Prabhudas Lilladher recommended Hold rating on Aurobindo Pharma with a target price of Rs 511 in its research report dated November 13, 2019.
Prabhudas Lilladher's research report on Aurobindo Pharma
ARBP sales, adj. EBITDA and PAT miss estimates by 1%, 7% and 14% respectively. With US injectable sales in line with guidance, AuroMedics grew by 12% QoQ to US$75m on launches of injectables in oncology and hormones (e.g. Makena) as well as bagline products of pantoprazole and Vancomycin. Besides, the execution of NBO supplies, launch of OTC drugs (out of 10-12 as guided) and non-oral launces (e.g. gSensipar) helped in core business growth in Q2 while we expect the impact of lower supply of Losartan to reflect with a lag of 1-2 quarters. NBO orders continue to benefit the company with more number of generic majors actively rationalizing US generic portfolio. Core EU grew only 1% QoQ, excluding the accounting integration benefits. ARV sales were flat QoQ with no improvement in order book execution of DTG based ARVs. Adj. gross margin and EBITDA margin are largely identical QoQ at 57% and 19.7%, respectively. In spite of 12% sequential growth in US generics, its net profit was flat QoQ and grew only 5% YoY. Its annualized earnings of H1FY20E was 12% lower than our estimates. ARBP needs to improve US growth in tandem with margin expansion, which were absent in H1FY20.
Moreover, regulatory (USFDA) hangover on Unit-7 and 4 remained high as we are concerned over concentration risk of US revenues. The two plants contributed 44% of US revenues and 43% of pending ANDAs. Also, Unit-4 contributed 80% of US injectable, the major growth driver of US sales. With adverse observations of Unit-7 and ongoing lengthy audit at Unit-4, the regulation risk over the two plants continues to be strong drag over valuation. We maintain 'Hold' recommendation and maintain TP at Rs511.
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