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Improved margin outlook

Result Synopsis

Aurobindo Pharma reported a better quarter on back of some calm in the injectable as well as oral solids portfolio. Margin improved slightly QoQ though compared to last year base, price erosion in oral solids, increased freight costs still translated into persistent pressure on OPM.

Aurobindo has indicated double digit growth in injectables in Q4 and Q1 FY24 which should assuage concern on the durability of the rebound in the near term. Oral solids continue to be a pain area and we broadly presume ~5% CAGR over next 2 years down from 8-9% growth earlier. Aurobindo has already postponed their injectable target by a year leading us to cut injectable growth estimates over next 3 years. Europe should rebound once the Vizag plant is ready in FY25 underpinning our double digit growth in that fiscal. Overall, we reckon Aurobindo (along with oral solid peers like Lupin) have been at the receiving end of sharp price erosion over last 4 quarters and any relief would straight away flow in to better gross margin. Expect gradual margin recovery next year along with 8-10% topline growth over FY24/25. Given the delayed injectable ramp up, we cut FY23/24 estimate by 20%/11% and also introduce FY25 forecast. Continue to believe Aurobindo could be at the trough end of price erosion cycle leading to margin also a cyclical low. Retain BUY based on unchanged 13x FY24 EPS for a revised TP Rs650 (earlier Rs750).

Result Highlights

* Better revenue quarter with US growth up 13.8% QoQ and 9% YoY (albeit aided by forex tailwind YoY) Growth markets posted strong rise of 25% YoY

* while Europe was subdued on account of discontinued business in the base quarter, excluding this, on a like-to-like Europe up 5% YoY

* Margin continues to bounce along the trough level on increased R&D for biosimilar filings

* Gross margin up 130bps QoQ while OPM benefited from strong US traction though flat YoY

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