Moneycontrol Bureau
Motilal Oswal says it is time to add exposure to Aurobindo Pharma as it sees negligible impact of lawsuit filed in the US related to price collusion and cartelisation for two generic drugs. With a buy target on the stock, the broking house says Aurobindo remained one of its top picks in the sector with a target price of Rs 1,050, implying 52 percent upside over Friday's (December 16) closing price of Rs 691.
"We do not see any major impact from the current lawsuit given the drug's negligible exposure to the company's sales (around 0.1 percent of US sales and less than 0.05 percent of total sales)," Motilal Oswal says in its research note. The stock price recovered from a more than 4 percent fall intraday on Friday to end only 0.5 percent lower.
According to media reports, 20 states in the US filed a civil lawsuit against six generic pharma companies, alleging that they conspired on pricing for generic drugs - Doxycycline Hyclate Delayed Release (antibiotic for respiratory tract infection) and Glyburide (oral diabetes medicine). Indian company Aurobindo Pharma was among these six companies.
The company is not present in the Doxycycline Hyclate DR market. According to IMS, the company's secondary sales from Glyburide were immaterial at USD 1.1 million in FY16 (primary sales should be even lower).
The brokerage house says under US pricing probe, more price collusion related lawsuits can be filed against various companies (Sun Pharma, Taro Pharma, Aurobindo and Cadila Healthcare have received subpoena in the past).
Given that Aurobindo primarily depends upon volume of launches and manufacturing strength to fuel growth, it sees limited risk of price collusion.
Aurobindo has by far the best approval/launch track record among Indian generic players operating in the US.
Since the beginning of FY16, it has received 88 ANDA (abbreviated new drug application) approvals in the US - launched more than 55 products (highest among Indian peers) and the remaining are delayed due to capacity constraints.
Motilal Oswal says it expects the company to launch around 25 ANDAs in the second half of FY17, including 20 oral solids and 6-7 injectables. Key launches expected in Q4FY17 are Vancomycin, Meropenem and Fenofibrate.Supply commencement from Unit 16 (wherein USFDA inspection completed recently) will help fuel supply of injectable products (e.g. Isosulfane Blue) which are in shortage, it says.
Aurobindo is not dependent on any single product, so it is best placed against pricing pressure, the brokerage house believes.
"Unlike other large cap peers, no single product for the company contributes more than 3 percent of US sales. This limits the risk of price pressure in the base portfolio (which has been one of the biggest concerns for most of the other large cap peers)," it explains.
Meanwhile, Motilal Oswal has upgraded Kaveri Seed to buy with a target price of Rs 489 after September quarter earnings.
The brokerage house says with all headwinds now behind, majority write-offs already taken, improved outlook for cotton acreage and clarity over distribution of cash in hand, it raised earnings estimates by 14/11 percent for FY17/FY18 and target P/E multiple to 15x (prior: 14x).
It expects FY18 to bounce back sharply (with revenue/PAT growth of 20.5/25 percent) and FY19 to continue witnessing healthy growth pace.
FY16 and FY17 were particularly bad for the cotton seeds business due to declining cotton acreages and lower prices. This also led to higher write-offs during the year, negatively impacting margins. The brokerage house believes the company has taken all major write-offs.
Also, in view of increase in cotton prices, the acreages should start moving up, benefiting Kaveri the most. The company also plans to distribute some part of cash to shareholders by way of special dividend or buyback of shares, it says.
Kaveri Seed Company's revenue increased 2 percent to Rs 67.8 crore in Q2FY17 from Rs 66.3 crore in the year-ago period. EBITDA stood at Rs 3.4 crore as against loss of Rs 44.6 crore in Q2FY16, and margins thus came in at 34 percent.
Adjusted PAT stood at Rs 7.7 crore as against loss of Rs 48.2 crore in Q2FY16. For 1HFY17, cotton seed volumes declined 4 percent YoY to 0.54 crore packets, rice seed volumes fell 8 percent YoY to 6.1 MT, while maize seed volumes increased 30 percent YoY to 8.1 MT.
The market share improved in FY17. Overall cotton seed volumes in India declined 15 percent YoY, but Kaveri's volumes moderated by just 4 percent as it gained market share in states like Andhra Pradesh and Telangana.Volume increased 30 percent YoY in Maharashtra and 20 percent YoY in Madhya Pradesh and Rajasthan. Maize volumes also showed robust growth of over 29 percent YoY. Additionally, the returned stock of field crops was around 35 percent lower YoY for the Kharif season.Posted by Sunil Shankar Matkar
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