Maintain BUY on Aurobindo Pharma - Strong beat, growth levers intact - HDFC Securities

Ms. Bansi Desai, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities.

Aurobindo Pharma (4QFY20): Strong beat, growth levers intact. Maintain BUY
(TP Rs 835, CMP Rs 759, MCap Rs 445bn)

Aurobindo beat our Revenues/EBIDTA/Adj.PAT forecasts by 5%/14%/17%, aided by strong performance across markets, better product mix and currency tailwinds. While Q1FY21 is expected to be muted, the underlying growth prospects for the business remain strong. Steady progress on differentiated pipeline will drive long term earnings sustainability in our view. Improvement in balance sheet is comforting with net reduction of USD365mn in FY20 and stable working capital days. The company intends to be net debt free by FY22. We increase our earnings estimates by 4-6% to incorporate slightly higher gross margin. Our revised TP of Rs835 is based on 14x FY22 EPS. Maintain Buy.

Q4 snapshot: Revenues were driven by strong growth in EU, ARV and Growth markets. US sales (USD413mn, -1% QoQ) were in line as subdued growth in injectables business (down 22% QoQ, Covid impact, lower Ertapenem) were offset by strong traction in oral solids, nutraceuticals business aided by shortages. EBIDTA margin expanded to 21.8% (+176bps YoY, +131bps QoQ) as strong improvement in gross margin (58.7%, +432bps YoY, +294bps QoQ) partially offset increase in staff cost and other expenses.

Apotex turnaround will drive Europe profitability higher: Apotex business (~16% of EU business) is expected to breakeven in 2HFY21 (negative EBIDTA margins of 2-3% at the time of acquisition, Feb 2019) and likely to turn profitable in FY22. Aurobindo plans to shift manufacturing of ~20 products to India over the next two years. EU margins are at 9-10% (~12% excluding Apotex) and are likely to improve by 200-300bps over FY20-22e.

Key to Note: a) Guidance: Q1FY21 to be soft, gross margin: 58-59%, US injectables to gradually recover through the year; cautiously optimistic on US growth; b) Expects 50-60 launches (25 approved) and 50+ filings in FY21; Price erosion: expects to be in the range of 5%; c) Net debt reduction - USD87mn in Q4, USD365mn in FY20, expects USD200-250mn debt reduction in FY21 and be net debt free by FY22; d) Unit 1, IX, XI - invited FDA for desktop review; Unit VII - submitted CAPA, awaiting FDA response; e) R&D to inch up to 5.5% of sales in FY21 led by clinical trials on biosimilars and filings/development of other complex opportunities.

Maintain Buy, risks: We increase our estimates by 4-6% and revise TP to Rs835 based on 14x FY22e EPS. Key downside risks: higher price erosion in the US, delay in plant resolution (Unit I, IX, XI, VII, AuroLife) and lower margin improvement in EU business.

Shares of AUROBINDO PHARMA LTD. was last trading in BSE at Rs.759.15 as compared to the previous close of Rs. 750.65. The total number of shares traded during the day was 541371 in over 13742 trades.

The stock hit an intraday high of Rs. 791 and intraday low of 754.25. The net turnover during the day was Rs. 416984485.

Source : Equity Bulls

Keywords