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2Q in-line; EU/ROW markets drive earnings Ramping up production/optimizing yield of PEN-G project

* Aurobindo Pharma (ARBP) delivered in-line performance for 2QFY25. It exhibited robust growth momentum in Europe/ROW markets. This was partly offset by moderate show in the US generics/API segment.

* ARBP is working to scale up manufacturing batches for PEN-G and optimize yield. This product will start contributing to profitability from FY26.

* We cut our earnings estimate by 7%/4%/5% for FY25/FY26/FY27, factoring in: a) reduced outlook from Eugia III unit, b) increased R&D spend, c) operational costs related to Pen-G, and d) higher tax outgo. We value ARBP 18x 12M forward earnings to arrive at a TP of INR1,360.

* ARBP is building multiple levers of growth through: a) developing GLP-1 peptides/building manufacturing capacities, b) the biosimilar portfolio for global markets, c) ramping up the manufacturing of Pen-G for internal consumption/external sales, and d) ongoing expansion in the offerings of ANDAs for the US market.

* Accordingly, we build 15% earnings CAGR over FY25-27. Maintain Neutral given the limited upside from current levels.

Lower RM cost/better operating leverage drive margins YoY

* ARBP 2QFY25 sales rose 8% YoY to INR78b (our est.: INR73.3b).

* Overall formulation sales increased 11.3% YoY to INR66.4b. The US formulations revenue grew 4.3% YoY to INR35.3b (CC: +2.9% YoY to USD421m; 45% of sales). Europe formulation sales improved 19% YoY to INR21.1b (27% of sales).Growth Markets sales rose 44% YoY to INR8.1b (10% of sales). API sales contracted 0.9% YoY basis to INR11.6b (15%).

* Gross Margin (GM) expanded 370bp YoY to 58.8%.

* However, the EBITDA margin expanded slower at 70bp YoY to 20.1% (our estimate: 21.1%) led by improved gross margin offset by an increase in employee costs/other expenses (+100bp/+90bp YoY as a % of sales).

* EBITDA was up 11.6% YoY to INR15.7b (our est.: INR15.5b).

* PAT grew 5.1% YoY to INR8.2b (our est.: INR8.3b) due to lower other income and higher tax outgo.

* ARBP’s revenue/EBITDA/PAT grew 9.2%/27.6%/25.3% YoY in 1HFY25.

* ARBP’s revenue/EBITDA/PAT is expected to grow -0.5%/2.6%/-0.9% YoY to INR148.6b/ INR33.7b/INR18.9b in 2HFY25.

Highlights from the management commentary

* ARBP aims to sustain the growth momentum and maintain its EBITDA margin of 21-22% for FY25.

* The company took ~35 Pen-G commercial batches in 2QFY25 and 35-40 batches in Oct’24. It aims to achieve breakeven in its Pen-G business from 4QFY25.

* Including Revlimid sales, ARBP expects ~USD600m (+/-5%) injectables sales for FY25.

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