Aurobindo Pharma Research Reports + Investors Presentation (Feb 2017)

IndiaNivesh recommends buy with target price of Rs. 1054 (55% upside)

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.

Investors’ presentation

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.