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Margin up cycle on the cards

Result Synopsis

Aurobindo Pharma clocked a better gross margin performance QoQ as mix improved along with some price pass-through in external API sales. Management appeared surprised by the sequential 2.5% price erosion in US business and now expects such pricing pressure to persist for next 1-2 quarters. Albeit, higher injectable sales on a weak base of past 2 years should support margin. US injectable sales have gone nowhere since high watermark of ~US$270mn in FY20. Commencement of injectable supplies from Vizag and New Jersey should boost volumes in FY24 coupled with initial monetization of complex pipeline. In light of FY22 performance, we have cut US sales by US$50-60mn (6-7%) each in FY23/24 coupled with lower gross margin in FY23 resulting in ~300bps cut in operating margin in current fiscal. A slower rebound in margin in next fiscal would translate in to a 15% cut to FY24 earnings. A look at Auro’s fixed asset base shows a declining utilization trend from ~2.7x to 2x in FY22. While difficult to pinpoint an exact point of reversal in utilization, reckon ongoing regular + PLI capex and management indication of withdrawal from certain US products point to a better profitability over next few years. Believe worst of margin woes may be behind or at best likely to after 1Q FY23, signaling less of a need to cut target PE of 13x. Retain BUY with revised TP Rs770 (earlier Rs900).

Result Highlights

▪ Revenue down 3.2% YoY to Rs 58,094mn, below our estimates of flattish revenues. US fell by 4.7% YoY and 0.6% QoQ.

▪ Gross margins were above expectations at 70.8%, a growth of 110bps QoQ but down 360bps YoY. Company filed 14 ANDAs including 3 Injectables with USFDA in Q4 FY22. Received final approval for 3 ANDAs including 2 injectable products in Q4 FY22

▪ Europe recorded flattish revenues YoY, whereas ARV business fell 52% YoY but improved 51.5% QoQ basis. Growth markets recorded a healthy growth of 28% YoY.

▪ API business delivered 15% growth YoY. The company filed 3 DMFs with USFDA during the quarter.

▪ Gross margins improved 220bps sequentially to 56.5%. Operating margins were down 10bps to 16.8% for 4Q.

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