1. Initiating Coverage | Pharmaceutical
October 18, 2010
Aurobindo Pharma BUY
CMP `1,120
Entering the big league Target Price `1,330
Aurobindo Pharma (APL), over the years, has transformed itself from being a Investment Period 12 Months
low-margin API player to a high-margin formulation player. Consequently, APL’s
FY2012 OPM and RoE are on par with top Indian generic peers. Concerns on the Stock Info
debt front are also receding and the company’s net debt/equity ratio is expected Sector Pharmaceutical
to improve to 0.6x in FY2012 from 1.1x in FY2010. We expect net sales and Market Cap (` cr) 6,521
recurring profit (excluding other operating income) to post a CAGR of 15.6% and Beta 0.8
29.1% respectively, over FY2010-12. The stock is currently trading at 13.6x 52 Week High / Low 1,176/735
FY2011E and 10.3x FY2012E earnings, which is at 50% discount to the top Avg. Daily Volume 27393
Indian generic peers and unwarranted due to the improving business mix owing Face Value (`) 5
to which we believe that the stock is poised for re-rating. We Initiate Coverage on
BSE Sensex 20,169
the stock, with a Buy recommendation and SOTP Target Price of `1,330.
Nifty 6,076
Supply agreements to drive growth: To leverage on its cost efficiency and strong Reuters Code ARBN.BO
product filings, APL entered into supply agreements with Pfizer and AstraZeneca, Bloomberg Code ARBP@IN
which provides significant revenue visibility. APL is also in talks with other MNCs
for more supply agreements. Revenues from the supply agreements are set to rise
3x over FY2010-12 from `227cr to `644cr. Shareholding Pattern (%)
Promoters 54.4
US and ARV formulation segments to be key drivers for base business: APL’s US
MF / Banks / Indian Fls 12.7
base business (ex-Pfizer) is expected to post CAGR of 36.0% over FY2010-12 to
FII / NRIs / OCBs 26.8
US $268mn with revenue per product increasing to US $2.6mn from US $2.3mn.
Indian Public / Others 6.1
On ARV front, we expect revenues to log CAGR of 11.1% to `612cr over
FY2010-12 as APL would continue to be the largest supplier under the PEPFAR
contract with a market share of 35%. Abs. (%) 3m 1yr 3yr
Valuation: Based on SOTP methodology, core business (ex-other operating Sensex 12.3 16.4 12.1
income) is valued at 14x FY2012E EPS (`1,263/share), while other operating APL 11.3 29.4 108.0
income has been valued at 7x 50% of FY2012E income (`9.5/share) and
ascribed `67/share.
Key Financials (Consolidated)
Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E
Net Sales 2,935 3,370 3,796 4,506
% chg 20.8 14.8 12.7 18.7
Net Profit 100 563 479 617
% chg (58.0) 462.6 (15.0) 28.7
Recurring Profit 301 454 465 617
% chg 26.3 50.7 2.5 32.6
EPS (Rs) 18.6 101.1 84.9 109.2
Adj EPS 56.0 81.5 82.4 109.2
EBITDA Margin (%) 12.7 18.3 18.6 20.4
P/E (x) 20.0 13.7 13.6 10.3 Sarabjit Kour Nangra
RoE (%) 25.5 29.6 22.7 24.1 Tel: 022 – 4040 3800 Ext: 343
sarabjit@angeltrade.com
RoCE (%) 7.3 12.1 12.3 15.5
P/BV (x) 4.9 3.4 2.8 2.2
Sushant Dalmia, CFA
EV/Sales (x) 2.8 2.5 2.2 1.8
Tel: 022 – 4040 3800 Ext: 320
EV/EBITDA (x) 22.0 13.5 11.6 8.7 sushant.dalmia@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. Aurobindo Pharma | Initiating Coverage
Initiate Coverage with a Buy and Target Price of `1,330
Recurring earnings (ex other OI) to post CAGR of 29.1%
Net sales are estimated to log a CAGR of 15.6% to `4,506cr over FY2010-12 on
back of supply agreements, the US (ex-Pfizer) and ARV formulation contracts. We
expect APL’s recurring earnings (excluding other operating income) to post a
CAGR of 29.1% over FY2010-12 to `506cr on the back of sales growth and OPM
expansion. We estimate OPM to increase by 206bp to 20.4% during the
mentioned period.
Exhibit 1: Net Sales, OPM and Recurring PAT (ex other OI) trend
5,000 600 25.0
4,506
506
4,000 3,796 500
20.0
3,370
2,935 400 355
3,000 3,000 304 15.0
(` cr)
(` cr)
2,430 2,273
(%)
2,122 1,852 300
1,397 230
2,000 1,600 999 189 10.0
694 169
271 200
1,000 67 5.0
1,330 1,429 1,431 1,538 1,518 1,523 1,506 100
0 0 0.0
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
API Formulations Recurring PAT OPM
Source: Company, Angel Research
APL aims to clock US $2bn in FY2014
APL expects to clock strong CAGR of 29.4% in top-line to US $2bn by FY2014
from US $713mn in FY2010. The company expects contribution from the
formulations segment to ramp up to 75% by FY2014 from current levels of 55%.
Exhibit 2: APL’s revenue target
2400 CAGR 29.4%
2,000
2000 125
1600 69.9 500
(US $mn)
1200
79.7
713 875
800
15
48 27.8
328
400
11.6 500
322
0
FY2010 FY2014
API Formulations Supply Agreements Injectable business
Source: Company, Angel Research
Our estimates are lower than company’s long term guidance as we expect growth
to be more back-ended for the company driven by US (injectables and controlled
substances) and supply agreements.
October 18, 2010 2
3. Aurobindo Pharma | Initiating Coverage
APL stock poised for re-rating
APL has moved up the value chain and transformed from being a
low-margin API player to a high-margin formulations player. Consequently,
contribution from the formulation segment to net sales is expected to increase from
55% in FY2010 to 67% in FY2012. Moreover, APL’s FY2012 OPM and RoE are
in-line with top Indian generic players. The debt concerns are also receding with
the company’s net debt/equity ratio expected to improve to 0.6x in FY2012 from
1.1x in FY2010. At current levels the stock is trading at 13.6x FY2011E and 10.3x
FY2012E earnings, which is at 50% discount to the top Indian generic peers and
unwarranted due to the improving business mix owing to which we believe that it is
poised for re-rating.
Exhibit 3: OPM and RoE comparison (FY2012)
30.0
24.1
25.0 22.9
22.0
20.4
20.0
15.0
10.0
5.0
0.0
Sector APL
OPM RoE
Source: Company, Angel Research. Note: Sector includes Cadila, Cipla, DRL, Lupin, Ranbaxy and
Sun Pharma
Valuation
On a PE basis, the stock has traded in the 2-22x one-year forward PE band, and
at an average of 11x in the last five years. On the EV/Sales front, the stock has
been trading in the range of 0.8-2.5x and at an average of 1.7x.
Exhibit 4: 1-year forward PE and EV/Sales band
2,200 12,000
2,000 20x
10,500 2.5x
1,800
1,600 15x 9,000 2.0x
1,400 7,500
EV (` cr)
(`)
1,200 1.5x
10x 6,000
1,000
800 4,500 1.0x
600 5x 3,000
400 1,500
200
0
-
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Source: Company, Angel Research
October 18, 2010 3
4. Aurobindo Pharma | Initiating Coverage
We have valued APL on a SOTP basis. The base business has been valued at 14x
FY2012E core earnings (`90.2/share), which is at 33% discount (on the back of
low presence in the high-margin domestic formulation business) to the top Indian
generic players and fetches `1,263/share. We have assigned a higher multiple to
APL’s core business compared to the multiple assigned by street and its historical
average, as we believe that the concerns about higher contribution of the API
business is unwarranted given that the company’s FY2012 OPM and RoE are on
par with top Indian generic peers and are likely to sustain going forward.
APL has also seen a substantial spurt in other operating income on the back of
dossier income primarily under the Pfizer agreement and sale of dossiers in
Europe. Other operating income constituted nearly 31.9% of PBT in FY2010.
However, we have assigned a lower multiple as there is lack of clarity regarding
the time-line of the recurring nature of the dossier income. We have valued other
operating income at 7x 50% of FY2012E income (`9.5/share) and ascribed
`67/share.
Exhibit 5: SOTP Valuation (FY2012)
Multiple
Per share (`)
(x)
Core business (`90.2/share) 14 1,263
Other Op. income at 50% FY2012E income (`9.5/share) 7 67
Total 1,330
Source: Company, Angel Research
We Initiate Coverage on the stock with a Buy recommendation and SOTP Target
Price of `1,330, implying an upside of 19% from current levels.
Exhibit 6: Comparative Valuation
Comparative Mcap (` cr) Sales (` cr) PE (x) EV/Sales (x) EV/EBITDA (x) RoE (%)
FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E FY2011E FY2012E
Cadila Healthcare 14,147 4,308 5,100 22.5 17.4 3.4 2.8 17.1 13.5 34.8 34.7
Cipla 26,255 5,902 6,797 23.5 19.1 4.3 3.7 21.3 17.3 17.5 18.9
Dr Reddy's 26,924 8,416 9,797 27.0 20.4 3.1 2.6 16.4 13.2 25.0 25.5
Lupin 18,264 5,645 6,579 22.2 17.8 3.3 2.9 17.7 14.7 31.8 31.2
Ranbaxy 24,362 8,162 9,913 15.1 20.1 3.0 2.4 18.6 12.7 31.3 20.2
Sun Pharma 42,252 4,830 5,581 28.5 24.1 7.8 6.6 24.0 19.8 17.1 17.7
Average - 6,521 7,305 23.9 20.6 4.7 3.9 19.9 15.9 24.3 22.9
Aurobindo 6,521 3,796 4,506 13.6 10.3 2.2 1.8 11.6 8.7 22.7 24.1
Prem /(Disc) % to Avg - - - (43.2) (50.2) (53.7) (54.7) (42.0) (45.0) - -
Source: Company, Angel Research
October 18, 2010 4
5. Aurobindo Pharma | Initiating Coverage
Investment Arguments
Supply agreements to drive growth
APL has increased its global filing On the global filings front (ANDAs and dossiers) APL has increased its filing
dramatically from 313 in FY2008 to dramatically from 313 in FY2008 to 1,171 in FY2010, as it proposes to scale up
1,171 in FY2010 from SSP and Cephs to NPNC products. Further, the transformation from being a
pure API supplier to becoming a formidable formulations player has increased its
cost efficiencies, as 90% of its formulation is now backward integrated.
Exhibit 7: API and Formulations filings
1,600 1,200
1,412
1,002
1,000
1,126 838
1,200
895 800
800 600
400
400 185 147 169
122 133 145 200 128
0 0
FY2008 FY2009 FY2010 FY2008 FY2009 FY2010
US Other Regulated markets US Other Regulated markets
Source: Company, Angel Research. Note: Other regulated markets include multiple registrations in the EU
Thus, to leverage on its cost efficiency and strong product filings, APL entered into
long-term supply agreements with Pfizer (March 2009) and AstraZeneca
(September 2010), which provides significant revenue visibility going ahead. The
company is also in discussion with other MNCs for more supply agreements.
In FY2010, under the Pfizer contract Under the Pfizer contract, APL would supply more than 100 products post full
APL scaled up supply to 23 products to commercialisation of the contract and cover various geographies. In FY2010, APL
the US and clocked revenues of US scaled up supply with 23 products to the US and clocked revenues of US $48mn.
$48mn In Europe, the company expects to significantly ramp up in the current fiscal. The
company proposes commercialisation for the rest of the world (RoW) by FY2012.
Pertinently, APL has received upfront payment under the contract boosting its cash
flow. Going ahead, Pfizer is likely to add more products and cover additional
geographies based on the initial response that it receives from its existing markets.
October 18, 2010 5
6. Aurobindo Pharma | Initiating Coverage
Exhibit 8: Pfizer contract - Number of products
US France ROEU Aus/NZ Canada RoW
Co-Exclusive
Solid oral products 75
Exclusive
Solid oral products 34
Sterile injectable products 11
Non-Exclusive
Solid oral products 13 77 44 14 55
Sterile injectable products 1 12 12 5
Total 87 59 89 44 14 60
Source: Company, Angel Research
Under its supply agreement with AstraZeneca, APL would be supplying several
solid dosage and sterile products to the emerging markets covering therapeutic
segments such as anti-infective, CVS and CNS. We expect the AstraZeneca
contract to contribute US $5mn in FY2012. Overall, we expect revenues from the
supply agreements to increase 3x over FY2010-12 from `227cr to `644cr.
Exhibit 9: Sales under supply agreements
800 16.0
23
600 12.0
(` cr)
400 8.0
(%)
621
200 367 4.0
227
0 0.0
FY2010 FY2011E FY2012E
Pfizer AstraZeneca % of Sales
Source: Company, Angel Research
October 18, 2010 6
7. Aurobindo Pharma | Initiating Coverage
US and ARV formulation segment key drivers for base business
APL’s business, excluding the supply agreements, would primarily be driven by the
US and the ARV segment on the formulation front. The API business is expected to
be subdued as the company would be using most of the API for internal
consumption.
Product launches to drive business in US market
APL’s base business (ex Pfizer) logged a APL has particularly been able to scale up its business in the US market through
CAGR of 82.3% to US $145mn over product introductions and the supply agreement with Pfizer. In the US, the
FY2006-10 company has seen a growth in business 16x over FY2006-10 and attained critical
mass. APL’s base business (ex Pfizer) logged a CAGR of 82.3% to US $145mn
over the period. Pertinently, the company scaled up supplies under the Pfizer
contract in FY2010 and clocked revenues of US $48mn. APL offset the lower
revenue per product (US $2.3mn) by widening its product basket (APL-61,
Pfizer-23 products).
Exhibit 10: US market - Performance across players (FY2010)
400 374
357
350 331
300
250 233
(US $mn)
193
200
146
150
100
50
0
Dr Reddy Lupin Ranbaxy Sun Pharma Aurobindo Cadila
Source: Company, Angel Research.
APL targets day-1 launches in the US APL has commercialised 61 products in the US with the top-10 products
and has commercialised 61 products in contributing nearly 60% of its revenues in FY2010. The company primarily targets
the US day-1 launches in the US. APL has been able to garner strong market share in
highly competitive generic products such as Citalopram Hydrobromide, Paroxetine
Hydrochloride, Amoxicillin, Metformin Hydrochloride and Simvastatin owing to cost
advantages. APL is also witnessing strong pick up (has garnered 8% market share)
in the recently launched Valacyclovir tablets. Additionally, APL recently also
received approvals for the low-competition Ampicillin injections, which has a
market size of more than US $100mn.
October 18, 2010 7
8. Aurobindo Pharma | Initiating Coverage
Exhibit 11: APL’s top products in US
Key Products # of players Market share (Rx, %)
Citalopram Hydrobromide >15 15
Paroxetine Hydrochloride >10 11
Amoxicillin >10 9
Metformin Hydrochloride >15 6
Simvastatin >15 5
Source: Industry, Angel Research; Note: Market share is for July 2010
APL has also commercialised its New Jersey (NJ) facility, which it acquired from
Sandoz in 2006. Through this facility APL is targeting the institutional business in
the US. Pertinently, to run the institutional business in the US it is necessary to have
a local production unit. APL has also begun filings of controlled substances from
the unit, which is expected to contribute from FY2013 onwards.
APL expects to file 15-20 ANDAs in APL has been one of the aggressive filers in the US market with 169 ANDAs filed
FY2011 and FY2012 with 113 approvals received till FY2010. Among the players, APL is the third
largest ANDA filer. APL has aggressively filed in the last three years and is now
geared to reap benefits, even though most of the filings are for highly competitive
products. APL expects to file 15-20 ANDAs in FY2011 and FY2012.
Exhibit 12: ANDA filings (FY2010)
180
250
22 211 204
150
19 200
169 163
120
46 150 130
90 113
169
100
60
82 50
30
0 0
FY2007 FY2008 FY2009 FY2010 Total Sun Pharma Ranbaxy Aurobindo Dr Reddy Lupin Cadila
Source: Company, Angel Research
We expect the base business Going ahead, the next three years in the US, with US $70bn going
(ex-Pfizer) to grow at a CAGR of 36.0% off-patent, one of the highest in history, we believe that APL is well placed to tap
over FY2010-12 and contribute US this opportunity. We expect the company to clock 42.0% CAGR in net sales in the
$268mn with revenue per product US over FY2010-12 to US $388mn driven by product launches and the Pfizer
increasing to US $2.6mn contract. This contract is expected to contribute US $120mn constituting 31% of US
sales. We expect the base business (ex-Pfizer) to post a CAGR of 36.0% over
FY2010-12 and contribute US $268mn by FY2012 with revenue per product
increasing to US $2.6mn from US $2.3mn in FY2010 as the company moves
towards the high revenue generating NPNC and injectable (SSP and Cephs)
products.
October 18, 2010 8
9. Aurobindo Pharma | Initiating Coverage
Exhibit 13: US sales trend
500 50.0
400 40.0
(US $mn)
300 30.0
268
(%)
200 20.0
192
145
100 10.0
121 120
58 48 76
0 13 35 0.0
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Pfizer Ex-Pfizer % of Sales
Source: Company, Angel Research
ARV business on strong footing
APL is one of the largest generic APL derives 15% of its revenues from the ARV segment, which registered 54.9%
suppliers under the PEPFAR contracts CAGR over FY2006-10 to `495cr. This segment derives around 80% of its
with 35% market share revenues from the President's Emergency Plan for AIDS Relief (PEPFAR) program.
The US had committed funds to the tune of US $18.8bn for the PEPFAR program
during FY2004-08. In FY2009, the relief was increased to US $6.6bn and
maintained at US $6.7bn in FY2010. Overall expenditure on the ARV drugs
increased from US $117mn in FY2005 to US $203mn in FY2008, registering a
CAGR of 20%. Meanwhile, the amount spent on generic ARV increased from 9.2%
in FY2005 to 76.4% in FY2008.
APL is one of the largest generic suppliers under the ARV contracts with 35%
market share. APL enjoys high market share as it is fully integrated in all its
products apart from having a larger product basket. Overall, we expect the ARV
segment to post CAGR of 11.1% over FY2010-12 to `612cr with the PEPFAR
allocation for generic ARVs expected to increase.
Exhibit 14: ARV sales trend
700 20.0
612
600 549
495 15.0
500 464
404
(` cr)
400
(%)
10.0
300
200
122 5.0
86
100
0 0.0
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
ARV % of Sales
Source: Company, Angel Research
October 18, 2010 9
10. Aurobindo Pharma | Initiating Coverage
Europe and RoW growing at steady pace
We expect EU to register CAGR of In Europe, APL has been developing its presence through licensing agreements
around 21.0% over FY2010-12 to with the MNC’s and other generic players. In the UK, Netherland and Italy, APL
`348cr driven by product launches and has a direct presence. The company is now targeting newer geographies, viz.
the Pfizer contract Romania, Spain, Yugoslavia and Bulgaria. During FY2006-10, the company’s EU
business registered CAGR of 51.6% to `237cr.
We expect EU to register CAGR of around 21.0% over FY2010-12 to `348cr
driven by product launches and the Pfizer contract. We expect the Pfizer contract to
scale up significantly from `2cr in FY2010 to `63cr in FY2012. Excluding Pfizer,
we expect overall sales to grow by 10.0% to `285cr in FY2012.
Exhibit 15: EU sales trend
400 9.0
300
6.0
(` cr)
(%)
200 285
247 3.0
235
100 201 198
128
45 63
0 2 18 0.0
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Pfizer Ex-Pfizer % of Sales
Source: Company, Angel Research
We expect revenues from the RoW to Over FY2006-10, RoW registered CAGR of 26.2%. In FY2010, RoW contributed
post a CAGR of 19.1% to `294cr over 6.1% to the company’s net sales to `207cr. We expect revenues from the RoW to
FY2010-12 and expect the AstraZeneca post a CAGR of 19.1% to `294cr over FY2010-12 and expect the AstraZeneca
contract to contribute Rs23cr in FY2012 contract to contribute Rs23cr in FY2012.
Exhibit 16: RoW sales trend
400 15.0
300
10.0
(` cr)
200
(%)
253
288 5.0
100 207 225
198
158
82 23
0 18 0.0
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Pfizer AstraZeneca Ex-Pfizer/Astra % of Sales
Source: Company, Angel Research
October 18, 2010 10
11. Aurobindo Pharma | Initiating Coverage
API segment to remain subdued
We expect the API segment revenues to APL is one of the largest players in the API space, which contributed around 45% to
remain flat to `1,575cr over FY2010-12 its FY2010 sales with supply of SSP (oral and sterile), Cephs (oral and sterile) and
as the company would use most of the other APIs having predominant exposure in its domestic segment.
API for internal consumption
APL registered a decline of 5.2% in oral (SSP and Cephs) APIs over FY2006-10 due
to price volatility. The company’s API segment is vulnerable to Pen-G prices as it is
the basic input for API. Hence, to protect its margins, APL shifted to sterile API
products and is now also using most of the API for internal consumption.
Going ahead, we expect the API segment revenues to remain flat to `1,575cr over
FY2010-12 as the company would use most of the API for internal consumption.
Exhibit 17: API sales break-up
(` cr) FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
SSP (Oral) 586 591 673 550 449 421 391
Growth (%) 1.0 13.8 (18.3) (16.8) (8.0) (7.0)
SSP (Sterile) - - 131 174 158 156 159
Growth (%) 32.2 (9.2) (1.0) 2.0
Cephs (Oral) 484 643 393 422 405 417 413
Growth (%) 32.7 (38.8) 7.3 (4.0) 3.0 (1.0)
Cephs (Sterile) - - 199 212 274 277 287
Growth (%) 6.6 29.5 0.9 3.7
ARV & other high value 355 296 152 271 307 310 325
Growth (%) (16.5) (48.8) 78.9 13.3 0.9 4.7
Total 1,425 1,530 1,548 1,628 1,593 1,581 1,575
Growth (%) 7.4 1.1 5.2 (1.6) (0.8) (0.4)
Source: Company, Angel Research
CRAMS a long term driver
APL launched its CRAMS division, AuroSource, to cater to the global innovators
and biotech players. The division offers services across the entire product life cycle
from pre-clinical to the commercial launch. APL is already in discussion with few
players though we have not factored in any upsides from the business in our
estimates.
October 18, 2010 11
12. Aurobindo Pharma | Initiating Coverage
Financials
Top-line to register 15.6% CAGR over FY2010-12E
Overall contribution of the formulation APL recorded 20.5% CAGR in net sales during FY2006-10 to `3,370cr driven by
segment increased from 17.0% in 2006 the formulation segments. Overall contribution of the formulation segment
to 55.0% in FY2010 increased from 17.0% in 2006 to 55.0% in FY2010 primarily led by the US and
ARV contracts. During FY2006-10, while sales in the US posted a CAGR of 99.2%
to `912cr driven by product launches and commencement of supplies to Pfizer,
ARV formulation sales logged 54.9% CAGR over on the back of the contract wins
under the PEPFAR project. The API segment however, recorded sluggish CAGR of
3.0% as the increase in volumes was offset by lower price realisations during the
period.
Exhibit 18: Increasing contribution from formulations
100%
17
33
80% 41
48
55 60
67
60%
40% 83
67
59
52
20% 45 40
33
0%
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
API Formulations
Source: Company, Angel Research
For FY2011, we expect net sales to grow at a slower pace of 12.7% to `3,796cr
due to capacity constraints (NPNC) - the new facilities at the Unit VII (SEZ) and NJ
are expected to scale up gradually. We expect the formulation segment to clock
22.7% yoy growth to `2,273cr, while the API segment is expected to decline by
1.3% to `1,581cr.
In the US region, the formulation segment is expected to clock 35.3% yoy growth
to `1,234cr driven by the off-take under the Pfizer contract primarily in 2HFY2011
and launch of new products (SSP and Ceph injectable products). In Europe, we
expect net sales to come in at `265cr, up 11.5%, while the RoW is expected to
register 8.7% yoy growth to `225cr on the back of product launches. The ARV
segment is expected to clock 10.8% yoy growth to `549cr as contribution from
PEPFAR contract increases.
For FY2012, we expect net sales to clock strong growth of 18.7% to `4,506cr on
the back of increase in capacity utilisation at its new facilities. Formulation sales
are expected to register 32.0% yoy growth to `3,000cr while the API segment is
expected to remain flat at `1,575cr.
October 18, 2010 12
13. Aurobindo Pharma | Initiating Coverage
Overall, we expect net sales to post a In the US, under the Pfizer contract we expect APL to clock sales of `540cr
CAGR of 15.6% over FY2010-12 to following the increase in product launches. Further, ex-Pfizer sales in the US is
`4,506cr driven by the supply expected to grow 36.3% yoy to `1,206cr and is likely to witness improvement in
agreements, US (ex Pfizer) region and revenue per product. For EU we expect revenues to grow at 31.4% to `348cr,
ARV contracts while RoW is expected to clock net sales of `294cr following commencement of
supplies under the Pfizer and AstraZeneca contracts. On the ARV front, we expect
growth of 11.5% in revenues to `612cr. Overall, we expect net sales to log a
CAGR of 15.6% over FY2010-12 to `4,506cr driven by the supply agreements, US
(ex Pfizer) region and ARV contracts.
Exhibit 19: Sales break-up
(` cr) FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E CAGR FY2010-12E
Formulations 271 694 999 1,397 1,852 2,273 3,000 27.3
US 58 156 236 537 912 1,234 1,746 38.3
Pfizer - - - 13 225 349 540 54.9
Ex-Pfizer 58 156 236 524 687 885 1,206 32.5
Europe 45 128 201 198 237 265 348 21.0
Pfizer - - - - 2 18 63 461.2
Ex-Pfizer 45 128 201 198 235 247 285 10.0
RoW 82 288 158 198 207 225 294 19.1
Pfizer - - - - - - 18 -
Astra - - - - - - 23 -
Ex-Pfizer, Astra 82 288 158 198 207 225 253 10.6
ARV 86 122 404 464 495 549 612 11.1
API 1,425 1,531 1,548 1,628 1,593 1,581 1,575 (0.6)
SSP 586 591 804 723 607 577 550 (4.8)
Cephalosporin 484 643 592 634 679 694 700 1.5
ARV & other high value 355 296 152 271 307 310 325 2.8
Gross Sales 1,696 2,224 2,547 3,025 3,446 3,854 4,575 15.2
Less Excise duty 95 102 117 90 76 58 69
Net Sales 1,601 2,122 2,430 2,935 3,370 3,796 4,506 15.6
Growth (%) 32.6 14.5 20.8 14.8 12.7 18.7
Source: Company, Angel Research
Margin expansion to be driven by increasing contribution from
formulations
APL has been able to expand its OPM APL has been able to expand its OPM (excluding other operating income) from
(excluding other OI) from 11.1% in 11.1% in FY2006 to 18.3% in FY2010 and is now on par with the sector average
FY2006 to 18.3% in FY2010 in spite of higher contribution from the low-margin API segment. The company’s
gross margins improved significantly by 12.1% over FY2006-10 to 47.3% on the
back of increasing contribution from the high-margin formulation segment.
However, the increase in gross margins was partly offset by the rise in SG&A and
employee expenses, which restricted the increase in OPM by 7.2% to 18.3% in
FY2010. APL increased its employee strength by 16% in FY2010 with the
commencement of its new facilities and expansion at its API facilities.
October 18, 2010 13
14. Aurobindo Pharma | Initiating Coverage
Going ahead, increase in contribution from formulations to 67% in FY2012 from
55% in FY2010 and gradual scale up in capacity utilisation at its new facilities are
likely to increase its OPM to 20.4% in FY2012 from 18.3% in FY2010.
Overall, the transformation to a On a comparative basis, APL’s OPM would be on par with the sector average. This
formulation player has benefited APL in is on back of backward integration on the formulation front. Overall, the
dual ways - most of the API is now transformation to formulation player has benefited APL in dual ways - most of the
utilised for internal consumption making API is now utilized for internal consumption (more than 90% of its formulation is
it cost competitive as well as insulating backward integrated) thereby making it cost competitive in the formulation space
the company from the high price as well as insulating the company from the high price volatility (seen especially
volatility witnessed in the API business between 2008-09 where gains of the formulation business was offset by price
volatility on the API front) witnessed on the API business. Further, APL does not
have a significant presence in the branded generic segment (including India)
owing to which its expenditure for sales promotion and advertisements are on the
lower side.
Exhibit 20: OPM comparison (FY2012)
40.0
33.5
30.0
21.5 21.0 20.4 19.5 19.4
(%)
20.0
10.0 7.8
0.0
Sun Cipla Cadila APL Lupin Dr Reddy's Ranbaxy
Pharma Healthcare
Source: Company, Angel Research. Note: Ranbaxy’s base business OPM considered.
Recurring PAT (ex other OI) to increase by 29.1% CAGR over
FY2010-12
Recurring PAT (ex other OI) registered CAGR of 46.0% to `304cr during FY2006-
10 driven by sales growth and margin expansion.
Going ahead, interest expense is expected to rise as the company raises debt to
repay the FCCBs (including premium) to the tune of `938cr in May 2011. We
estimate interest expense to increase from `73cr to `91cr in FY2012. Depreciation
cost is also expected to increase from `149cr in FY2010 to `208cr in FY2012 due
to the new facilities (Unit VII (SEZ), NJ and Trident).
In the last two years (FY2009 and FY2010), the company clocked other OI of
`142cr and `206cr on the back of sale of dossiers to Europe and under the Pfizer
contract, which has resulted in strong cash flows for the company. On a
conservative basis, we expect the company to clock dossier income of `140cr both
in FY2011 and FY2012 primarily from the supply agreements.
October 18, 2010 14
15. Aurobindo Pharma | Initiating Coverage
Excluding the dossier income, recurring Overall, we expect recurring PAT to increase by 16.6% to `617cr assuming lower
PAT is estimated to record strong CAGR income from the sale of dossiers. Excluding the dossier income, recurring PAT is
of 29.1% to `506cr in FY2012 estimated to record strong CAGR of 29.1% to `506cr in FY2012.
Exhibit 21: Other operating income and Recurring PAT (ex other OI)
250 50.0 600
506
44.2
200 40.0
31.9 400 355
150 30.0 304
(` cr)
(` cr)
(%)
22.6 17.4 230
100 206 20.0 189
200 169
142 140 140
50 10.0 67
6.4
3.4 3.6
0 3 13 11 0.0 0
FY2006 FY2008 FY2010 FY2012E FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Other Op Income % of PBT Recurring PAT
Source: Company, Angel Research
Capex spend to moderate
APL has been on aggressive capex The company has been on an aggressive capex spree in the last five years
spree in the last five years with capex of incurring capex of `1,721cr (73% of FY2010 fixed assets), which was largely spent
`1,721cr on the formulation segment.
However, capacity utilisation has been subdued especially in tablets/capsules at
46% in FY2010 primarily due to lower utilisation at the Unit VIB (Cephs) and Unit
XII (SSP). However, going ahead, we expect the utilisation to increase at these
facilities on the back of injectable product launches in the US and pick up in
volume under the supply agreements.
Exhibit 22: Formulation facilities
Units Product Capacity Utilisation (%)
Unit VIB Cephs oral & sterile < 25
Unit XII SSP oral and sterile <25
Unit III NPNC > 85
Unit VII (SEZ) NPNC Newly commenced
USA NJ NPNC Newly commenced
Trident Injectables (NPNC) To commence in 2HFY2012
Source: Company, Angel Research
To address capacity constraints on the Further, to address the capacity constraint in Unit III (NPNC), APL built a facility
NPNC front, APL commercialised Unit near Hyderabad (Unit VII SEZ) in FY2010. APL spent around `250cr to set up this
VII (SEZ) in FY2010 facility, which is spread across 10 acres of the total 75 acres land. The unit has
the capacity to produce to 1,000mn tablets and 100mn capsules per month, which
has almost doubled the company’s tablets/capsules production. The company
expects the unit to meet the increasing demand in the regulated markets and
emerging markets.
October 18, 2010 15
16. Aurobindo Pharma | Initiating Coverage
APL has also commercialised its NJ facility, which it acquired from Sandoz in
2006. Through this facility APL is targeting the institutional business in the US. It is
necessary to have a local production unit to run the institutional business. APL has
begun filings of controlled substances from the unit, which is expected to contribute
from FY2013 onwards. Overall, we expect Unit VII SEZ and the NJ facility to scale
up and witness ramp up in capacity utilisation in FY2012 driven by supply
agreements, US and ARV segment leading to an improvement in margins.
Thus, with most of the facilities in place, we expect APL to incur moderate capex of
`568cr over the next two years.
Debt concerns receding
In view of APL’s aggressive capex, its net debt/equity increased to 1.8x in FY2009,
which was much higher than the industry average of 0.4x. However, in FY2010,
with overall improvement in business profitability (OPM expansion), the company’s
net debt/equity improved to 1.1x. Going ahead, in FY2012, we expect net
debt/equity to further improve to 0.6x on the back of debt repayments, decline in
capex and improvement in profitability.
APL has outstanding FCCB of US $139.2mn repayable in May 2011 with the
conversion price at 25-43% premium over the current price. We expect APL to
repay its outstanding FCCBs through internal accruals and debt resulting in outflow
of `938cr.
Exhibit 23: FCCB details
Issued Converted/ O/s US YTM Exch Rate Amt Payable Breakeven
Maturity Date
(US$ mn) Bought back $mn (%) (`/US $) (` cr) price (`)
August 8, 2010 60.0 60.0 - 40.0 - - -
May 10, 2011 150.0 43.8 106.2 46.3 46.0 715 1,615
May 17, 2011 50.0 17.0 33.0 46.9 46.0 223 1,406
Total 260.0 120.8 139.2 938
Source: Company, Angel Research
Exhibit 24: Debt levels, FCF and Capex
2,500 2.0 600
479
400
450 345
2,000 1.6 288 280
253 244 247
300 198
1,500 1.2 150
(` cr)
29
(` cr)
(x)
2,333 0
1,000 2,078 2,155 2,004 0.8
1,908 1,766
(150) (48)
1,373
500 0.4 (300) (237)
(450) (326) (343)
0 0.0
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
FY2006 FY2008 FY2010 FY2012E
Debt Net Debt Equity FCF Capex
Source: Company, Angel Research
October 18, 2010 16
17. Aurobindo Pharma | Initiating Coverage
Concerns
Delay in ramp up of supply agreements: APL is expected to receive 14.3% of
its FY2012 revenues from the supply agreements (Pfizer and AstraZeneca).
Hence, any delay in ramp up of the supply agreements would pose a
downside risk to our estimates.
Forex risks: Exports constitute 61% of the company revenues. Therefore, any
significant appreciation in the rupee could adversely affect the company's
margins. However, more than 80% of the company’s debt is foreign currency
denominated providing a natural hedge against currency volatility.
High price volatility in the API business: Higher-than-anticipated price erosion
in the company's generic API business, could impact its profitability. In
FY2008-09, OPMs were flat in spite of higher contribution from the
high-margin formulation business as the gains were offset by the price
volatility in the API business. However, with formulation contribution to net
sales increasing to 67% in FY2012 and reducing dependence on Pen-G
related APIs, which should cushion the company’s margins going ahead.
October 18, 2010 17
18. Aurobindo Pharma | Initiating Coverage
Company Background
APL, one of the largest API manufacturers in Asia, was incorporated in 1989 by P V
Ramaprasad Reddy and K Nityananda Reddy. APL is now present across the value
chain from intermediates, API and formulations supported by a strong R&D team.
APL has commercialised over 200 APIs and 300 formulation products till date.
Over the years, the company has developed its presence in key therapeutic areas
such as SSPs, Cephs, Anti-virals, CNS, CVS, gastroenterology, pain management,
etc. Being an integrated player, the company enjoys an edge over competition.
The company has 15 manufacturing facilities across the globe approved by the US
FDA and other regulators. APL has presence in more than 100 countries and
derives more than 60% of its revenues from exports.
Exhibit 25: Facilities
Formulations
Unit Products
Unit III Multi-purpose non-Betalactums Oral
Unit VII (SEZ) Non-Betallactums Oral
USA NJ Non-Betallactums Oral
Unit VIB Cephalosporins (Oral & Sterile)
Unit XII Semi-synthetic penicillins (SSP) oral and sterile
API
Units Products
Unit I CVS, CNS, Anti-allergic
Unit IA Cephalosporins (Non-Sterile)
Unit V Semi-synthetic penicillins (sterile and Non sterile)
Unit VIA Cephalosporins (Sterile)
Gastro enterologicals,
Unit VIII
Anti-retroviral
Unit XIB Anti-retroviral
Source: Company, Angel Research
October 18, 2010 18
