Buy Aurobindo Pharma Ltd for the Target Rs 1,860 by Motilal Oswal Financial Services Ltd
Operational delivery remains on track
* Aurobindo Pharma (ARBP) delivered in-line revenue in 1QFY27. It delivered better-than-expected EBITDA/PAT (6%/8% beat) for the quarter. This was driven by improved traction in EU and ROW segments. The US sales were largely in line for the quarter.
* ARBP closed the Lannett acquisition deal on 29th Jun’26 following approval from the US FTC and subsequent payment of USD250m. This adds a US manufacturing facility, which provides scope for generating business in controlled substances (CS) and other government demands. ARBP would be able to leverage Lannett's strategic partnerships to improve the scope of its business.
* ARBP has not only been tracking healthy growth in European business but has also improved profitability to 20%+ in this segment.
* ARBP is tracking well to prepare itself for commercial scale-up with respect to the contract with MSD. It is scheduled to take validation batches in CY27.
* We largely maintain our estimates for FY26/FY27. We continue to value ARBP at 20x 12M forward earnings to arrive at our TP of INR1,860.
* In addition to the base US/EU generics business, the company is in the process of scaling up additional growth levers in the biosimilar and CMO space. The product development, investing in a manufacturing facility, and subsequent regulatory approvals are on track in the biologics segment. Also, the capacity build-up for CMO contracts is underway, and ARBP is gearing for a meaningful scale-up in this business from FY29 onwards. We expect a 21% earnings CAGR over FY26-28. Reiterate BUY.
Highlights from the management commentary
* Management reiterated FY27 guidance of double-digit revenue growth, EBITDA margin above 21%, and absolute EBITDA above INR80b.
* ARBP guided FY27 R&D expenditure of INR14-15b, broadly in line with the current quarterly run rate (INR3.5b; ~4% of revenue), while development costs are likely to moderate as multiple clinical programs advance into later stages.
* Management highlighted that ANVISA GMP certification has been received for both drug substance and drug product facilities, while commercial supplies of three oncology biosimilars have commenced in Mexico.
* Management guided for double-digit revenue growth in Europe in FY27 while indicating the business has already achieved an EBITDA margin above 20%.
* The Advair launch through Lannett remains on track for Aug'26, with incremental growth primarily driven by new respiratory product launches.
* Management expects Lannett synergies through SG&A rationalization, procurement savings, and manufacturing transfers, with benefits likely over the next 9-12 months.
* Eugia is expected to deliver over USD500m in revenue in FY27, with single-digit growth.
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