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Steady quarter, outlook remains strong

Q3 revenue/PAT grew by 8%/17% YoY, in line with estimates. Barring weakness in API (-14% YoY), most markets grew at healthy pace. In contrast to peers, Aurobindo's US business (ex-Natrol) performed well and grew 4% QoQ driven by volume gains and improvement in injectables revenues. In addition to PLI scheme investments (Rs30bn, benefits to be back ended), Aurobindo plans to augment its capacities in APIs (to invest Rs8bn over 2-2.5 years) and expects to double its revenues over the next 4-5 years. The progress on complex/vaccine pipeline remains on track and we remain positive on Aurobindo's capabilities to monetize these over the next few years. The growth outlook for EU, ARVs and RoW markets remain strong with ~7-10% revenue CAGR estimated over FY21-23e. The balance sheet is further strengthened as it turned net debt free as of Dec’20. We ascribe NPV of Rs51/sh. for PLI opportunity and revise our TP to Rs1,080/sh. Maintain BUY.

* Steady margins despite higher R&D: Revenue at Rs63.6bn grew by 8% YoY as strong traction across businesses (EU: +1% YoY, +10% QoQ, lockdown lifted; ARVs: +36% YoY, TLE to TLD conversion; RoW: +10% YoY) offset muted growth in API (-14% YoY). Despite higher R&D (6.1% of sales, +178bps YopY) and withdrawal of MEIS, EBITDA margin improved to 21.5% (+101bps YoY) led by improvement in gross margin (+120bps YoY, EU, favorable mix, currency). Reported PAT at Rs29bn was boosted by oneoff items.

* Pipeline update: Generic injectables – portfolio is expected to grow from ~USD380mn to USD650-700mn in the next 3 years; Biosimilars – 13 assets under development (6 in first wave, 2 Onco products to complete Phase 3 trials by Q1-Q2FY22); Vaccines – Covid vaccine - UB-612 (Covaxx) – to complete phase 3 trials by July’21, own vaccine and one in collaboration with CSIR; PCV vaccine - to start phase 3 by Mar’21, to target India/ GAVI in next 1-1.5 years; Viral vaccine - developing 4 (incl. 1 for Covid).

* PLI scheme benefits are back-ended – The recent approval for 3 key drugs (Pen-G, 7-ACA, TIOC) offers opportunity to manufacture it for external sales as well as internal consumption (requirement of ~40-45%). It may opt to go ahead with 2 or 3 products based on clarifications (awaited) on its queries. Assuming, asset turns of ~1.2-1.5x with ~15-35% margins (incl. incentives), we believe the opportunity can add an NPV of Rs51/sh to our target price.

* Key call highlights: a) Europe - ~15% margins, scope to improve exists as it gains scale; b) China – Setting up an OSD facility, expect 8-10 approvals in 2021; c) Capex – ~USD200mn (ex-PLI); d) Covid vaccine - to double existing 220mn dose capacity to 480mn by Jun’21; e) Net cash position of USD117mn.

* Maintain BUY, risks: We revise our TP to Rs1,080 based on 16x FY23e EPS and NPV of Rs51 for the PLI opportunity. Key risks: higher price erosion in the US, delay in plant resolution (Unit I, IX, XI, VII, AuroLife).

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