aurbindo -ic centrum aug 09
TRANSCRIPT
-
8/8/2019 Aurbindo -IC Centrum Aug 09
1/17
Buy
Target Price: Rs806
CMP: Rs639*Upside: 26%
*as on 4 Aug. 2009
Sriram [email protected] 22 4215 9643
Formulations Ripe for picking
Huge potential to ramp-up formulations: Aurobindo iswell placed to ramp-up its formulations business at a fastpace on the back of strong pipeline of regulatory filingsand approvals, dossier licensing, newer supply contractswith MNCs and huge unutilized capacity. We estimatecontribution of formulations to total revenue (excldossier licensing) to increase from 46.1% in FY09 to58.4% in FY11E.
Steady growth in APIs to continue:The APIs business isestimated to register steady 5% CAGR over FY09-11Epost strong presence in key APIs like Cephalosporins,Penicillins and ARVs. However, more APIs would be
manufactured for captive use in formulations whichwould provide cost efficiency.
FCCBs not a major concern: FCCBs worthUS$192.8mn does not seem a major concern and weexpect the company to redeem part of the FCCBsthrough additional debt and internal accruals. Post this,the companys debt/equity would fall to 0.8x in FY11E.We do not view raising debt to redeem FCCBs as aconcern, given our estimate of 2.1x debt/EBITDA forFY11, which is very much comfortable.
Strong growth momentum: Aurobindo is on a stronggrowth trajectory, thanks to the high marginformulations business. We expect consolidated revenueCAGR of 19.1% and PAT CAGR of 38.2% over FY09-11E.EBITDA margin is estimated to remain higher at 21% inFY11 on the back of higher formulations growth, verticalintegration and increasing capacity utilization.
Valuations attractive: Growth visibility and improvingfinancial strength render valuations attractive currently.We initiate coverage on Aurobindo with a Buy rating andtarget price of Rs806 per share based on 10xFY11Eearnings. As we have assumed conversion of August2010 FCCBs and redemption of May 2011 FCCBs, we have
factored in interest on May 2011 FCCBs.
Key Risks: Upside Buy back of FCCBs at discountwould be key positive. Downside Currency fluctuation,as about 60% of revenue is from exports and delays inlaunch of new products.
Key Data
Bloomberg Code ARBP IN
Reuters Code ARBN.BOCurrent Shares O/S (mn) 53.8
Diluted Shares O/S(mn) 64.6
Mkt Cap (Rsbn/USDmn) 34.3/718.9
52 Wk H / L (Rs) 655/101
Daily Vol. (3M NSE Avg.) 238,338
Face Value (Rs) 5
1 USD = Rs47.8
Shareholding Pattern
Foreign
13.6%
Non
Promoter
Corp. Hold.
6.7%
Institutions
9.9%
Public &
Others
9.9%
Promoters
59.8%
As on 31stMarch 2009
One Year Indexed Stock Performanc
0
50
100
150
200
250
Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Au g-09
AUR OBINDO PHAR MA NSE S&P CNX NIFTY INDEX
Price Performance (%)
1M 6M 1Yr
Aurobindo 27.3 348.3 111.5
NIFTY 6.5 68.1 7.2Source: Bloomberg, Centrum Research
* as on 4 Aug. 2009
Initiation 5 August 2009
Pharma
INDIA
Aurobindo Pharma
Please refer to important disclosures/disclaimers inside
Y/E Mar(Rsmn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) EPS ROE (%) ROCE (%) P/E (x) EV/EBITDA (x)
FY07 21,362 33.8 3,155 14.8 1,906 282.6 35.7 22.4 8.9 17.9 15.5
FY08 24,465 14.5 3,521 14.4 1,819 (4.6) 33.8 18.1 7.1 18.9 14.2
FY09E 31,243 27.7 5,732 18.3 2,840 56.1 52.8 24.4 10.5 12.1 9.8
FY10E 38,979 24.8 7,917 20.3 4,401 54.9 81.9 31.4 14.2 7.8 7.0
FY11E 44,333 13.7 9,300 21.0 5,425 23.3 93.2 27.3 15.1 6.9 5.6
Source: Company, Centrum Research Estimates
-
8/8/2019 Aurbindo -IC Centrum Aug 09
2/17
Aurobindo Pharma2
Shareholding Pattern (%)
Q209 Q309 Q409 Q110
Promoter 55.3 58.0 59.9 59.0
Foreign 24.6 16.6 13.2 19.0
Institutions 8.4 9.3 9.9 10.3
Public & Others 11.7 16.2 17.1 11.7
Total 100.0 100.0 100.0 100.0
Source: NSE
Company Background
Aurobindo Pharma forayed into the pharmaceutical sector asan API supplier focusing on antibiotics like Semi SyntheticPenicillins (SSPs) and Cephalosporins, emerging a marketleader in these segments. Over the years, the companydiversified into the cardiovascular (CVS), central nervoussystem (CNS), gastrointestinal (GI), anti-infective segments, etc.
After a strong presence in its core business of bulk actives, thecompany is now focusing on generic formulations. It has 14state-of-the-art manufacturing facilities spread across India,China, USA and Brazil. The companys operations are verticallyintegrated and formulations supported by in-house APIs.Aurobindo has a presence across US, Europe, India and otheremerging countries like Brazil, China, South Africa, etc. A higherproportion of the companys revenue is from APIs andformulations are likely to replace this, going forward.
Revenue break-up (FY09)
Source: Company, Centrum Research Source: Company, Centrum Research
Key management personnel
Mr. P.V. Ramaprasad Reddy Chairman A postgraduate in Commerce and has held management positions in various
pharmaceutical companies prior to incorporating Aurobindo Pharma in 1986.
He is actively involved in the strategic planning of the company and pilots the
successful implementation of joint ventures.
Mr. K. Nityananda Reddy Managing Director Mr. Nityananda has Masters degree in Science (Organic Chemistry) and is
versatile with the companys manufacturing technology. He supervises theoverall affairs of the company.
Mr. M. Madan Mohan Reddy Whole-time director Mr. Madan Mohan has a Master's Degree in Science (Organic Chemistry) and
has held top managerial positions in leading pharma companies. He has
experience in regulatory affairs of the industry. Before joining Aurobindo
Pharma, he was working as the Managing Director of M/s Srichakra Remedies.
Source: Company
46%
54%
Formulations APIs
44%
39%
17%
SSPs Cephs ARV and others
39%
14%
33%
14%
US Europe ARVs ROW
-
8/8/2019 Aurbindo -IC Centrum Aug 09
3/17
Aurobindo Pharma3
Investment Rationale Contribution from formulations to total sales to risecontinuously
Higher formulations revenue and higher capacityutilisation to improve profitability
Leverage ratios to turn comfortable with part of thedebt being met through internal accruals
Higher profitability and easing leverage to helpvaluation re-rating
31.2
39.4
46.1
54.658.4
5,000
10,000
15,000
20,000
25,000
30,000
FY07 FY08 FY09 FY10E FY11E
20
25
30
35
40
45
50
55
60
65
F ormu la ti on s Rev en ue % o f to ta l rev en ue
(Rsmn) (%)
Source: Company, Centrum Research Estimates
Summary Financials
Source: Company, Centrum Research Estimates
Y/E March (Rsmn) FY07 FY08 FY09E FY10E FY11E
Revenue 21,362 24,465 31,243 38,979 44,333YoY growth (%) 33.8 14.5 27.7 24.8 13.7
EBITDA 3,155 3,521 5,732 7,917 9,300
YoY growth (%) 74.3 11.6 62.8 38.1 17.5
EBITDA margin (%) 14.8 14.4 18.3 20.3 21.0
PBT 2,197 3,023 2,896 7,146 8,391
Provision for Tax 21 536 346 1,100 1,356
PAT (adjusted) 1,906 1,819 2,840 4,401 5,425
YoY growth (%) 282.6 (4.6) 56.1 54.9 23.3
PAT margin (%) 8.9 7.4 9.1 11.3 12.2
Key CF statement
Cash generated from operations 907 2,792 (1,086) 3,791 5,356
Cash flow from investing activities (1,809) (3,059) (4,000) (2,000) (500)
Cash flow from financing activities 6,441 (2,949) 2,603 (1,409) (1,493)
Net cash increase/decrease 5,539 (3,216) (2,483) 382 3,363
Key balance sheet data
Shareholders' fund 8,860 11,240 12,012 16,053 23,751
Debt 20,781 18,470 22,111 22,111 19,394
Total capital employed 30,359 30,475 34,947 38,987 43,968
Fixed assets 13,713 15,149 17,927 18,504 17,463
Investments 3 604 604 604 604
Net current assets 16,643 14,722 16,416 19,880 25,901
Total assets 30,359 30,475 34,947 38,987 43,968
Key ratio (%)
ROCE 8.9 7.1 10.5 14.2 15.1
ROIC 10.0 7.5 10.6 14.3 15.9
ROE 22.4 18.1 24.4 31.4 27.3
Per share ratio (Rs)
Basic EPS 35.7 33.8 52.8 81.9 93.2
Fully diluted EPS 29.5 28.1 43.9 68.1 83.9
Book value 166.1 209.1 223.4 298.6 408.0
Solvency ratio(x)
Debt/ Equity 2.3 1.6 1.8 1.4 0.8
Debt/EBITDA 6.6 5.2 3.9 2.8 2.1
Interest coverage 4.8 5.8 5.6 6.2 7.4
Shareholders' value
EVA per share (Rs) 5.2 2.8 29.4 43.4 50.1
Dividend payout (%) 7.0 9.7 6.8 7.0 7.0
Valuation parameters (x)
P/E (Basic) 17.9 18.9 12.1 7.8 6.9
P/BV 3.8 3.1 2.9 2.1 1.6
EV/EBITDA 15.5 14.2 9.8 7.0 5.6
EV/Sales 2.3 2.0 1.8 1.4 1.2
Leverage ratios to ease withhigher profitability and internalaccruals
-
8/8/2019 Aurbindo -IC Centrum Aug 09
4/17
Aurobindo Pharma4
Investment Argument
Huge potential to ramp up formulations
We expect Aurobindos formulations business to grow at a fast pace on the back of huge capacity,strong pipeline of regulatory filings and approvals, newer supply contracts with MNCs andcontinuous launch of new products. We estimate 34.3% revenue CAGR over FY09-11 to Rs25.4bnfrom the formulations segment. Cumulative 155 ANDA filings with 99 (including 29 tentativeapprovals) already approved would drive significant revenue growth for Aurobindo. The companyis currently operating at about 40% capacity utilization in the formulations segment, providinghuge scope to ramp up the business. Further, dossier licensing and supply contracts would alsoassist in maintaining the growth momentum, as is evident from its recent contract with Pfizer. Weestimate the proportion of formulations to total revenue (excluding dossier licensing) to increasefrom 31.2% in FY07 to 58.4% in FY11.
Exhibit 1: Contribution of formulations to total sales to rise continuously
31.2
39.4
46.1
54.6
58.4
5,000
10,000
15,000
20,000
25,000
30,000
FY07 FY08 FY09 FY10E FY11E
20
25
30
35
40
45
50
55
60
65
Formulations Revenue % of total revenue
(Rsmn) (%)
Source: Company, Centrum Research Estimates
Strong regulatory pipeline for formulations
Aurobindo has a strong regulatory pipeline of filings and we expect the momentum of filings tocontinue. The company made 155 ANDA filings in the US, of which it has already receivedapprovals for 99, including 29 tentative approvals. Out of 70 final approvals, it launched 50products in the US. We believe the company will regularly receive approvals on the back ofconsistent filings and will continue to launch new products, which would drive revenue growth,going forward.
The company has also registered 901 formulation dossiers for Europe and other semi-regulatedmarkets. This includes multiple registrations in Europe for same product. We expect productapprovals for the European market to increase at a rapid pace, given that more than 670 filingshave been made, of which more than 120 were in FY09 and more than 50 in Q1FY10. We expect
the approval and launch of products to follow the rapid pace at which regulatory filings havebeen made and thereby drive revenue growth.
Exhibit 2: ANDA pipeline
(Nos) Total filings Products approved
US 155 99
Europe 670 200
WHO 25 11
South Africa 206 47
Total 1,056 357
Source: Company
Base for generating growth hasalready been built up with largeregulatory filings
-
8/8/2019 Aurbindo -IC Centrum Aug 09
5/17
Aurobindo Pharma5
US and Europe to drive major growth
Aurobindo would see majority of its growth from the US and European markets on the back ofstrong product pipeline, huge generics opportunity in these markets, increasing customer base,dossier licensing and supply contracts coupled with huge unutilized capacity. We expectformulations revenue from the US and Europe to register 51.2% CAGR to Rs12.8bn and 32.6%CAGR to Rs3.4bn over FY09-11E, respectively. The company has built a strong regulatory pipelinefor these regulated markets and has the capability to launch products in these markets
immediately post approvals, thanks to its huge capacity and in-house availability of APIs. Thecompany recently ventured into dossier licensing and supply contracts of finished dosageproducts for the US and European markets, which would enhance its growth prospects in future.We believe the company would be able to garner more such licensing and supply contracts, goingforward.
Exhibit 3: Growing revenue from US and EU formulations
1.6 1.32.4 2.0
5.6
1.9
10.0
2.8
12.8
3.4
0
2
4
6
8
10
12
14
US Europe
FY07 FY08 FY09 FY10E FY11E
(Rsbn)
Source: Company, Centrum Research Estimates
Formulations - Operating at mere 40% capacityWe are optimistic on Aurobindos strategy of building strong API franchise and incurring capex todevelop huge formulation capacity (over last four to five years) and expect this along withregulatory product pipeline to increase business in future. The company currently operates atmere 40% capacity in formulations, which leaves huge scope for it to increase its formulationsbusiness at a rapid pace, especially given its large capacity and API strength.
Further, Aurobindo is also setting up a formulations facility at an SEZ near Hyderabad whichwould be ready to operate by Q4FY10E along with regulatory inspection. This facility would bebased on area of 55,000 sq mts with a capacity of about 10bn tablets and 1bn capsules. Thisfacility would primarily cater to European supply contracts and other export businesses. Weexpect Aurobindo to regularly register more product filings and utilize these capacities to cater toincremental business. The facility in SEZ would also drive tax and excise benefits, thereby
increasing profitability.Dossier licensing and supply contracts new growth drivers
The company has one more stream of business, which includes sale of dossiers to anothercompany (MNCs) and enter into long-term supply contracts for respective products with thatcompany. This provides the other company with ready dossier to start business and rewardsAurobindo in terms of milestone income for the dossier and regular supply contract for theproducts. Recently, Aurobindo entered into an agreement with Pfizer in March 2009 for dossierlicensing and long-term supply contracts. The agreement involves 44 finished dosage productsand 12 injectables. Aurobindo would receive milestone payment from Pfizer on the basis ofcommercialization of products and has also received supply contracts for these products.Aurobindo would manufacture and supply these products to Pfizer after patent expiry. Theagreement stands for 8 years and is renewable thereafter for 7 more years. We expect Aurobindo
to leverage on more such contracts, which would significantly drive its topline.In May 2009, Pfizer extended the deal by adding 60 (including 5 injectables) products across US,EU and emerging countries. The deal would benefit Aurobindo in terms of upfront milestoneincome and regular revenue through supply contracts.
-
8/8/2019 Aurbindo -IC Centrum Aug 09
6/17
Aurobindo Pharma6
Formulations to register 34.3% CAGR
We expect Aurobindos formulations business to witness 34.3% revenue CAGR to Rs25.4bn overFY09-11E. The growth would be driven by continuous regulatory filings and approvals coupledwith launch of products, dossier licensing and supply agreements and availability of largeunutilized capacity. We expect the US and European markets to contribute to majority of thisgrowth while ARV and Rest of the world (ROW) segments to grow at a steady pace. We expect theUS and Europe to constitute more than 60% of total formulations revenue in FY10E and FY11E
cumulatively and register 51.2% and 32.6% CAGR, respectively, over FY09-11E with ARV and ROWsegments estimated to witness 20.3% and 15.3% CAGR, respectively, over the same period.
Exhibit 4: Formulations revenue trend
0
3
6
9
12
15
US Europe ARV ROW
FY09 FY10E FY11E
(Rsbn)
51.2% CAGR
15.3% CAGR
20.3% CAGR
32.6% CAGR
Source: Company, Centrum Research Estimates
-
8/8/2019 Aurbindo -IC Centrum Aug 09
7/17
Aurobindo Pharma7
Steady growth in APIs to continue
We expect the API segment to witness steady 5% CAGR over FY09-11E to Rs18.2bn after buildingstrong APIs, particularly in the semi synthetic penicillin (SSPs) and Cephalosporin (Cephs)segments. Lower growth in APIs is mainly on account of higher focus on increasing formulationsbusiness and more APIs being used for captive consumption. As in the case of formulations, thecompany has also built large capacities in API and currently operates at about 75% utilization.Apart from SSPs and Cephs, the company is also present in manufacturing of APIs for ARV
products. Increased focus on formulations and captive use of APIs would result in lower APIgrowth, in our view. However, we expect steady growth in this segment to continue, given itsleadership in some APIs and increasing demand of these products for exports.
Exhibit 5: Segmental revenue trend in API
5.96.4
3.0
8.0
5.9
1.5
7.4
6.3
2.7
7.7
6.7
2.9
8.1
7.0
3.0
0
1
2
34
5
6
7
8
9
SSPs Cephs ARV and others
FY07 FY08 FY09 FY10E FY11E
(Rsbn)
Source: Company, Centrum Research Estimates
Aurobindo is a leading player in APIs and has a strong presence in SSPs, CCPs, and ARVs.Aurobindo ranks the highest in terms of DMF filings by any Indian company and is the second
largest globally. The company has filed a total of 1,259 DMF filings globally of which 133 pertain tothe US market and remaining to Europe and other emerging markets. In FY09 alone, Aurobindofiled 242 DMFs for APIs, which reflects its strength in API manufacture and its ability to cater to theglobal demand. However, we see the proportion of API to total revenue declining, going forward,primarily due to higher formulation growth and not because of lesser API revenue.
Exhibit 6: Steady growth in APIs
68.8
60.6
53.9
45.441.6
5,000
7,000
9,000
11,000
13,000
15,000
17,000
19,000
FY07 FY08 FY09 FY10E FY11E
20
30
40
50
60
70
80
Revenue % of total sales
(Rsmn) (%)
Source: Company, Centrum Research Estimates
-
8/8/2019 Aurbindo -IC Centrum Aug 09
8/17
Aurobindo Pharma8
Aurobindo has set up seven stateof-the-art manufacturing facilities and all have the necessaryregulatory approvals. Six of these facilities are situated in India near Hyderabad and one is inChina. The company currently operates at 75% capacity utilization. We expect the company to usepart of its capacity for captive use to manufacture formulations, which explains our view that thissegment would witness steady growth going forward.
Exhibit 7: Details of manufacturing facilities
Units Products Regulatory approvals
Unit 1 CVS, CNS, Anti-allergic USFDA, WHO, UKMHRA, TGA (Australia)
Unit 1A Cephs (non-sterile) USFDA, UKMHRA, TGA (Australia)
Unit VA SSPs USFDA, TGA (Australia)
Unit VI Cephs (Sterile) USFDA, WHO, Health Canada, EU-GMP
Unit VIII Gastro Intestinals, ARVs USFDA, WHO, UKMHRA, TGA (Australia)
Unit XIA ARVs USFDA, WHO, UKMHRA
Source: Company
-
8/8/2019 Aurbindo -IC Centrum Aug 09
9/17
Aurobindo Pharma9
Financial Analysis
FCCBs not a major concern
We do not see outstanding FCCBs worth US$192.8mn as a major concern for the company. Only apart of the total FCCBs are likely to get redeemed, in our view. We expect FCCBs worth US$53.6mndue for conversion in August 2010 to get converted at Rs522/share and the balance beingredeemed by the company. Of its total outstanding FCCBs of US$255.5mn at the beginning of
FY09, the company has already bought back FCCBs worth US$62.7mn at more than 15% discountto face value. It is scouting for opportunities to buy back more FCCBs, which if occurs, would be ahuge positive and provide further upside to our estimates.
Given its comfortable debt/EBITDA of 2.1x for FY11E, it is unlikely that the company would facetroubles raising debt to redeem its FCCBs. We expect the FCCBs to be redeemed through acombination of internal accruals and debt. Hence, we have considered equity dilution of 8.3%,assuming FCCBs due in August 2010 would get converted, with the remaining getting redeemed.
Exhibit 8: Outstanding FCCB details
MaturityAmount
($mn)Conversion price
(Rs)Redemption
premium (%)Redemption amount
($mn)
Aug-2010 53.6 522.0 40.0 75.0
May-2011 33.0 879.0 47.0 48.5
May-2011 106.2 1,014.1 46.3 155.4
Total 192.8 278.9
Source: Company
We estimate equity dilution to the tune of 20.2%, even if all FCCBs get converted. Full FCCBconversion would lead to issue of 10.9mn equity shares. In case FCCBs get converted on maturitydate, then 4.5mn equity shares would be issued in FY11E and the balance 6.4mn would be issuedin FY12E. However, in our estimates we have factored in conversion of August 2010 FCCBs andredemption of May 2011 FCCBs at respective premium (yield) on maturity date and thus debtraising and interest there after.
Exhibit 9: Dilution in case of conversion of FCCBs
MaturityAmount
($ mn)Conversion price
(Rs)Issue of Eq shares on
conversionDilution
(%)
Aug-10 53.6 522.0 4.5 8.3
May-11 33.0 879.0 1.7 3.2
May-11 106.2 1,014.1 4.7 8.8
Total 192.8 11.0 20.2
Source: Company, Centrum Research
19.1% revenue CAGR over FY09-11E
We estimate consolidated revenue CAGR of 19.1% over FY09-11E to Rs44.3bn mainly on the backof higher growth in formulations and steady growth in APIs. The formulation segment isestimated to register robust 34.3% sales CAGR over FY09-11E on the back of strong growthmomentum in the US and European markets. API, on the other hand, is estimated to post 5%revenue CAGR over the same period. The growth would be driven by strong product pipeline,dossier licensing and supply contracts and large unutilized capacity. The proportion offormulations would keep on rising while proportion of APIs would decline to total revenue onaccount of high growth in formulations and steady lower growth in APIs. We have estimatedincome from dossier licensing at US$35mn in both FY10E and FY11E and most of it would comefrom Pfizer.
-
8/8/2019 Aurbindo -IC Centrum Aug 09
10/17
Aurobindo Pharma10
Exhibit 10: Revenue break-up
(Rsmn) FY08 FY09 FY10E FY11E
Formulations 10,048 14,098 20,807 25,441
% of sales 39.2 43.9 52.5 56.4
% YoY 44.9 40.3 47.6 22.3
USA 2,359 5,584 10,028 12,759
Europe 2,011 1,923 2,763 3,380
ARV 4,044 4,640 5,714 6,711
ROW 1,634 1,951 2,302 2,591
APIs 15,476 16,466 17,289 18,154
% of sales 60.4 51.2 43.7 40.3
% YoY 1.1 6.4 5.0 5.0
SSPs 8,041 7,379 7,748 8,135
Cephs 5,918 6,344 6,661 6,994
ARVs & others 1,517 2,743 2,880 3,024
Dossier Licensing 106 1,584 1,645 1,610
Total 25,630 32,148 39,741 45,205
Less: Excise duty 1,164 906 762 872
Total Revenue 24,466 31,242 38,979 44,333
Source: Company, Centrum Research Estimates
Higher formulations to improve EBITDA margin
EBITDA margin has expanded 390bp YoY to 18.3% in FY09 from mere 14.4% in FY08 on the backof higher formulations sales and revenues from dossier licensing. We expect this trend to continueand estimate EBITDA margin of 20.3% and 21% in FY10E and FY11E, respectively. Higher EBITDAmargin is on account of rising contribution of formulations to total revenue from 43.9% in FY09 to56.9% in FY11E and estimated steady revenue of US$35mn from dossier licensing both in FY10Eand FY11E. EBITDA in absolute terms is slated to register 27.4% CAGR to Rs9.3bn over FY09-11E.
In addition, the company is currently operating at 40% and about 75% capacity utilization informulations and APIs, respectively. We expect higher capacity utilization going forward on theback of increasing generics business and supply contracts, which would drive economies of scale.
Further, formulations in general, have higher margins compared to APIs and with Aurobindo nowexpanding into formulations; higher margins cannot be ruled out. Moreover, vertical integration,which aids in-house consumption of APIs to manufacture formulations, also provides cost benefit.
Exhibit 11: Operating margin expansion
14.814.4
18.3
20.321.0
2,500
3,500
4,500
5,500
6,500
7,500
8,500
9,500
10,500
FY07 FY08 FY09 FY10E FY11E
10
12
14
16
18
20
22
EBITDA Margin (%)
Rsmn (%)
Source: Company, Centrum Research Estimates
-
8/8/2019 Aurbindo -IC Centrum Aug 09
11/17
Aurobindo Pharma11
Adjusted PAT to register 38.2% CAGR
We expect adjusted PAT to register 38.2% CAGR over FY09-11E to Rs5.4bn on the back of higherrevenue growth and EBITDA margin expansion. The growth would be supported by strongEBITDA margin expansion of 70bp over FY09-11E and steady revenue from dossier licensing. As aresult of robust growth in adjusted PAT, net profit margin is also expected to improve to 12.2% inFY11E from 9.1% in FY09.
Exhibit 12: Adjusted PAT and NPM trend
12.2
9.1
11.3
8.9
7.4
1,500
2,500
3,500
4,500
5,500
6,500
FY07 FY08 FY09 FY10E FY11E
6
8
10
12
14
Adjusted PAT NPM (%)
(Rsmn) (%)
Appreciation in
Indian currency
resulted lower
profitability
Source: Company, Centrum Research Estimates
Strong return ratios
We expect strong return ratios going forward on the back of higher profitability and marginexpansion. We estimate ROE of 27.3% in FY11E compared with 18.1% in FY08. However, it wouldbe lower than FY10E ROE of 31.4% because of our assumption of conversion of August 2010FCCBs. However, we are not expecting any negative trend in net profit margin and Asset turnoverratio. Further, ROCE is expected to improve significantly from 10.5% in FY09E to 15.1% in FY11E.
The improvement in ROCE would be driven by higher internal accruals, which would be utilized inrepaying debt and redeeming FCCBs.
Exhibit 13: Stronger return ratios
0
5
10
15
20
25
30
35
FY07 FY08 FY09E FY10E FY11E
ROE ROCE ROIC
(%)
Source: Company, Centrum Research Estimates
-
8/8/2019 Aurbindo -IC Centrum Aug 09
12/17
Aurobindo Pharma12
Valuation Analysis
Valuations attractive
We initiate coverage on Aurobindo Pharma with a Buy rating and target price of Rs806/share,which provides 26% upside potential from current levels. At CMP, the stock trades at FY10E andFY11E earnings of 7.8x and 6.9x and EV/EBITDA of 7x and 5.7x, respectively. Our target price isbased on 10x FY11E earnings assuming August 2010 FCCBs would get converted and the
company would have to redeem May 2011 FCCBs. We have assumed 10% interest on FCCBs worthUS$139.2mn plus YTM to arrive at our target value.
Exhibit 14: Valuation methodology
Rsmn
FY11E Adjusted PAT 5,425
10% interest on redeemable FCCBs including YTM 917
Post tax interest 734
Adjusted PAT post interest on FCCBs 4,691
EPS post interest on FCCBs (Rs) 80.6
P/E (x) 10
Target price (Rs) 806
Source: Centrum Research Estimates
Our positive view on the stock is based on superior growth visibility and the companys improvingfinancial strength. Attractive valuations and above-mentioned positive factors justify the ongoingre-rating in the stock. We expect valuations to improve further on the back of improving businessmodel and financial stability. The stock traded at low valuations mainly due to concerns ondebt/equity and huge MTM losses reported in FY09 on account of translation of FCCBs. However,we consider these MTM forex losses as exceptional items, as these losses are not operational innature and expect the companys financial position to improve, going forward, with debt/equityfalling to 0.8x in FY11E.
Exhibit 15: One year forward P/E
-
500
1,000
1,500
2,000
2,500
M
ay-06
A
ug-06
N
ov-06
Feb-07
M
ay-07
A
ug-07
N
ov-07
Feb-08
M
ay-08
A
ug-08
N
ov-08
Feb-09
M
ay-09
A
ug-09
N
ov-09
Feb-10
(Rs)
4x
22x
16x
10x
Source: Bloomberg, Centrum Research Estimates
-
8/8/2019 Aurbindo -IC Centrum Aug 09
13/17
Aurobindo Pharma13
Exhibit 16: One year forward EV/EBITDA
10,000
30,000
50,000
70,000
90,000
110,000
130,000
150,000
170,000
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
(Rsmn)
4x
16x
12x
8x
Source: Bloomberg, Centrum Research Estimates
Positive EVA reinforces our positive view
Until FY06, the company reported negative EVA, positive thereafter, once its formulationsbusiness picked up (higher EBITDA margin). We expect Aurobindo to report positive EVA ofRs2.3bn in FY10E and Rs2.9bn in FY11E translating in to EVA per share of Rs43.4 and Rs50.1,respectively, which reinforces our positive view on the stock. This high EVA is mainly on accountof high debt/equity, leading to lower weighted average cost of capital (WACC) of 10.8%.
Exhibit 17: Increasing EVA value for shareholders
5.22.8
29.4
43.4
50.1
(15.8)(10.2)
(1,000)
(500)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY05 FY06 FY07 FY08 FY09E FY10E FY11E
(20)
(10)
-
10
20
30
40
50
60
EVA EVA per share
(Rsmn) (Rs)
Source: Company, Bloomberg, Centrum Research Estimates
-
8/8/2019 Aurbindo -IC Centrum Aug 09
14/17
Aurobindo Pharma14
Key Concerns
Upside risks
Further buy back of FCCBs at discount would result in savings of yield premium on FCCBs andalso provide positive sentiment through debt reduction, as current debt/equity is 1.8x. Thecompany has already bought back US$60.9mn worth FCCBs at a discount and the balanceUS$194.6mn is outstanding.
Downside risk
Currency fluctuation may impact topline growth and profitability margins as about 60% ofrevenue is from exports. The company also has FCCBs of US$194.6mn in its books andcurrency fluctuation would impact the reported net profit.
Delay in launch of approved products may impact our estimates negatively as our estimatesare based on strong product pipeline.
Delay in regulatory approvals of products may impact our revenue growth estimates. Lesser income from dossier licensing would have a negative impact on both topline and
profitability.
-
8/8/2019 Aurbindo -IC Centrum Aug 09
15/17
Aurobindo Pharma15
Financials (Consolidated)
Exhibit 18: Income Statement
Y/E March (Rsmn) FY 07 FY08 FY09 FY 10E F Y11E
Revenues 21,362 24,465 31,243 38,979 44,333
Growth in revenues (%) 33.8 14.5 27.7 24.8 13.7
Raw materials 12,216 13,514 16,283 19,601 22,216
% of Sales 57.2 55.2 52.1 50.3 50.1
Personnel expenses 1,5 04 1,930 2,4 35 3,173 3,6 31
% of Sales 7.0 7.9 7.8 8.1 8.2
Sel ling and other expenses 4,487 5,500 6,793 8,288 9,185
% of Sales 21.0 22.5 21.7 21.3 20.7
EBITDA 3,155 3,521 5,732 7,917 9,300
EBITDA Margin 14.8 14.4 18.3 20.3 21.0
Depreciation 997 1,004 1,221 1,424 1,541
PBIT 2,157 2,517 4,510 6,493 7,759
Interest expenses 454 432 811 1,049 1,049
PBIT from operations 1,704 2,084 3,700 5,445 6,711
Other income 366 246 1,743 1,701 1,680
PBT before extra-ordinary i tems 2,070 2,330 5,443 7,146 8,391
Extra-ordinary income/ (exp) 127 693 (2,547) - -PBT 2,197 3,023 2,896 7,146 8,391
Provision for tax 21 536 346 1,100 1,356
Effective tax rate 1.0 17.7 12.0 15.4 16.2
PAT 2,176 2,487 2,550 6,046 7,035
Minority Interest 11 (3) - - -
PAT after minority interest 2,165 2,491 2,550 6,046 7,035
Adjusted PAT 1,906 1,819 2,840 4,401 5,425
Growth in PAT (%) 282.6 (4.6) 56.1 5 4.9 23.3
PAT margin 8.9 7.4 9.1 11.3 12.2
Source: Company, Centrum Research Estimates
Exhibit 19: Balance Sheet
Y/E March (Rsmn) FY07 FY08 FY09E FY10E FY11E
Share Capital 267 269 269 269 291
Reserves 8,593 10,971 11,744 15,784 23,459
Shareholders' fund 8,860 11,240 12,012 16,053 23,751
Minority Interest 35 32 32 32 32
Debt 20,78 1 18 ,470 22,11 1 22 ,111 19,39 4
Deferred Tax Liability 682 732 792 792 792
Total Capital Employed 30,359 30,475 34,947 38,987 43,968
Gross Block 14,681 17,180 21,525 24,125 25,125
Accumulated depreciat ion 3,155 4,177 5,398 6,822 8,363
Net Block 11,526 13,003 16,127 17,304 16,763
Capital WIP 2,187 2,146 1,800 1,200 700
Total Fixed Assets 13,713 15,149 17,927 18,504 17,463
Investments 3 604 604 604 604
Inventories 6 ,544 7,950 9,0 86 11 ,063 12,47 7
Debtors 6,261 6,650 9,751 11,251 12,875
Cash and bank balances 5,825 2 ,826 343 725 4,088
L oans and Advances 2,71 9 3,1 65 3,836 4,82 9 5 ,526
Total current assets 21,349 20,591 23,016 27,869 34,967
Current l iabilities and provisions 4,706 5,869 6,600 7,989 9,066
Net current assets 16,643 14,722 16,416 19,880 25,901
Misc. Expenditure - - - - -
Total Assets 30,359 30,475 34,947 38,987 43,968
Source: Company, Centrum Research Estimates
Exhibit 20: Cash flow
Y/E March (Rsmn) FY07 FY08 FY09E FY10E FY11E
Cash flow from operating
Profit before tax 2,064 2,917 1,312 5,501 6,781
Depreciation 997 1,004 1,221 1,424 1,541
Interest expenses 454 432 811 1,049 1,049
Op. profit before WC change 3,515 4,354 3,344 7,973 9,370
Working capital adjustment (2,546) (1,078) (4,177) (3,082) (2,658)
Gross cash from operations 969 3,276 (833) 4,891 6,712
Direct taxes paid (62) (484) (254) (1,100) (1,356)
Cash from operations 907 2,792 (1,086) 3,791 5,356
Cash flow from investing
Capex (1 ,810) (2,4 57) (4,00 0) (2 ,0 00) (50 0)
Investment 0 (602) - - -
Cash from investment (1,809) (3,059) (4,000) (2,000) (500)
Cash flow from financing
Borrowings/ (Repayments) 7,051 (2,311) 3,641 - -
Interest paid (454) (432) (811) (1,049) (1,049)
Dividend paid (156) (206) (227) (360) (444)Cash from financing 6,441 (2,949) 2,603 (1,409) (1,493)
Net cash increase/ (decrease) 5,539 (3,216) (2,483) 382 3,363
Source: Company, Centrum Research Estimates
Exhibit 21: Key Ratios
Y/E March FY07 FY08 FY09E FY 10E FY 11E
Margin Ratios (%)
EBITDA Margin 14.8 14.4 18.3 20.3 21.0
PBIT Margin 10.1 10.3 14.4 16.7 17.5
PBT Margin 10.3 12.4 9.3 18.3 18.9
PAT Margin 8.9 7.4 9.1 11.3 12.2
Return Ratios (%)
ROCE 8.9 7.1 10.5 14.2 15.1
ROIC 10.0 7.5 10.6 14.3 15.9
ROE 22.4 18.1 24.4 31.4 27.3
Turnover Ratios
Asset turnover ratio (x) 0.8 0.8 1.0 1.1 1.1
Working capital cycle (days) 96 104 106 102 103
Average collection period (days) 104 97 101 103 103
Average payment period (days) 121 119 117 119 122
Inventory holding (days) 113 126 122 118 123
Per share (Rs)
Basic EPS 35.7 33.8 52.8 81.9 93.2
Fully diluted EPS 29.5 28.1 43.9 68.1 83.9
CEPS 44.9 43.7 62.8 90.1 107.8
Book Value 166.1 209.1 223.4 298.6 408.0
Solvency ratios
Debt/ Equity 2.3 1.6 1.8 1.4 0.8
Interest coverage 4.8 5.8 5.6 6.2 7.4
Valuation parameters (x)
P/E (Basic) 17.9 18.9 12.1 7.8 6.9
P/BV 3.8 3.1 2.9 2.1 1.6
EV/ EBITDA 15.5 14.2 9.8 7.0 5.6
EV/ Sales 2.3 2.0 1.8 1.4 1.2
M-Cap/ Sales 1.6 1.4 1.1 0.9 0.8
Source: Company, Centrum Research Estimates
-
8/8/2019 Aurbindo -IC Centrum Aug 09
16/17
Aurobindo Pharma16
Disclaimer
entrum Broking Pvt. Ltd.(Centrum) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock Exchange ofndia Ltd. (NSE). Our holding company, Centrum Capital Ltd, is an investment banker and an underwriter of securities. As a group Centrum has Investment Banking,dvisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our research professionals provide
mportant inputs into the Group's Investment Banking and other business selection processes.
ecipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other businesses and mayeceive commission, brokerage, fees or other compensation from the company or companies that are the subject of this material/report. Our Company and Groupompanies and their officers, directors and employees, including the analysts and others involved in the preparation or issuance of this material and their dependants,
may on the date of this report or from, time to time have "long" or "short" positions in, act as principal in, and buy or sell the securities or derivatives thereof ofompanies mentioned herein. Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to ourients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions
hat are inconsistent with the recommendations expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein withecommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing,mong other things, may give rise to or potential conflicts of interest. We and our Group may rely on information barriers, such as "Chinese Walls" to control the flowf information contained in one or more areas within us, or other areas, units, groups or affiliates of Centrum.
his report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase orubscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract orommitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of the clients of Centrum.hough disseminated to clients simultaneously, not all clients may receive this report at the same time. Centrum will not treat recipients as clients by virtue of their
eceiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs ofndividual clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs ofny specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The securities described herein mayot be eligible for sale in all jurisdictions or to all categories of investors. The countries in which the companies mentioned in this report are organized may have
estrictions on investments, voting rights or dealings in securities by nationals of other countries. The appropriateness of a particular investment or strategy will
epend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it isuitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conductingis/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in theecurities forming the subject matter of this document.
he projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertaintiesnd contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projectionsnd forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecastsescribed in this report have been prepared solely by the authors of this report independently of the Company. These projection s and forecasts were not prepared
with a view toward compliance with published guidelines or generally accented accounting principles. No independent accountants have expressed an opinion orny other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as aepresentation or warranty by or on behalf of the Company, Centrum, the authors of this report or any other person that these projections or forecasts or theirnderlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluatingl of the information in this report, including the assumptions underlying such projections and forecasts.
he price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize lossesn any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results
may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Centrum does
ot provide tax advice to its clients, and all investors are strongly advised to consult regarding any potential investment. Centrum and its affiliates accept no liabilitiesor any loss or damage of any kind arising out of the use of this report. Foreign currency denominated securities are subject to fluctuations in exchange rates thatould have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are
nfluenced by foreign currencies effectively assume currency risk. Certain transactions including those involving futures, options, and other derivatives as well as non-nvestment-grade securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have read and understood the current riskisclosure documents before entering into any derivative transactions.
his report/document has been prepared by Centrum, based upon information available to the public and sources, believed to be reliable. No representation orwarranty, express or implied is made that it is accurate or complete. Centrum has reviewed the report and, in so far as it includes current or historical information, it is
elieved to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to changewithout notice and have no obligation to tell you when opinions or information in this report change.
his report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media andhould not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not beistributed to the public used by the public media without the express written consent of Centrum. This report or any portion hereof may not be printed, sold oristributed without the written consent of Centrum. Neither this document nor any copy of it may be taken or transmitted into the United State (to US persons),anada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distributionf this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, andbserve, any such restrictions. Neither Centrum nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect,
ncidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
his document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything containederein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information,
may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. In particular, neither this document nor any copyhereof may be taken or transmitted into the United States, Canada or Japan or distributed, directly or indirectly, in the United States, Canada or Japan or to any USerson.
he distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about,nd observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that this report is accurater complete.
he opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are givens of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be nossurance that future results or events will be consistent with any such opinions, estimate or projection.
his document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or
ny other person. Information in this document must not be relied upon as having been authorised or approved by the company or its directors or any other person.ny opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability
whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith.
-
8/8/2019 Aurbindo -IC Centrum Aug 09
17/17
Sanjeev Patni Head - Institutional Equities [email protected] 91-22-4215 9699
Research
Harendra Kumar Head - Research Strategy [email protected] 91-22-4215 9620
Dhananjay Sinha Economist Economy & Strategy [email protected] 91-22-4215 9619
Niraj Shah Sr Analyst Metals & Mining, Pipes [email protected] 91-22-4215 9685
Mahantesh Sabarad Sr Analyst Automobiles/Auto Ancillaries [email protected] 91-22-4215 9855
Madanagopal R Sr Analyst Power, Capital Goods [email protected] 91-22-4215 9684
Abhishek Anand Analyst Media, Education [email protected] 91-22-4215 9853
Ankit Kedia Analyst Media [email protected] 91-22-4215 9634
Himani Singh Analyst Hospitality, Healthcare [email protected] 91-22-4215 9865
Nitin Padmanabhan Analyst Technology [email protected] 91-22-4215 9690
Piyush Choudhary Analyst Telecom [email protected] 91-22-4215 9862
Pranshu Mittal Analyst Sugar, Retail [email protected] 91-22-4215 9854
Rajan Kumar Analyst Cement [email protected] 91-22-4215 9640
Rupesh Sankhe Analyst Real Estate, Infrastructure [email protected] 91-22-4215 9636
Rajagopal Ramanathan Analyst Financial Services [email protected] 91-22-4215 9644
Saikiran Pulavarthi Analyst Financial Services [email protected] 91-22-4215 9637
Siddhartha Khemka Analyst Logistics [email protected] 91-22-4215 9857Sriram Rathi Analyst Pharmaceuticals [email protected] 91-22-4215 9643
Adhidev Chattopadhyay Associate Real Estate [email protected] 91-22-4215 9632
Janhavi Prabhu Associate Sugar, Retail [email protected] 91-22-4215 9864
Jatin Damania Associate Metals & Mining, Pipes [email protected] 91-22-4215 9647
Vijay Nara Associate Automobiles/Auto Ancillaries [email protected] 91-22-4215 9641
Sales
V. Krishnan +91-22-4215 9658 [email protected] +91 98216 23870
Ashish Tapuriah +91-22-4215 9675 [email protected] +91 99675 44060
Ashvin Patil +91-22-4215 9866 [email protected] +91 98338 92012
Siddharth Batra +91-22-4215 9863 [email protected] +91 99202 63525
Centrum Securities (Europe) Ltd., UK
Dan Harwood CEO +44-7830-134859 [email protected]
Michael Orme Global Strategist +44 (0) 775 145 2198 [email protected]
Nicole Rappel Client Management +44 (0) 798 441 6878 [email protected]
Centrum Securities LLC, USA
Melrick DSouza +1-646-701-4465 [email protected]
Key to Centrum Investment Rankings
Buy: Expected outperform Nifty by>15%, Accumulate: Expected to outperform Nifty by +5 to 15%, Hold: Expected to outperformNifty by -5% to +5%, Reduce: Expected to underperform Nifty by 5 to 15%, Sell: Expected to underperform Nifty by>15%
Centrum Broking Private Limited
Member (NSE, BSE), Depository Participant (CDSL) and SEBI registered Portfolio Manager
Regn NosCAPITAL MARKET SEBI REGN. NO.: BSE: INB 011251130, NSE: INB231251134
DERIVATIVES SEBI REGN. NO.: NSE: INF 231251134 (TRADING & SELF CLEARING MEMBER)CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-20-99
PMS REGISTRATION NO.: INP000000456
Website: www.centrum.co.inInvestor Grievance Email ID: [email protected]
REGD. OFFICE AddressBombay Mutual Bldg.,2nd Floor, Dr. D. N. Road, Fort,
Mumbai - 400 001
Correspondence AddressCentrum House, 6th Floor, CST Road, Near Vidya Nagari Marg,
Kalina, Santacruz (E), Mumbai 400 098.
Tel: (022) 4215 9000