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Buy Aurobindo Pharma Ltd For Target Rs. 1,050 

* We maintain Buy rating on Aurobindo and raise the TP to Rs1,050 from Rs1,000 after a good Q3 which saw healthy yoy growth across segments (except for API) and ~100bps expansion in EBITDA margins. We largely maintain our estimates.

* Q3 revenue and EBITDA came in line with our estimates. Overall EBITDAM stood at 21.5% (+100bps yoy; -60bps qoq) vs. our estimate of 21%. Adj. PAT of Rs8.4bn beat our estimate by 6%, thanks to higher-than-expected other income, offset in part by higher tax.

* Management reaffirmed its injectable business revenue target of US$650-700mn in the next 3 years. As injectable revenue contribution increases, margins should also expand. In addition, management expects its API external sales to double in the next 4-5 years.

* The stock is trading at a one-year forward P/E of 15x, in line with historical average. We value the stock at 15x on our FY23E EPS, leading to a TP of Rs1,050. Catalysts: PLI scheme, resolution of regulatory issues, biosimilar and complex Gx filings, and vaccine approval.

Q3 was broadly in line:

While revenue grew 8% YoY to Rs63.6bn, it fell marginally QoQ (-2%). On constant currency basis, US, Europe, RoW and ARV sales grew 3%, 1%, 10% and 36% YoY, respectively. Within the US business, both oral solids and injectables sales grew by mid-single digit QoQ. EBITDAM stood at 21.5% - up by ~100bps YoY but down ~60bps QoQ. Adj. PAT at Rs8.4bn grew 16% YoY. Reported PAT of Rs29.4bn included an exceptional gain (net of tax) of Rs21.1bn. Exceptional items include a gain of Rs30.1bn related to Natrol divestments and a gain of Rs1.5bn on account of the re-measurement of the equity interest in Eugia Pharma, offset in part by the provision for intangible impairment of Rs4.3bn and tax on exceptional item of Rs7bn.

Medium-term growth to be driven by injectables and PLI scheme:

The company’s global generic injectable sales have reached US$283mn in 9MFY21. Management expects this to grow to US$650-700mn per annum in the next three years. This will be driven by continued 12-14 product launches in the US and significant growth in the EU and RoW injectables as the company expects to launch >50 products after the commercialization of its Vizag plant. In addition, management sounded positive on the API business with an expectation to double its external sales in the next 4-5 years, including the impact of the PLI scheme. In addition to the PLI scheme capex of ~Rs30bn, the company will invest an additional Rs8bn for few high-volume APIs.

B/S strengthens further; attractive valuations:

With cash inflow from Natrol divestment, the company has turned net cash positive (~US$117mn). The stock is trading at a reasonable valuation of 15x 1-year forward P/E. We value the company at ~15x P/E on our FY23E EPS, suggesting an intrinsic value of Rs1,050/share. Downside risks: adverse regulatory outcome on plants, adverse currency movement, and higher-than-expected price erosion.

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