Buy Aurobindo Pharma; target of Rs 849: EIS

EIS's research report on Aurobindo PharmaAurobindo’s revenues grew 9.4% y-o-y and 4.7% q-o-q to Rs 35,024 mn in 3Q FY16 marginally below our expectations. Revenue was driven by 30.8% y-o-y growth in US formulations business but growth was offset by flat performance in Europe and API business during the quarter. De-growth in ARV further negatively impacted revenue during the quarter. EBITDA increased 28.1% y-o-y and 5.4% q-o-q at Rs 8,299 mn during 3Q FY16. EBITDA margin increased 346 bps y-o-y and 16 bps q-o-q to 23.7% in 3Q FY16 mainly due to lower than expected other expense as a percentage of revenues; exceeding our expectations for the quarter.Issues faced by Unit VII pose a threat to the company’s top-line and profitability going forward. Moreover, in spite of receiving significant number of approvals during the year, Aurobindo’s top-line failed to reflect expected growth. However, we believe the company’s margins will improve aided by better product mix from FY 2017 onwards. Hence, we have valued the business at 16.0x FY 2018E EPS of Rs 52.0 i.e Rs 833 per share. We assume a target EV/EBITDA multiple of 11.0x for FY 2018 EBITDA, to arrive at a target price of Rs 827 per share. Aurobindo’s DCF valuation is Rs 868 per share. Consequently, using a weighted average methodology we arrive at a share price of Rs 849, generating a 32.6% upside potential in the medium term. For all recommendations, click here 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.

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