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In-line 2Q; Future growth drivers intact

Aurobindo’s (ARBP) 2QFY25 results were broadly in-line with our expectations. Revenue/EBITDA/PAT grew 8%/12%/8% YoY, and margins expanded by 65 bps YoY. The US segment, which accounts for 45% of sales, grew by 4% YoY, marred by supply chain challenges – this should ease as production gets streamlined. Europe reported robust 19% YoY grow driven by strong performance across key markets. Growth markets grew 44% YoY and API segments reported muted growth at -1% YoY. ARBP is heavily investing in high ROIC areas (above 20%), such as PenG & its derivatives, biosimilars, biologic CDMO, specialty oncology and complex injectables. These investments are expected to drive Revenue/EBITDA/PAT CAGR of 9%/13%/15% respectively over FY24 to FY27, despite a sharp decline in Revlimid sales in FY27. With improving business fundamentals and structural growth drivers in place, ARBP’s currently trades at ~17x/15x on FY26/27 EPS, which appears attractive and represents a significant discount compared to peers. We maintain a BUY with a Dec’25 TP of INR 1,755.

* USA flat on supply chain challenges: Revenue grew 4% YoY to INR 35.3bn, with specialty & Injectable revenue contributing ~19% of US revenues (USD 81mn) declined 11% YoY due to supply chain challenges. Revenue from oral gx products grew 9% YoY to USD 289mn driven by volume gain and new product launches. Management has indicated that specialty segment is picking up as production is being streamlined. Overall the management indicated that price erosion remained neutral. During the quarter ARBP filed 10 ANDAs with USFDA. The company launched 14 products during the quarter. The company is making steady progress with its biosimilar pipeline; they have completed recruitment for bDenosumab trials and are on track to complete this by May-Jun’25. However, trials for bXolair are ramping slower than expected; the management now expect complete recruitment by Jan-Feb’25. The company has negligible sales for gRevlimid during the quarter, it is expected to pick from 4Q onwards.

* Europe, Growth markets and API: The Europe business grew 19% YoY to INR 21bn and contributed 27% of overall revenue. The management reiterated annual guidance of EUR 900mn for the segment driven by 4-5 launches and should post high single to low double digit growth going forward. The margin profile of the Europe segment could improve as the biosimilar sales ramp-up. The company aims to commercialise bDenosumab in CY26. Growth markets posted a strong performance, growing 44% YoY this was mainly driven by sales expansion and entry into new geographies. API business was muted declining 1% YoY to INR 1.2bn.

* Future growth drivers: The company has several near term growth drivers namely; (1) ramp-up of Pen-G & its derivatives; (2) Multiple biosimilar launches in EU, 2+ launches in the US; and (3) Vizag/China plants to strengthen US injectable and EU sales, respectively. The company is setting up 30kl of mammalian drug substance facility (25-30mn vials) for INR 10bn as part of its biologic CDMO agreement with Merck. The commencement could be in FY28 and ramp-up will be faster as it for Merck’s existing product. Based on industry standards, we estimate peak sales potential of INR 13bn with EBITDA margins upwards of 30%. The civil work for this project has commenced and is on track to be completed by 2026.

* Key Financials:

* Revenue/EBITDA/APAT grew 8%/12%/8% YoY to INR 78bn/15.7/8.2bn and were broadly in line with JMFe, however EBITDA/PAT were below consensus by 7%/16% respectively;

* EBITDA margins expanded 65bp YoY to 20.1% due to improved gross margins;

- R&D spend for the quarter amounted to INR 4.1bn (5.3% of sales);

* Net Capex of USD 80mn primarily towards capacity enhancements - Net debt including investments is at ~USD 133mn as on Sep’24;

* ETR: 30% in FY25

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SEBI Registration Number is INM000010361