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Significant revenue miss due to US, ARVs…

About the stock: Aurobindo is a significant global generics player with 28 manufacturing facilities, including eight key formulations facilities in India and abroad along with three R&D centres. The current employee strength is more than 8000, which includes more than 750 scientists.

* FY21, API: formulations ratio was at 12:88. US formulations constitute 50% of revenues followed by Europe (24%), APIs (12%), RoW (6%) & ARV (8%)

* It has received government approval for setting up plants for production of Penicillin-G, 7-ACA & Erythromycin Thiocyanate, with capacity of 15,000 MT, 2,000 MT & 1,600 MT, respectively, under the PLI scheme.

Q1FY22 Results: Aurobindo reported underwhelming Q1FY22 results.

* Sales were down 3.8% YoY to | 5702 crore

* EBITDA in Q1FY22 was at | 1209 crore, down 3% YoY with margins at 21%

* Consequent adjusted PAT was at | 770 crore down 1.4% YoY

What should investors do?

Aurobindo’s share price has grown by ~1.1x over the past five years (from ~| 791 in July 2016 to ~| 916 levels in July 2021).

* We change our rating from BUY to HOLD due to the challenging business environment in the near to medium term, especially in the US

Target Price & Valuation: We value Aurobindo at | 865 at 14x P/E on FY23E EPS.

Key triggers for future price performance:

* Aurobindo has one of the most enduring generics ecosystems among peers (vertically integrated model, lower product concentration)

* The company plans to venture into complex areas like biosimilars, vaccines & complex injectables. Additionally, participation in the PLI scheme will enhance its backward integration in antibiotics, open new revenue streams

* It engages in continuous US filings & launches, incremental launches and filings in the RoW markets along with site transfers and supplies for products covered under the European deals.

Alternate Stock Idea: Apart from Aurobindo, we like Cipla in healthcare coverage.

* Cipla is a global pharma company with over 1,500+ products in 65 therapeutic categories, with over 50 dosage forms

* BUY with a target price of | 1205

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