Aurobindo Pharma - Overcomes the last hurdle - Edelweiss

Lifting of the import alert on Unit-VI facility has eliminated the last hurdle in Aurobindo Pharma's (ARBP) growth path. Imposition of the alert in May 2011 had dented profitability/growth, resulting in correction of valuation multiples. However, post a series of inspections during FY13 (including affected plants), the company has successfully complied with FDA requirements. Thus, increasing pace of approvals in the US will fuel growth, while operating leverage will result in higher profitability over FY14-15. We expect 24% CAGR in operating profit, while reduction in debt and lower capex are likely to result in 32% CAGR in earnings over FY13-15E. Reiterate 'BUY' with TP of INR250 (10x NTM EPS).

Recovery in base business post lifting of import alert on Unit-VI

Prior to the import alert, ARBP has been supplying nine oral Cephalosporins in US from Unit-VI with sales of USD33mn. Post revocation of ban, the company will be able to restore ~65% of sales (USD25mn) during FY14 and offer positive operating leverage, as fixed costs are build in. We expect core operating margin to scale up from 14.4% to 16.7% over FY13-15E.

Strong operating leverage from injectibles/controlled substances

Apart from recovery in sales, ARBP has a robust pipeline of injectibles (15 pending approvals) and controlled substances (4-5 launches over FY14) that will render strong growth in US, coupled with higher margin. On back of these launches, we expect US (ex-Licensing sales) to scale up to USD500mn by FY15E from USD335mn in FY13.

Operations unaffected by CBI's land seizure

Recent land seizure via a CBI enforcement directive (ED) does not have any bearing on operations, as per management. Moreover, maximum penalty to be paid to release the land will be ~USD2mn or INR125mn (0.3% of market cap), according to ARBP.

Outlook and valuations: Growth visibility; reiterate 'BUY'

The import alert had been a key negative overhang over valuation, and post revocation of the same, we do not see any regulatory overhang. Units IV / Unit- XII have also started to ramp up in terms of approvals. Hence, we reiterate 'BUY/SP' rating.

Source : Equity Bulls

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