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Superior product mix benefit offset by higher R&D spend

On track to build niche portfolio and supporting manufacturing capacity

* Aurobindo Pharma (ARBP) delivered an operationally in-line 3QFY21 performance. A gradual revival is seen in global injectable sales and improved traction in the Oral Solids portfolio. ARBP is progressing well on a) the vaccine opportunity, b) enhancing the Injectables portfolio, and c) building the Biologics portfolio.

* We tweak our EPS estimate for FY21/FY22/FY23, factoring in a) moderation in the API business and b) higher R&D spend. We continue to value ARBP at 16x 12M forward earnings to arrive at Target Price of INR1,100. We remain positive on ARBP on the back of a) complex injectables, supported by manufacturing capabilities/capacity, b) healthy business prospects for APIs over 3–5 years, c) the improving profitability of the Europe business, d) its good position to cater the vaccine opportunity over the medium term, and e) reduced financial leverage. Maintain Buy.

Operationally in line with estimates

* ARBP’s 3QFY21 sales were up 8% YoY to INR63.6b (our estimate: INR62.9b). ARV formulation sales grew 42% YoY to INR4.4b (7% of sales). Revenue in the growth markets increased 14.6% to INR4b in 3QFY21 (6% of sales). Europe sales grew 13% YoY to INR16.7b (26% of sales). US formulation sales grew 6.8% YoY to INR31.7b (+3% in CC terms to USD431m; 50% of sales). API sales declined 14% to INR6.8b (11% of sales).

* The gross margin (GM) expanded 310bp YoY to 59.6% on a superior product mix. However, the EBITDA margin expanded at a lower rate of 100bp to 21.5% (our estimate: 21.8%) – primarily due to an increase in R&D expenses (+180bp as a percentage of sales). EBITDA was up 13.3% YoY to INR13.7b (in-line).

* Reported other income stood at INR728m for 3QFY21, including ~INR400m in write-backs for provisions made previously.

* ARBP recorded an exceptional item of INR28b for 3QFY21 on account of a) gains on the disposal of the Natrol business (INR30.9b), b) the remeasurement of equity interest in Eugia Pharma (INR1.5b), and c) impairment charges (INR4.3b).

* Adjusted for the exceptional items and write-backs for provisions, PAT grew 8% YoY to INR7.7b (our est.: INR8.1b).

* For 9MFY21, sales / EBITDA / adj. PAT grew 11%/17%/18% YoY to INR188b/INR41.2b/INR23.8b.

Highlights from management commentary

* ARBP is confident of achieving USD650–700m revenue from global injectables over the next three years (USD283m in 9MFY21).

* It intends to launch 12–15 injectables on an annual basis over the next 2–3 years.

* ARBP indicated strong momentum in oral solid products as well as the US market. Growth was broad-based rather than the company seeing any product-specific opportunities.

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