Aurobindo under CBI scanner: Is it still a buy?

Surajit Pal, pharma analyst at Elara Capital feels that investors can enter the stock around Rs 100 given its fundamentals. “I believe the current price roughly around Rs 100 will be the right price to enter considering the prospect in the company for this year and next year in immediate terms,” he told CNBC-TV18.

He expects FY13 to be fundamentally strong for Aurobindo. However, high operating and financial leverage is a risk for the company. "Unless and until they get approval and they can utilise more capacity, that will eat away their margin," he added.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Are you worried or investors in Aurobindo should be worried about the kind of news flow that’s coming on the CBI investigation front?

A: It is hard to predict about what will be the outcome of the investigation because as an outsider we don’t know what has happened earlier and what could be the consequences. As far as fundamental in the company is concerned, I believe the current price roughly around Rs 100 will be the right price to enter considering the prospect in the company for this year and next year in immediate terms.

Q: They had some issues as well with the USFDA, any update on that in terms of what is happening with unit 3, unit 6?

A: I think unit 3 got approval for supplying Seroquel this time. If I have to read between the lines and understand from the behaviour of US FDA on unit 3 means that the problem has been clarified and US FDA is satisfied that’s why the new approval has come. There was supposedly visit by US FDA by March, so I believe that has happened and satisfactorily that has been met.

Q: The stock trading at about Rs 115 but you have got a price target of Rs 100 on this stock; you are approaching the next couple of months with caution on Aurobindo or do you think any fall could be an opportunity to buy because of the business prospect?

A: I believe FY13 will be a good year. I am just keeping a tab on the development. As and when their new prospects fall in place, the company will start showing that in the result. The biggest problem in the company is that it is at a very high operating leverage as well as financial leverage. Unless and until they get approval and they can utilise more capacity, that will eat away their margin.

Bigger approval in a valuable product like Seroquel will definitely help the company. More new products coming out of the current dullness will help the company to score bigger and that will reflect in price going forward, so current price is basically stable. As an investor with a target of immediate to midterm one can definitely enter it, for the long-term also it’s definitely good. I think 2014-15 will be very good considering that the company is entering two-three new areas.