Aurobindo Pharma rating ‘add’: A strong performance in the quarter

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Published: November 27, 2018 1:42:40 AM

Showing was led by the US business; strong pipeline for FY19-21 augurs well; FY20/21 estimates up 3-4%; TP raised to Rs 785.


Aurobindo Pharma is well-poised to gain market share in US orals. (Representational photo)

ARBP’s Q2FY19 revenues were 4% ahead of estimates, with US leading growth with $32 mn q-o-q ($21 mn vs KIE) jump, led by ertapenem and valsartan opportunities as well as strong base business growth. Ebitda expanded 100 bps, exceeding our estimates by 8.6%. Aurobindo Pharma is well-poised to gain market share in US orals and will continue to benefit from a strong FY2019 launch schedule with Sandoz deal adding to a strong FY2020/21 pipeline. Add with a revised target price of Rs 785/share (Rs 760 earlier).


Strong quarter, led by US
ARBP reported a solid quarter, largely led by the US, which at $318 mn was $21 mn ahead of our estimates, led by higher injectable sales, particularly ertapenem, valsartan market share gains and pricing benefits, along with strong volume gains for the base business, steady sales in OTC, even as bulk of the benefit from new buying orders is likely to be reflected in the coming quarters.

The US benefit was offset by a disappointment in the EU, which declined 3.6% q-o-q, while ARV was strong in the quarter, though off a low base. Gross margin expanded to 57% (70 bps vs KIE), reflecting ertapenem and valsartan benefits, as well as INR depreciation. Ebitda surprised (9% vs KIE), with 21.6% Ebitda margins, despite R&D costs increasing to 4.6% of sales. A combination of forex loss and acquisition-related charges meant that PAT was in line with our estimates. Net debt declined by $20 mn, though on a constant currency basis, net debt declined by $20 mn q-o-q.

Strong pipeline for FY2019-21
The strong US injectables performance was encouraging against the backdrop of discontinuation of the bag line in Q4FY18, and we expect sustained improvement with FY2019 sales likely to grow to $208 mn, implying a significant improvement in 2HFY19 (1HFY19: $86 mn). We believe ARBP now has a strong pipeline including Concerta (FY2020), Intuniv (FY2021), Afinitor/Zortress AG (FY2021), AndroGel (FY2023), Suboxone (AG launch) as well as Xifaxan (FY2023).

Valuations comforting—ADD
We raise our FY2020/21 estimates by 3-4% to take into account the stronger US business and as we incorporate cyclo RTU. ARBP trades at 13.5X FY2020e EPS and 9X FY2020e EV/Ebitda.


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