MOSL: AUROBINDO PHARMA (Buy)-US led earnings growth despite regulatory hurdles at few sites
AUROBINDO PHARMA: US led earnings growth despite regulatory hurdles at few sites
(ARBP IN, Mkt Cap USD5b, CMP INR598, TP INR720, 20% Upside, Buy)
- Revenue growth led by the US: 1QFY20 sales at INR54.4b (v/s est. INR52.2b) was up 28% YoY, largely led by US formulation sales at INR26.8b (USD390m, 49.4% of sales), which were up 42.3% YoY. EU sales came in at INR13.9b (+16% YoY, 25.6% of sales); emerging market sales at INR3.1b were up 22% YoY. ARV sales at INR3.2b doubled YoY while API sales dipped 2% YoY to INR7.3b, mainly due to 12% YoY decline in Betalactum.
- Superior product mix expands margins: Gross margin (GM) stood at 57.8%, up 270bp YoY/ 130bp QoQ, mainly driven by good product mix and overall good geographical mix. EBITDA margin was up 280bp YoY to 21% (v/s est. 20%), due to improved GM and lower other expenses (down 90bp YoY as % of sales). EBITDA at INR11.5b (v/s est. INR10.4b) was up 47% YoY. Forex gain for the quarter was INR48m. There is an exceptional expense of INR127m as acquisition related cost. Adj. PAT came in at INR6.4b (v/s est. INR6.2b) and was up 25% YoY.
- Key concall highlights: (1) ARBP would complete corrective and preventive action (CAPA) related to 'site under warning letter' by end-CY19. (2) ARBP has provided response/periodic updates related to observations at Unit 3. About 5-6 products are pending for approval from this site. (3) It has guided for ~40 launches over the remaining 9MFY20. (4) Auromedic sales were stable YoY at USD67m. (5) ARBP has maintained its guidance of USD150-200m debt reduction in FY20.
- Valuation view: We lower our EPS estimate for FY20/FY21 by 8%/2% to factor in the delay in closure of the Sandoz transaction. We roll our price target on 11x (unchanged) 12M forward earnings to INR720 (unchanged). We remain positive on ARBP on the back of a healthy ANDA pipeline and limited erosion in base business. However, regulatory issues remain a hangover for the stock over the near term. Maintain Buy.
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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