JPMorgan on Aurobindo Pharma stock re-rating trigger and target price

In its report, JPMorgan says that the injectables business of Aurobindo Pharma includes the $1.4bn U.S. franchise (likely the best profitability among peers), EUR700+Mn European operation (largest EU player from India), RoW and an API business. Even assuming a generics business multiple of 8-9x, Aurobindo Pharma's business could be valued at Rs 1,400 - 1,500/share. This does not capture the upside from its complex pipeline investment (respiratory, biosimilar or API growth from PLI scheme). Media reports  on the demerger of the injectables unit for unlocking shareholder value could be a near-term trigger to re-rate the stock. JPMorgan raises target price on Aurobindo Pharma to Rs 1100.

JPMorgan added that Aurobindo has underperformed peers YTD despite strong U.S. performance in the Dec quarter and medium-term upside from the PLI scheme for the three key KSMs/intermediaries.

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JPMorgan believes the diversified earnings and the upside in its key business segment are underappreciated despite continued execution, accretive M&A and deleveraging.

JPMorgan also argued that the valuation discount to peers with U.S. dependent earnings growth is unwarranted, given superior execution of organic and inorganic efforts. It said that its view is reinforced by recent news reports on potential demerger of the injectables business. In our view, near doubling of the high-margin injectables revenue driven by pipeline investment and planned capex imply a value of $7bn for this business, assuming a discount to the listed injectables peer GLAND IN (not covered).

A strong pipeline of injectable drugs reduced R&D costs, and the establishment of new facilities could all help to boost the outlook. Aurobindo Pharma has seen revenue increase 8.0% YoY to Rs. 6,365 crore, boosted by US formulation (+6.8% YoY; 50% of total revenue) and Europe (+13.2% YoY; 26% of total revenue), partly offset by a drop in APIs (-13.6% YoY). R&D increased to Rs. 391 crore (6.1% of total revenue).