Aurobindo Pharma's Q4FY18 results (Outperformer) - Performance impacted by recent injectable recalls

Q4FY18 result highlights

• Cons revs came in higher at Rs40.5bn (-7% qoq) vs our est of Rs42.6b led by lower US revs at $270m, ($297m in Q3; est $290m). Injectables sales dropped sharply qoq to $35mn ($46mn in Q3) on account of recalls and product disruption. ARV was lower at Rs1.5bn (est Rs2.7bn) while EU /API came in higher at Rs11.5bn/Rs8bn vs est Rs11.2bn/Rs7.8bn.
• GMs came in higher at 58.8% (vs 58.1% in Q3; est 57%). Other exp were higher at Rs9.9b (+4% qoq; est Rs9.8bn) with higher R&D cost at Rs1.87bn (+19% qoq).
• Due to negative operating leverage, EBITDA came in lower at Rs8bn (-22% qoq) vs est of Rs9.3bn with margins at 19.9% vs est of 21.8%
• Tax rate stood lower at 19% vs est of 27%. Consequently despite lower revenues PAT stood at Rs5.3bn (-11% qoq) vs est of Rs5.6bn
• Net debt as on Mar-18 stood at $538mn (flat qoq) with guidance of atleast $100mn reduction in FY19. Mgt expects injectable business to normalize from Q2FY19 onwards with the receipt of EIR for unit 4, likely approval for gErtapenem and re-initiation of bag supplies (H2 onwards)

Key positives: EU revenues; better GMs, lower tax rate; Unit 4/12 EIR

Key negatives: Lower US /ARV sales; high other expense; high NWC

Impact on financials: We reduced our FY19/20 earnings est by 6%/7%

Valuations & view

Despite hiccups arising from multiple injectable recalls / implementation of remediation measures in Q4, Aurobindo’s FY18 performance has been better than most peers in a tough operating environment. Improving traction in EU adding to the overall growth momentum and imparts further solidity to the business. Aurobindo continues to see growth opportunities in global generics, unlike most large-cap peers who look to actively diversify beyond generics. Aurobindo believes monetization of its R&D investments in complex generics (microspheres, peptides, vaccines, biosimilars, etc) will help the company sustain organic growth momentum beyond FY20. We estimate FCF of ~US$310m over FY18-20E, with consistent RoCE of 20-21% will provide leeway to complement organic growth with M&A initiatives. Reiterate Outperformer. Aurobindo is our preferred large cap pharma pick.