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Operationally in-line quarter; broad-based growth across segments

Efforts under way to resolve regulatory issue/scale up Pen-G production

Aurobindo Pharma (ARBP) delivered in-line operational performance in 1QFY25. The robust execution across key markets was partly offset by seasonality and higher remediation costs for the quarter.

* We largely maintain our estimates for FY25/FY26. We value ARBP at 18x 12M forward earnings to arrive at our TP of INR1,500.

* ARBP is progressing well on: a) scaling up its Pen-G production, b) resolving regulatory issues at the Eugia site III, c) clinical development of the biosimilar portfolio, and d) strengthening the US generic pipeline. We model a 15% earnings CAGR over FY24-26. Considering limited upside from the current level, we reiterate our Neutral rating on the stock.

Product mix drives margin on a YoY basis

* ARBP’s 1QFY25 sales grew 10.5% YoY to INR75.7b (our estimate: INR77b). Overall formulation sales grew 11% YoY to INR64.8b. The US formulation revenue grew 7.6% YoY to INR35.6b (CC: +5.7% YoY to USD426m; 47% of sales). Europe formulation sales grew 7.9% YoY to INR19.8b (26% of sales). Growth markets sales jumped 45.9% YoY to INR7.1b (9.4% of sales). ARV revenue grew 20.2% YoY to INR2.3b (3% of sales). API sales rose 5.7% YoY basis to INR10.9b (14% of sales).

* Gross margin (GM) expanded 540bp YoY to 59.4%.

* Ex-remediation costs, EBITDA margin expanded 560bp YoY to 22.4% (our estimate: 22.1%) led by improved gross margin offset by increase in employee cost/other expense (+30bp/+80bp YoY as a % of sales).

* EBITDA was up 41% YoY to INR16.2b (our estimate: INR17.0b).

* Adjusting for the forex gain of INR10m, PAT grew at a higher rate of 52% YoY to INR9.0b (our est.: INR9.7b), led by 1.5x YoY jump in other income, offset by a higher tax outgo.

Highlights from the management commentary

* ARBP aims to sustain the growth momentum and maintain its EBITDA margin of 21-22% for FY25. Adj. for remediation related measures, it achieved 22.4% EBITDA margin in 1QFY25.

* While injectable sales were impacted due to remediation measures in 1QFY25, ARBP aspires to achieve USD600m sales for FY25.

* With respect to b-Denosumab, recruitment for the Phase III clinical trial has been completed in May’24 for the EU market. The trial would be completed in Jun’25. ARBP expects to file the product in the US/EU by 2QFY26.

* ARBP plans to file b-Omalizumab in 3QFY26 with the EMA and FDA, bTrastuzumab by 2QFY25 in the US, and b-Tocilizumab by 2Q/FY25/3QFY25 in India and EM.

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