Aurobindo Pharma Ltd.|Q2FY15 Result Update | The good show continues… :: IndiaNivesh

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US market remains the key driver for ARBP’s performance for the quarter: Sales
and adjusted PAT at Rs28.6bn and Rs4.1bn, grew by 51% y-y and 37% y-y, respectively
for the quarter. The strong performance for the quarter was driven mainly by
superior performance in US market. The better product mix led gross margin to
improve from 51.6% y-y and 52.3% q-q to 55.8% for the quarter. The increased
proportion of higher margin US business compared to relatively lower margin API
and ARV formulation business led to better product mix for the quarter. However,
employee cost and other expenditure increased sharply by 72% y-y and 78% y-y,
respectively, resulting in EBITDA margin to drop by 64bps on y-y basis. Higher
employee cost and other expenditure is partly due to integration of acquired Actavis
operations. R&D cost remained at 4.5-5% of net sales and management has guided
for similar rate for FY15 and FY16. ARBP has spent Rs2-2.5bn as capex for 1H FY15
and intend to spend Rs6bn for FY15.
US quarterly sales surpassed previous high: US sales at Rs11.7bn (US$196mn),
grew by 61% y-y, led by new product launches and increased traction in existing
products. Cephalosporin sales by ARBP were US$12mn for the quarter. Aurolife
segment also showed better traction with sales of US$32mn for the quarter.
Auromedics maintained the sales momentum with sales of US$17mn for the quarter.
During the quarter, ARBP filed two ANDAs, taking the cumulative filing to 378. ARBP
received three approvals, taking the cumulative approvals to 197. With robust
pipeline of 181 ANDAs pending for approval, we believe that ARBP would be able
to maintain sales momentum, if approvals are received at regular pace.
ARV formulation sales declined sharply due to lower tender business for the
quarter: ARV formulation sales reduced sharply by 40% y-y to Rs1.4bn. This is mainly
due to lower tender business. Tender business for ARV formulation segment is
skewed in 2H FY15 and hence expects better growth in 2H FY15, as per management.
Internal consumption led to y-y contraction in API sales: API sales at Rs6.9bn
reduced by 5% y-y. This is mainly due to more in-house consumption of API for
manufacturing formulation. We expect external sales of API to grow at moderate
pace in order to supply for relatively higher margin formulation business.
Valuation: We raise our PAT estimate for FY15 and FY16 by 13% and 12% to Rs17.4bn
and Rs21bn, respectively, to factor superior performance in US market as well as
better operating margin on faster turnaround of acquired Actavis operations for
Europe market. Accordingly, we raise our price target to Rs1,293 (from Rs1,154)
based on 18x FY16 earnings. We re-iterate BUY rating on the stock with implied
upside potential of 25% from current levels.

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