Aurobindo Pharma's Q3FY20 results (Outperformer) - Best in class execution
Q3FY20 result highlights
- Consol revs came at Rs59bn above est of Rs57.1bn; Beat mainly US and EU driven. US sales came at $418m vs est $395m; Q2 was $403m; Organic sales (ex-Spectrum) likely to be ~$393m vs $378m in Q2. Notably, this sales performance was achieved despite no meaningful new launches during the qtr combined with ongoing FDA issues
- EU revs came at $207m vs est $200m. API revs stood lower at Rs7.9bn
- Consol EBITDA came ahead at Rs12.1bn inline with est; Q2 was Rs11.7bn. EBITDAM came at 20.5% vs est of 21.2%; Q2 was 20.8%.
- EBITDAM miss due to GMs – 56.5% vs est of 57.6%; Q2 was 57.7% - Sequential decline could be due to a higher contribution from ARV
- Overheads were at Rs21.2bn vs est of Rs20.8bn; R&D spends were Rs2.5bn vs Rs2.2bn in Q2. Depreciation came higher at Rs2.5bn vs est Rs2.4bn.
- PAT came at Rs7.1bn vs est of Rs6.8bn; Auro booked Rs129m 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 $446m vs $522m in Q2 – already repaid $277m in 9MFY20 higher than the guidance of $200m debt repayment in FY20. Guides to becoming zero net debt over next 3 years (ex-Sandoz).
Impact on financials: Maintain earnings estimates. We introduce FY22 est
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. Novartis disclosure on Sandoz financials is positive as it reinforces the significant value accretive potential of this large transaction. With this deal, Aurobindo will be 2nd largest US generics player and add niche dermatology segment to its strong Oral Solids and Injectables portfolio. This has significant long term competitive advantage. Auro believes monetization of its R&D investments in complex products will sustain organic growth momentum beyond FY20. Reiterate Outperformer with TP of Rs878 (14x FY21E EPS). Aurobindo is our preferred pharma pick.
Aurobindo Pharma is a vertically integrated pharmaceutical group based in India. Co. maintains a product portfolio spread over major product areas encompassing CVS, CNS, Anti-Retroviral, Antibiotics, Gastroenterologicals, Anti-Diabetics and Anti-Allergic with approved manufacturing facilities by USFDA, UKMHRA, WHO, MCC-SA, ANVISA-Brazil for both APIs & Formulations. In addition to Semi-Synthetic Penicillins, Co. has a presence in key therapeutic segments such as neurosciences, cardiovascular, anti-retrovirals, anti-diabetics, gastroenterology and cephalosporins, among others. Co. exports to over 125 countries across the globe.
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