Aurobindo Pharma – sparkling multibagger with 700% gain in Rakesh Jhunjhunwala’s portfolio
Rakesh Jhunjhunwala, the Badshah of Dalal Street, has a penchant for landing up at investor conferences of companies where he is a shareholder and of grilling the management on various esoteric issues.
Aurobindo Pharma is one of the companies to have enjoyed this rare privilege.
In June 2013, the Badshah landed up unannounced to cross-examine Robert Cunard, the CEO, and Sudhir Singhi, the CFO, of Aurobindo Pharma, on a variety of issues relating to margins, exports, foreign currency etc.
The sleuths of DNA, who witnessed the rare interaction between the Badshah and the Company’s executives, were awestruck by the incident. They recorded a transcript of the conversation which is available for posterity.
“I am very bullish about Aurobindo Pharma”
Normally, Rakesh Jhunjhunwala does not publicly disclose names of the stocks that he is bullish on though there are occasions when he is feeling generous and charitable and in a mood to talk about specific stocks.
“I have bought some Aurobindo Pharma. I am very bullish on it,” the Badshah proclaimed in September 2013.
Needless to say, the investment has worked out very well. The stock has given a mind-boggling gain of nearly 700% since then.
Aggressive increase of holding in stock by Rakesh Jhunjhunwala
The extent of bullishness of the Badshah in Aurobindo Pharma is evident from the fact that he has been aggressively increasing his holding of the stock in his portfolio.
In December 2014, Rakesh Jhunjhunwala held 30,00,000 shares of Aurobindo Pharma.
As of December 2016, the holding has increased to 63,50,000 shares.
The investment is worth Rs. 436 crore at the CMP of Rs. 685.
Unanimous buy recommendations by leading brokerages
Aurobindo Pharma has always been a favourite amongst the analysts owing to its product portfolio and capability of management.
Let us take a quick look at the recent recommendations:
Daljeet Kohli recommends buy with target price of Rs. 1054 (55% upside)
Daljeet Kohli is regarded as an expert on Pharma stocks given that he has recommended blockbuster Pharma stocks such as Ajanta Pharma (10-bagger), Alembic Pharma, Shilpa Medicare etc.
Daljeet has been a devoted fan of Aurobindo Pharma as well.
He was among the first to recognize the potential of the Company to deliver multibagger gains.
He recommended the stock in June 2012 when it was languishing at the throwaway valuation of Rs. 55.
At the CMP of Rs. 685, mind-boggling gains of 1147% are on the table.
Daljeet’s latest recommendation is very succinct and convincing:
“We remain positive on ARBP on the back of robust ANDA pipeline, subject to regulatory approval, and improvement in profitability from turnaround of Actavis and Natrol.
At CMP of Rs 679, the stock is trading at attractive valuation of 15.2x FY17E EPS of Rs 44.6 and 14x FY18E EPS of Rs 48.4 & 12.9x FY19E EPS of Rs 52.7. We value ARBP at (unchanged) 20x FY19 EPS to arrive at target of Rs 1054 (Rs 1012 earlier).”
Centrum recommends buy for target price of Rs. 1,110 (57% upside)
Diversified product basket, maintain Buy
We maintain our Buy rating on Aurobindo Pharma (APL), with a TP of Rs1,110 (earlier Rs1,060) based on 18x March’19E EPS of Rs61.7. APL’s Q3FY17 results were below our expectations. APL reported 11% YoY sales growth, a 40bps decline in margin to 22.9%, and 6% YoY net profit growth. Its entry into specialised segments such as injectable, penam, microspheres, hormones, oncology, depot injections and peptides would help improve margins. APL has developed a strong pipeline of 421 ANDA for the US market. The management expects approvals for many of its injectable in FY18. APL is among our top picks in the pharma sector.
Motilal Oswal recommends buy for target price of Rs. 1,050 (49% upside)
Strong earnings growth trajectory, improving cash flows to drive valuations:
ARBP trades at 14x FY18E EPS, at >25% discount to peers. The valuation gap is expected to narrow on account of the company’s increasing profitability, strong earnings growth trajectory (19% CAGR till FY19E), and improving free cash flow. ARBP remains one of our top picks in the sector, with a target price of INR1,050 (20x 1HFY19E EPS).
ICICI-Direct recommends buy with target price of Rs. 965 (42% upside)
Injectable focus to underpin US growth amid pricing pressure
The Q3 numbers once again highlighted eminent pricing pressure in the US oral solid business. The scenario is unlikely to change in the near future. However, the company continues to thrive in the US, backed by a robust product pipeline and niche launches. Moreover, we expect the percentage of injectables, which are relatively insulated from pricing pressure in the US portfolio, to grow from 10% in FY16 to 20-25% by FY19. We believe launches continuum, especially in the injectable space, can effectively neutralised channel consolidation and pricing pressure headwinds. Other important segment i.e. Europe is likely to fetch better margins on the back of product transfers to India and focussed approach. We have ascribed a target price of Rs 965, based on 19x (earlier 20x) FY19E EPS of Rs 50.7.
Khambatta Securities recommends buy for target price of Rs. 917 (38% upside)
We believe the company’s margins will continue to improve aided by launch of new products resulting in better product mix over the long term. Hence, we have valued the business at 19x FY 2018E EPS of Rs 48.5 i.e Rs 922 per share. We assume a target EV/EBITDA multiple of 13x for FY 2018 EBITDA, to arrive at a target price of Rs 919 per share. Aurobindo’s DCF valuation is Rs 914 per share. Consequently, using a weighted average methodology we arrive at a share price of Rs 917, generating a 38.8% upside potential in the medium term.
Axis Direct recommends buy for target price of Rs. 800 (13% upside)
Aurobindo’s (ARBP) Q3FY17 EBITDA (up 9% YoY) was 4% below our estimate. Gross/ EBITDA margin declined 180 bps/170 bps QoQ on increased price erosion of key oral solid products (gAbilify, gEntecavir) in US. While injectables grew over 80%, the growth could soften given withdrawal (post injunction) of isosulfan blue. Reduction in net debt (USD 410 mn vs. USD 484 mn in Sep’16) was positive. We expect increased R&D expenses (biosimilars/ liposomal injectables) in FY18/19 to weigh down operating margin.
We cut FY18/19E EPS by 6%/7% given increasing pricing pressure in US and higher R&D costs. We revise TP to Rs 800 (17x Dec’18) vs. Rs 860 earlier. While we expect near term pressure, we maintain BUY as we expect growth to pick up with increased capacity in FY18.
Aurobindo Pharma has issued an investors’ presentation in February 2017 which makes for interesting reading.
In particular, the details about the “way forward” indicates that the Company has a number of ambitious plans on the anvil to increase market share and profitability.
End of FDA woes?
Aurobindo Pharma has been in the doldrums in the recent past owing to controversies of the entire Pharma sector relating to FDA’s inspection and warning letters.
The indications are that these woes may have come to an end at least in the case of Aurobindo Pharma.
The Company today issued a release stating that it has successfully completed US FDA inspection of its Unit-11 plant in Srikakulam, Andhra Pradesh with zero observations. It was pointed out that the USFDA inspection was concluded today.
It was also stated that the Unit-11 plant produces non-antibiotic active ingredients which is used for both the captive purpose of Aurobindo’s formulation manufacturing and for supplies to external customers.
It was also stated that the US formulation business contributes 45 percent of Aurobindo’s total revenue Rs.13,890 crore.
BIG news fro AUROBINDO – sources
Unit 11 (2nd largest API plant supplying to US) inspection completed today with zero observations by USFDA
— Varinder Bansal (@varinder_bansal) February 21, 2017
Foray into biosimilars is a big deal?
Aurobindo announced recently that it has taken made a “strategic investment” for future growth which will position it as a strong player in the rapidly evolving biosimilars landscape.
It was also stated that the branded market size of four biosimilars, three of which are monoclonal antibodies, in oncology is “very promising”.
Prima facie, the bullishness of Rakesh Jhunjhunwala in Aurobindo Pharma, coupled with the unanimous buy recommendations of leading experts and the apparent end of FDA woes augurs well for the stock. We need to take a closer look and decide whether we should also tuck into the stock or not!