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Anand Rathi
Aarti Drugs (Buy)
CMP: ₹523.25
Target: ₹796
Key takeaways: a) The company’s API (active pharmaceutical integredient) range covers therapies such as antibiotics, anti-inflammatories, cardio-protectants, anti-diarrhoeals, anti-fungals, anti-diabeties, etc. Capacities have been recently added in all these, except antibiotics. The company will become the largest producer of Metformin once issues with the technology to produce on a large scale are solved. It now manufactures 550-600 tonnes a month, whereas after the technology is in place it will manufacture 1,000 tonnes a month. Ciprofloxacin, which is one of its top 10 products, has a 40-50 per cent global market share; growth, though, has been flat. The company plans to push growth by capturing competitors’ market shares. Considering the new capacities and volume growth, we expect a 15 per cent revenue CAGR in APIs over FY19-21.
b) We expect the operating margins to expand 192 bps by FY21, with a 22.5 per cent EBITDA CAGR over FY19-21, supported by stabilising raw material prices and a better product mix.
Valuation: We retain our ‘Buy’ rating, with an unchanged price target of ₹796, based on 12x FY21e EPS.
Risks: Delay in the ramp-up of the recently-added capacity; more-than-expected competition in generic APIs.
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