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Removed from Asia Pacific Conviction Buy List
Aurobindo Pharma (ARBN.BO)
Equity Research
USFDA import alert poses medium term overhang, move to Neutral
What happened
We remove Aurobindo Pharma (APL) from the Conviction Buy and Buy lists
and move it to Neutral following its announcement that USFDA has imposed
an import alert for detention of products from its Cephalosporin facility (Unit
VI) located in India (refer to our APL note today, ‘USFDA import alert on
Cephalosporin facility poses earnings risk’). We cut our TP to Rs226 and EPS
estimates by 2%-17% for FY11E-FY13E to incorporate loss of revenues and
increased opex for remediation. Since its initiation (Oct 20, 2010), APL is down
12% (vs. Sensex -8.5%). Since adding to the Conv. list (Feb 18, 2011), it is
down 8.9% (vs. Sensex -0.2%). In last 12m, APL is up 10.4% vs. Sensex 11.6%.
Current view
We attribute APL’s recent underperformance to concerns over its stretched
balance sheet. APL’s Unit-6 plant is one of its largest units, currently
manufacturing cephalosporin antibiotics (both parenteral and oral
formulations). Unit-6 generated about US$70mn of sales in 2010, of which
US$35mn was from US. We estimate current capacity utilization to have
been around 35% and believe further capacity utilization could be limited till
the Import alert is lifted. Hence, we lower our revenue forecasts by 6% for
FY12E and 13E. We increase our operating expenditures to incorporate
remediation measures and legal costs which we expect the company to
incur, and lower our EBIT margin forecasts by 160bps for FY12E and 13E.
According to APL, it is uncertain if the FDA import alert affects only sterile
products (US$4-5 mn of sales in US), or includes oral products too (US$30 mn
of sales in US). The company believes that the revenue impact could be a
maximum of US$35 mn being blocked under the import alert (4% of FY11E
sales). The company also stated that it is not selling any Cephalosporin APIs in
the US (19% of our FY11E revenues). However, in our view, this issue could
lower their ability to add new clients.
We revert to applying a 30% discount (vs. 20% prior) on APL’s implied EV vs.
peers, in-line with their historical discount. Our revised 12-m Director’s Cutbased TP of Rs226 (from Rs313) implies a P/E of 10.8X. Risks: resolution of
import alert (upside), further reduction in capacity utilization (downside).
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACTION
Removed from Asia Pacific Conviction Buy List
Aurobindo Pharma (ARBN.BO)
Equity Research
USFDA import alert poses medium term overhang, move to Neutral
What happened
We remove Aurobindo Pharma (APL) from the Conviction Buy and Buy lists
and move it to Neutral following its announcement that USFDA has imposed
an import alert for detention of products from its Cephalosporin facility (Unit
VI) located in India (refer to our APL note today, ‘USFDA import alert on
Cephalosporin facility poses earnings risk’). We cut our TP to Rs226 and EPS
estimates by 2%-17% for FY11E-FY13E to incorporate loss of revenues and
increased opex for remediation. Since its initiation (Oct 20, 2010), APL is down
12% (vs. Sensex -8.5%). Since adding to the Conv. list (Feb 18, 2011), it is
down 8.9% (vs. Sensex -0.2%). In last 12m, APL is up 10.4% vs. Sensex 11.6%.
Current view
We attribute APL’s recent underperformance to concerns over its stretched
balance sheet. APL’s Unit-6 plant is one of its largest units, currently
manufacturing cephalosporin antibiotics (both parenteral and oral
formulations). Unit-6 generated about US$70mn of sales in 2010, of which
US$35mn was from US. We estimate current capacity utilization to have
been around 35% and believe further capacity utilization could be limited till
the Import alert is lifted. Hence, we lower our revenue forecasts by 6% for
FY12E and 13E. We increase our operating expenditures to incorporate
remediation measures and legal costs which we expect the company to
incur, and lower our EBIT margin forecasts by 160bps for FY12E and 13E.
According to APL, it is uncertain if the FDA import alert affects only sterile
products (US$4-5 mn of sales in US), or includes oral products too (US$30 mn
of sales in US). The company believes that the revenue impact could be a
maximum of US$35 mn being blocked under the import alert (4% of FY11E
sales). The company also stated that it is not selling any Cephalosporin APIs in
the US (19% of our FY11E revenues). However, in our view, this issue could
lower their ability to add new clients.
We revert to applying a 30% discount (vs. 20% prior) on APL’s implied EV vs.
peers, in-line with their historical discount. Our revised 12-m Director’s Cutbased TP of Rs226 (from Rs313) implies a P/E of 10.8X. Risks: resolution of
import alert (upside), further reduction in capacity utilization (downside).
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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