MOSL: AUROBINDO PHARMA (Buy)-Better off compared to peers-positive outlook for FY18

​Aurobindo Pharma: Better off compared to peers; positive outlook for FY18

(ARBP IN, Mkt Cap USD5.2b, CMP INR580, TP INR750, 29% Upside, Buy)

• One-offs impact results: Net sales declined ~3% YoY (-7% QoQ) to ~INR36.4b (est. of ~INR38.5b). Gross margin expanded 210bp YoY (+260bp QoQ) to 58.7% due to favorable business mix change (low ARV sales and increase in US business contribution). EBITDA declined 13% YoY to ~INR7.7b (est. of INR9b). EBITDA margin contracted 240bp YoY (-170bp QoQ) to 21.2%, impacted by INR500m of inventory write-off & other exceptional items, and high R&D expense at 4% of sales (+70bp QoQ, -30bp YoY). Adjusted for one-time expenses, PAT came in at INR5.55b (largely in-line). For FY17, sales EBITDA and PAT stood at INR150b (+8.1% YoY), INR34.3b (+8% YoY) and INR23b (+13.6% YoY), respectively.
  
• Unlike peers, US business not as concerning: US business sales came in at USD246m (-1% YoY, -5.5% QoQ), attributed to few new launches and additional competition in the base business. ARBP is guiding for growth in the US business, led by strong growth in the injectable business (>50% growth YoY), ramp-up in Natrol & OTC business, and less-than-expected industry price erosion.
  
• Key earnings call takeaways: 1) Inventory write-off of ~INR520-550m related to Actavis business in EU in 4Q. 2) Single-digit price erosion expected in the US in FY18. 3) R&D as % of sales expected to be ~4.5-5% in FY18. 4) Naidupet plant inspection over with zero 483s. 5) DTG combination drug – TAD for Aug-17. 6) Capex guidance of USD120m in FY18 (excl. biosimilars and vaccines). 7) Guiding for improvement in EBITDA margin in FY18.