The Hindu Business Line : Aurobindo Pharma: Hold

INVESTORS can retain their holdings of the Aurobindo Pharma stock, which currently trades at about Rs 370. The stock has not participated in the bull run of the past year, largely as its earnings card failed to match street expectations.

Aurobindo has been on investment mode to put in place the infrastructure needed to pursue its developed market thrust; till such time these initiatives yield results, we expect the misalignment between costs and revenues to persist. Though we expect a rebound in Aurobindo's performance in the near-to-medium term, already-rich valuations deter us from putting out a "buy" rating on the stock; any gains from now on are also likely to be measured and moderate.

Aurobindo's revenue profile, with close to 70 per cent of sales being accounted for by semi-synthetic penicillin (SSPs) and cephalosporin (ceffs) in both oral and sterile forms, exposes it significantly to a market that has commodity characteristics. Operating in such a market calls for tight control over costs, which Aurobindo, with a vertically integrated operation, may find easier to achieve; further, integrated players also stand to gain more in the event of an upturn in pricing trends.

Aurobindo has sought to widen its product portfolio to de-risk itself from an excessive dependence on SSPs and ceffs.

Anti-retrovirals, which are used in AIDS treatment, appears to be the company's next focus area, as it has already received the US Food and Drug Administration approvals for five such products. These approvals would now enable Aurobindo to participate in the Emergency Plan for AIDS Relief announced by the US President, Mr George Bush, (called the PEFAR programme). This programme envisages a spending of $15 billion (Rs 66,000 crore) to fight the disease, with a focus on some of the severely-affected countries.

Aurobindo has been steadily ramping up its filings of drug master files and Abbreviated New Drug Applications for the US market, as also dossiers for the European market. As there is a time lag between the filing of applications and the actual launch, the outcome of such initiatives should manifest themselves in FY07.

Aurobindo has put through a foreign currency convertible bond issue to raise $60 million (Rs 264 crore), redeemable in 2010 at a price that is not yet known. Proceeds from the issue are to be used to fund capital expenditure and repay foreign currency debt.

The latter is a positive, as Aurobindo has, on a consolidated basis, debt in excess of Rs 10 billion on its books.

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