Aurobindo Pharma - Margin Skids, But Business Trends Steady; Result Update Q3FY15 ::Edelweiss, report

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Aurobindo Pharma’s (ARBP) adjusted PAT was 8% below estimate largely due to lower gross profit, which was impacted by a one-off provision in EU and emerging market currency impact. The company has guided for bounce back in margin. We perceive the new acquisitions (Actavis’ European business and Natrol) as high risk initiatives and believe any structural trend of business trajectory will still take time to form. We maintain ‘HOLD’ owing to execution risks related to acquisitions (15x FY17E), rich valuations and high dependence on US, which is seeing slowdown in ANDA approvals. Prefer Cadila Healthcare over ARBP.

Margin miss, but expected to bounce back

Revenue surpassed estimate marginally as ARV sales surprised with 140% QoQ surge despite muted API business (down 9% YoY). Strong growth in the US (up 29% YoY) continued despite no new ANDA approvals and a high base in Q3FY14 (Cymbalta exclusivity) on increasing share, price hikes and contribution from Natrol acquisition (27days of Dec’14). Gross margin missed (~400bps) estimate due to a product related one-off in EU (INR500mn) and emerging market currency impact, but is expected to bounce back. EBITDA margin missed our estimate by 230bps on lower gross profit and rise in staff cost (9% QoQ). Accordingly, adjusted PAT missed our estimate 8%.

Other key takeaways

(a) Natrol: Expects 15% revenue growth and higher PAT growth over the long term as margin expands from current 14% (target 20%) over the next few years; (b) Natrol’s sales outside US are currently limited, but have huge expansion scope; (c) gross debt surged >USD100mn to USD735mn due to Natrol acquisition (USD133mn consideration), cash at USD76mn; (d) capex at INR6.5-7.0bn for FY15 and INR7-8bn for FY16; (e) no ANDA approvals received from the recently USFDA inspected units-Unit IV, VI and XII; Unit IV has received form 483, which has been responded to by ARBP; (f) moving towards more complex generics-penem, peptides, nanosphere, liposomal for long-term growth in the US; (g) management held its guidance of turnaround of acquired EU business (breakeven by Q4FY16).

LINK
https://www.edelweiss.in/research/Aurobindo-Pharma--Margin-Skids,-But-Business-Trends-Steady;-Result-Update-Q3FY15/28261.html