Aurobindo Pharma, Margin pressure overshadows solid sales growth :: ICICI Securities, report

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Margin pressure overshadows solid sales growth • Revenues grew 48% YoY to | 3166.2 crore vs. I-direct estimate of | 2835 crore on the back of higher-than-expected Europe & ARV sales • EBITDA margins declined 1077 bps to 19.3% vis-à-vis I-direct estimate of 21.6%. This was on account of higher-than-expected sales in the loss making European business. EBITDA de-grew 5% to | 612.2 crore (I-direct estimate of | 612.3 crore) • Net profit de-grew 8% to | 384.35 crore in line with I-direct estimate of | 393.7 crore 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 374. 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 37% of the total turnover, up from 18% in FY09. This higher contribution has a positive impact on the EBITDA margins, which have improved from 17% in FY09 to 26% in FY14. The US traction has also boosted investors’ confidence, which was affected by warning letters, piling debts besides non-business political adversaries. We expect US sales to grow at a CAGR of 28% on a higher base to | 7233.5 crore between FY14 and FY17E. Transformation, capacity optimisation to improve margins, cash flows The API: formulations ratio has improved from 58:42 in FY09 to 22:78 in 9MFY15. 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 & intermediates) in India & abroad. These can be optimised by 1) continuous US filings & launches 2) incremental launches & filings in the RoW markets and 3) site transfers & supplies for products covered under the Actavis deal. Higher capacity utilisation is likely to have a positive impact on margins that are likely to be under some pressure after the Actavis deal. Debt no more a fear factor The company’s debts have kept on piling up over the last few years as the capacity built up was in full flow. Working capital loans form 60-65% of overall debts. A depreciating rupee worsened the matter even further as most of the debt was US dollar denominated. However, with consistent and 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 1.8x during FY09-14. US traction key for margin improvement; upgrade to BUY Q3 margins were affected by some one-offs but for which the margins could have been higher. Aurobindo continues to thrive in the US, backed by a robust product pipeline and niche launches that, of late, have slowed down because of a slowdown in approvals. However, the filing to approval gap (182 at present) still bodes well for future US growth. We expect initial margin pressure, on account of Actavis and now Natrol, to ease further on the back of incremental high margin US launches. Our new target price stands at | 1303, based on 16x FY17E EPS of | 81.4.

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