MOSL: AUROBINDO PHARMA (Buy)- Margins subdued, but outlook intact

Aurobindo Pharma: Margins subdued, but outlook intact

(ARBP IN, Mkt Cap USD5.2b, CMP INR610, TP INR750, 23% Upside, Buy)

• Lower gross margin leads to earnings miss: Aurobindo Pharma's (ARBP) revenue grew ~16% YoY to INR42.5b (est. of INR42b), largely led by growth of 30% YoY in EU (34% of sales), 32% YoY in growth market (7% of sales) and 20% YoY in API (21% of sales). US sales continued the uptrend, with 11.5% YoY growth to INR19b (54% of sales). Gross margin shrank 420bp YoY to 55.1% due to provision related to product recall, a change in product mix and increased raw material prices. EBITDA margin shrank ~450bp YoY (-150bp QoQ) to 18.3% due to gross margin contraction and higher employee cost. EBITDA declined ~7.4% YoY to INR7.8b (est. of INR9.2b). Reported PAT was lower at INR4.5b due to a forex loss of INR682m. Adjusting for the same, PAT would be INR5.2b.
• US sales continue uptrend; strong growth momentum in EU: US sales came in at USD282m (+7% YoY, 4% QoQ). Injectable sales stood at USD36m (v/s USD32m in 4Q), while Natrol sales were stable YoY at USD34m. EU sales grew 16% YoY on a CC basis. ARBP has transferred manufacturing of 94 products from EU to India, and is on track to improve its operating margins.
• Key con-call takeaways: (1) Although 1QFY19 US injectable sales were subdued, ARBP remains confident to grow by 30% YoY on USD163m sales in FY18. (2) Net debt increased by USD33m sequentially due to an increase in working capital (up USD63m) and capex of USD70m. (3) ARBP filed first derma ANDA this quarter; is on track to file 10-12 ANDAs in this space. (4) Apotex deal would be complete by 3QFY19. (5) A few ANDAs expected in FY19 are g-Toprol, g-Prevacid and g-Welchol.