Angel Broking- Buy Aurobindo Pharma ; 3QFY2011 Result; Target Rs. 1,415.

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  Aurobindo Pharma – 3QFY2011 Result Update

             Angel Broking recommends a Buy on Aurobindo Pharma with a Target Price of Rs. 1,415.

For 3QFY2011, Aurobindo Pharma (APL) posted higher-than-expected results.

The only disappointment was on the operating margin front. Top-line growth was

mainly led by above-expectation growth in the formulations segment. Net profit

(adj. for the extraordinary items and forex gains) grew by 10% yoy. We have

revised our estimates upwards and recommend Buy on the stock.

Revenue led by US and ARV formulation segments: Net sales grew strongly by

30.0% to `1,072, driven by the US and ARV formulation segments. The US

formulation segment grew by healthy 48.4% yoy to `328cr. The ARV formulation

segment posted 63.8% yoy growth to `175cr. OPM remained flat at 18.6%,

lower than our estimates of 19.3%, impacted by increased employee and other

expenses. Adjusted net profit grew by 10% to `189cr, higher than our estimates

of `145cr, driven by revenue growth and higher dossier income.

Outlook and valuation: Considering that the commencement of operations at the

Hyderabad SEZ and incremental contribution from the Pfizer deal would boost

APL’s earnings with better growth visibility going forward, we have revised our

estimates upwards to factor in the same. We estimate net sales to log an 18.8%

CAGR to `4,756cr over FY2010–12 on the back of supply agreements and the

US and ARV formulation contracts. We expect APL’s recurring earnings (excluding

other operating income) to post a 33.2% CAGR over FY2010–12 to `539cr on

the back of sales growth and OPM expansion. With the revision of estimates, we

upgrade the stock to Buy with a revised Target Price of `1,415 (`1,330).

Revenue up 30%, driven by the US and ARV formulation segments: APL reported

strong 30% growth in net sales to `1,072 (`825cr), led by the better–than-expected

growth in the formulations space, which grew by 53.3% yoy to `644cr (`420cr),

majorly driven by growth in the US and ARV formulation segments. The US

formulation segment grew by healthy 48.4% yoy to `328cr (`221cr). The company

filed 15 ANDAs during the quarter, taking its cumulative filings to 200. The ARV

formulation segment reported 63.8% yoy growth to `175cr (`107cr). Further, the

Europe and RoW formulation segments grew by 36.2% and 72.3% yoy,

respectively. As a result, contribution from the formulations segment to net sales

increased to 60% in 3QFY2011 from 51% in 3QFY2010. Overall, growth across

the segment was led by contribution through the Hyderabad SEZ, which helped

APL overcome capacity constraints. The API segment posted growth of 9.2% yoy to

`455cr (`417cr), driven by Cephs API that grew by 17.5% yoy.

Flat OPM for the quarter: During the quarter, gross margins contracted to 46.7%

(50.4%) due to increased material costs. OPM remained flat at 18.6% (18.4%) yoy

due to the increase of 20% and 12% in the employee and other expenses to

`108cr (`90cr) and `194cr (`173cr), respectively. This was majorly because of the

increase in employee strength due to commencement of new facilities.

Adjusted net profit up 10%: APL reported adjusted net profit growth of 10% yoy to

`189cr (`172cr), driven by revenue growth and higher dossier income. This

included forex gain of `4.08cr (`24.81cr) and exceptional item of `7.66cr for the

quarter. The company recorded other operating income of `126cr (`101cr), up

25.4%, on the back of higher dossier income of `120cr (`91cr) yoy.

Recommendation rationale

􀂄 Supply agreements to drive growth: On the global filings front (ANDAs and

dossiers), APL has increased its filing dramatically from 313 in FY2008 to

1,171 in FY2010, as it proposes to scale up from SSP and Cephs to NPNC

products. Further, the company’s transformation from being a pure API

supplier to becoming a formidable formulations player has increased APL’s

cost efficiencies, as 90% of its formulation is now backward integrated. Thus,

to leverage on its cost efficiency and strong product filings, APL entered into

long-term supply agreements with Pfizer (March 2009) and AstraZeneca

(September 2010), which provide significant revenue visibility going ahead.

APL is also in discussion with other MNCs for more supply agreements.

􀂄 US and ARV formulation segments – The key drivers for base business: APL’s

business, excluding the supply agreements, would primarily be driven by the

US and ARV segments on the formulation front. APL has been an aggressive

filer in the US market, with 169 ANDAs filed and 113 approvals received till

FY2010. Amongst peers, APL is the third-largest ANDA filer. The company has

aggressively filed ANDAs in the last three years and is now geared to reap

benefits, even though most of the filings are for highly competitive products.

APL expects to file 15–20 ANDAs in FY2011 and FY2012. Going ahead,

during the next three years in the US with US $70bn going off-patent, one of

the highest in history, we believe APL is well placed to tap this opportunity. We

expect the base business (ex-Pfizer) to post a 36.0% CAGR over FY2010–12

and contribute US $268mn by FY2012, with revenue per product increasing to

US $2.6mn from US $2.3mn in FY2010, as the company moves towards the

high revenue-generating NPNC and injectable (SSP and Cephs) products.

APL is one of the largest generic suppliers under the ARV contracts, with 35%

market share. The company enjoys high market share as it is fully integrated

in all its products apart from having a larger product basket. Overall, we

expect the ARV segment to post a 21.4% CAGR over FY2010–12 to `730cr,

with PEPFAR allocation for generic ARVs expected to increase.

Outlook and valuation

Considering that the commencement of operations at the Hyderabad SEZ and

incremental contribution from the Pfizer deal would boost APL’s earnings with

better growth visibility going forward, we have revised our estimates upwards

to factor in the same. We estimate net sales to log an 18.8% CAGR to

`4,756cr over FY2010–12 on the back of supply agreements and the US and

ARV formulation contracts. We expect APL’s recurring earnings (excluding

other operating income) to post a 33.2% CAGR over FY2010–12 to `539cr on

the back of sales growth and OPM expansion. With the revision of estimates,

we upgrade the stock to Buy with a revised Target Price of `1,415 (`1,330).