EUR 120.00 For Business Accounts Only

MOSL: AUROBINDO PHARMA (Buy)-Channel destocking, higher RM costs impact margins

AUROBINDO PHARMA: Channel destocking, higher RM costs impact margins

(ARBP IN, Mkt Cap USD5.4b, CMP INR677, TP INR800, 18% Upside, Buy)

 

• Aurobindo Pharma (ARBP)'s 2QFY22 results came in below our estimates, weighed by decline in ARV/API sales and an increase in raw material (RM) costs, which impacted profitability. Compared with the steady-to-declining US sales of peers for the quarter, ARBP's US sales grew 7% YoY (ex-Natrol) on higher volumes.
• We cut our EPS estimate for ARBP for FY22/FY23 by 9%/6%, factoring in: a) a slowdown in injectables offtake on account of COVID, b) lower ARV/API sales due to channel destocking, c) higher solvent prices, and d) increased R&D spending on complex products and biosimilar trials.
• We value ARBP at 13x 12M forward earnings and arrive at TP of INR800. Near-term headwinds are expected in the business, led by higher RM costs and higher inventory in the channel at the industry level. Nonetheless, we remain positive on ARBP on the back of a) a complex product pipeline build-up (respiratory products / injectables / biosimilars), b) a wide product portfolio, supported by backward integration, and c) improving margins in the EU business. Additionally, current valuations largely factor in the near-term pressure on the business. We maintain a Buy rating.