MOSL: AUROBINDO PHARMA (Buy)-Ahead of peers-2Q expected to be best-ever quarter

​Aurobindo Pharma: Ahead of peers; 2Q expected to be best-ever quarter

(arbp IN, Mkt Cap USD6.2b, CMP INR683, TP INR850, 24% Upside, Buy)

• Net sales declined ~2% YoY (+~1% QoQ) to ~INR36.8b (est. of ~INR40.7b). US business grew 3.2% YoY (+7% QoQ) to USD263m. In INR terms, US sales remained largely flat YoY due to currency movement. Gross margin improved to 59% (+400bp YoY, flat QoQ). EBITDA declined 5% YoY to ~INR8.4b (est. of INR9.2b), with the margin at 22.9% (-70bp YoY, +~170bp QoQ). Adj. PAT declined 9.7% YoY (-6% QoQ) to INR5.2b, ~13% below our estimate.
• US business shines; strong growth expected in 2Q: US sales increased 7% QoQ (+3% YoY) to USD263m, led by stable pricing sequentially and ramp-up of key launches, such as Strattera, Meropenem, Mucinex, Renvela Oral solutions and Ebzicom. gRenvela tablet launch in July-17 (market size: ~USD800m; currently ARBP is the only generic player) is expected to lead to strong growth sequentially. We expect gRenvela to remain a limited-competition product in the near term, contributing ~USD150m on annualized basis.
• Key earnings call takeaways: 1) Net debt expected to come down to USD475m by end-FY18 (from USD516m now). 2) High-single-digit to low-double-digit price erosion expected in FY18. 3) R&D expense as % of sales expected to be ~5% in FY18 and 6% in FY19. 4) DTG combination drug approval expected in a few weeks (TAD for Aug-17). 5) Capex guidance of USD110m for FY18 (excluding Biosimilar and vaccines). 6) Tax rate guidance of ~27% in FY18 and lower in FY19. 7) Top-25 products’ revenue contribution stood at 35% v/s 45% in 1QFY17. 8) EU business delivered EBITDA margin in double-digits.