Buy Aurobindo Pharma Ltd For Target Rs.2,110 by Motilal Oswal Financial Services Ltd
Operational beat led by broad-based formulation growth Growth levers in place: EU, Lannett, and PenG to drive a 20% earnings CAGR
* Aurobindo Pharma (ARBP) delivered better-than-expected revenue/ EBITDA with 7% beat for the quarter. However, earnings came in line due to higher depreciation and a higher tax rate for the quarter.
* The formulation segment grew at a higher-than-expected rate during the quarter, backed by superior execution across key geographies.
* ARBP sustained growth momentum in EU segment through continued portfolio expansion, deeper customer engagement, improving market penetration and reliable supply execution reaching EUR288m in quarterly sales in 2QFY27. Management remains confident of further growth despite an annualized revenue base of over EUR1b from this geography.
* The addition of Lannett, differentiated product launches, higher volume gains, as well as injectables led to improved performance in US segment for the quarter.
* We largely maintain our estimates for FY27/FY28. We value ARBP at 21x 12M forward earnings to arrive at our TP of INR2,110.
* We expect a 20% earnings CAGR over FY26-28, led by an improved outlook in the EU, differentiated product launches in the US, integration benefits from the Lannett acquisition, production scale-up of the China facility and higher margins from the PenG project. Maintain BUY.
Segment mix benefits partly offset by higher opex YoY
* Aurobindo’s (ARBP) 2QFY27 sales grew 24% YoY to INR102.6b (a 7% beat), driven by strong performance across all business areas
* Gross margin (GM) was up 150bp YoY to 61.2%, due to better business mix.
* EBITDA margin expanded 75bp YoY to 21%. This was due to decrease in R&D cost (down 130bps as % of sales) offset by increases in other costs and staff costs (up 130bps/75bps as a % of sales)
* EBITDA grew 28.5% YoY to INR21.6b (a beat of 7%)
* Adj. PAT grew 33% at INR11.2b (in line).
* For 1HFY27, its revenue/EBITDA/PAT grew 20%/24%/30% YoY at INR194b/ INR40.8b/INR21.8b.
Highlights from the management commentary
* ARBP reiterated guidance of double-digit revenue YoY growth, EBITDA margin of 21%+ with absolute EBITDA of INR80b+ for FY27.
* ARBP guided that FY28 financial performance is expected to be significantly stronger than FY27 due to full-year consolidation benefits from Lannett, positive operating leverage in China, and expanding biosimilar commercialization.
* Raw material procurement costs faced inflation due to geopolitical disruptions in the Gulf, with management noting that the cost escalation has not yet fully flowed into consumption and will partly impact upcoming quarters.
* Raleigh manufacturing facility received a Voluntary Action Indicated (VAI) classification from the US FDA, clearing the pathway for transdermal, dermal, and respiratory filings and commercial launches.
* Penicillin G fermentation facility attained capability to manufacture 15K TPA, with current production operating at approximately 10K TPA against total domestic Indian market demand of roughly 9K TPA, targeting an output expansion to 12K TPA in FY28.
* Penicillin G plant is operating at a modest positive EBITDA level prior to the receipt of PLI scheme benefits, supported by manufacturing yield gains and recent benchmark price increases in 6-APA.
* Advanced the complex respiratory franchise through the mid-quarter launch of generic Advair (G-Adware) and approval of generic Qvar (GQR); pipeline includes 1 approved MDI asset, 4 in-house inhalation candidates in development, a codevelopment partnership with a global pharma major, and ongoing global inlicensing discussions targeting multi-billion dollar market categories with scaleup expected around mid-FY29.
Reiterate BUY
* We largely maintain our estimates for FY27/FY28. We value ARBP at 21x 12M forward earnings to arrive at our TP of INR2,110.
* We expect a 20% earnings CAGR over FY26-28, led by an improved outlook in the EU, differentiated product launches in the US, integration benefits from the Lannett acquisition, production scale-up of the China facility and higher margins from the PenG project. Maintain BUY.
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