Aurobindo Pharma - Strong performance in the US - Centrum

Aurobindo Pharma's (APL) revenues for Q3FY13 were in line with our expectations but EBIDTA and net profit were below expectations due to lower than expected margin and higher forex losses. The company reported 22%YoY growth in revenues, 160bps improvement in EBIDTA margin and net profit of Rs918mn against net loss of Rs286mn. The formulations business (58% of revenues) grew by 23%YoY whereas API business (40% revenues) grew by 22%YoY. APL reported forex loss of Rs734mn against Rs1,445mn. We have a Buy rating for the scrip with a target price of Rs245 (based on 8x FY14E EPS of Rs30.6).

Good sales growth: APL reported 22%YoY growth in revenues from Rs12.85bn to Rs15.70bn due to good growth in the formulation business and benefit of rupee depreciation against the dollar. The formulation business (58% of revenues) grew by 23%YoY. Formulation exports to US and (EU & RoW) grew by 58% and 9%YoY respectively. The company's ARV formulation export declined by 18%YoY as the company accepts tenders with higher margins. APL's API business grew by 22%YoY from Rs5.43bn to Rs6.60bn. Dossier income grew by 69%YoY from Rs228mn to Rs386mn.

Margin improvement: APL's EBIDTA margin improved by 160bps YoY from 14.9% to 16.5% due to the decline in material and personnel costs. Material cost declined by 510bps from 54.9% to 49.8% of revenues due to higher formulation sales. Personnel cost declined by 40bps from 11.0% to 10.6% due to strong sales growth. Other expenses grew by 390bps YoY from 19.2% to 23.1% due to an increase in power and fuel cost and legal & professional fees for remedial measures of its manufacturing units. APL's material cost has been declining steadily over last five quarters.

Unit VI likely to get inspected: APL's manufacturing unit VI (cephalosporin oral and injectable) which is under import alert from US FDA was inspected in Q2FY13. We expect the unit to contribute significantly after clearance from US FDA. APL's Unit IV (general liquid injectable) and Unit XII (SSP oral and injectable) have been cleared by US FDA after re-inspection in Q3FY13 and are likely to contribute from Q4FY13 onwards.

Strong product pipeline: APL has a strong product pipeline for regulated markets. The company has filed 262 ANDAs with US FDA, of which 171 are approved. APL has over 170 DMFs filed in regulated markets. The company has filed 1,337 dossiers in Europe. We expect all these approvals to contribute significantly in future.

Valuations: We expect APL to benefit from strong growth of generic formulations in regulated markets. We expect margin improvement due to its reduced exposure to ARV formulations and re-approval of its two facilities by US FDA. We have revised our FY13 estimates downwards by 10% and kept FY14 estimates unchanged in view of higher MTM losses. At the CMP of Rs184, the stock trades at 12.8x FY13E EPS of Rs14.4 and 6.0x FY14E EPS of Rs30.6. We have a Buy rating on the scrip with a target price of Rs245 (based on 8x FY14E EPS of Rs30.5) with a 32.9% upside over the CMP.

Source : Equity Bulls

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