Aurobindo Pharma - Q2FY21 Result Update - YES Securities

An emerging injectable franchise

We upgrade Aurobindo to BUY with revised TP of Rs1,030, based on 15x based on Sep'22 EPS. We revise our FY21/22 estimates by 23%/16% and raised target PE from 13x earlier with roll over to Sep'22 from Mar'22. Our upgrade is premised on 1) increasing confidence on ~8-10% US growth driven by injectables business as also scope for sustained growth beyond FY23 as 3 depot injections come in to play 2) Margin to sustain around 22% on back of stability in injectables pricing; better margin in vaccines business to partly offset loss of export incentives 3) Balance sheet in very good shape after US$550mn Natrol sale deal which leaves surplus cash - a change from net debt situation a month back. We are ~5% ahead of consensus on FY22 EPS and reckon most of the upsides are to be had from persistent earnings delivery supported by modest PE rerating. We upgrade from Reduce and prior TP of Rs710. Escalation of Unit VII observations is key risk as it could jeopardize new approvals for the oral solids unit.

Guidance bolsters our confidence on injectables growth

Management guidance of US$700mn injectables business in 3 years including Europe and growth markets gives us confidence on sustainability of this segment beyond FY22. In the near term, US would be a key driver and once the capacity for Europe and growth markets comes on stream, these would also add to injectables sales. We factor in US$450mn injectables revenues in US in FY23; our assumption is pricing will hold up till the depot injections come in to play in FY24 which would impart a solid momentum thereafter. In the meanwhile, biosimilars in FY23 and generic injectables will hold fort and support margin.

Factors in place for growth beyond FY23

Aurobindo has ramped up R&D to 5.5% in Q2 and spending in FY22 will include biosimilar assets that will be introduced in Europe (2 molecules) followed by US. While the nature of molecules is not known, company will be in the first wave for ophthalmic biosimilars. We have not factored biosimilar revenues as we await more clarity though this would present an upside risk to our US sales estimates in FY23. Additionally, 3 depot injectables products will also come in to play which would drive injectables sales beyond FY23; while depot injections are not new, nearness of going in to clinic in current fiscal followed by first depot filing in FY22 brings greater comfort on monetization of complex injectables. In addition, transdermals and inhalers (admittedly a longer gestation project to monetization) capacity will further add to visibility.

Europe to continue with margin up move

Europe business has performed commendably so far and while margins not comparable to US, it has clocked double digit margin in Q2 FY21. While gross margin factors like transfer of manufacturing to India has played out, reckon this aspect can still contribute EBIDTA along with boost from biosimilars business in FY23. We expect a sustained 14% growth in the region coupled with improving margins.

Balance sheet in solid shape as it transitions to net cash

There has always been lingering concern on debt (albeit most of it related to working capital) which have now been adequately addressed with the proceeds from US$550mn Natrol deal. With capex of US$180-200mn spread over 2 years, we reckon Aurobindo will be left with surplus cash, a turnaround from net debt a month back. While capex on PLI scheme for investment in APIs would require funding, reckon internal FCF generation would also pick up to support incremental capex. We upgrade Aurobindo to BUY from Reduce with TP of Rs1,030 (prior Rs710) and roll over target PE to 15x Sep' 22 EPS from 13x Mar'22.

Shares of AUROBINDO PHARMA LTD. was last trading in BSE at Rs.858.15 as compared to the previous close of Rs. 838.95. The total number of shares traded during the day was 136584 in over 3849 trades.

The stock hit an intraday high of Rs. 860.2 and intraday low of 833.4. The net turnover during the day was Rs. 115824421.

Source : Equity Bulls

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