Aurobindo Pharma: Hardtimes ending; Re-rating around the corner

India Infoline News Service | Mumbai |

APL has tied up with MNCs partners for selling and distribution in various countries (out licensing the dossiers).

CMP Rs176, Target Rs218, Upside 23.9%

Aurobindo Pharma (APL), in the past one year has witnessed many highs and lows led by USFDA clearance uncertainties and setbacks at the operational front. Now, with USFDA approval expected shortly for Unit IV, and improvement at operating front, we believe a re-rating is just around the corner. We recently interacted with the management and re-affirm our belief on the stock. Management expects to get approval for the newly constructed Unit IV, injectable facility in few weeks time. We also expect approval of Unit VI in H2FY12. For Unit VI, which is under import alert, the US FDA had some very minor observations and company has already submitted the response letter.

APL has a twin benefiting business model. APL has tied up with MNCs partners for selling and distribution in various countries (out licensing the dossiers). Additionally, it has its own distribution given that all the molecules are not exclusively licensed. While the strategy augurs well for better business mix in the long run, it will stress the balance sheet with higher working capital in the near term. In Q2 FY13, APL reported better than expected operating performance driven by favorable business mix (launch of generic Singulair and ramp-up in Combivir & Plavix sales in US) and tighter control at operating level (EBITDA margins improved by 600 bps to 16.7%). We expect core margins to be maintained at ~17% with a potential upside from FDA resolution of Unit-VI and early commercialization of Unit-IV.

We expect continual improvement in fundamentals driven by new Unit IV approval (Injectable facility with 18 ANDA filed as on October 2012), resolution of US FDA issues of Unit VI, better business mix and tight control at operating level. We up our FY13-14E earnings estimates and raise our TP to Rs218. APL is currently trading at a deep discount to its peers and even to its historical PE multiple of ~12x (6 yrs avg). We expect valuations to catch up on improving outlook.

Financial summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 44,529 46,521 54,784 65,063
yoy growth (%) 24.5 4.5 17.8 18.8
Operating profit 10,347 5,860 9,157 11,174
OPM (%) 23.2 12.6 16.7 17.2
Adj PAT 5,730 3,114 4,594 5,985
Reported PAT 5,635 (1,235) 4,594 5,985
yoy growth (%) 2.2 (45.7) 47.5 30.3
EPS (Rs) 19.7 10.7 15.8 20.6
P/E (x) 8.9 16.5 11.2 8.6
Price/Book (x) 2.1 2.2 1.9 1.5
EV/EBITDA (x) 6.6 13.0 8.4 6.7
Debt/Equity (x) 0.8 1.1 1.0 0.8
RoE (%) 26.8 13.0 18.0 19.6
RoCE (%) 20.5 8.3 12.9 15.1
Source: Company, India Infoline Research


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