperformance was led by higher revenues leading to positive operating leverage and
lower fixed costs at INR 3 bn versus our estimate of INR INR 3.2 bn. Overall EBITDA
margins were also boosted by higher milestone income. Including milestone income,
EBITDA margins were 22.8% versus our expectation of 19%. The company indicates that
core margins could expand in the coming quarters as operations in the SEZ scale up
(ARBP expects the SEZ to break even in Q3FY11).
Net profit, at INR 1.4 bn [adjusted for forex gain of ~INR 585 mn (adjusted for tax)],
was 23% higher than our estimate of INR 1.14 bn. ARBP redeemed balance USD 2 mn of
FCCBs due in August 2010, resulting in a charge of INR 30-40 mn in interest costs (not
built in our estimates); adjusted for this, net profit was INR 1.43 bn. Tax rate, at 32%,
was higher than our estimate of 22%.
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