The rally that pharmaceutical stocks have seen in the current equity market turmoil has not gone unnoticed by anyone. A number of pharmaceutical stocks have been hitting fresh highs on a day-to-day basis, making the sector a white knight for investors. Amidst this one pharma share that has skyrocketed is Aurobindo Pharma. Up 120% from its recent lows of March 23, the scrip has jumped 40% since the beginning of this year. But, this is surge is just the beginning and if brokerages are to be believed, Aurobindo Pharma is not looking to rest anytime soon.
Key reason for the Auro Pharma’s jump is clearance of regulatory overhangs from the stock, namely Unit IV of the company getting a VAI (voluntary action initiated) from the United States Food & Drug Administration (USFDA). “Unit IV is an injectable manufacturing unit and contributes ~18% of US sales. This facility is important from future growth perspective as 46 ANDAs are pending for approval and injectables offer better margins,” said ICICI Securities while pinning a target price of Rs 824 on the stock. The most recent VAI classification comes after the same was granted to Auro Pharma in February of this year, only to be rescinded immediately.
With the start of the current calendar year, Aurobindo Pharma has not only received VAI for not just Unit IV but for Unit VIII as well. Aurobindo Pharma has also pulled out of the deal with Sandoz. A deal that would have seen the company’s current debt increase three times, according to brokerage and research firm Emkay Global. With the recent developments, Aurobindo Pharma has been graded to ‘Buy’ from ‘Hold’ by the brokerage with a target price of Rs 786 per share. In 9MFY20, ARBP (Aurobindo Pharma) has reduced debt by ~US$ 280mn, and is tracking ahead of its FY20 guidance of US$200mn reduction. While we expect modest earnings growth (+6%CAGR over FY19-22), we expect ARBP to be largely debt-free by FY22 (assuming no acquisitions) and multiple expansion should follow,” Emkay Global said.
ICICI Securities has raised the target P/E (x) to 14x from 10x after the USFDA classification, while Emkay has the same pinned at 13.7x. Both the brokerages expect the Aurobindo Pharma to trim debt. ICICI Securities expects the pharma major to cut annual debt by US$150-200mn over the next two years, bringing net debt EBITDA down to 0.2x by FY21 and 0.0x by FY22, by their estimates. Emkay Global Global sees a modest earnings growth at 6% CAGR over FY19-22 for Aurobindo Pharma while expecting it to be largely debt-free by FY22, assuming no acquisitions, and multiple expansion should follow.
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