Aurobindo Pharma's Q2FY20 results (Outperformer) - US drives another strong quarter

Q2FY20 result highlights

• Consol revs came at Rs56bn above est of Rs55.3bn; Beat mainly US driven. US sales came at $403m vs est $380m; Q1 was $387m; Organic sales (ex-Spectrum) likely to be ~$378m vs $362m in Q1. Notably, this sales performance was achieved despite no meaningful new launches during the qtr combined with ongoing FDA issues
• EU revs came at $199m vs est $195m. API revs stood below est
• Consol EBITDA came ahead at Rs11.7bn vs est Rs11.5bn; Q1 was Rs11.5bn. EBITAM came at 20.8% inline with est; Q1 was 21.1%.
• EBITDAM driven by GMs – 57.7% inline with est; Q1 was 57.8% - Notably, lower GMs had been a challenge for the company in FY19, so the improvement witnessed in H1FY20 is positive
• Overheads were largely inline with est at Rs20.6bn; R&D spends were Rs2.2bn vs Rs2.5bn in Q1. Depreciation was inline with est at Rs2.4bn.
• PAT came at Rs6.4bn below est at Rs6.5bn; Auro booked Rs128m of non-recurring charges related to acquisition expenses.
• Mgt reiterates Sandoz transaction to be closed in near future. Mgt remains positive of beating its earnings guidance linked to the transaction. Net Debt is $522m vs $599m in Q1 – already repaid $200m in H1FY20 which was the guidance for debt repayment in FY20. Guides to becoming zero net debt over next 3 years (ex-Sandoz).

Impact on financials: We have reduced our FY20 earnings est by 9% to account for possible delay in closure of Sandoz transaction to FY21.

Valuations & view

Despite limited meaningful new launches over last few quarters, Aurobindo’s US performance has been far better than most peers in a tough operating environment. Improving traction in EU and RoW is adding to the overall growth momentum. Additionally, the proposed Sandoz business acquisition, arguably near the bottom of generic cycle, is positive for Aurobindo strategically and financially. With this acquisition Aurobindo becomes the second largest US generics player and adds niche dermatology segment to its strong Oral Solids and Injectables portfolio. This has significant long term competitive advantage. Further, Aurobindo believes monetization of its R&D investments in complex products will help the company sustain organic growth momentum beyond FY20. Reiterate Outperformer with a TP of Rs941 (15x FY21E EPS). Aurobindo is our preferred pharma pick.