Company update: Aurobindo Pharma (Outperformer) - Better days ahead

Aurobindo reported steady earnings growth versus most peers in FY17-18, disproving apprehensions on the company’s US generics-focussed business model. The company’s US sales grew from US$255m in Q1FY17 to US$327m in Q2FY18, aided by gRenvela launch in Q2FY18. We estimate 13% CAGR from US sales over FY17-20E to $1.45bn in FY20, despite likely erosion in oral solid dosage (OSD) portfolio. Growth in US sales will be driven by 33% CAGR in injectables, new niche OSD launches and scale-up in Natrol and OTC segments. Additionally, EU profitability will drive 11% PAT CAGR over FY17-20 with significant operational cash generation. We reiterate Outperformer on the stock with a target price of Rs944; Aurobindo is our top pick in the large cap pharma space.

US Generics – Execution edge: Aurobindo has successfully managed challenges of consistently growing volumes while staying compliant with USFDA norms. A diversified portfolio with limited product concentration risk and limited reliance on OSDs (~57% of revenues in FY17) along with strong growth in injectables has enabled Aurobindo to successfully navigate price erosion challenges in the US market. Recent first-to-market launch of gRenvela and gFondaparinux approval adds to our comfort on Aurobindo’s ability to move up the value/complexity curve – critical for sustaining momentum on a much enlarged base.

Growing injectables share and EU turnaround to aid profitability: We expect injectables to contribute 68% and 52% of net incremental sales in FY19E and FY20E, respectively, with multiple high-value launches in the coming quarters - these include gErtapenem and market share gains from gTazo-Pip, etc. A growing high margin injectables business, steady improvement in EU profitability and calibrated R&D investments will drive EBITDA at 12% CAGR over FY18-20E, despite high gRenvela base in FY18E.

Solid generic growth platform: Aurobindo continues to see abundant growth opportunities in global generics, unlike most large-cap peers who look to actively diversify beyond generics. The company believes monetization of its R&D investments in complex generics (microspheres, peptides, etc., and vaccines, biosimilars, etc.,) will help the company sustain organic growth momentum beyond FY20. Further, we estimate free cash flow of ~US$375m over FY17-20E, with consistent RoCE of 24-25% will provide significant headroom for M&A strategies to complement the organic growth initiatives. Reiterate Outperformer.