Buy Aurobindo Pharma; target of Rs 1100: ICICI Direct

Aurobindo Pharma has acquired the Generis group in Portugal (subject to the fulfilment of certain anti-trust approvals), through its step down subsidiary Agile Pharma (Netherlands) for a consideration of €135 million (Rs. 985 crore). The consideration is proposed to be financed via European debt. Generis’ CY16 revenues were € 64.8 million and EBITDA was €12.7 million. In CY17, the management expects revenues to increase to €73 million and EBITDA to €16 million mainly from new launches and resolution of temporary supply chain issues from third party in 2016.

As per management, Generis will be EPS accretive from the first year. This acquisition will also cement Aurobindo’s position as No. 1 player in Portugal both by value and volume. The management has estimated synergies from Aurobindo’s vertical integration would be €2 million in CY18 and € 5 million CY19. This will be achieved through 1) new products launches and improved capacity utilisation from the current 50% to 80% by 2020 and 2) procurement of APIs from India. It will also be able to participate in European tenders within short notice with optimum economies of scale, thanks to the available manufacturing facility in Portugal. Overall improvement in profitability in Europe bodes well in the long run. We maintain our target price of Rs. 1100, based on 20x FY19E EPS of Rs. 54.9. We believe 20-25% correction in the stock from the recent high has provided some more headroom for the long term horizon.