Aurobindo Pharma - USFDA issues resolved finally, growth visibility higher - Reliance Securities

Aurobindo management hosted a conference call to provide an insight on business developments of the company. Find below the excerpts:

Key Points

- Unit VI gets USFDA clearance: With Unit VI receiving approval, Aurobindo's long pending regulatory issues with the USFDA seems to have come to an end. USFDA clearance of its unit III in 1QFY2013 and Unit IV and Unit 12 in December 2012 indicates an end to the overhang on the company.

- To recover 60-65% of lost sales from Unit VI: The company has immediately launched 4 out of the 9 solid oral dosages it had from the cephalosporin facility at the time of import alert in February 2011. The other 5 products would be launched soon. Management has indicated of recovering 60-65% of sales i.e. ~US$20mn (prior to the import alert, Unit VI had sales of US$33mn) in FY2014E. The sterile dosage segment is small in nature and does not hold much value. Hence, evaluating the commercial viability the management has decided to discontinue such products.

- Key filings in US to drive growth: US growth is led by 31 new launches in FY2013 along with ramp up in existing product sales. The company received approval for 7 ANDAs during 3QFY2013 with Felodipine ER, Levofloxacin, Pioglitazone, Valsartan+Hydrochlorithiazide being the major ones. The combined market size for these 7 products at the innovator level is ~US$5bn. All these products are likely to ramp up from FY2014E onwards.

- D/E to come down to 0.75x by FY2014E: Management is focused on bringing down debt from 1.3x in FY2012 to 0.75x in FY2014E. The net debt currently stands at US$600mn (repaid ~US$15mn in 4QFY2013). The long term debt is US$210mn (4-5years), short term debt is US$46mn (6-9 months) and the working capital stands at US$355mn, net of cash. Aurobindo has no hedges on its foreign currency debt.

- Enforcement Directorate (ED) case update: In relation to the money laundering case, management has clarified that in the worst case it will have to pay a penalty of U$3mn, which is unlikely to have any impact on the company's financials.

Outlook and Valuation

We remain confident on Aurobindo's structural growth drivers such as (a) Ramp up of licensing deals with large MNC's (like Pfizer, Astra Zeneca); (b) differentiated launches (controlled substances, injectibles, Opthalmics) in US to achieve scale and profitability; (c) Increased scale of operations and improved business mix in favor of formulations (59.4% in FY2014E v/s. 55.1% in FY2012) to aid margin expansion. Reduced capex investments are likely to expedite de-leveraging of balance sheet and improve financial health of the company. We assert resumption of Unit VI to be EPS accretive. Hence, we maintain our Buy recommendation on the stock with a Target Price of Rs240.

Risks to the view

- Slowdown in niche approvals

Source : Equity Bulls

Keywords