Hold Aurobindo Pharma; target of Rs 1272: Sharekhan

Sharekhan has recommended a hold rating on Aurobindo Pharma with a target price of Rs 1272 per share in its research report dated February 05, 2015.

February 09, 2015 / 12:32 IST

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Sharekhan's report on Aurobindo Pharma

Aurobindo Pharma (Aurobindo) has reported a moderate performance in Q3FY2015, amidst an integration process of newly acquired entities during the past few quarters and lack of new product approvals in the key markets like the USA. The company witnessed a 47.8% growth in net sales to Rs3,166 crore on the back of contribution from its newly acquired entities. However, the operating margin declined by 1,074BPS YoY on the back of high base effects, integration costs and adverse currency movement in some of the geographies. This led the adjusted profit to decline by 2.6% to Rs404.6 crore during the quarter.

The company witnessed a 29% growth in formulation business in the USA, a 51.5% growth in the anti-retroviral (ARV) business on the back of winning new tenders and a 203% jump in the European business on the contribution from newly acquired businesses (base business growth in low double digit). However, API business declined by 9% due to a higher captive consumption and less priority to low margin tender business.

While we believe the integration process will continue to restrict the expansion in operating margins in short term and high level of debts would continue to pose concern for the company, but its focus to get better synergy from the integration, broad-basing the production base and focus on niche segments would help them to achieve stronger earnings growth.

"We have broadly maintained our estimates and price target of Rs 1,272 (implies 16x FY2017E EPS). However, owing to a limited upside we downgrade our rating to Hold", says Sharekhan research report.