Thursday, February 16, 2012

>AUROBINDO PHARMA: 3QFY2012 Result Update

Performance boosts sequentially
Key highlights of the result

■ Better than expected 3QFY2012: Aurobindo reported better than expected top-line growth of 17.7% yoy (19% qoq) led by low margin ARV API (up 106% yoy) and healthy formulations growth in EU and ROW markets (up 45.1% yoy), partially aided by weak INR. The US formulations grew 14.9% qoq despite the ban on non-betalactum plant, which is commendable. The licensing income remained low at Rs22.8cr.

 Margins improved sequentially: Despite higher contribution from the low margin ARV tender business, the gross margins improved 60bp qoq to 44.1%. Further, favorable currency led the EBITDA expansion by 400bp at 13.3% qoq as exports remain unhedged.

 APAT up 10.2% qoq: Aurobindo reported net loss of Rs28.5cr in 3QFY2012, affected by USFDA issues and forex loss of Rs144.5cr on account of loan restatement. Adjusting for the one-time expense, the APAT stood at Rs116cr, above our estimate.

 Concall takeaways: (1) The Company expects USFDA inspection by March, 2012 for Unit III and by June, 2012 for Unit VI, (2) It has guided for 25 product launches in US out of which 11 from Unit III and 14 through Unit VII post USFDA resolution in FY2013E, (3) AstraZeneca contract is likely to start from October, 2012 and it expects to launch ~80 products (worth US$30-50mn) by December, 2013, (4) Pfizer contributed Rs67cr in 3QFY2012, expected to double in 4QFY2012, (5) Company guided to improve margins by cost saving of US$1.5mn per quarter on Unit VI, (6) Capex guided at Rs200cr for the next 2 years, while, tax rate at 20% for FY2013, (7) Gross debt stands at Rs3,360cr, cash at Rs225cr.

Outlook and Valuation
Aurobindo’s 3QFY2012 performance reflected strong growth traction on a sequential basis. New launches in EU and ROW markets, gradual improvement in US through shift of products from affected units and favorable currency led to better than expected quarter. Despite management’s encouraging picture of strong visibility (US$2bn sales guidance by 2015) led by new launches in US, ramp up in filings in niche OCs and OTC segments, pick up in Pfizer and AstraZeneca sales and sustained growth in EU and ROW, we believe that the growth would remain under pressure until the USFDA resolution is obtained. We factor in the sequential improvement of the company and revise our EPS to Rs13.3 (Rs11.9 earlier) and Rs14.5 (Rs13.9 earlier) for FY2012E and FY2013E respectively.

The stock has corrected 51% in the last 1 year due to slippages in growth affected by import alert on manufacturing plants and high forex losses. Further, high fixed costs relating to facility up-gradation and import alert on Unit VI impacted its operating performance. CBI raids with regards to financial misdeeds by promoter also added to its woes. We believe that stock correction is overdone (up by 25% in the last 3 months) and a likely rebound in growth and margins would drive growth. Hence we maintain Hold with a price target of Rs139.

To read full report: AUROBINDO PHARMA