Aurobindo Pharma. Promising prospects

The stock of Aurobindo Pharma has shed over 28 per cent over the past four months, despite the company reporting good performance in the second and third quarters of this fiscal.

The fall in the price was mainly attributable to the gloomy near-term growth outlook for the company, coupled with the weak sentiment that has engulfed the overall pharma sector due to regulatory clampdown.

The weak market sentiment over the last couple of months added to the slide. But investors with a long-term horizon can consider buying the stock, given the company’s healthy growth outlook over the next couple of years. The steep fall has made the stock attractive from a valuation perspective. At the current price of ₹615, the stock trades at about 13 times of its 2018-19 estimated earnings, compared with the three-year average multiple of 21 times.

Over the medium to long term, the company’s prospects look robust, given that there are multiple growth drivers in its US business, and profitability is improving in its European operations. In the September quarter of FY18, the company reported a good set of numbers, driven by higher Renvela (Sevelamer Carbonate) sales and improving growth in the Europe business. Aurobindo Pharma capitalised on the exclusivity sales of Renvela (prescribed for chronic kidney disease), as it was the first generic company to receive the USFDA approval in July 2017 to market the product in the US.

However, the expected decline in the sales from Renvela due to increased competition (currently, it has become a five to six-player market), post the exclusivity, and lack of such meaningful launches in the near term have kept the investors away from the stock. Further, the company has recalled its four injectable products from the US market in the last two months due to the presence of glass particles and particulate matter in the vials. Though it has a marginal impact on the business, the recalls have led to concerns over adverse impact of USFDA action. In the December 2017 quarter, the company reported 11 and 3 per cent year-on-year growth in the consolidated revenue and net profit, respectively.

Moderation in US growth

The company’s US business, which had grown at a faster pace earlier, is now moderating due to increased competition and pricing pressure, especially in the oral solid business that contributes around 73 per cent of the US revenue.

Currently, the company’s US business accounts for 44 per cent of the total revenue.

Over the medium term, the management is confident of strong volume growth in its existing portfolio, new launches and ramp-up of injectable in its US business.

The company has indicated that it has taken corrective measures to avoid recalls in future by installing new X-ray equipment.

Production has been resumed for two recalls and the inspections for both injectable units (Unit IV and XII) are scheduled over the next few weeks. The management is confident that the injectables portfolio will drive strong growth from the December quarter onwards.

Among Indian players, Aurobindo has the largest number of products (55 approved, two with tentative approval and 33 under review) in its injectables portfolio. The growth in the OTC business, aided by the Nexium launch, should also prop up the US revenue.

Improving Europe business

The company’s Europe business (contributes 27 per cent of total revenue) has gained traction significantly over the last few years, driven by tenders, especially from large markets such as the UK, France and Germany. The management has indicated that around 200 products are under development for the Europe market.

Profitability in the European business should continue to improve, as shifting the products to India should aid margins in the medium to long term.

Aurobindo reported net debt of $540 million in Q3FY18, which is expected to reduce to $475 million by May 2018.

The company’s debt-to-equity ratio is now at a comfortable 0.3 times.

In the nine months ended 2017-18, the consolidated net sales was ₹12,450 crore, growing 9 per cent over the same period last year. Consolidated net profit was ₹1,895 crore, up 7 per cent Y-o-Y.

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