Emkay reiterates Buy on Aurobindo Pharma
Emkay has recommended Buy on Aurobindo Pharma with a price target of Rs 1,581 as against the market price (CMP) of Rs 1,343 in its report dated Nov 9, 2010.
Aurobindo`s Q2FY11 results were above our expectations. While net revenues grew 24% YoY to Rs 10.4 billion, profit was up 92% to Rs 2 billion (including forex gain of Rs 762 million). Top line growth was driven by 38% growth in formulations led by a) US (up 29% to Rs 3 billion), due to commencement of operations at SEZ, b) Europe (up 55% to Rs 860 million), c) ARV formulations (up 49% to Rs 1.7 billion), and d) RoW markets (up 40% to Rs 625 million). The excellent growth across regions was on account of unlocking of capacity constraint, with SEZ Unit III commencing its operations. Dossier income (includes licensing income from AstraZeneca) at Rs 699 million was higher than expected. Income from dossiers posted good growth of 74% to Rs 699 million and contributed 6% to the overall sales. EBITDA for the quarter was up by 23% to Rs 2.5 billion largely driven by robust top line growth of 26% (including dossier income). This was in spite of contraction in gross margins by 208bps and 27% YoY increase in total expenditures. Adjusted PAT growth of 14% to Rs 1.22 billion was lower than growth in EBITDA due to a) lower other income (down 17%), b) higher interest outgo (includes Rs 35 million YTM paid on redemption of Aug`10 FCCBs), and c) higher tax provisioning (539bps YoY increase). This quarter, the company booked forex gains to the tune of Rs 762 million (Rs 210 million on account of restatement of FCCBs and Rs 552 million of operational gains).
High fixed overheads impacted operating performance
Operating margins for the quarter declined by 60bps to 22.8% mainly because of increase in fixed overheads from the unit at SEZ and New Jersey. However, commencement of operations of SEZ unit led to 423bps QoQ expansion in EBITDA margins. Higher employee cost (up 36% YoY) was on account of annual increments and festival bonuses this quarter. Adjusting for one-offs (such as the increment and bonus), EBITDA margins would have witnessed YoY expansion of 200bps.
APAT at Rs 1.22 billion is above our expectation
Despite lower other income (down 17%) and higher tax provisioning (up 539bps YoY), APAT was above our expectations at Rs 1.22 billion (we expected Rs 1.1 billion). Higher interest cost was due to non-recurring amount of Rs 35 million paid on redemption of Aug2010 FCCB. The company has incurred forex gain of Rs 762 million vs. forex loss of Rs 36 million in Q2FY11. Out of this, Rs 210 million is MTM gains and Rs 552 million is from operations. Adjusted EPS stood at Rs21 for the quarter and Rs37 for H1FY11 (reported EPS of Rs50). Going ahead, we believe net profit to grow at 21% CAGR to Rs 6.6 billion over FY10-12E, clocking an EPS of Rs113 in FY12E.
H2FY11 likely to be stronger than H1FY11
We believe H2FY11 will be robust than H1FY11 on account of a) first full quarter impact of operations at its Hyderabad SEZ facility, and b) higher revenue contribution from supply agreements with Pfizer and other innovators (product ramp-up from the Pfizer contract has already commenced. The SEZ facility has the capacity to manufacture 6bn tablets per annum (can be increased up to 18bn tablets with minimum incremental capex). We expect the capacity utilization to increase to 45-50% by the end of FY11E from the current levels of 30%. Increased product ramp-up from the Pfizer deal will further lead the utilization levels to increase by FY12. Further savings in tax will lead to incremental earnings. With operating and financial leverage coming into play, we believe that Aurobindo is now in a much better position to leverage its extensive manufacturing infrastructure, going forward.
Revise target price upwards to Rs 1,581; Re-iterate Buy
During H1FY11, the company has clocked adjusted EPS of Rs 37 (reported EPS of Rs 50.1) against our full estimation of Rs 93.3 in FY11E. We continue to maintain our earning estimates of Rs 93.3 and Rs112.9 for FY11E and FY12E respectively. We believe that this quarter performance is encouraging and expect the company to improve its earnings trajectory from next quarter onwards on account of incremental contribution from the Pfizer deal and commencement of operations at Unit III (Hyderabad SEZ). We are of the view that Aurobindo provides good visibility in terms of consistent CAGR growth of 19% over next few years. We raise our target price on the stock to Rs1,581 (Rs 1,242 earlier), valuing at 14x adjusted FY12E EPS. At CMP, the stock trades at 14.4xFY11E and 11.9xFY12E EPS. Reiterate Buy.
Nov 15, 2010