Neutral Aurobindo Pharma Ltd For Target Rs.910 - Motilal Oswal Financial Services
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US/EU markets drive profitability Re-exploring restructuring of Eugia business
* Aurobindo Pharma (ARBP) delivered operationally better-than-expected 1QFY24 performance, on the back of a healthy volume off-take in the US as well as the EU market. With improved outlook, ARBP has re-started the exercise to restructure the Eugia business and evaluate options to unlock the inherent value of its injectable business.
* We raise our earnings estimate by 8%/7% for FY24/FY25, factoring a) superior execution in the EU segment, b) reduced scope of price erosion in the US base portfolio, c) moderation in business prospects in the ARV segment. We value ARBP at 15x 12M forward earnings to arrive at a price target of INR910.
* With the current favourable macro-economic environment and broad portfolio offerings by ARBP, we believe it is well-placed to capitalize on the opportunity related to US generics. The better margins of the EU segment further support overall profitability. However, valuation provides limited upside from its current levels. We reiterate our Neutral rating on the stock.
Improved operational performance offset by higher depreciation/ interest/tax
* Aurobindo’s (ARBP) 1QFY24 sales grew 10% YoY to INR69b (our est.: INR66b). US formulation revenues grew 11% YoY to INR33b (CC: +4% YoY to USD403m; 48% of sales). ARV revenue declined 50% YoY to INR2b (3% of sales). Growth Markets sales grew 13% YoY to INR4.9b (7% of sales). Europe formulation sales grew 19% YoY to INR18.4b (27% of sales).
* API sales grew 14% YoY to INR10.3b (15% of sales).
* Gross margin (GM) expanded 20bp YoY to 53.9%.
* EBITDA margin expanded 40bp YoY to 16.8% (our est.: 16.2%). Lower other/employee expense (down 60bp/30bp YoY as a percentage of sales) were offset by higher R&D expense (70bp YoY as a percentage of sales).
* EBITDA was up 12% YoY to INR12b (our est.: INR11b).
* An exceptional income of INR698m was realized, attributed to the strategic restructuring of Auro PR’s facility in Puerto Rico, which resulted in a significant increase in production volume.
* Adjusting for this exceptional item and forex gain of INR377m, PAT declined at a higher rate of 17% YoY to INR5b (our est: INR5.2b), due to higher depreciation/interest cost/tax rate
Highlights from the management commentary
* Ex-Revlimid, ARBP guided EBITDA margin of 18% for FY24.
* The improvement in EBITDA margin (from 16.8% in 1QFY24) is expected to be driven by higher volume offtake/reduced price erosion in base portfolio, PLI benefit and enhanced production from the Puerto Rico facility
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