Edelweiss research is bullish on Aurobindo Pharma and has maintianed buy rating on the stock. The stock trades at a P/E of 16.1x and 12.0x on FY08E and FY09E earnings respectively.

Edelweiss research report on Aurbindo Pharma

ARV business:

4Q08 onwards could be a major trigger Aurobindo’s ARV business recorded revenues of INR 470 million for 1Q08; these were lower on account of some quarterly aberration which is intrinsic to the tender business. The company is primarily supplying to the PEPFAR programme and this business is expected to increase significantly going forward. The WHO business is the second largest contributor to this segment. Also, Aurobindo is expecting to participate in a new tender to be floated by the South African government in 4Q08; the tender size is expected to be approx USD 500 million–800 million and there would be four-five players in the fray.

The tender is expected to help the company achieve revenues of approx USD 85 million in FY08E and USD 125 million in FY09E. Formulations: Improving visibility in US generics Aurobindo reported revenues of Rs 1,800 million from its formulations business in 1Q08. US generics contributed approx Rs 550 million, a growth of approx 26%. This was driven by some important approvals like Ciprofloxacin, Cefprozil, Cefpodosime Proxetil, etc. Its EU business recorded revenues of INR 360 million. Formulations from ROW markets had revenues of INR 420 million. Revenues from both these segments are expected to be stronger in the second half of the year. We expect US generics to record revenues of approx USD 99 million for FY08E and USD 153 million for FY09E.

Increased Pen-G prices:

Likely to boost profitability in next three quarters Aurobindo’s Q1FY08 EBITDA margins at 13.1% were lower than expectations as more than 30% increase in Pen-G prices were expected to immediately impact the company’s increased realizations, which did not happen. Margins are expected to recover over the next three quarters on account of passing on of the higher Pen-G prices to customers for semi synthetic penicillins; margins are also expected to be higher on account of higher revenues from US formulations and ARV formulations sales which are likely to increase significantly in the second half of FY08E. We believe Aurobindo’s EBITDA margins are likely to increase from 13.4% in FY07 to approx 15.5% in FY08E; this will translate in an operating profit CAGR of 31% from FY07-09E.

Outlook and valuations

We believe the overall traction of growth drivers is intact with: (1) higher revenues from US generics market due to launch of new products; (2) higher revenues from AIDS business with new tender in South Africa likely to contribute in late FY08E; and (3) steady growth in base business with higher margins. With a significant correction in the stock price, we believe the downside for the stock price is limited, and as the company delivers better results from second half of this year, the stock could see some upside. At CMP of Rs 619, the stock trades at a P/E of 16.1x and 12.0x on FY08E and FY09E earnings, respectively. We maintain our ‘BUY’ recommendation.

Investment Theme

We believe that Aurobindo will have significant growth going forward on account of: (1) wide basket of products to be launched in the US generics market with some niche opportunities; (2) stability in the base business; and (3) increased revenues from anti-AIDS business which could start contributing significantly from FY08E onwards.

Key Risks 

• Severe pricing pressure in US generics business could hurt Aurobindo’s margins. 
• Delay in getting regulatory approvals for some key products. �� Increased competition in the anti-AIDS segment could impact the company’s growth rate. 
• Cyclicality in pricing of Pen-G prices could impact its base business.