'Buy' Aurobindo Pharma on US growth signs, target price Rs 425: BofA-ML

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SummaryWe forecast a 47% EPS CAGR over FY13-16E with an improving earnings profile

We forecast a 47% EPS CAGR over FY13-16E with an improving earnings profile and see valuation upside as Aurobindo Pharma Ltd plays catch up with its domestic peers.

We reinstate coverage on ARBP with ‘buy’ and target price of R425 (46% upside).

Over the past five years, ARBP has transformed from an API (active pharmaceutical ingredient) company to a formulation maker, but its valuations have yet to catch up (trading at 47% discount to peers). We are 11/15% above consensus for FY14/15E.

We see the re-rating of ARBP being realised by evidence of earnings growth being driven by success in the US, B/S improvement, induction of professional management and clear signs of the scale improving margin.

Historically the stock was de-rated due to an FDA import alert on unit IV in FY11, a profit miss, earnings cut by street and over leveraged B/S.

Following the FDA resolution, the firm scaled up its US business rapidly, which has seen higher market share in existing products and new launches. Driven by a large pipeline and incremental focus on differentiated products, we expect US business to grow FY13-16E revenue by a 34% CAGR and +580bps in margin. With the investment cycle behind us, increased capacity utilization and a favorable product mix, we expect profitability to improve.

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