Aurobindo Pharma - Initiating coverage - Natverlal Research

NATVERLAL RESEARCH
Friday, June 10, 2016
Aurobindo Pharma Limited
Natverlal Research
Regd. Off. : Fairy Manor, 5th Floor, 13 Rustom Sidhwa Marg, Fort, Mumbai - 400 001.
Tel. Board: 91-22-4213 4444 Dealing Rm: 91-22-4213 4400, 2265 1121 Fax : 91-22-4213 4440 Email : reasearch@natverlal.com
BUY
BSE Code 524804
NSE Code AUROPHARMA
Bloomberg Code ARBP:IN
Current Price 743
Target Price 1027
Mcap ` bn 435
Mcap US mn 6508
52 wk H/L 891/582
Face Value 1
2 wk avg vol (000) 1640
Financial Snapshot
` Mn FY16 FY17E FY18E
Net sales 138,961 162,755 194,387
% ch 14.6 17.1 19.4
EBIDTA 32,738 39,111 47,882
%ch 25.0 20.8 22.9
PAT 19,820 24,040 30,043
%ch 25.8 21.3 25.0
EPS 33.9 41.1 51.3
BV 120.6 156.7 201.9
P/E 21.9 18.1 14.5
EV/EBIDTA 14.6 12.1 9.6
RoCE 28.79 29.62 32.58
RoE 28.09 26.21 25.43
Shareholding Pattern
Mar-16 Dec-15 Mar-15
Promoter 53.8 53.9 54.0
FII 27.4 28.8 29.6
DII 7.3 6.5 6.2
Retail 8.9 8.5 8.1
BodiesCorp 2.6 2.4 2.1
Sameer Dalal
Sameer@natverlal.com
91-22-42134444
Gaurav Singh
gaurav.singh@natverlal.com
91-22-42134421
Large ANDA approvals in the US, new launches for these to drive growth
Aurobindo Pharma Limited (Aurobindo) is a global pharmaceutical company producing oral
and injectable generic formulations and active pharmaceutical ingredient. The company
headquartered at Hyderabad has a product portfolio spread over six therapeutic segment
encompassing antibiotics, anti-retrovirals, cardiovascular, central nervous system,
gastroenterological and anti allergies. It is a vertically integrated company with 12 sites
located in parts of India, United States and Brazil for formulation and 13 API sites in India.
Business growth in United States: Aurobindo has a well entrenched US portfolio of 398
ANDA filed of which 215 have been approved. US business recorded a sales of `6bn and
grew by 27.25% reflecting its strong presence and growth. It recently acquired Natrol to
enter into fast growing nutraceuticals market. It launched 28 products in FY16 and it is
expected to launch 30-40 products in FY17E. US contributed 45% of sales for FY16 and will
remain the growth driver going forward. It was engaged in the generic space where
competition was already high thus working on base margin business. Although it has few
filings in Para IV, the future plan is to compete more in this space where profitability is
significantly higher.
Turnaround of Europe business: Europe recorded sales of `3bn in the FY16 and
contributed 22% to the overall sales of the company. Aurobindo acquired Western Europe
operations of Actavis in FY15 to maximize opportunities and improve performance. The
acquisition made it one of the leading generic pharmaceutical companies in Europe which
helped it in tapping high growth high margin western European business. This deal enabled
it to achieve critical mass in western Europe with a top 10 position in several key markets.
It achieved EBITDA positive in the second quarter of FY16 and is this trend is expected to
continue.
Entering into limited competition and complex molecule areas: Aurobindo is entering into
complex areas like penems, peptides and controlled substances, going forward these
segments will contribute more to the overall sales. Further, it is entering into niche areas
like oncology, anti diabetics and hormone based drugs. These segments have relatively
limited generic competition as they are highly technical and needs huge investments in
R&D which they are investing in.
Regulatory compliant: India has highest number of US-FDA approved plants outside US.
However in the last few years’ discrepancies of one or other kind have been found in most
of the plants of Indian companies. Aurobindo has 13 API units in India and 12 formulations
units out of which 8 are in India, 3 in US and 1 in Brazil. Further, 3 sites are under
construction in India. It is pertinent to note that most of the US-FDA approved plants have
been regularly inspected with no major irregularities found at the site.
Valuations: At present, the stock is trading at P/E of 18x and 14.4x and EV/EBITDA of 12x
and 9.6x for the FY17E and FY18E. It RoCE will increase to 29.6% and 32.5% and RoE of
26.2% and 25.4% for FY17E and FY18E respectively. We believe, the company is poised for
good growth in U.S, Europe and antiretroviral segments. Therefore, We decide to value the
company on P/E basis with a target multiple of 20x its FY18E based on this we arrive at a
price target of `1027 and initiate our coverage with a ‘BUY’.

NATVERLAL RESEARCH Aurobindo Pharma Limited
Natverlal Research
2
Investment Rationale:
United States business growth to continue: Aurobindo has a well entrenched US
portfolio of 398 ANDA filed of which 215 have been approved. US business recorded a
sales of `6bn and grew by 27.25% reflecting its strong presence and growth in world’s
largest generic market. The company launched 28 products in FY16 and it is expected
to launch 30-40 products in FY17E. Injectables will dominate the new launches which
have relatively lower competition and high entry barrier. The US product basket
encompasses from antibiotics to anti-retroviral to cardiovascular to central nervous
system to gastroenterological to anti allergies. The launch at risk of generic version of
‘Aripiprazole’ (Abilify) in second half of FY16 registered good sales and it will continue
to generate decent sales. The probable launch of ‘Esomeprazole’ (Nexium) in the
second half of FY17 is expected to record huge sales because of Nexium being one of
the drugs with a very large market size and has limited players to capture market. US
contributed 45% of overall sales in FY16 and will continue to remain the growth driver
in the medium as well as long term. The company for long focused on products which
had its exclusivity period expired (Para I, II, III). However now after making a large
base in the United States, it has started to enter the high risk and high reward area of
Para IV. It plans to increase the number of Para IV filings, including ‘First to File’ (FTF)
in the near future. The chart on the left shows the ANDA list and DMF list in USA
whereas the below chart depicts the sales and growth in United States.
Turnaround of Europe business: Europe is the second largest market of Aurobindo in
terms of revenue contribution. It recorded sales of `3bn in the FY16 which
contributed 22% of overall sales. Aurobindo acquired the commercial operations of
Actavis for its western European countries in FY15 to maximize opportunities and
improve performance. Actavis is a global integrated specialty pharmaceutical
company focused on developing, manufacturing and distributing generic, branded and
biosimilar products. It has presence in more than 60 countries and is focused in the
women’s health, urology, gastroenterology and dermatology. It also has portfolio of
five biosimilar products in development of women’s health and oncology. The
acquisition made Aurobindo one of the leading generic pharmaceutical companies in
Europe which helped in tapping high growth and high margin western European
business. This deal has enabled it to achieve critical mass in western Europe with a top
10 position in several key markets. The manufacturing for European business will start
in India soon from Unit XV which will give it cost advantage. It achieved EBITDA
positive in the second quarter of FY16 and this trend is expected to continue. The
chart below shows the sales and filings in the Europe.
398
215
360
50
100
150
200
250
300
350
400
450
ANDA Filed ANDA
Approved
Tentative
Approval
ANDAList
213
13 10 19 12-
50
100
150
200
250
DMFList

Natverlal Research
3
ActiveIngredient TherapeuticSegment
DORIPENEMMONOHYDRATE Antibiotic
DABIGATRANETEXILATEMESYLATE Cardiovascular
LURASIDONEHYDROCHLORIDE Central Nervous System
DOLUTEGRAVIR SODIUM Antiretroviral
IMIPENEM Antibiotic-Penem
CILASTATINSODIUM Antibiotic-Penem
LINAGLIPTIN Anti Diabetics
FEXOFENADINEHYDROCHLORIDE Anti-Allergics
RIVAROXABAN Anticoagulant
SODIUMBICARBONATE Gastroenterological
OCTREOTIDEACETATE Hormonal
RANOLAZINE Cardiovascular
LINACLOTIDE Gastroenterological
MIRABEGRON UrinaryIncontinence
LORCASERINHYDROCHLORIDE
HEMIHYDRATE
Central Nervous System
DESMOPRESSINACETATE Hormonol
ERTAPENEMSODIUM Anti Bacterial
TERIFLUNOMIDE Central Nervous System
ListofDMFFiledsinceFY14 Entering into limited competition and complex molecule areas: Aurobindo is entering
into complex areas like penems, peptides and controlled substances and going
forward, these segments will contribute more to the overall sales. Further, Aurobindo
is entering into niche areas like oncology, anti diabetics and hormone based drugs.
These segments have relatively limited generic competition as they are highly
technical and require large spends on Research and development (R&D). The filings
suggest that Aurobindo is likely to launch more products in the complex molecules
category. The recent approvals are a reflection of their R&D in niche areas where the
competition is limited and entry barriers are high. The table on the below lists down
the recent approvals and their therapeutic segments and the table to the left shows
the product pipeline for which approvals will be received in short to medium term.
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
FY13 FY14 FY15 FY16
4,679
6,700
32,000 31,210
EuropeSales(`mn)
1,328
149-
200
400
600
800
1,000
1,200
1,400
Dossiers Products
EuropeFiling

Natverlal Research
4
Regulatory compliant: Pharmaceutical companies are highly regulated in United
States as well as Europe and other developed parts of the world for the obvious
reason for its impact on the general health of the citizens. India has highest number of
US-FDA approved plants outside US. However over the last few years, discrepancies of
one or the other kind have been found in most of the plants of Indian companies and
thus posing serious threats to the business. In such a scenario, regulatory compliance
is of paramount importance not only for sustenance and expansion but also for
corporate governance and brand equity. Aurobindo has 13 units in India for API and
11 formulation sites of which 8 are in India, 3 in US. Further, 3 sites are under
construction in India. It is pertinent to note that most of the US-FDA approved plants
have been regularly inspected with no major irregularities found. This reflects the
belief and commitment of the management in the ethical practices of conducting
business. Almost 90% of the formulation units have been inspected in FY15 and FY16,
while inspections usually happen every 2 years we don’t expect any major setback
from the US FDA through either warning letters or inspection alerts for at least
another 2 years. Although we don’t expect major action, inspections will continue as
routine as there will be some inspections every year for which we will keep a check
on.
Leader in Antiretroviral: Aurobindo has a large portfolio of anti retroviral drugs (ARV)
for HIV/AIDS relief. It is in the top five preferred global suppliers to reputed global
funding agencies such as PEPFAR, USAID, UNITAID, Global Fund, World Bank and
Clinton Health Access Initiative. ARV segment continues to remain one of the most
specialized and niche area for Aurobindo which contributes to more than 10% of the
formulation sales and this trend is likely to continue. Its product portfolio has various
ARV drugs and its recent approvals also include important ARV medicines. In most of
the areas, Aurobindo is a leader or competes with 2-4 players. It has the distinction of
being one of the few players in the entire pharmaceutical industry to have ever
received any patent. It has already received tentative approval for ‘Nevirapine
Anhydrous’. The company holds New Drug Application (NDA) which is a matter of
pride for a generic company to receive patent. This will provide a huge impetus in the
long run. This truly reflects its commitment to R&D. Strong growth in the ARV
segment will help to drive the overall growth.
Operating margins to improve with increase in higher margin business: Operating
margins will improve with the company venturing into Para IV and complex molecules
where competition is relatively limited as medicines generate much higher operating
margins. At present the strategy is to enter into highly completive spaces where
patents expired, but as the mix changes with an increase in the Para IV filings which
have a higher margin profile, going forward the overall operating profit and margins
will improve. We get further comfort from the fact that its existing business will not
see too much margin erosion as they are currently working on products which are
highly competitive and not the focus area of many players.
Net profit growth to see larger uptick: Aurobindo has done a lot of its capital
investment over the past few years and its utilization for its plants are currently at
60% levels. Further business expansion can be done with limited capital investments.
Given the lower capital invested, it will ensure the depreciation as a percentage of
sales will not rise allowing a disproportionate increase to profitability. Additionally the
company has strong cash generations which will cushion its future capital expenditure
from internal accruals and giving it ample room to repay its debt. This will lower its
interest burden which boost profitability. Given these facts we believe the profit
growth will be much higher than that of the operating margins.
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
FY14 FY15 FY16 FY17E FY18E
8,300
9,600
12,080
15,100
19,177AntiRetroviralSales (`mn)
-
5
10
15
20
25
FY15 FY16 FY17E FY18E
OperatingProfitMargin NetProfitMargin Debt/Equity

Natverlal Research
5
Valuations:
At present, the stock is trading at P/E of 18.1x and 14.5x and EV/EBITDA of 12.1x and
9.6x and a P/BV of 4.7x and 3.6x for the FY17E and FY18E respectively. The RoCE are
expected to increase to 29.6% and 32.58% and the RoE will come in at 26.2% and
25.43% for FY17E and FY18E respectively. We believe, the company is poised for good
growth in U.S because of large product basket, foraying into niche and complex areas,
high growth nutraceuticals market and entering into the big reward Para IV filings
(albeit with some risks).
US business will witness strong growth because of the company’s aggressive ANDA
filing and timely approval. It still remains most lucrative pharmaceutical market for the
generic makers across the globe. Aurobindo has 45% sales from US and growth in the
US will boost the performance in the near to medium term. Europe is again one of the
major markets and Aurobindo’s strategy to buy Actavis for capturing western Europe
is likely to pay rich dividends. The company has already achieved high single digit
EBITDA positive and this trend is likely to continue. It is one of the top leaders in
Antiretroviral drugs segment and its recent filings are likely to make it a top player in
the United States and top preference for the institutions, since most of the filings are
in the category where there is limited to no competition. It has 1 NDA to its kitty, a
very unlikely for an Indian company which could give a huge impetus in the long run.
At present, Aurobindo is trading at 10% discount to its peers. However this gap is
likely to narrow with the D/E likely to improve with the improvement in free cash
flows and reduction in debt and slow down in capital investment.
We would like to value Aurobindo at P/E of 20x for FY18E this would ensure the PEG
ratio remains below 1x. The reason why we prefer to value the company on the FY18E
earnings is the profit growth is expected to accelerate marginally in FY18E given the
launches in the more complex business with higher margins. Based on our target
multiple we would be trading at similar levels to the larger players in the market. At
this multiple we arrive at a target price of `1027 implying an upside of 38% over the
next 21 months and a CAGR of 17.5%. Given the upside we initiate coverage on it with
a BUY recommendation.

Natverlal Research
6
Risk Management:
US FDA regulation: US FDA reviews, identifies and prioritizes the threat level of
potential hazardous forces in the manufacturing process of molecules and drugs. Its
function is highly procedural and in it wants assurance from the pharmaceutical
companies that they have the mechanisms in place to accomplish their tasks in the
established timeframe. Aurobindo has never received any serious US-FDA alert and
this acts as boon as well as bane because in a scenario where all its peers are getting
alert approval, Aurobindo is the only major company where serious issue has not been
raised relating to its compliance, quality assurance. However an alert could hurt the
pace of its growth as well as aggressive approach to ANDA filings.
Competition: Indian pharmaceutical industry being one of the top generic
manufacturers in the world have found themselves in favorable position because of
increasing penetration and acceptance of generic drugs all over the world due to its
affordability. The Indian pharmaceutical industry is vying for larger market share in
exports market due to higher margins and increased demand especially in the United
States and the Europe. With several blockbuster drugs of innovator companies going
off patent in the next few years, this opens up challenges for Indian generic maker to
enter the developed markets and encash opportunity for growth and expansion.
Aurobindo has strong team of R & D in place and has been increasing its investments
on the same to manufacture off patent blockbuster drugs for entering developed
markets.
Currency risk: Exposure to volatility in foreign currency exchange rates poses a threat
to the company as 80% of its sales are exports sales. The long term loans of the
company are in USD terms and this acts as natural hedge. Lastly with most of the
exports being done in US$ is not as risky as supplying to multiple emerging market
currencies.
Government regulation: The pharmaceutical sector is highly regulated and most
business in the sector monitor supply chain risks very closely. Health and safety and
environment risk is closely monitored by government to keep a check on companies.
Aurobindo considers health and safety as one of the integral operational priorities. It
seeks to continually monitor and find ways to improve the risk management
framework.

Natverlal Research
7
Financials:
Profit & Loss Balance Sheet
In ` million FY15 FY16 FY17E FY18E In ` million FY15 FY16 FY17E FY18E
Net sales 121,205 138,961 162,755 194,387 Equity capital 292 585 585 585
YoY (%) 15 17 19 Reserves 51,267 69,982 91,129 117,556
Total expenses 95,569 106,905 124,020 146,762 Minority Interest 258 596 596 596
EBIDTA 25,636 32,056 38,736 47,625
YoY (%) 25.0 20.8 22.9 Total Borrowings 44,511 40,762 39,068 28,025
EBIDTA (%) 21.2 23.1 23.8 24.5 Non curr liabilities 2,349 2,600 2,647 2,703
Other income 967 682 376 257 Current liabilities 30,468 42,469 48,709 57,848
PBIDT 26,603 32,738 39,111 47,882 Total Liabilities 129,145 156,994 182,734 207,313
Depreciation 3,326 3,926 4,620 5,369
PBIT 23,277 28,812 34,491 42,512
Interest 1,599 1,587 1,477 1,241 Net Assets 41,253 52,635 65,835 71,835
Exceptional Item 0 0 0 0 Non current assets 4,904 4,343 4,774 5,248
PBT 21,679 27,225 33,014 41,271 Current assets 82,988 100,015 112,124 130,230
(-) Tax 5,967 7,444 9,013 11,267
Tax/ PBT 28 27 27 27
Minority interest (45) (39) (39) (39)
PAT 15,757 19,820 24,040 30,043
YoY (%) 25.8 21.3 25.0 Total Assets 129,145 156,994 182,734 207,313
Cash Flow Key Ratios
In ` million FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E
Net profit 15,757 19,820 24,040 30,043 EPS (Rs) 54.0 33.9 41.1 51.3
Depn and w/o 3,326 3,926 4,620 5,369 CEPS (Rs) 65.3 40.6 49.0 60.5
Deferred tax (13) 0 0 0 Book value (Rs) 4.2 6.2 4.7 3.7
Change in wrkg cap (10,409) (1,570) (8,511) (10,808) DPS (Rs) 4.5 2.5 4.1 5.1
Other income 967 682 376 257 Debt-equity (x) 0.9 0.6 0.4 0.2
Operating cash flow 7,694 21,494 19,775 24,347 ROCE 27.7 29.4 29.9 32.8
Other income 967 682 376 257 ROE 30.6 28.1 26.2 25.4
Capex (14,371) (15,556) (15,309) (13,200)
Investments 0 196 0 0
Investing cash flow (13,404) (14,677) (14,933) (12,943) Valuations
Dividend (1,563) (1,761) (2,894) (3,616)
Equity 1 293 0 0 PE (x) 13.8 21.9 18.1 14.5
Debt 6,819 (3,749) (1,694) (11,043) Cash PE (x) 11.4 18.3 15.2 12.3
Change in long term WC 3,371 506 (384) (417) Price/book value (x) 4.2 6.2 4.7 3.7
Financing cash flow 8,628 (4,710) (4,972) (15,076) Market cap/sales 1.8 3.1 2.7 2.2
Others (38) 1,546 (2,512) 1,831 EV/sales (x) 2.1 3.4 2.9 2.4
Net change in cash 2,880 3,653 (2,642) (1,841) EV/EBDITA (x) 10.0 14.6 12.1 9.6
Disclaimer
DisclaimerThe information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views
expressed by our research team.
The report is purely for information purposes and does not construe to be investment recommendation/advice. Investors should not solely rely on the information
contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. Efforts are made to try
and ensure accuracy of data however, Natverlal Research. And / or any of its affiliates and / or employees shall not be liable for loss or damage that may arise from
any error in this document. Natverlal Research and / or any of its affiliates and / or employees may or may not hold positions in any of the securities mentioned in the
document.
This document is not for public distribution and should not be reproduced or redistributed without prior permission.
Natverlal Reserach. Fairy Manor, 13 Rustom Sidhwa Marg Fort Mumbai 400001 Tel 91-22-42134444 Email research@natverlal.com

Aurobindo Pharma - Initiating coverage - Natverlal Research

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Aurobindo Pharma - Initiating coverage - Natverlal Research

Similar to Aurobindo Pharma - Initiating coverage - Natverlal Research (20)

More from Gaurav Singh

More from Gaurav Singh (6)

Aurobindo Pharma - Initiating coverage - Natverlal Research