Buy Aurobindo Pharma Ltd For Target Rs.1,091 - ICICI Securities
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Approval for 3 products under PLI Scheme
Aurobindo Pharma (Aurobindo) received approval from government of India for three fermentation based products under Production Linked Incentive (PLI) Scheme. These products include Penicillin G, 7-ACA and Erythromycin Thiocyanate (TIOC). Currently, these products are largely dependent on China imports. Post approval under the PLI scheme, Aurobindo will become a very large player in anti-biotic space. The combined committed capital investment for these three products stands at Rs30.4bn which can easily be funded from internal accruals and can have asset turnover between 1-1.5x. We believe this is a positive development for Aurobindo that would ensure continuous growth momentum over medium term without straining balance sheet. Upgrade to BUY.
* Wins approval for three products under PLI Scheme: Aurobindo won government approval under PLI Scheme for three anti-biotic products namely, Penicillin G, 7- ACA and TIOC. The respective committed production capacities and committed capital investment for these products are 15,000MT, 2,000MT & 1,600MT and Rs13.9bn, Rs8.13bn & Rs8.34bn.
* Financial impact: We assume asset turnover ratio for these capacities as ~1.2x and Aurobindo can generate annual revenue of ~Rs36bn with an EBITDA margin of ~16%, implying annual EBITDA of ~Rs5.8bn (>10% of FY22E EBITDA). Additionally, the cumulative incentive from PLI scheme would be ~Rs24bn over a five-year period. The below table shows an estimate of financial metrics for this investment (Rs30.4bn).
* Outlook: We remain positive on Aurobindo’s long-term outlook considering its strong US pipeline with potential to launch >30 products every year, significant benefit of scale in APIs, and growing contribution from complex generics (injectables, ophthalmics, penems, etc.). We expect it to register 5.5% revenue and 8.9% earnings CAGR over FY20-FY23. Growth appears lower due to the Natrol divestment in US.
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