US revenues grew 4.4% QoQ in constant currency terms with pick-up in injectables portfolio.
US scale-up continues; debt further reduced Aurobindo Pharma’s (Aurobindo) Q2FY20 performance was in line with our estimates. Revenues grew 17.9% YoY to Rs. 56.0bn (I-Sec: Rs. 55.8bn), EBITDA margin declined 80bps YoY to 20.8% (I-Sec: 20.5%) and adjusted net profit grew 1.0% YoY to Rs. 6.7bn (I-Sec: Rs. 6.6bn). US revenues grew 4.4% QoQ in constant currency terms with pick-up in injectables portfolio. Company reduced debt by $71 m in Q2FY20, taking cumulative debt reduction of $201 m in H1FY20. We remain positive on Aurobindo’s long-term outlook considering its strong US pipeline with potential to launch >30 products every year, significant benefit of scale in the US with Sandoz acquisition in Q4FY20, and increasing contribution from complex generics (injectables, opthalmics, penems, etc.). Maintain Buy.
We expect Aurobindo to register 15.4% revenue and 11.6% PAT CAGRs over FY19-FY22E with EBITDA margin of 20-21%. Lower PAT growth is due to significant increase in depreciation and interest cost on acquisition of Sandoz’s generic portfolio in the US (Q4FY20). Positive surprise came from reduction in net debt in Q2FY20 to $522 m from $593 m QoQ, which is in addition to $130 m reduction in Q1FY20. Although, integration of Sandoz in FY21E acquisition would increase leverage. The completion of Sandoz deal has been delayed due to pending FTC approval, which is now expected in next few weeks.
Valuations and risks: We reduce our earnings estimates by 3-4% to factor-in delay in Sandoz deal and higher depreciation charge. We maintain our Buy rating on the stock with a revised target price of Rs. 682/share based on 12xSep’21E earnings (earlier: Rs. 660/share based on FY21E). Key downside risks: regulatory hurdles, currency volatility, and delay in US launches.