Buy Aurobindo Pharma; target Rs 247: Sharekhan
Sharekhan is bullish on Aurobindo Pharma and has recommended buy rating on the stock with a target price of Rs 247 in its December 20, 2012 research report.
December 21, 2012 / 12:28 IST
Sharekhan is bullish on Aurobindo Pharma and has recommended buy rating on the stock with a target price of Rs 247 in its December 20, 2012 research report.
"Aurobindo Pharma has been reeling under pressures from various quarters including (1) the US Food and Drug Administration (USFDA) scrutiny on some of its key manufacturing facilities; (2) fluctuation in foreign currency resulting in substantial marked-to-market (MTM) losses; and (3) an enquiry by the Central Bureau of Investigation (CBI) into the promoter’s links with former chief minister of Andhra Pradesh, YSR Reddy. However, the situation is normalising now. The USFDA has cleared one of its manufacturing units and the management is awaiting USFDA clearance for another unit (Unit VI) that has already undergone USFDA inspection (a positive outcome could bring in incremental revenues of $25-30 million).Change in strategy to rejuvenate growth: The company envisages several changes in its business strategy to rejuvenate growth. These include (a) reduction of the dependence on partners in the developed markets (the USA and Europe) and focus on self-driven businesses (through wholly owned subsidiaries) to ensure predictable growth; (b) focus on niche segments like controlled substances in the USA; (c) focus on cost control and margin expansion; (d) investments in upgrading manufacturing units to avoid USFDA action in future; and (e) aggressive product filings in different countries.Margins and cash flows to improve going ahead: With the expected increase in the export-led business post-resolution of the USFDA issues, the favourable tilt in the revenue mix is likely to boost the margins, resulting in a relatively much better growth in earnings as compared with revenues. The company has also been able to successfully redeem its outstanding foreign currency convertible bonds (FCCBs) through external commercial borrowings in FY2012 and is well funded to meet its commitment of repaying its long-term debt (close to $80 million) in the current fiscal. Though the net debt level continues to be high (a debt-equity ratio at 1.1x) but we expect the improving operating performance and the consequent strong internal generation of cash flows to ease the stress on the balance sheet (the debt-equity ratio is likely to drop to 0.5x by FY2015E).Though the stock has run up recently, it is still trading at a 30% discount to its long-term average multiple (around 13.5x one-year forward earnings) and at close to an average discount of 20% to some of its peers (like Torrent Pharmaceuticals and Ipca Laboratories) despite the fact that it has a relatively much better product pipeline. Thus, we see scope for substantial rerating of the stock, in line with a distinct improvement in its financial performance. Consequently, we recommend Buy on the stock with a price target of Rs247 (12x average of FY2014 and FY2015 estimated earnings). Any negative development on the nod from the USFDA or any enquiry related to the promoter’s links with the politician is a potential risk to our prognosis.Despite a high level of debts causing higher interest cost and foreign exchange (forex) losses, we expect the adjusted net profit to jump by 104% to Rs404 crore in FY2013 (from a low base), primarily due to a jump in the OPM and a lower interest cost (due to expectation of a lower forex loss). We expect a 27.8% rise in the net profit to Rs516.5 crore during FY2014 and a 31.8% jump in the same to Rs680.9 crore in FY2015.Despite the odds, the company has meticulously strengthened its product pipelines. Currently it has 265 cumulative filings (30 filings in FY2012), of which 98 products are pending approvals from the USFDA. It filed 267 dossiers with the European authorities in FY2012 (cumulative 1,258 dossiers), besides 1,194 product filings in the other key markets. Moreover, it aims to maintain 25 ANDA filings per year, which should see the product pipeline strengthening further. Its focus on margin would also help it strengthen the bottom line. That’s not all, the USFDA clearance would be an immediate booster for the company. We expect the company’s revenues to grow at a compounded annual growth rate (CAGR) of 16% and its net profit to grow at a CAGR of 51% over FY2012-15.The stock is currently trading at 9.3x average of the FY2014E and FY2015E earnings which is a 22% discount to the BSE Healthcare Index. Among peers, it is trading at a 22% discount to Ipca Laboratories and a 17% discount to Torrent Pharmaceuticals, though it has a stronger product pipeline. This leaves scope for further re-rating of the stock. Consequently, we recommend a Buy on Aurobindo Pharma with a price target of Rs 247 (12x average of FY2014 and FY2015 estimated earnings," says Sharekhan research report.Shares held by Central Governments/State Governments Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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