Aurobindo Pharma (AURPHA) | 757content.icicidirect.com/mailimages/IDirect_AurobindoPharma_Q2FY1… · commissioning of new plant and acquisition EBITDA 1,117.3 1,121.9 929.2 841.6

November 10, 2017

ICICI Securities Ltd | Retail Equity Research

Result Update

Strong growth across key geographies…

Revenues increased 18% YoY to | 4436 crore (I-direct estimate: |

4189 crore) mainly due to strong growth in the US and Europe. The

US revenue grew 21% YoY to | 2099 crore (I-direct estimate: | 1957

crore) mainly due to launched of limited competition product

Sevelamer carbonate (nephrology). Europe revenues grew 37% YoY

to | 1114 crore (I-direct estimate: | 997 crore).

EBITDA margins improved 58 bps YoY to 25.2% (I-direct estimates:

26.8%) mainly on account of higher gross margins

Net profit increased 29% YoY to | 782 crore (I-direct estimates: | 728

crore) mainly due to strong operational performance

US key growth driver despite imminent pricing pressure

After filing ANDA in the US in 2003, the company has come a long way as

current ANDA filings are at 463. The US revenue run rate has grown from

~US$100 million in 2009 to crossing $1 billion sales as on 2017. Note that

this was despite the USFDA embargo in FY12-13 on unit VI and unit III. In

rupee term, US sales have grown at 41% CAGR to | 6827 crore in FY13-

17. US formulations now constitute 45% of total turnover, up from 30% in

FY13. US traction has also boosted investor’s confidence, which was

affected by warning letters, piling debts besides non-business political

adversaries. We expect US sales to grow at 7% CAGR on a higher base to

| 8243 crore in FY17-20E.

Transformation, capacity optimisation to improve margins, cash flows

The API: formulations ratio has improved from 43:57 in FY13 to 20:80 in

FY17. Another USP of the company is its vertically integrated model with

huge capacity, unmatched by most peers. The company owns 22

manufacturing facilities, including eight key formulations facilities in India

and abroad. These can be optimised by 1) continuous US filings and

launches, 2) incremental launches and filings in the RoW markets and 3)

site transfers and supplies for products covered under the Actavis deal.

Higher capacity utilisation is likely to improve operating leverage thereby

maintaining the margin improvement trend.

Debt no more a fear factor

The company’s debts kept on piling over the last few years as the

capacity built up was in full flow and rupee depreciation. Working capital

loans are now 85% of overall debts from 65-70% earlier. However, with

consistent and incremental US cash flows the situation improved

markedly. While D/E ratio improved from 1.9x to 0.3x, the debt/EBITDA

improved from 4.5x to 0.9x in FY09-17. As the capex cycle moderates by

FY18, the company expects to utilise maximum FCF for debt repayment.

Injectable portfolio expanding but pricing pressure in orals to weigh

The Q2 numbers were a positive surprise on the European front. US sales

were also higher than expected due to solid growth in injectables

segment besides Sevelamer carbonate (gRenvela) windfall. Going

forward, we expect the injectable portfolio aggressive growth trend to

continue and contribute to ~23% of the US portfolio by FY20 from

current 14%. However prospects on the US oral solids business front

remain weak despite substantial pending pipe line as the macros on this

front continue to be challenging and no let-off is expected in the near

term. European business on the other hand is continuously delivering

better numbers. However the exposure to the US oral solid space (even

though waning) is likely to weigh on the stock in the near term. Our new

target price arrives at | 810, based on 18x FY20E EPS of | 45.

Rating matrix

Rating : Hold

Target : | 810

Target Period : 15-18 months

Potential Upside : 7%

What’s Changed?

Target Changed from | 755 to | 810

EPS FY18E Changed from | 46.8 to | 39.4

EPS FY19E Changed from | 41.4 to | 39.4

EPS FY20E Introduced at | 45.1

Rating Unchanged

Quarterly Performance

Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%)

Revenue 4,435.9 3,775.5 17.5 3,678.8 20.6

EBITDA 1,117.3 929.2 20.2 841.6 32.8

EBITDA (%) 25.2 24.6 57.6 22.9 231.1

Net Profit 781.6 605.6 29.1 518.5 50.7

Key Financials

(| Crore) FY17 FY18E FY19E FY20E

Revenues 15089.9 17007.2 17508.4 18845.9

EBITDA 3434.3 3974.8 3826.0 4161.7

Net Profit 2301.6 2606.5 2412.3 2626.0

Adjusted PAT 2265.7 2625.3 2412.3 2626.0

EPS (|) 39.4 44.8 41.4 45.1

Adjusted EPS (|) 38.8 45.1 41.4 45.1

Valuation summary

FY17 FY18E FY19E FY20E

PE (x) 19.2 16.9 18.3 16.8

Target PE (x) 20.6 18.1 19.6 18.0

EV to EBITDA (x) 13.6 11.8 12.1 10.9

Price to book (x) 4.7 3.7 3.1 2.7

RoNW (%) 24.2 22.3 17.2 16.0

RoCE (%) 24.4 23.8 19.8 19.2

Stock data

Particular

Market Capitalisation

Debt (FY16)

Cash (FY16)

EV

52 week H/L (|) 809/503

Equity capital

Face value | 1

| 58.6 crore

Amount

| 44351 crore

| 47320 crore

| 3084 crore

| 115 crore

Price performance (%)

1M 3M 6M 1Y

Aurobindo Pharma 2.7 10.2 22.2 -4.3

Sun Pharma 0.1 15.2 -17.4 -20.3

Lupin -21.3 -10.8 -33.2 -43.7

Dr Reddy's -2.5 20.9 -9.0 -27.8

Aurobindo Pharma (AURPHA) | 757

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah

[email protected]

Harshal Mehta

[email protected]

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis

| cr Q2FY18 Q2FY18E Q2FY17 Q1FY18 YoY (%) QoQ (%) Comments

Revenue 4,435.9 4,188.7 3,775.5 3,678.8 17.5 20.6 YoY growth mainly due to robust growth in US, Europe and RoW markets

Raw Material Expenses 1,767.9 1,675.5 1,629.9 1,497.8 8.5 18.0 Gross margins improved 332 bps YoY mainly due to launch of limited

product Sevelamer in the US

Employee Expenses 518.7 490.7 426.6 490.2 21.6 5.8

Other Expenditure 1,031.9 900.6 789.8 849.2 30.7 21.5 YoY Increased mainly due to higher carriage, customer charges, settlement,

commissioning of new plant and acquisition

EBITDA 1,117.3 1,121.9 929.2 841.6 20.2 32.8

EBITDA (%) 25.2 26.8 24.6 22.9 58 bps 231 bps YoY improvement mainly due to higher gross margins.

Interest 17.3 15.4 17.5 16.9 -1.5 2.4

Depreciation 132.1 131.2 110.2 131.2 19.9 0.7 YoY increased due to consolidation of Generis group in Portugal and

commissioning of new plants in India

Other Income 10.3 21.0 8.3 33.3 24.0 -69.1

PBT before EO & Forex 978.2 996.2 809.8 726.8 20.8 34.6

Forex & EO 0.0 0.0 -20.2 18.8 -100.0 -100.0

PBT 978.2 996.2 829.9 708.0 17.9 38.2

Tax 198.0 268.8 224.0 191.0 -11.6 3.6

Tax Rate (%) 20.2 27.0 27.0 27.0 -675 bps -674 bps

PAT before MI 780.3 727.5 606.0 517.0 28.8 50.9

MI -0.2 -0.1 -0.1 -0.2 100.0 0.0

Net Profit 781.6 727.6 605.6 518.5 29.1 50.7

Adj. Net Profit (ex forex) 781.6 727.6 585.5 537.3 33.5 45.5 YoY increased mainly due to strong operational performance and lower

taxation

Key Metrics

US 2,098.9 1,956.5 1,735.1 1,694.9 21.0 23.8 YoY growth was mainly due to launch of Sevelamer and robust growth in

injectable segment. Injectable segment grew 21% YoY to US$ 46 million.

Beat vis-à-vis I-direct estimates mainly due to higher-than-expected sales in

Injectable segment

Europe 1,113.5 997.3 813.4 917.6 36.9 21.3 Excluding acquisition of Generis, European revenue grew 22% YoY. Beat vis-

à-vis I-direct estimates mainly due to higher-than-expected growth in most

of the key geographies

RoW 243.4 203.3 176.8 193.9 37.7 25.5

ARV 207.5 245.1 278.5 244.6 -25.5 -15.2

API 771.8 784.2 768.8 625.0 0.4 23.5

Source: Company, ICICIdirect.com Research

Change in estimates

(| Crore) Old New % Change Old New % Change

Revenue 16,253.4 17,007.2 4.6 16,990.2 17,508.4 3.1

EBITDA 4,143.7 3,974.8 -4.1 3,737.9 3,826.0 2.4

EBITDA Margin (%) 25.5 23.4 -213 bps 22.0 21.9 -15 bps

Adj. PAT 2,724.8 2,625.3 -3.7 2,411.3 2,412.3 0.0

EPS (|) 46.8 45.1 -3.7 41.4 41.4 0.1

FY18E FY19E


Assumptions

(| crore) FY16 FY17 FY18E FY19E FY18E FY19E

US 6,143.8 6,827.3 8,023.0 7,704.0 7,462.4 7,630.5 Increased mainly due to better-than-expected sales in Q2FY18 and strong injectable

segment growth

Europe 3,125.3 3,277.2 4,177.0 4,632.4 3,791.9 3,992.2 Increased mainly due to higher-than-expected growth in Q2FY18

ARV 1,199.9 1,185.3 953.3 1,001.0 1,171.0 1,229.6 Reduced mainly due to lower-than-expected 1H sales

RoW 646.0 755.7 879.9 1,011.9 839.9 965.8

API 2,883.9 3,042.0 2,966.3 3,150.6 2,978.7 3,163.2

Current Earlier



Company Analysis

Aurobindo Pharma was set up by first generation entrepreneurs PV

Ramprasad Reddy and K Nithyananda Reddy in 1986. Based in

Hyderabad, the company is an integrated pharmaceutical company,

which started as an API manufacturer. In 2001, it moved up the value

chain by foraying into formulations while from 2007 onwards it started

scaling up the formulation business. APL's manufacturing facilities have

been approved by several leading regulatory agencies like USFDA,

UKMHRA, WHO, Health Canada, MCC South Africa, ANVISA Brazil. The

company owns 22 manufacturing facilities, including eight key

formulations facilities in India and abroad. The company owns three R&D

centres. The current employee strength is more than 8000, which

includes more than 750 scientists.

In FY17, the API: formulations ratio is at 20:80. US formulations constitute

45% of revenues followed by APIs & RoW formulations (25%), Europe

(22%) and ARV formulations (8%).

The company faced a USFDA embargo in 2011 for two of its units for

non-compliance with cGMP. It also went through political turmoil due to

the Telangana issue and alleged favours received by promoters through

political connections. Aurobindo acquired commercial operations in

seven Western European countries from Actavis. The company has

acquired personnel, commercial infrastructure, products, marketing

authorisation and dossier license rights in these seven countries. The

acquisition brought in a pipeline of ~1200 products from different

segments and an additional pipeline of over 200 products under its foray.

Net sales for acquired businesses were ~€320 million. GPMs were ~30%.

They were fetching losses of ~€23 million at the EBITDA level.

Aurobindo Pharma also acquired the Generis group in Portugal in

Q4FY17, through its step down subsidiary Agile Pharma (Netherlands) for

a consideration of ~€135 million (~| 985 crore). Generis’ CY16 revenues

were €64.8 million and EBITDA was €12.7 million.

The company also acquired the assets of nutritional supplement maker

Natrol Inc for a consideration of ~US$132.5 million. With this acquisition,

the company has forayed into the nutritional OTC business in the US and

other international markets. Overall, we expect revenues to grow at 8%

CAGR in FY17-20E to | 18846 crore on the back of Actavis consolidation

and incremental US launches.

Exhibit 1: Revenues to grow at CAGR of 8% in FY17-20E

5855.3

8099.9

12120.5

13831.2

15089.9

17007.217508.4

18845.9

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

(|

crore)

Total Operating Income


26.7% CAGR

7.7% CAGR


After filing ANDA in the US in 2003, the company has come a long way as

current ANDA filings are at 463. The US revenue run rate has grown from

~US$100 million in 2009 to crossing $1 billion sales as on 2016. Note that

this was despite the USFDA embargo in FY12-13 on unit VI and unit III.

The much hyped Pfizer deal, which eventually fell apart, also had an

impact on US sales as the company had to invest in the front end

network. The US sales have grown at 41% CAGR to | 6827 crore in FY13-

17. US formulations now constitute 45% of the total turnover, up from

30% in FY13. The US traction has also boosted investors’ confidence,

which was affected by warning letters, piling debts besides non-business

political adversaries. We expect US sales to grow at a CAGR of 7% on a

higher base to | 8243 crore in FY17-20E.

Exhibit 2: US growth on the back of robust pipeline and Natrol acquisition

1752.6

3446.8

4831.7

6143.8

6827.3

8023.07704.0

8243.2

0

1000

2000

3000

4000

5000

6000

7000

8000

9000


(|

crore)

US


From a prominent API supplier and participant in the global ARV tenders

to a leading formulations vendor the company has virtually changed its

identity. The API: formulations ratio has improved from 43:57 in FY13 to

20:80 in FY17. Another USP of the company is its vertically integrated

model with huge capacity, unmatched by most peers. The company owns

22 manufacturing facilities, including eight key formulations facilities in

India and abroad. These can be optimised by 1) continuous US filings and

launches 2) incremental launches and filings in the RoW markets and 3)

site transfers and supplies for products covered under the Actavis deal.

Higher capacity utilisation is likely to have a positive impact on margins,

which are likely to be under some pressure after the Actavis deal.

Exhibit 3: Acquisition of Actavis Europe business boosts sales in Europe

467.9672.1

3194.7 3125.33277.2

4177.0

4632.4

5014.1

0

1000

2000

3000

4000

5000

6000


(|

crore)

Europe


40.5% CAGR

6.5% CAGR

62.7% CAGR

15.2% CAGR


Exhibit 4: Aurobindo to concentrate on high margins tender business

750.3

840.2

963.9

1199.9 1185.3

953.31001.0

1051.0

0

200

400

600

800

1000

1200

1400


(|

crore)

ARV


Exhibit 5: API business to see muted growth due to higher captive consumption

2536.2

2828.92706.2

2883.93042.0

2966.3

3150.6

3366.1

0

1000

2000

3000

4000


(|

crore)

Total API


Exhibit 6: Impact on margins due to acquisitions to be neutralised by US growth

889.2

2132.9

2563.6

3140.7

3434.3

3974.83826.0

4161.7

15.2

26.3

21.2

22.7 22.823.4

21.9

22.1

0

500

1000

1500

2000

2500

3000

3500

4000

4500


(|

crore)

0

5

10

15

20

25

30

(%

)

Operating Profit (EBITDA) EBITDA Margins (%)


12.1% CAGR

-3.9% CAGR

4.7% CAGR

3.4% CAGR


Exhibit 7: Net profit to grow at CAGR of 5% in FY17-20E

1575.8

2301.6

2606.5

2412.3

2626.0

293.9

1173.0

1915.6

0

500

1000

1500

2000

2500

3000


(|

crore)

PAT


Exhibit 8: Trends in return ratios

10.9

23.8 24.123.1

24.4 23.8

19.8

17.6

36.7

30.4

27.2

22.3

19.2

24.2

17.2

16.0

0

5

10

15

20

25

30

35

40


(%

)

RoCE (%) RoNW (%)


4.5% CAGR

67.3% CAGR


Exhibit 9: Trends in quarterly financials

(| Crore) Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 YoY (%) QoQ(%)

Total Operating Income 2881.2 3166.2 3162.1 3298.9 3365.1 3505.6 3745.9 3766.6 3775.5 3906.2 3641.6 3678.8 4435.9 17.5 20.6

Raw Material Expenses 1264.7 1538.5 1373.6 1512.4 1512.1 1550.8 1625.9 1637.0 1629.9 1709.7 1502.8 1497.8 1767.9 8.5 18.0

% of revenue 43.9 48.6 43.4 45.8 44.9 44.2 43.4 43.5 43.2 43.8 41.3 40.7 39.9 -332 bps -86 bps

Gross Profit 1616.5 1627.6 1788.5 1786.6 1853.0 1954.8 2120.0 2129.6 2145.6 2196.5 2138.8 2180.9 2668.0 24.3 22.3

GPM (%) 56.1 51.4 56.6 54.2 55.1 55.8 56.6 56.5 56.8 56.2 58.7 59.3 60.1 332 bps 86 bps

Employee Expenses 337.0 368.0 373.3 361.2 373.0 401.6 406.8 432.1 426.6 445.6 463.5 490.2 518.7 21.6 5.8

% of revenue 11.7 11.6 11.8 10.9 11.1 11.5 10.9 11.5 11.3 11.4 12.7 13.3 11.7 39 bps -163 bps

Other Manufacturing Expenses642.4 647.4 759.1 700.3 700.9 735.5 852.1 808.6 789.8 856.0 954.1 849.2 1031.9 30.7 21.5

% revenues 22.3 20.4 24.0 21.2 20.8 21.0 22.7 21.5 20.9 21.9 26.2 23.1 23.3 234 bps 18 bps

Total Expenditure 2244.0 2554.0 2506.0 2573.9 2586.1 2687.9 2884.8 2877.6 2846.2 3011.3 2920.4 2837.2 3318.6 16.6 17.0

% of revenue 77.9 80.7 79.3 78.0 76.9 76.7 77.0 76.4 75.4 77.1 80.2 77.1 74.8 -58 bps -231 bps

EBITDA 637.2 612.2 656.1 725.1 779.0 817.7 861.1 889.0 929.2 894.8 721.2 841.6 1117.3 20.2 32.8

EBITDA Margins (%) 22.1 19.3 20.7 22.0 23.1 23.3 23.0 23.6 24.6 22.9 19.8 22.9 25.2 58 bps 231 bps

Depreciation 89.9 67.3 84.7 89.0 92.6 99.4 111.4 106.2 110.2 111.1 100.1 131.2 132.1 19.9 0.7

Interest 21.0 21.9 22.6 20.8 24.1 22.7 25.1 20.6 17.5 14.3 14.3 16.9 17.3 -1.5 2.4

Other Income 27.3 35.9 6.7 29.4 12.2 7.5 21.0 22.9 8.3 7.9 40.8 33.3 10.3 24.0 -69.1

Less: Forex & Exceptional Items42.0 20.2 -1.2 10.6 43.9 -14.0 -15.3 0.0 -20.2 -15.8 0.0 18.8 0.0

PBT 511.7 538.7 556.8 634.0 630.6 717.2 761.0 785.0 829.9 793.2 647.7 708.0 978.2 17.9 38.2

Total Tax 140.4 156.3 153.4 163.4 176.7 174.2 206.4 200.8 224.0 217.7 117.2 191.0 198.0 -11.6 3.6

Tax rate (%) 27.4 29.0 27.6 25.8 28.0 24.3 27.1 25.6 27.0 27.4 18.1 27.0 20.2 -675 bps -674 bps

PAT 371.2 382.4 403.4 470.6 453.9 543.0 554.6 584.2 606.0 575.5 530.5 517.0 780.3 28.8 50.9

Minority Interest -1.0 -2.0 -0.5 -1.9 -1.1 0.4 -0.3 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2 100.0 0.0

Net Profit 372.2 384.4 403.8 472.5 455.0 542.6 554.9 584.2 606.0 575.6 530.8 517.2 780.5 28.8 50.9

EPS (|) 6.4 6.6 6.9 8.1 7.8 9.3 9.5 10.0 10.4 9.9 9.1 8.9 13.4


SWOT Analysis

Strengths - US product pipeline, huge capacity, vertically integrated

business model

Weakness - No presence in Indian domestic formulations, substantial debt

Opportunities - US generics space, foray into oncology

Industry specific threats- Increased USFDA scrutiny across the globe

regarding cGMP issues, pricing pressure due to client consolidation.

Conference call highlights

As per the management, the price erosion in the US oral solid

base business was at low double digits (10-12% YoY) in Q2FY18

and the scenario is likely to continue. Sequentially the price

erosion on the oral solid base business was ~5%

On the Sevelamer Carbonate launch front, the company has

communicated that 5-6 players have entered the market leading

to a price erosion of 70-80%

Aurobindo JV Eugia Pharma has filed 9 ANDAs with the USFDA

and 6 in the current quarter (potential size of $1.8 billion of the 6

filed ANDAs). The management expects the JV to file 7-8 ANDAs

each year. Revenues from the JV is expected post H1FY19

The management expects the Dolutegravir (HIV) sales (PEPFAR)

to commence from 1 April, 2018 and estimates US$40 million

sales annually

On the pneumococcal vaccine front, the company is in clinical

trials phase and expects 3-4 years for its launch

Aurobindo’s cumulative filings were at 463 ANDAs including 294

final approvals, 40 tentative approvals and 129 pending approvals.

During Q2FY18, the company filed 21 ANDAs with USFDA

including 11 in Oral and 10 in Injectable category. It has launched

8 products in US including 6 in Oral and 2 in Injectable category in

Q2FY18


In Q2FY18, R&D spend was at | 161 crore, 3.6% of revenues. The

company expects R&D spending to be ~ 5% for FY18 and FY19

Capex spent during the quarter stood at US$53 million. The

management has guided for a capex of US$120-130 million

(excluding vaccine and biosimilar) in FY18

For FY18, the effective tax rate will remain in the range of 25-26%

On the M&A strategy, the company intends to focus on market

penetration (East Europe businesses on priority list) and newer

technologies

The company as on 30 September, 2017, has transferred

manufacturing of 74 products from Europe (Actavis) to India

On the debt front, the company reported net debt of US$ 616

million in Q2FY18, which is expected to be reduced to US$ 475

million by FY18 end

The company expects to file microsphere and liposomal

injectables from next year and also expects biosimilar drugs trial

to begin next year

Exhibit 10: Major facilities

Unit No. Segment Approvals Type Location

Aurolife Formulations USFDA Non antibiotic & Controlled substances USA

Unit-I API CVS, CNS, Anti-Allergics, Non-Sterile India

Unit-II API Intermediates for non antibiotics, Penems India

Unit-III Formulations USFDA Non antibiotics, ARVs / Orals India

Unit-IV Formulations USFDA Injectables (Non-antibiotics) & Ophthalmics India

Unit-V API Antibiotics (Sterile & Non-sterile) India

Unit-VI Formulations USFDA Cephalosporins Orals India

Unit-VII (SEZ) Formulations USFDA Oral dosage India

Unit-VIII API ARV, CVS, CNS (Non-sterile) India

Unit-IX API Intermediates India

Unit-X * Formulations Facilities under construction/development India

Unit-XI API India

Unit-XII Formulations USFDA Antibiotics, injectables, Orals India

Unit-XIV * Facilities under construction/development India

Unit-XV India

Unit-XVI * Facilities under construction/development India

Unit-XVII * Facilities under construction/development India

APLRC-I @ R&D Center Research and Development Centers India

APLRC-II @ R&D Center Research and Development Centers India

Bhiwadi Unit Formulations USFDA Penem Injecables India


Exhibit 11: US pipeline

Units Therapies Tentative Approvals Final Approvals Pending Total

Unit III Oral Formulations 14 102 10 126

Unit IV Injectables & Ophthalmics 2 42 45 89

Unit VIB Cephalosphorins Oral 11 11

Unit VII (SEZ) Oral Formulations 24 103 33 160

Unit X Oral Formulations 17 17

Unit XII Penicillin Oral & Injectables 19 1 20

Aurolife USA Oral Formulations 16 11 27

AuroNext Penem Injectables 1 3 4

Eugia Oral &Injectable Formulations 9 9

Total 40 294 129 463



Valuation

The Q2 numbers were a positive surprise on the European front. US sales

were also higher than expected due to solid growth in injectables

segment besides Sevelamer carbonate (gRenvela) windfall. Going

forward, we expect the injectable portfolio aggressive growth trend to

continue and contribute to ~23% of the US portfolio by FY20 from

current 14%. However prospects on the US oral solids business front

remain weak despite substantial pending pipe line as the macros on this

front continue to be challenging and no let-off is expected in the near

term. European business on the other hand is continuously delivering

better numbers. However the exposure to the US oral solid space (even

though waning) is likely to weigh on the stock in the near term. Our new

target price arrives at | 810, based on 18x FY20E EPS of | 45.

Exhibit 12: One year forward PE

0.0

200.0

400.0

600.0

800.0

1000.011/10/20

11

5/10/201

2

11/10/20

12

5/10/201

3

11/10/20

13

5/10/201

4

11/10/20

14

5/10/201

5

11/10/20

15

5/10/201

6

11/10/20

16

5/10/201

7

11/10/20

17

|

Aurobindo 18.1x 15.1x 8.9x 5.8x

[


Exhibit 13: One year forward PE of company vs. CNX Pharma

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

11/10/20

11

5/10/201

2

11/10/20

12

5/10/201

3

11/10/20

13

5/10/201

4

11/10/20

14

5/10/201

5

11/10/20

15

5/10/201

6

11/10/20

16

5/10/201

7

11/10/20

17

x

Aurobindo CNX Pharma

20% Discount


Exhibit 14: Valuation

Revenues Growth Adj. EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY17 15090 9.1 39.4 14.3 19.2 13.6 24.2 24.4

FY18E 17007 12.7 44.8 15.9 16.9 11.8 22.3 23.8

FY19E 17508 2.9 41.4 -8.1 18.3 12.1 17.2 19.8

FY20E 18846 7.6 45.1 8.9 16.8 10.9 16.0 19.2



Recommendation history vs. Consensus

0

200

400

600

800

1,000

1,200

Nov-17Aug-17Jun-17Apr-17Jan-17Nov-16Aug-16Jun-16Mar-16Jan-16Nov-15

(|

)

74.0

76.0

78.0

80.0

82.0

84.0

86.0

88.0

90.0

92.0

94.0

96.0

(%

)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, Company, ICICIdirect.com Research

Key events

Date Event

Mar-10 Starts contract manufacturing business Aurolife

Sep-10 Signs an agreement with AstraZeneca to supply generic drugs for emerging markets

Jan-11 Sells stake in API unit of China for US$23 million

Feb-11 USFDA issues import alert for Unit VI

May-11 Redeems FCCB bonds

May-11 Receives warning letter for Unit VI & concerns on packing division of Unit III

Apr-12 CBI raids company premises

May-12 Ramprasad Reddy & Nithyananda Reddy step down from CEO and MD posts. Govindarajan appointed Managing Director

Mar-13 USFDA withdraws import alert for Unit VI

Jan-14 Acquires Actavis's Western European operations in 7 countries for ~EUR 30 million

Nov-14 Highest bidder for US nutritional supplement market Natrol with a bid of US$ 132.5 million

Dec-14 Acquires manufacturing assets, personnel, commercial infrastructure including the well established nutraceuticals brands in USA of Natrol along with an agreement

to take on certain liabilities, with a bid of $ 132.5 million

Feb-15 Gets approval for setting up JV with Tergene Biotech Pvt Ltd for development of Pneumococcal Conjugate Vaccine with a global market of more than US$5 billion.

The company holds majority stake in the JV

Feb-16 The USFDA inspects Unit III and Unit VII facilities of the company. Unit III was cleared without observations while unit VII received four 483 observations.

Jan-17 Acquires Portugal’s Generis Farmaceutica SA from Magnum Capital Partners for a consideration of €135 mn

Feb-17 Forays into biosimilars development through an acquisition of four products from TL Biopharmaceutical AG


Top 10 Shareholders Shareholding Pattern

Rank Investor Name Latest Filing Date % O/S Position (%) Position Change

1 RPR Sons Advisors Pvt. Ltd. 30-Sep-17 33.5 196.38m 0.00m

2 HDFC Asset Management Co., Ltd. 30-Jun-17 5.4 31.78m 6.84m

3 Reddy (Nityananda K) 30-Sep-17 4.3 25.36m 0.00m

4 Kambam (Kirthi Reddy) 30-Sep-17 3.5 20.70m 0.00m

5 Reddy (Ramaprasad P V) 30-Sep-17 3.1 18.00m 0.00m

6 Axis Clinicals, Ltd. 30-Sep-17 3.0 17.38m 0.00m

7 Sivakumaran (M) 30-Sep-17 2.5 14.49m 0.00m

8 SBI Funds Management Pvt. Ltd. 30-Sep-17 2.1 12.56m (0.97)m

9 Aditya Birla Sun Life AMC Limited 30-Sep-17 2.0 11.44m 0.57m

10 The Vanguard Group, Inc. 30-Sep-17 1.6 9.22m (0.08)m

(in %) Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

Promoter 53.8 53.8 51.9 51.9 51.9

Others 46.2 46.2 48.1 48.1 48.1

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor name Value ($) Shares Investor name Value ($) Shares

HDFC Asset Management Co., Ltd. 72.5m 6.8m Reliance Nippon Life Asset Management Limited -22.5m -2.1m

ICICI Prudential Asset Management Co. Ltd. 17.5m 1.6m Macquarie Funds Management Hong Kong Ltd. -20.3m -1.9m

Kotak Mahindra Asset Management Company Ltd. 10.9m 1.0m Artisan Partners Limited Partnership -14.9m -1.4m

Aditya Birla Sun Life AMC Limited 6.1m 0.6m SBI Funds Management Pvt. Ltd. -10.2m -1.0m

FIL Investment Management (Singapore) Ltd. 5.4m 0.5m Lyxor Asset Management -8.3m -0.9m

Buys Sells

Source: Reuters, ICICIdirect.com Research


.

Financial summary

Profit and loss statement | Crore

(Year-end March) FY17 FY18E FY19E FY20E

Revenues 15,089.9 17,007.2 17,508.4 18,845.9

Growth (%) 9.1 12.7 2.9 7.6

Raw Material Expenses 6,479.4 7,101.8 7,309.5 7,726.8

Employee Expenses 1,767.8 2,097.8 2,297.8 2,471.5

Other Manufacturing Expenses 3,408.5 3,832.8 4,075.1 4,485.8

Total Operating Expenditure 11,655.6 13,032.4 13,682.4 14,684.2

EBITDA 3,434.3 3,974.8 3,826.0 4,161.7

Growth (%) 9.3 15.7 -3.7 8.8

Interest 66.7 65.0 51.7 41.7

Depreciation 427.6 527.4 582.9 638.3

Other Income 79.9 64.1 24.1 18.9

PBT before Exceptional Items 3,019.8 3,446.5 3,215.6 3,500.6

Less: Forex & Exceptional Items -36.0 18.8 0.0 0.0

PBT 3,055.8 3,427.7 3,215.6 3,500.6

Total Tax 759.7 824.3 803.9 875.1

PAT before MI 2,296.2 2,603.4 2,411.7 2,625.4

Minority Interest -0.5 -0.6 -0.6 -0.6

PAT 2,301.6 2,606.5 2,412.3 2,626.0

Adjusted PAT 2,265.7 2,625.3 2,412.3 2,626.0

Growth (%) 14.3 15.9 -8.1 8.9

EPS (Diluted) 39.4 44.8 41.4 45.1


Cash flow statement | Crore


Profit/(Loss) after taxation 2,301.6 2,606.5 2,412.3 2,626.0

Add: Depreciation & Amortization 427.6 527.4 582.9 638.3

Net Increase in Current Assets 801.4 -1,218.8 -426.0 -838.3

Net Increase in Current Liabilities -102.4 411.3 187.3 335.6

CF from operating activities 3,428.3 2,326.4 2,756.4 2,761.8

(Purchase)/Sale of Fixed Assets -1,675.6 -1,628.6 -900.0 -900.0

(Inc)/dec in Investments -122.9 100.0 -1,000.0 -1,000.0

Others -102.5 -726.0 -45.9 -50.3

CF from investing activities -1,901.1 -2,254.6 -1,945.9 -1,950.3

Issue of Equity Shares 0.1 0.0 0.0 0.0

Inc / (Dec) in Debt -1,676.9 -280.0 -500.0 -500.0

Dividend & Dividend Tax -137.2 -189.9 -175.8 -191.4

others 0.0 0.0 0.0 0.0

CF from financing activities -1,814.0 -469.9 -675.8 -691.4

Net Cash flow -286.8 -398.2 134.8 120.1

Opening Cash 800.3 513.5 115.3 250.1

Closing Cash 513.5 115.3 250.1 370.2

Free Cash Flow 1,752.7 697.7 1,856.4 1,861.8


Balance sheet | Crore


Equity Capital 58.6 58.6 58.6 58.6

Reserve and Surplus 9,313.3 11,729.9 13,966.4 16,401.1

Total Shareholders funds 9,371.9 11,788.5 14,025.0 16,459.6

Total Debt 3,364.1 3,084.1 2,584.1 2,084.1

Deferred Tax Liability 49.3 54.2 60.7 68.0

Minority Interest 2.1 2.3 2.6 2.9

Long term Provisions 22.4 24.7 27.6 30.9

Source of Funds 12,809.8 14,953.8 16,700.0 18,645.6

Gross Block - Fixed Assets 4,799.8 5,595.5 6,245.5 6,895.5

Accumulated Depreciation 716.8 1,160.0 1,654.8 2,201.0

Net Block 4,083.1 4,435.5 4,590.8 4,694.5

Capital WIP 1,237.4 1,437.4 1,637.4 1,837.4

Net Fixed Assets 5,320.4 5,872.9 6,228.1 6,531.9

Total Intangible Assets 565.2 1,113.9 1,075.8 1,033.7

Goodwill on Consolidation 406.3 1089.11 1089.11 1089.11

Investments 245.9 145.9 1,145.9 2,145.9

Inventory 4,330.5 4,880.8 5,024.6 5,408.5

Cash 513.5 115.3 250.1 370.2

Debtors 2,765.3 3,116.7 3,208.6 3,453.7

Loans & Advances & Other CA 1,596.8 1,914.0 2,104.3 2,313.6

Total Current Assets 9,206.2 10,026.8 10,587.6 11,546.0

Creditors 2,488.3 2,804.4 2,887.1 3,107.6

Provisions & Other CL 951.3 1,046.4 1,151.1 1,266.2

Total Current Liabilities 3,439.6 3,850.9 4,038.2 4,373.8

Net Current Assets 5,766.6 6,175.9 6,549.4 7,172.2

LT L& A, Other Assets 337.8 371.5 408.7 449.6

Deferred Tax Assets 167.8 184.5 203.0 223.3

Application of Funds 12,809.8 14,953.8 16,700.0 18,645.6


Key ratios


Per share data (|)

Adjusted EPS (Diluted) 38.8 45.1 41.4 45.1

BV per share 160.5 202.5 240.9 282.7

Dividend per share 2.3 3.3 3.0 3.3

Cash Per Share 8.8 2.0 4.3 6.4

Operating Ratios (%)

Gross Profit Margins 57.1 58.2 58.3 59.0

EBITDA margins 22.8 23.4 21.9 22.1

Net Profit margins 15.0 15.4 13.8 13.9

Inventory days 104.7 104.7 104.7 104.7

Debtor days 66.9 66.9 66.9 66.9

Creditor days 60.2 60.2 60.2 60.2

Asset Turnover 1.2 1.2 1.1 1.0

EBITDA Conversion Rate 99.8 58.5 72.0 66.4

Return Ratios (%)

RoE 24.2 22.3 17.2 16.0

RoCE 24.4 23.8 19.8 19.2

RoIC 28.8 27.0 22.9 22.4

Valuation Ratios (x)

P/E 19.2 16.9 18.3 16.8

EV / EBITDA 13.6 11.8 12.1 10.9

EV / Net Sales 3.1 2.8 2.6 2.4

Market Cap / Sales 2.9 2.6 2.5 2.3

Price to Book Value 4.7 3.7 3.1 2.7

Solvency Ratios

Debt / Equity 0.4 0.3 0.2 0.1

Debt / EBITDA 1.0 0.8 0.7 0.5

Current Ratio 2.5 2.6 2.6 2.6



ICICIdirect.com coverage universe (Healthcare)

Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E

Ajanta Pharma AJAPHA 1212 1,300 Hold 10667.4 47.0 57.4 49.3 61.5 25.8 21.1 24.6 19.7 46.0 42.3 30.9 30.2 36.7 33.7 23.8 24.3

Alembic Pharma ALEMPHA 514 530 Hold 9690.7 38.2 21.2 20.4 25.3 13.5 24.3 25.1 20.3 52.2 25.3 18.9 20.8 45.1 21.0 17.5 18.6

Apollo Hospitals APOHOS 1002 1,180 Hold 13933.4 13.2 15.9 6.9 19.5 75.9 63.1 145.8 51.4 6.6 6.0 5.8 8.9 5.3 6.0 2.5 6.7

Aurobindo Pharma AURPHA 757 810 Hold 44351.3 33.9 38.8 45.1 41.4 22.3 19.5 16.8 18.3 23.1 24.4 23.8 19.8 27.2 24.2 22.3 17.2

Biocon BIOCON 392 380 Hold 23520.0 5.2 8.5 8.2 11.7 74.7 46.2 48.1 33.5 6.5 9.6 10.3 14.1 7.8 10.5 9.4 12.2

Cadila Healthcare CADHEA 465 440 Hold 47604.0 15.0 14.5 19.4 22.8 31.1 32.0 24.0 20.4 24.9 13.1 17.3 19.8 34.4 21.4 23.5 22.9

Cipla CIPLA 617 650 Hold 49649.5 18.5 12.5 22.0 27.2 33.4 49.2 28.0 22.7 11.8 7.7 13.1 14.6 12.9 8.0 12.7 13.9

Divi's Lab DIVLAB 1026 1,090 Hold 27230.4 42.4 39.9 34.6 43.1 24.2 25.7 29.6 23.8 31.6 25.3 20.1 22.1 26.2 19.8 15.4 16.9

Dr Reddy's Labs DRREDD 2350 2,520 Hold 38968.2 125.0 78.0 63.5 94.0 18.8 30.1 37.0 25.0 15.3 7.3 6.5 9.4 17.0 10.5 8.0 10.8

Glenmark Pharma GLEPHA 587 670 Hold 16567.5 26.4 42.2 34.7 36.6 22.2 13.9 16.9 16.1 15.7 19.5 16.0 15.9 20.5 26.5 18.1 16.2

Indoco Remedies INDREM 259 250 Hold 2387.2 9.4 8.4 5.3 12.5 27.6 31.0 49.0 20.7 12.9 8.7 6.1 11.4 14.8 11.8 7.1 14.8

Ipca Laboratories IPCLAB 561 410 Hold 7076.4 7.4 15.4 12.4 25.5 76.0 36.4 45.2 22.0 4.5 8.7 6.9 12.5 4.1 7.9 6.1 11.3

Jubilant Life JUBLIF 634 815 Buy 10100.8 24.6 36.1 40.5 54.0 25.8 17.5 15.7 11.7 11.8 13.8 13.5 16.0 13.2 16.8 16.0 17.8

Lupin LUPIN 835 890 Hold 37723.4 50.4 56.7 35.5 38.5 16.6 14.7 23.5 21.7 17.8 16.6 11.0 12.0 20.3 19.0 10.8 10.7

Natco Pharma NATPHA 906 1,190 Buy 15800.1 8.9 27.9 48.0 64.4 102.1 32.5 18.9 14.1 15.7 33.6 43.6 44.8 11.9 29.5 36.7 35.6

Sun Pharma SUNPHA 527 445 Hold 126548.3 23.4 29.0 14.6 19.8 22.5 18.2 36.2 26.7 18.6 19.8 9.7 12.2 18.0 19.0 9.0 11.1

Syngene Int. SYNINT 504 580 Buy 10081.0 12.0 14.4 16.0 20.4 42.6 35.7 32.2 25.1 15.3 16.8 18.6 20.9 23.5 20.3 18.8 19.5

Torrent Pharma TORPHA 1222 1,365 Hold 20683.3 110.9 55.2 53.3 66.5 11.0 22.2 23.0 18.4 46.5 18.9 19.3 20.7 53.7 21.5 17.9 19.2

RoE (%)EPS (|) PE(x) RoCE (%)



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Documents

Aurobindo Pharma (AURPHA) | 757content.icicidirect.com/mailimages/IDirect_AurobindoPharma_Q2FY1… · commissioning of new plant and acquisition EBITDA 1,117.3 1,121.9 929.2 841.6