Analysts Corner | Aurobindo Pharma: Maintain ‘buy’ with a TP of Rs 485

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April 04, 2020 2:30 AM

The termination of Sandoz deal would impact the growth outlook in near term. However, we remain positive on Aurobindo’s track record of continuously growing US generic business, maintaining margin profile in challenging times and de-leveraging of balance sheet.

Aurobindo and Sandoz have mutually terminated the agreement of Aurobindo buying out the generic oral solids and dermatology businesses of Sandoz.

Aurobindo Pharma (Aurobindo) and Sandoz mutually announced the termination of the deal that the company was buying US generic oral solids and dermatology businesses from Sandoz. This comes as a negative surprise because it was highly anticipated to conclude anytime soon. It was attractive valued at 5x Ebitda along with benefit of significant scale up in US generic business. They have cited non-receipt of approval from the US Federal Trade Commission (FTC) for this transaction within the anticipated timelines as the reason for call-off. This acquisition would have aided in improving revenue growth in near term for Aurobindo. We now expect consolidated revenue growth in mid-single digit for Aurobindo over next two years as we take out Sandoz from estimates. Maintain ‘buy’ on attractive valuations.

Aurobindo and Sandoz have mutually terminated the agreement of Aurobindo buying out the generic oral solids and dermatology businesses of Sandoz at $900 (1x sales and ~5x Ebitda). This deal has been called-off. This agreement was initially inked in Sep’18 and there had been constant delay in consummating it.

Sandoz’s portfolio would have supplemented Aurobindo’s with a wide product portfolio of over 300 products, significant scale-up in US sales and ready dermatology portfolio with approvals in place. Further, this deal was done at very attractive valuation of ~5x Ebitda and would have been funded through a low-cost debt at ~4% interest rate. We remove Sandoz acquisition from our estimates and cut revenue/Ebitda/PAT estimates by 15-17/14-17/6-7% for FY21-FY22. The impact on EPS is lower due to associated depreciation charge and interest cost.

The termination of Sandoz deal would impact the growth outlook in near term. However, we remain positive on Aurobindo’s track record of continuously growing US generic business, maintaining margin profile in challenging times and de-leveraging of balance sheet. We expect Aurobindo to register 5.2% revenue and 7.2% PAT CAGRs over FY20-FY22E with Ebitda margin of 20-21%. We cut target P/E (x) to 9x from 10x due to termination of the Sandoz deal and resultant drop in earnings growth. Considering attractive valuation of 7.3xFY22E EPS, we maintain ‘buy’ rating with a revised target price of `485/share based on 9xFY22E earnings (earlier: `574/share based on 10xFY22E EPS). Key downside risks: regulatory hurdles, currency volatility, and delay in US launches.

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