Shares of Aurobindo Pharma surged almost 6 per cent in early trade on Thursday, despite reporting a decline in net profit for the latest June quarter.

Better visibility in earnings growth in the coming quarters found favour with investors. However, as the initial euphoria waned, the stock ended almost flat compared to the previous day’s close.

The company’s consolidated net profit for the first quarter of 2017-18 declined by 11.4 per cent year on year (Y-o-Y) to Rs 518.5 crore as against Rs 585 crore reported in the same quarter last year.

The fall in earnings was mainly attributable to lower sales from the Antiretroviral (ARV) and Active Pharmaceutical Ingredients (API) segments. ARV business sales for the June quarter was Rs 245 crore, a fall of more than 19 per cent Y-o-Y, due to loss in market share.

API business fell 15 percent to Rs 625 crore during the quarter due to the impact of GST implementation and deferment of certain products sale.

Consolidated revenue for the company during the June quarter came in at Rs 3,678.7 crore, a decline of 2.3 per cent Y-o-Y. Operating profit for the quarter fell 5.3 per cent Y-o-Y to Rs 841.6 crore. Operating margin stood at 22.9 per cent against 23.6 per cent in the same quarter last year.

The company's formulations business, contributing 83 per cent of the total gross sales, declined 0.6 per cent Y-o-Y during the quarter.

Strong US business

The US business, a key driver for the company, accounting for 46 per cent of its gross sales, witnessed a marginal decline of about half a per cent in the June quarter compared to the same quarter last year. This indicates normalisation of price erosion that the company has been facing for several quarters.

The management has indicated that the price erosion has narrowed from lower double digit in the June quarter last year to 3-5 per cent now. A diversified US portfolio than peers has helped the company contain the downside risk better.

During June and July this year, the company had received USFDA approval for higher-margin Sevelamer Carbonate tablets and oral suspension which is prescribed for kidney disease.

Aurobindo Pharma is the first generic company to receive generic approval for the drug, while companies, including Lupin, Cipla and Actavis, have filed for the product with the regulator.

There will be limited competition for Aurobindo in the generic space for Sevelamer in the near term as most peers have indicated that approvals may happen by FY19. The drug has huge potential in the US market which is expected to contribute more than 7 per cent of the company’s US sales during FY18.

The company is gaining market share by new launches especially in the injectables, oncology and other complex segments. This should help the company generate sustainable topline growth in the US over the medium term.

Aurobindo Pharma has one of the largest pipelines of ANDAs amongst Indian peers, largely populated by products from niche areas of controlled substances, injectables, penems and peptides. The company is hoping to launch 20-25 products in the US in FY 18.

The European formulations business, contributing 25 per cent to gross sales, registered a growth of 10 per cent year-on-year in the June quarter. The acquired businesses contributed significantly to the company’s profitability during the quarter.

The stock trades at about 18 times its trailing 12-month earnings — around 9 per cent discount to its three-year average.

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