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Bottoming out of margin, valuation attractive

Result Synopsis???????

Aurobindo Pharma reported a better US performance after several quarters of disappointment as US revenues rose 9% QoQ; price erosion seems to have moderated compared to 4Q while company catered to additional volume opportunities. Other segments like ARV, API and growth markets too rebounded barring Europe. Company underwent another round of input cost pressure as gross margin further compressed QoQ coupled with price erosion YoY. It expects anther soft gross margin quarter in 2Q followed by recovery in H2. Aurobindo is poised for better growth as ~Rs37bn of CWIP is commercialized across vaccine, biosimilars, Vizag injectables units. We continue to factor in traction in injectables business over next 2 years, even as we cut US oral solids estimates given the subdued outlook. Also 1Q performance leads to a cut in gross margin assumption combined with revenue cut translates in to a 11%/5% reduction in FY23/24 estimates. Reckon Aurobindo has seen worst of margin pressure with likelihood of better growth ahead. Retain BUY as valuation at ~11x FY24 EPS appears attractive with a revised TP Rs750 (earlier Rs775) at ~13x FY24 EPS

Result Highlights

* Revenues beat estimate, up 7% QoQ and 9% YoY driven by US business which was up 9% QoQ  

* All round growth across ARV, API and growth markets even as Europe lags YoY

* Gross margin continues to be impacted by a combination of price erosion in US, still higher input costs though RM prices have started to soften QoQ

* Other expenses higher by Rs600mn due to elevated freight costs leading to lower margin and decline in PAT YoY

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