The Hindu Business Line : Aurobindo Pharma: Hold

Aurobindo's entry into the US market may have been later than peers, but it is making up for the lost time by aggressively upping the pace of its filings.

MR P. V. RAMAPRASAD REDDY, Chairman, Aurobindo Pharma.

Investors can retain their holdings of the Aurobindo Pharma stock, which trades at about Rs 630. After having spent the past couple of fiscal years in investment mode, with an objective to ramp-up its developed markets foray, Aurobindo is poised to reap the benefits of its initiatives.

Post strong first-quarter results, the stock too has rallied on the back of an improvement in visibility of pay-offs. This has been accompanied by an expansion in the valuation multiple accorded to the stock. At the current price, the Aurobindo stock trades at a multiple of about 25 times its expected per-share earnings on a fully diluted basis (assuming complete conversion of the recent Foreign Currency Convertible Bonds issue), certainly not undemanding, in our view. In this backdrop, we believe it would be appropriate for investors to retain their holdings at this juncture; any fresh exposures can be considered on demonstrable evidence of earnings-growth sustenance.

Financial performance

Aurobindo's performance in the first quarter of the ongoing fiscal has been solid, and the strength has been secular across all its business segments. Even in categories such as semi-synthetic penicillin (SSP) and cephalosporins, which can be labelled mature, growth has been in excess of 20 per cent. The contribution from the formulations division trebled; this division now accounts for close to a quarter of the sales. Further, this growth across various segments has taken place across all areas of Aurobindo's operations.

The across-the-board trend in growth and a higher contribution from the formulations division has led to a bolstering of margin, which stands at 15 per cent for the quarter (8.2 per cent in the year-ago period). This also appears to have been aided by an improvement in realisations in the SSP business. The other point to note is that the expansion in margins has come about in spite of the company stepping up the pace of filings (a total of 21 Abbreviated New Drug Applications and Drug Master Files) with the US Food Drug Administration. Aurobindo may be a late entrant into the US market, but it is making up for lost time by aggressively ramping up filings with the FDA. Off a low base, the earnings grew multi-fold to Rs 36 crore.

Prospects

Aurobindo is a player to reckon with in the anti-retrovirals (ARV; used to treat the AIDS) segment. To tackle this disease both the PEPFAR(President's Emergency Plan for AIDS Relief) programme and the WHO have earmarked significant budgets, a sizeable amount of which is yet to be used up.Aurobindo, by virtue of its scale in this business, can corner a chunk of this opportunity as and when it arises. However, given the nature of this business, margins may not be as high as, say, in the formulations business; brisk volumes, though, could prop up operational profitability. Aurobindo derives close to a quarter of revenues from its SSP division. When pricing trends tend to be favourable, Aurobindo benefits because while its costs are capped on account of full integration, realisations are market driven. Should pricing take a turn for the worse, the reverse would be the case, though the integrated nature of its operation should partially cushion the impact. It could, therefore, be argued that this business exhibits commodity-type characteristics.

Even as it steps up its US-market initiative, the generics business environment continues to be challenging and the way forward — in order of attractiveness — could be by winning exclusivity, targeting niches or being present across several molecules. Aurobindo's broad pipeline is a plus in this regard, though it is best to watch its performance over the next couple of quarters. The company recently acquired an FDA-compliant plant in New Jersey and that should lend some impetus to its operations in the US.

Finally, consolidation, which till now was confined primarily to the US and Europe, is now a part of the domestic landscape, with the Matrix-Mylan deal being put through. India's attractiveness from a manufacturing standpoint is a key plus and other global majors may have India on their radar for possible buy-outs.

In January, Aurobindo denied speculation that a global generic major wanted to pick up a stake in it. Even the news of striking any product- or market-specific deal with a global major may provide a fillip to the stock.

More Stories on : Stocks | Recommendation | Pharmaceuticals

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page