Aurobindo Pharma (Q1 FY12)

CMP Rs158, Target Rs226, Upside 43% 

• Aurobindo reported revenues growth of 17% yoy driven by 27% jump in US formulation revenues along with 39% increase in ARV sales partially offset by lower Dossier income (down by 51% yoy). Adjusting for Dossier income sales grew by ~20% yoy. Overall Aurobindo clocked in 26.2% growth in formulations and 11.5% growth in APIs. EBIDTA margin contracted 340bps yoy due to increased staff and raw material cost. Adjusted profit at Rs821mn (down 12% yoy) was below our expectation.
• The company has guided for a +20% revenue growth with margins improvement to ~18.5%. In Q1FY12, low margin ARV business contributed 19.5% to sales v/s 16.5% in Q1FY11. We are confident about margin expansion with better product mix and new launches in US, Europe & RoW.
• We marginally revise our FY13 EPS estimate by -5%. There is no change in FY12 estimates as lower tax rate (~18%) would set off lower margin and lower licensing income. FY13 would see increased contribution from international formulation heading to higher margin. Aurobindo trades at attractive valuations of 7.4x and 6.3x of FY12E and FY13E earnings respectively. We maintain our BUY recommendation  with a revised 9-mth TP of Rs226 (earlier Rs238)

• As on Q1 FY12, Aurobindo has 138 ANDAs approved in the US (including 29 tentative approvals)
• The Company has 75 products in the US with ~6 private label products
• ARBP is considering restructuring of its operations, which may involve de-merging high margin formulations business from commoditised API operations, thereby improving business profile in near term
• In Q1 FY12 company redeemed and extinguished its entire outstanding Zero Coupon FCCBs of $139.2mn and funded the requirement with low cost ~4% ECB loan. The redemption premium on crystallization along with withholding tax of Rs3199mn has been shown as an Exceptional item.
• Aurobindo has taken all the necessary steps to address and resolve the regulatory challenges with USFDA around Unit VI Cephalosporin manufacturing facility and awaits the approval
• Recently commercialized formulations facility Unit VII (SEZ) in Hyderabad to contribute significantly to  growth during the year
• Net debt position as on Q1 FY12  is ~Rs26bn