Buy Aurobindo Pharma Ltd for the Target Rs. 1,350 by Motilal Oswal Financial Services Ltd
Margins intact despite lower g-Revlimid sales
Consolidation phase nears end; positioned for next growth leg
* Aurobindo Pharma (ARBP) reported an in-line performance in 2QFY26. Interestingly, the quarter saw lower contribution from g-Revlimid compared to earlier quarters.
* ARBP has been delivering robust growth momentum in EU market and is close to achieving annualized revenue of EUR1b. Product introductions and its increasing reach can help ARBP sustain growth prospects in EU.
* ARBP has maintained US sales run rate despite lower contribution from gRevlimid. In fact, the price erosion in the base portfolio has reached low single digits. With remediation measures completed at Eugia III and products filed from Vizag, the outlook is expected to improve in FY27.
* ARBP is on track with respect to development/clinical studies on biosimilar products and providing feedback to EU/US regulators.
* We largely maintain our estimates for FY26/FY27/FY28. We value ARBP at 16x 12M forward earnings to arrive at a TP of INR1,350.
* FY26 has been the year of consolidation, with a reduction in business from g-Revlimid, operational costs associated with the scale-up of Pen-g plant, and remediation measures at Eugia III. With these factors largely done, we expect a scale-up in revenue and profitability going forward. We expect 16% earnings CAGR over FY25-28. Considering
Margin expansion driven by better product mix
* Sales grew 6.3% YoY to INR82.9b (our estimate: INR81.1b).
* Overall formulation sales grew 10.3% YoY to INR73.2b. US formulation revenue grew 3.1% YoY to INR36.4b (CC: -1.0% YoY to USD417m; ~44% of sales). Europe formulation sales grew 18% YoY to INR24.8b (6% YoY in CC terms; ~30% of sales). Growth markets sales grew ~9% YoY to INR8.8b (~11% of sales). ARV revenue grew ~68% YoY to INR3.2b (~4% of sales).
* API sales declined ~17% YoY basis to INR9.6b (~11% of sales)
* Gross margin (GM) expanded 90bp YoY to 59.7% due to a better product mix.
* EBITDA margin expanded 20bp YoY to 20.3% (our estimate: 20.4%) led by higher GM and partly offset by higher employee expenses (+120bp YoY as % of sales). EBITDA grew 7% YoY to INR16.8b (our estimate: INR16.6b).
* PAT grew 3.4% YoY to INR8.5b (our est.: INR8.6b).
* Revenue/EBITDA grew 5.1%/0.6% YoY, while PAT declined 2.8% YoY in 1HFY26.
Highlights from the management commentary
* ARBP has guided for 20-21% EBITDA margin in FY26.
* ARBP indicated 7% sales growth, 10% gross profit growth and 14% EBITDA growth on QoQ basis (Ex-g-Revlimid) for 2QFY26.
* ARBP has strengthened its MSD contract by signing the second product. It would be adding a 15KL bioreactor line to cater to a new contract with MSD.
* USFDA has accepted the request to re-inspect the Eugia III plant and the company expects inspection within eight months. Injectable sales are still short of pre-Covid levels. While production is on track, new launches would drive better growth prospects.
* ARBP has scope of specialty injectable product launches from its Vizag plant to drive growth in this segment FY27 onward.
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