Aurobindo Pharma - Event Update - BUY - Generis acquisition to boost margin - Reliance Securities

Generis acquisition to strengthen ARBP's Europe business

Aurobindo Pharma (ARBP) has acquired Generis Farmaceutica SA (Generis) for Euro135mn (including net working capital of Euro21.7mn) with reasonable valuation at 2.1x EV/Sales and 10.4x EV/EBITDA. With this acquisition (Generis SA: 2nd largest player by value), combined entity would become the largest player in Portuguese generic pharma market. In CY16, Generis generated 85% of sales from retail (73%) and hospital (12%) segment and have a well-diversified portfolio of 227 products, out of which 51 are pending for approval. Portuguese pharmaceutical market size is estimated at Euro3.4bn with low generic penetration in volume (~30% vs. Europe average of 50%) and Government plan to increase generic penetration to ~45% by CY19E. In our view, this acquisition will strengthen ARBP's position in European region, going forward.

Acquisition to Improve Profitability of Existing Europe Biz

Capacity utilization of Generis's facility is at 50%, which is expected to increase to 80%+ by CY20E. It helps to transfer manufacturing of Europe products from Actavis to ARBP and would also help to service untapped biz opportunities for ARBP's EU biz (short lead-time tenders, low-volume products). Management expects synergistic benefits of Euro2mn & Euro5mn in CY18E & CY19E, respectively driven by improvement in capacity utilisation, vertical integration & new product launches. Management expects Sales & EBITDA growth of 12% & 24.4%, respectively in CY17E led by new launches and resolution of temporary supply chain issues from 3rd party. We expect the acquired entity will be EPS accretive by FY18E.

Con-call highlights

1) Generis acquisition to make ARBP a largest generic company in Portugal with~14% market share (market size- Euro600mn), 2) Patent expiry in the market worth Euro110mn in CY17 and ARBP have all the products in pipeline, 3) EBITDA margin is above 20% as Portugal is primarily branded generic market and top 5 companies get benefits of higher pricing, 4) No capex required as of now, and 5) ARBP to raise debt (inEuro) to fund the acquisition and interest rate will be lower than company level

Outlook & Valuation

ARBP has one of the strong ANDA pipelines for US biz and expect US to grow ~22% CAGR over FY16-19E driven by traction in inj. portfolio and ramp-up in launches. With strong earnings growth, healthy returns ratios, and comfortable leverage position (capex cycle ends in FY17E), we maintain our BUY rating on the stock with Target Price of Rs991 based on 20x FY18E EPS of Rs49.5.

Shares of AUROBINDO PHARMA LTD. was last trading in BSE at Rs.704.1 as compared to the previous close of Rs. 704.55. The total number of shares traded during the day was 45333 in over 1188 trades.

The stock hit an intraday high of Rs. 708.9 and intraday low of 697.85. The net turnover during the day was Rs. 31946600.

Source : Equity Bulls

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