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In-line quarter; positive outlook

Aurobindo Pharma (ARBP IN) reported Q2FY25 results marginally weaker than our estimates. Revenue came in 2% higher than our estimates, but the lower margin led to EBITDA missing our estimates by 3%. PAT came in 5% below our estimates. The margin miss seems from the losses at the new Penicillin-G plant at Kakinada. Management expects the plant to breakeven in Q4. Revenue from the US was in line with our expectations; the EU and RoW grew well. Management has retained its EBITDA margin guidance of 21-22% for FY25. We raise our core EPS estimates by 2-3% for FY25-27. We retain Buy with a TP of INR 1,568.

In-line US sales; likely larger gRevlimid sales in Q4:

US sales was slightly up QoQ and down YoY, in line with our expectations. We expect a gradual pickup in the base runrate once operations for the Eugia-3 plant normalize after the remediation works. We expect a major bump-up in gRevlimid sales in Q4 – we believe this lends confidence to management to retain 21-22% EBITDA margin target for FY25 despite the nine-month run-rate being lower. For the medium term, we expect the US business to sustain a steady mid-single-digit growth.

EU, RoW perform well:

Constant-currency growth of 24% in the EU surprised on the upside. Additional geography-wise & channel penetration and better demand for injectable products helped (due to supply disruption for a few competitors). We expect high growth to continue for the rest of the year before it normalizes to mid-high-singledigit growth. Biosimilar launches could add to this growth, starting in FY27. RoW revenue growth of 39% YoY benefitted from the acquisition in Indonesia. Excluding that, we estimate 25%+ growth in the quarter

Price chart

Source: Bloomberg

Penicillin-G ramping up:

Expenses at the new penicillin-G plant continue to hit EBITDA in Q3 as well; management says the plant should be break-even in Q4 and contribute in FY26. At a 50% capacity utilization, the plant could add USD 165mn to top line (or equivalent contribution to the bottom line if used internally), as per our estimates.

Biosimilars, biologics CDMO medium-term growth drivers:

ARBP has a biosimilars pipeline of 14 products – three are already filed with the EU regulator. US FDA filings will kickstart in FY26. bAvastin, bProlia, bXolair and bLucentis are in Phase 3 for Europe and ROW. The company is also investing heavily in biologics CDMO. The recently announced partnership with MSD is a strong start, we believe.

Reiterate Buy with a TP of INR 1,568:

We raise our core EPS estimates by 2-3% during FY25-27. ARBP trades at 15.1x FY26E core P/E; contribution from one-off gRevlimid justifies the low multiple. We retain our TP at INR 1,568 based on 22.6x FY27E core EPS that has little gRevlimid contribution. We reiterate Buy. Escalation of cGMP issues and resumption of pricing pressure in the US market are key risks to our call.

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