Broker's call: Aarti Drugs (Buy)

| Updated on May 19, 2020

Anand Rathi

Aarti Drugs (Buy)

CMP: ₹766.7

Target: ₹1,028

Key takeaways: a) Aarti’s API sales were down 5 per cent to ₹400 crore as manufacturing and sales were curtailed in the last 10 days of Q4. Barring this, the company increased the proportion of antibiotics products to 44 per cent in FY20 (41 per cent in FY19), mainly due to higher ciprofloxacin, ofloxacin and norfloxacin sales.

b) Prices of key APIs rose 10-15 per cent as supplies from China have yet to resume in full swing. The company is evaluating contract manufacturing of products in shortage due to issues of supply from China. It expects prices to hold at these levels till global supplies are normal. Considering the new capacities and higher realisations we expect API revenue to register a 14.1 per cent CAGR over FY20-22.

c) In Q4 formulations grew 26.5 per cent to ₹49.5 crore, driven by export formulations as the company was establishing its marketing presence and filing products in different territories..

Valuation: Aarti Drugs is currently in a sweet spot as it will benefit from opportunities arising out of China and is the prime candidate to benefit from the government’s push for indigenous API manufacturing. We retain our ‘Buy’ rating, with a higher price target of ₹1,028, based on 12x FY22e EPS.

Risks: Delay in the ramp-up of the recently-added capacity; more-than-expected competition in generic APIs.

Published on May 20, 2020

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