|Date of report||May 30, 2017|
|Target Price (Rs)||753|
Aurobindo Pharma Research Report
US holds firm amid pricing pressure…
• Revenues declined 3.5% YoY to Rs 3642 crore (I-direct estimate: Rs 3774 crore) mainly due to an 8% decline in Europe to Rs 777 crore (Idirect estimate: Rs 848 crore) and 20% decline in ARV business to Rs 262 crore (I-direct estimate: Rs 345 crore). US growth was flat YoY at Rs 1643 crore (I-direct estimate: Rs 1634 crore)
• EBITDA margins fell 318 bps YoY to 19.8% (I-direct estimate: 22.5%) mainly due to one-off inventory write-off and higher employee cost
• Adjusted net profit fell 5% YoY to Rs 513 crore (I-direct estimate: Rs 531 crore). The EBITDA decline was offset by lower tax rate
US key growth driver despite imminent pricing pressure
After filing ANDA in the US in 2003, the company has come a long way as current ANDA filings are at 429. The US revenue run rate has grown from ~US$100 million in 2009 to crossing $1 billion sales as on 2017. Note that this was despite the USFDA embargo in FY12-13 on unit VI and unit III. In rupee term, US sales have grown at 42% CAGR to Rs 6827 crore in FY12- 17. US formulations now constitute 45% of total turnover, up from 26% in FY12. US traction has also boosted investor’s confidence, which was affected by warning letters, piling debts besides non-business political adversaries. We expect US sales to grow at 7% CAGR on a higher base to Rs 7748 crore in FY17-19E.
Transformation, capacity optimisation to improve margins, cash flows
The API: formulations ratio has improved from 43:57 in FY12 to 21:79 in FY17. Another USP of the company is its vertically integrated model with huge capacity, unmatched by most peers. The company owns 22 manufacturing facilities, including eight key formulations facilities in India and abroad. These can be optimised by 1) continuous US filings and launches, 2) incremental launches and filings in the RoW markets and 3) site transfers and supplies for products covered under the Actavis deal. Higher capacity utilisation is likely to improve operating leverage thereby maintaining the margin improvement trend.
Debt no more a fear factor
The company’s debts kept on piling over the last few years as the capacity built up was in full flow and rupee depreciation. Working capital loans are now 85% of overall debts from 65-70% earlier. However, with consistent and incremental US cash flows the situation improved markedly. While D/E ratio improved from 1.9x to 0.3x, the debt/EBITDA improved from 4.5x to 0.9x in FY09-17. As the capex cycle moderates by FY18, the company expects to utilise maximum FCF for debt repayment.
Injectable focus continues to underpin US growth amid pricing pressure
The Q4 numbers once again highlighted imminent pricing pressure in the US oral solid business. The scenario is unlikely to change in the near future. However, unlike other peers, the management seems relatively undeterred regarding US prospects. Moreover, we expect the percentage of injectables, which are relatively insulated from pricing pressure, in the US portfolio, to grow from 14% in FY17 to 20-25% by FY19. We believe launches continuum, especially in the injectable space, can effectively neutralise 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 a focused approach. We have ascribed a target price of Rs 750, based on 18x FY19E EPS of Rs 41.8.