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Aurobindo Pharma (ARBN.BO)
1QFY12: Adverse Mix Drag on Margins
A Mixed Bag — Recurring PAT was c10% below our estimate, as adverse revenue mix
(higher share of ARVs, lower in US) suppressed margins, despite strong topline growth
remaining strong. We expect things to normalize going forward, on ramp-up in deals
with key partners, new launches in the US & higher capacity utilization in the SEZ (Unit
VII). Valuations remain attractive (8xFY12E core EPS) but a sustained re-rating would
be contingent on more clarity vis-à-vis the FDA issues at Unit III. Maintain Buy.
Revenue Growth Strong — US (+27% YoY), ARV formulations (+44%, tender sales in
India) & a steady API biz (+ 12% YoY, ARVs, SSPs) drove topline up 20%. The
sequential dip in US sales (-22% QoQ), while not unexpected, was higher than
expected – driven by lower contribution of cephs (seasonality, Unit-VI import alert in
Feb’11) & possibly lower off take by Pfizer during the quarter. We expect this to scale
up over the rest of the year, as recent approvals (6 in Q1) gain traction.
But Adverse Mix Hits Margins — Gross margin was flat, owing to poorer revenue mix
(high share of ARVs) during the quarter & higher input costs. Overheads on the
recently commissioned SEZ (Unit VII) & remediation initiatives for Unit VI led to some
cost push & suppressed EBIDTA margin (14%, excluding licensing income: +98bps
YoY, -274bps QoQ). Adj PAT growth was strong (+64% YoY) on lower interest (-23%
QoQ) and lower effective tax rate. A one-time payment of FCCB redemption premium
(Rs3.2bn) led to a loss at the reported level.
Update on FDA Issues — ARBN continues to work toward resolution of FDA issues
related to Unit-VI & Unit-III. The management mentioned that it has taken all necessary
steps to address the issues but has no clear timeline for final resolution. We believe
some clarity (especially on Unit III) is needed before the stock can materially re-rate.
Other Details — a) Filings in key markets: USA (ANDAs – 6 in 1Q, 215 cumulative;
DMFs – 155 cumulative), Dossiers - 91 in 1Q, 1,360 cumulative; b) Patents filed - 8 in
4Q, 472 cumulative; c) Gross Debt: cRs27bn, Cash: cRs900m; d) FY12 capex: Rs3bn.
Aurobindo Pharma
Company description
Aurobindo Pharma is an Indian pharma company targeting global generics. It has
traditionally had a strong presence in the cephalosporin and ARV segments but has
expanded its product basket recently. It is fully integrated and owns one of largest
manufacturing bases (14 plants) and portfolios of products amongst Indian
companies.
Investment strategy
We rate Aurobindo Pharma Buy/Medium Risk, given improving fundamentals and
attractive valuations. We believe APL is much better placed to leverage its large
backend infrastructure and product basket. A multiple-market supply deal with Pfizer
and critical scale in its own operations in key markets would drive revenues. Rising
capacity utilization and better product mix (higher share of formulations) would drive
sustained margin expansion. Moreover, rising cash generation and lower capex
going forward will also enable APL to lower debt and alleviate balance sheet
concerns.
Valuation
We value Aurobindo using a sum of the parts approach. Given that pharma is a
growth sector, we use P/E as our primary method to value the base business of
pharma companies. We value Aurobindo's core earnings on 14x 12m forward
FDEPS - a 30% discount to the target multiple of 20x that we use for sector leaders
such as Cipla, Lupin and DRL. We believe that the discount is justified at this point,
given the risk of an appreciating rupee (c20-25% net exposure) and higher
customer concentration (the Pfizer deal). At 14x Mar ‘12E EPS we value
Aurobindo's core business at Rs265/sh. We also value Aurobindo's dossier
licensing income at 5x. We believe the lower multiple captures the fact that this
income stream may not be recurring, at current levels, over the longer term. At 5x
Mar'12 estimates, we value Aurobindo's dossier licensing income at Rs20/sh.
Cumulatively, we arrive at our target price of Rs285/sh.
Risks
We rate Aurobindo Medium Risk in line with our quantitative risk-rating system,
which tracks 260-day historical share price volatility. We maintain Medium Risk as
the recent run-up in the stock and matured convertible bonds could prove to be a
technical overhang if the stock continues to rise. Key downside risks that could
impede the stock from reaching our target price include (1) Execution hiccups in the
supply deal with Pfizer; (2) Currency Risk - an appreciating INR would be
structurally negative.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aurobindo Pharma (ARBN.BO)
1QFY12: Adverse Mix Drag on Margins
A Mixed Bag — Recurring PAT was c10% below our estimate, as adverse revenue mix
(higher share of ARVs, lower in US) suppressed margins, despite strong topline growth
remaining strong. We expect things to normalize going forward, on ramp-up in deals
with key partners, new launches in the US & higher capacity utilization in the SEZ (Unit
VII). Valuations remain attractive (8xFY12E core EPS) but a sustained re-rating would
be contingent on more clarity vis-à-vis the FDA issues at Unit III. Maintain Buy.
Revenue Growth Strong — US (+27% YoY), ARV formulations (+44%, tender sales in
India) & a steady API biz (+ 12% YoY, ARVs, SSPs) drove topline up 20%. The
sequential dip in US sales (-22% QoQ), while not unexpected, was higher than
expected – driven by lower contribution of cephs (seasonality, Unit-VI import alert in
Feb’11) & possibly lower off take by Pfizer during the quarter. We expect this to scale
up over the rest of the year, as recent approvals (6 in Q1) gain traction.
But Adverse Mix Hits Margins — Gross margin was flat, owing to poorer revenue mix
(high share of ARVs) during the quarter & higher input costs. Overheads on the
recently commissioned SEZ (Unit VII) & remediation initiatives for Unit VI led to some
cost push & suppressed EBIDTA margin (14%, excluding licensing income: +98bps
YoY, -274bps QoQ). Adj PAT growth was strong (+64% YoY) on lower interest (-23%
QoQ) and lower effective tax rate. A one-time payment of FCCB redemption premium
(Rs3.2bn) led to a loss at the reported level.
Update on FDA Issues — ARBN continues to work toward resolution of FDA issues
related to Unit-VI & Unit-III. The management mentioned that it has taken all necessary
steps to address the issues but has no clear timeline for final resolution. We believe
some clarity (especially on Unit III) is needed before the stock can materially re-rate.
Other Details — a) Filings in key markets: USA (ANDAs – 6 in 1Q, 215 cumulative;
DMFs – 155 cumulative), Dossiers - 91 in 1Q, 1,360 cumulative; b) Patents filed - 8 in
4Q, 472 cumulative; c) Gross Debt: cRs27bn, Cash: cRs900m; d) FY12 capex: Rs3bn.
Aurobindo Pharma
Company description
Aurobindo Pharma is an Indian pharma company targeting global generics. It has
traditionally had a strong presence in the cephalosporin and ARV segments but has
expanded its product basket recently. It is fully integrated and owns one of largest
manufacturing bases (14 plants) and portfolios of products amongst Indian
companies.
Investment strategy
We rate Aurobindo Pharma Buy/Medium Risk, given improving fundamentals and
attractive valuations. We believe APL is much better placed to leverage its large
backend infrastructure and product basket. A multiple-market supply deal with Pfizer
and critical scale in its own operations in key markets would drive revenues. Rising
capacity utilization and better product mix (higher share of formulations) would drive
sustained margin expansion. Moreover, rising cash generation and lower capex
going forward will also enable APL to lower debt and alleviate balance sheet
concerns.
Valuation
We value Aurobindo using a sum of the parts approach. Given that pharma is a
growth sector, we use P/E as our primary method to value the base business of
pharma companies. We value Aurobindo's core earnings on 14x 12m forward
FDEPS - a 30% discount to the target multiple of 20x that we use for sector leaders
such as Cipla, Lupin and DRL. We believe that the discount is justified at this point,
given the risk of an appreciating rupee (c20-25% net exposure) and higher
customer concentration (the Pfizer deal). At 14x Mar ‘12E EPS we value
Aurobindo's core business at Rs265/sh. We also value Aurobindo's dossier
licensing income at 5x. We believe the lower multiple captures the fact that this
income stream may not be recurring, at current levels, over the longer term. At 5x
Mar'12 estimates, we value Aurobindo's dossier licensing income at Rs20/sh.
Cumulatively, we arrive at our target price of Rs285/sh.
Risks
We rate Aurobindo Medium Risk in line with our quantitative risk-rating system,
which tracks 260-day historical share price volatility. We maintain Medium Risk as
the recent run-up in the stock and matured convertible bonds could prove to be a
technical overhang if the stock continues to rise. Key downside risks that could
impede the stock from reaching our target price include (1) Execution hiccups in the
supply deal with Pfizer; (2) Currency Risk - an appreciating INR would be
structurally negative.
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