Broker’ Call: Aarti Drugs (Buy)

| Updated on July 30, 2020

Anand Rathi

Aarti Drugs (Buy)

Target: ₹2,090

CMP: ₹1,707.35

As a prominent partner of pharma companies seeking to diversify supplies from China, Aarti’s Q1 sales grew 34 per cent y-o-y. A better product mix and higher realisations on key APIs (prices rose 10-15 per cent) led to a 772 bps gross-margin expansion. The EBIDTA margin swung to a record 24.6 per cent (a 1,110 bps expansion).

The better operating performance and lower tax rate rocketed adj PAT 281 per cent to ₹85.5 crore. On such a strong Q1, we raise our FY21/22/23 EPS by 43.5 per cent, 29.5 per cent and 28.9 per cent, respectively. We expect revenue/PAT to clock 18.9 per cent/34.5 per cent CAGRs over FY20-23.

API continues to be backbone of growth. On strong demand for Indian APIs and Aarti’s higher realisations, its API sales rose 28 per cent to ₹460 crore. The share of antibiotics climbed to 46 per cent of Q1FY21 sales (44 per cent the year prior), mainly on more sales of ciprofloxacin, ofloxacin and norfloxacin. New capacities and higher realisations are likely to lead to an 18 per cent CAGR in API sales by FY20-23.

The production-linked ₹10,000-crore incentive scheme announced by the Centre will benefit those like Aarti. It has short-listed a basket of products it plans to manufacture under this scheme. It is also evaluating contract manufacturing of specialty products, earlier manufactured in China. Now in a sweet spot, Aarti Drugs will benefit from opportunities arising out of China. Besides, it is a prime candidate to benefit from the government’s push for indigenous API manufacturing.

Published on July 30, 2020

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