Buy Aurobindo Pharma Ltd for the Target Rs.1,500 by Motilal Oswal Financial Services Ltd
Backward & forward integration unlocking PenG value chain
Large-scale fermentation + 6-APA conversion + policy support driving throughput and margin expansion
We visited the PEN-G plant of Aurobindo Pharma (ARBP) to gain insight into the manufacturing complexities and the degree of integration between processes:
* Under the Production-Linked Incentive (PLI) scheme, ARBP constructed the PENG and 6-APA plants within a record three-year period and ramped up production following the start of the PEN-G plant in Jul’25. The 6-APA plant is likely to scale up meaningfully over the next 3-4 months.
* The plant has a substantial fermentation capacity of ~7,600 KL and features backward integration extending to glucose manufacturing.
* Notably, ARBP is forward integrated to manufacture 6-APA and is in the process of further forward integration to produce amoxicillin and other APIs that require PEN-G as a raw material.
* Considering robust operational efficiency and financial support from the Government of India, we project an EBITDA of INR5.5-INR6.6b from this project over the next 12 months.
* Overall, we expect a 21% earnings CAGR over FY26-28, aided by: 1) biosimilars/ EU market prospects, and 2) benefits from the PLI-led PENG-project and the integration of Lannett. We value ARBP at 16x 12M forward earnings to arrive at our TP of INR1,500. Reiterate BUY.
PEN-G/6-APA integrated manufacturing to drive optimum throughput
* On a 127-acre land parcel, ARBP has constructed the PEN-G plant with a capacity of 15,000TPA and the 6-APA plant with a capacity of 5,400 TPA. About 230 acres of land are available for further expansion.
* The company has constructed a desalination plant to make seawater suitable for the process, consuming ~18m3 of water daily. ? ARBP has 39 fermenters with a capacity of 325 KL each (17 units), 125 KL fermenters (12 units), and 56 KL fermenters (10 units).
* The technology, degree of backward integration, and scale of operations distinguish ARBP from its peers in this manufacturing setup.
* Maize serves as the primary feedstock for producing glucose, a key energy source for microorganisms. Another essential raw material, phenylacetic acid (PAA), is also manufactured in-house, thereby minimizing operational costs.
* Apart from physical infrastructure, ARBP has effectively developed inoculum to significantly improve yield.
* ARBP also employs a semi-continuous fermentation process to optimize both production and process productivity.
* In addition to maximizing process productivity, ARBP has improved overall cost efficiency through an in-house 52MW power plant, solvent recovery systems, and the in-house manufacturing of certain reagents.
Government support through a minimum import price in place now
* The Director General of Foreign Trade (DGFT) notified in Jan’26 that imports of Penicillin-G for domestic consumption are restricted at values not less than INR2,216 (USD24) per kg for the next one year.
* Similarly, imports of 6-APA for domestic consumption are restricted at values below INR3,405 (USD37) per kg. Amoxicillin sales are also limited to values less than INR2,733 (USD29.7) per kg.
* Volume-wise, out of the planned 15,000MT of Pen-G output, 3,000MT is earmarked for domestic sales, while 12,000MT will be converted into ~6,000MT of 6-APA used in antibiotics such as amoxicillin, ampicillin, piperacillin, sulbactam, and tazobactam.
* The domestic demand for PEN-G equivalent is between 12,000 and 13,000TPA. The entire demand for 6-APA, about 4,000 TPA, is currently met through imports, while ARBP can fulfill the entire domestic demand. The domestic demand for Amoxicillin salts is 4000TPA.
* The company invested INR35b in a large-scale penicillin manufacturing complex in Kakinada, with reported allocations of INR27b for Pen-G and INR8b for 6-APA.
* The minimum import duty on these products, combined with the availability of manufacturing capacity, would not only enable domestic sales but also enhance the economic viability of investments in this PLI project.
Valuation and view
* We expect a 9%/14%/21% revenue/EBITDA/PAT CAGR over FY26-28. We expect ARBP’s earnings to be driven by 1) the scale-up of the PEN-G plant, 2) increased external sales of 6-APA, 3) higher off-take in the EU markets, and 4) new product launches/market share gains in the US and the integration of Lannett.
* We value ARBP at 16x 12M forward earnings to arrive at our TP of INR1,500.
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