Aurobindo Pharma Share price: Sharekhan retains their Buy recommendation with a revised Price target of Rs 1100

Aurobindo Pharma Q3 FY21 revenue, operating profits and PAT were a tad below the estimates. Sales at Rs 6365 cr is up 8% yoy (slightly below estimates), attributable to an 11.3% yoy growth in the formulations segment, while API sales were down 13.6% yoy. OPM expanded by 100 BPS yoy to 21.5% (estimated OPM 22%) led by a 310 bps expansion in gross margins, which were partly offset by an increase in other expenses. Sharekhan retains their Buy recommendation on Aurobindo Pharma with a revised Price target of Rs 1100.

Aurobindo Pharma operating profits for the quarter at Rs 1368 cr is up by 13.3% yoy. Adjusting for one-off gains, PAT stood at Rs 836 cr, up 18.5% yoy but missed estimates. Aurobindo’s injectables business is fast gaining traction with increasing number of regulatory approvals and geographic expansion.

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Aurobindo Pharma is also in the midst of commissioning an injectables facility in the US and is also setting up a dedicated facility at Vizag for Europe and RoW markets. Based on this, the annual run-rate of the injectables business is expected to reach $ 650-700 million over the next three years versus $ 380 million now. The US formulations business is also on a strong growth footing, backed by a sturdy product pipeline (50 products to be launched in the US each in FY21 and FY22) and growth in base business.

Aurobindo Pharma’s European business also revived, staging a double-digit revenue growth. Driven by the transition in favor of TLD, the anti-retro-viral (ARV) segment’s revenues are expected to grow strongly. Further, Aurobindo is investing Rs 1500 cr ($200-220 million) annually towards capacity expansion over FY21 and FY22, which offers ample growth visibility. In the long term, vaccines and APIs are expected to be the growth drivers.

Aurobindo Pharma is looking to double its API sales over the next 4 years, largely driven by the capex under the PLI scheme, though it is at planning stage. It would be developing PCV (Pneumococcal Conjugate Vaccine) and has also entered into agreement with a US company to manufacture viral vaccines. Also it is doubling its vaccine capacity to 440 million doses from 220 million doses by June 2021. Successful clearance from USFDA for five plants is awaited as the company has submitted its responses. In the long term, focus on building and developing a strong portfolio of specialty products (biosimilars, oncology, inhalers, transdermal patches, etc) would be key growth drivers.

Aurobindo Pharma Key positives:

European sales grew 13.2% yoy, better than estimates
ARV business grew sturdily by 41.5% yoy due to transition to combination drug TLD
OPM expanded by 100 bps y-o-y to 21.5% backed by a 310 bps expansion in gross margins
Aurobindo Pharma turned cash positive with net cash of Rs 117 cr as of December 2020

Aurobindo Pharma Key negatives:

API segment revenues declined by 13.6% yoy due to a 24.3% decline in Betalactum sales
USFDA clearance for five plants (unit I, IX, XI, VII and US) is yet to be received

Aurobindo Pharma Key Risks:

Delay in resolution of USFDA issues and product approvals; change in regulatory landscape; and negative outcome of key facility inspection by USFDA can affect earnings prospects.