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Earnings decline for second consecutive year

Levers in place to deliver growth over next two years

* Aurobindo Pharma (ARBP) delivered a better-than-expected operating performance in 4QFY23, driven by healthy growth in the US/EU/ROW formulation and API segments. In addition to robust ANDA filings, ARBP continues to work toward building a niche portfolio in the biosimilar/ peptide space. Its ambitious Pen-G project is also on track for commercialization in FY25.

* We raise our FY24/FY25 EPS estimates by 3%/4% to factor in 1) additional new business opportunities due to regulatory issues at peers, 2) limitedcompetition product launches, and 3) a better outlook on operational costs, particularly raw material and freight costs. We value ARBP at 11x 12M forward earnings to arrive at a TP of INR600.

* Growth prospects look encouraging for the next 2-3 years on the back of 1) better scope to garner US generics business, given its presence across the manufacturing value chain, 2) regulatory-compliant facilities, and 3) work-in-progress to develop complex products. However, the current valuation adequately prices in the upside in earnings. Maintain Neutral.

Higher opex/R&D spending affect profitability on YoY basis

* 4QFY23 sales grew 11% YoY to INR65b (est. INR63b). Total formulation sales rose 11% YoY to INR54.6b. US generics revenue grew 12% YoY to INR31b (flat YoY in CC terms at USD370m; 47% of sales). Growth Market sales jumped 51% YoY to INR6b (9% of sales). Europe formulation sales grew 8% YoY to INR16.6b (26% of sales). ARV sales declined 33% YoY to INR1.6b (2% of sales). API sales rose 11% YoY to INR10.2b (16% of sales).

* Gross margin contracted 190bp YoY to 54.7% due to product mix change. ? EBITDA margin declined 130bp to 15.5% (est. 15%). Lower gross margin and higher other expenses (+210bp YoY as a % of sales) hurt profitability for the quarter, marginally offset by a decline in employee/R&D expenses (-150bp/-110bp as a % of sales).

* EBITDA grew 3% YoY to INR10b (est. INR9.5b).

* Adjusting for the forex gain of INR227m, PAT declined 10% YoY to INR5.2b (est. INR4.7b), due to higher depreciation/interest cost.

* In FY23, revenue grew 6% YoY to INR249b, while EBITDA/PAT declined 8%/14% YoY to INR40b/INR22b

Highlights from the management commentary

* ARBP has guided for double double-digit YoY growth in Eugia revenue in FY24.

* It plans to launch g-Revlimid in Oct’23.

* The company intends to file b-Xolair for the US market in CY25, three to six months ahead of patent expiry (Nov’25).

* ARBP plans to spend USD130-140m for the Pen-G project in FY24 (USD120m spent in FY23).

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