Buy Aurobindo Pharma; target Rs 914: Sharekhan

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Sharekhan Research has maintained buy rating on Aurobindo Pharma with target price of Rs 914. At the current market price of Rs 769, the stock trades at 13.4x of its FY2009E earnings.

 

Share khan Research report on Aurobindo Pharma:

 

Result highlights

 

For FY2007 Aurobindo Pharma has reported an impressive growth of 349.8% in its consolidated profit to Rs 203.2 crore against our expectations of a profit of Rs 202.7 crore.

 

In FY2007 the company's consolidated revenue grew by 32.7% to Rs 2,250.2 crore. The revenue growth was driven by a 64% increase in the international business during the year. The exports from the domestic base increased by 34% to Rs 1,147.6 crore in the same period.

 

The operating profit margin (OPM) expanded by 230 basis points to 13.4%, which was lower than our expectations. However, the operating profit grew by 70% to Rs 302.0 crore during the year. The net profit jumped by 349.8% to Rs 203.2 crore on the back of a 25% fall in the interest cost and a substantial decline in the tax incidence brought about by the minimum alternate tax (MAT) credit entitlement of Rs 14.54 crore.

 

At the current market price of Rs 769, the stock trades at 13.4x of its FY2009E earnings. We maintain our Buy recommendation on the stock with a price target of Rs 914 per share.

 

International business reports 64% growth

 

In FY2007 the consolidated revenues of the company grew by 32.7% to Rs 2,250.2 crore. The revenue growth was driven by a 64% increase in the international business during the year. The exports from the domestic base grew by 34% to Rs 1,147.6 crore. Basically, the company's efforts to establish its business in the USA, the European Union (EU) and the other key countries helped it to expand its international business. With the ramp-up in the formulation exports, the formulation business contributed about 37.5% to the consolidated top line in FY2007 vs 29.2% in FY2006.

 

OPM saw marginal expansion

 

With the increasing contribution of formulations, the OPM of the company improved by 290 basis points to 13.4%, which was less than our expectation of a 15.3% improvement.

 

The gross margin increased by 420 basis points to 48% in FY2007. But the 70-basis-point increase in both the employee cost and the other expenses restricted the margin growth. The employee expenses went up by 46.9% on account of the integration of the newly acquired Dutch company, Pharmacin International, and the Sandoz's facility in the USA. Also the company added 360 employees (total: 4,600 employees) during year which inflated the employee cost. The other operating expenses rose because of higher dossier filings expenses (up 55% to Rs 62 crore) during the year. Though the Pen-G prices rose by more than two times, the company could not take advantage of the same because the Pen-G prices saw a significant rise only in January 2007. During the fourth quarter the company executed only old contracts where the realisations were capped at the pri agreed upon earlier.

 

Bottom line jumps 349.8%

 

With the improvement in both the top line and the margin, the operating profit rose by 70.1% to Rs 177.5 crore in FY2007. Subsequently, the profit after tax stood at Rs 204.3 crore owing to a 25% fall in the interest cost and a substantial decline in the tax incidence. In fact, the interest cost (net of interest income coming from the FCCB proceeds) fell by 24.9% to Rs 45.4 crore and the net tax (after the MAT credit entitlement of Rs14.54 crore) declined by 90% to Rs 2.1 crore in FY2007. The company had raised foreign curency convertible bonds (FCCBs) worth USD 200 million in FY2006. The minority interest was down to Rs 1.1 crore, resulting in a 166.8% rise in the profit after minority interest to Rs 203.2 crore (against our estimate of Rs 202.7 crore). Again the previous year's profits were boosted by an extraordinary income of Rs 30.98 crore. So if we discount the impact of the extraordinary income from the FY2006 profit, the FY2007 net profit after minority interest actually jumps by 349.8%.

 

Valuation and view

 

To sum up, the FY2007 consolidated financials of Aurobindo Pharma are in line with our estimates, with sales and profits of Rs 2,250.2 crore and Rs 203.2 crore respectively. On the other hand, the stand-alone Q4FY2007 numbers are a bit disappointing with a 230-basis-point decline in the OPM. We feel the consolidated financials reflect the true performance of the company.

 

Aurobindo Pharma has already made its presence felt in the USA generic market with a robust product pipeline. Gradually, it is improving the quality of its ANDA filings for US generics, as is evident from the product approval of Cefedoxime proxetil, Quinapril Hydrochloride and Hydrochlorothiazide, which are having just two to four competitors. On the other hand, the initiatives taken to establish its business in the EU and the other emerging markets are well on track. Also, by setting up a subsidiary in South Africa the company is well prepared to participate in the upcoming USD 600-million tender of South Africa for ARVs. All these efforts of the company would fuel growth in the formulation business.

 

On the margin front, we believe the increasing contribution of the formulation business, that too from the regulated markets, and higher Pen-G prices would expand the OPM of the company going forward. We expect the consolidated OPM to improve to 17-18% levels during FY2007-09. At the current market price of Rs 769, Aurobindo Pharma is trading at 13.4x its FY2009E earnings. Its transition from a mere API player to a speciality formulation maker (and that too in the regulated markets like the USA) is very impressive and would boost its revenue and profitability. We maintain our Buy recommendation on the stock with a price target of Rs 914.