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Regulatory concerns misplaced
We upgrade ARBP to BUY owing to attractive valuations after the recent fall in stock price. Our TP at Rs 800 is unchanged (15x FY21E EPS).
HIGHLIGHTS OF THE QUARTER
* The strong YoY performance in revenue, EBITDA and PAT for 4QFY19 and FY19 was supported by a 6-7% fall in the currency, continued launch momentum in the US and new business opportunities arising out of product withdrawals by bigger players like Teva/Mylan.
* At US$ 353mn, US sales grew 31% YoY. It was largely aided by an 86% YoY growth in injectable revenues in the US and new business opportunities. With 40+ product approvals, ramp up in injectable revenues and integration of Sandoz portfolio, we expect US segment to achieve US$ 2.3bn sales by FY21E (~33% CAGR) margin was at 20.0%, up 18/-56bps YoY/QoQ. With acquisition cost of Rs 362mn, reported PAT at Rs 5.8bn, grew only 10% YoY (Adj PAT was up 17% YoY).
* Net debt jumped 49% YoY to Rs 48bn in FY19. The increase was attributed to two acquisitions – Spectrum in the US and Apotex portfolio in Europe. The increase in working capital on account of higher inventory is intentional (to capture new business opportunities in the US). We expect a gradual moderation.
Near-term outlook: New product launches to drive the stock price in the near term.
Having fallen 18-20% over the trailing month on regulatory concerns related to three API/intermediate plants, the stock is now available at 14x FY20E EPS, a ~15% discount to its five-year historical average. We believe the concerns are misplaced as only 5-6 products (out of 100+ pending) are dependent on these plants. With high visibility on FY21E EPS of Rs 53.2 driven by the Sandoz acquisition, we see this as a good entry point for investors and expect at least ~15% upside in the near term as this acquisition materializes. Upgrade to BUY
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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