Aurobindo Pharma, Margin expansion a positive surprise… :: ICICI Securities, report link

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Margin expansion a positive surprise…
• Revenues grew 50.5% YoY to | 2881.2 crore, vs. I-direct estimate of
| 2958.3 crore on the back of 61% growth in the US, 349% growth in
Europe (Actavis consolidation) and 67% growth in RoW markets
• EBITDA margins declined 80 bps to 22.1% vis-à-vis I-direct estimate
of 17.2%. The beat in margins was on account of de-growth in the
low margin ARV and API businesses. EBITDA in absolute terms grew
45.4% to | 637.2 crore (I-direct estimate of | 508.6 crore)
• Net profit grew 58.4% to | 372.2 crore (I-direct estimate: | 297.1
crore) due to strong EBITDA margins
Galloping US business reduces stress
After filing an ANDA in the US in 2003, the company has come a long way
as the current ANDA filings stand at 378. The US revenue run rate has
grown from ~US$100 million in 2009 to ~US$560 million as on 2014.
Note that this was despite the USFDA embargo during FY12-13 on unit VI
and unit III. The much hyped Pfizer deal, which eventually fell apart, also
had an impact on the US sales as the company had to invest in the front
end network. In rupee term, US sales have grown at a CAGR of 44% to
| 3447 crore in FY09-14. US formulations now constitute 41% of the total
turnover, up from 18% in FY09. This higher contribution has a positive
impact on the EBITDA margins, which has improved from 17% in FY09 to
26% in FY14. The US traction has also boosted investors’ confidence,
which was affected by warning letters, pilling debts besides non-business
political adversaries. We expect US sales to grow at a CAGR of 24.7% on
a higher base to | 6690 crore in FY14-17E.
Transformation, capacity optimisation to improve margins and cash flows
The API-formulations ratio has improved from 58:42 to 34:66 in FY09-14.
Another USP of the company is its vertically integrated model with huge
capacity, unmatched by most peers. The company owns a network of 19
manufacturing facilities (eight formulations and 11 API and intermediates)
in India and abroad. These can be optimised by 1) continuous US filings
and launches 2) incremental launches and filings in RoW markets and 3)
site transfers and supplies for products covered under the Actavis deal.
Higher capacity utilisation is likely to have a positive impact on margins,
which are likely to be under some pressure after the Actavis deal.
Debt no more a fear factor
The debts kept on piling over the last few years as the capacity built-up
was in full flow. Working capital loans form 60-65% of overall debt. A
depreciating rupee worsened matters even further as most debt was US$
denominated. However, with consistent & incremental US cash flows the
situation has improved markedly. While the D/E ratio improved from 1.9x
to 1x, the debt/EBITDA has improved from 4.5x to 1.7x during FY09-14.
US traction provides cushion against margin correction; maintain HOLD
Contrary to our expectation, the company reported strong margins,
thanks to higher US traction and de-growth in low margin ARV and API
segments. Despite price erosions, which is a fallout of channel
consolidation in the US, as mentioned by most Indian generic players,
Aurobindo continues to thrive in the US, backed by robust product
pipeline and niche launches. Going ahead, with more launches from niche
categories such as injectables and controlled releases on the cards, the
margin scenario is unlikely to deteriorate. Our new target price stands at
| 1111, based on 15x FY17E EPS of | 74.1.

LINK
http://content.icicidirect.com/mailimages/IDirect_AurobindoPharma_Q2FY15.pdf