11th December, 2019

Q2FY20 RESULT UPDATE

Retail Equity Research

Aurobindo Pharma Limited BUY
Pharmaceuticals 12M Investment period Rating as per Large Cap
BSE CODE: 524804 NSE CODE: AUROPHARMA CMP Rs 433 TARGET Rs 492 RETURN 14%
(Closing: 10-12-19)
Bloomberg CODE: ARBP:IN SENSEX: 40,240

KEY CHANGES: TARGET RATING EARNINGS

Company Data
Growth story intact despite USFDA observations Market Cap (cr) Rs.26,378
Aurobindo Pharma Ltd (ARBP) is a leading pharmaceutical company which Enterprise Value (cr) Rs.29,685
Outstanding Shares (cr) 58.6
is vertically integrated with business units comprising of formulations, Free Float 48.0%
custom synthesis, peptides, aurozymes, R&D and API. Dividend Yield 0.6%
 Q2FY20 revenue grew 17.9% YoY to Rs. 5,600cr, marginally beating 52 week high Rs.838
street estimates, primarily driven by increase in sales of US (+27.3% 52 week low Rs.390
YoY) and Europe (+21.2% YoY) formulations. 6m average volume (lacs) 1.0
Beta 0.7
 EBITDA rose by 13.8% YoY to Rs. 1,167cr partly helped by IND AS Face value Rs.1
implementation although EBITDA margin declined 75bps YoY to 20.8%. Shareholding % Q4FY19 Q1FY20 Q2FY20
Resultantly, adjusted PAT increased by 2.4% YoY to Rs. 653cr with PAT Promoters 51.9 51.9 51.9
margin at 11.7% (down 120bps). FII’s 21.5 22.0 22.0
 ARBP received 14 observations from USFDA post inspection of its MFs/Insti 13.7 13.3 13.0
injectable manufacturing facility at Hyderabad in early November. Public 8.6 8.5 8.6
 Though we maintain our BUY rating on the stock, given strong US sales, Others 4.4 4.4 4.6
near term Sandoz deal closure and new product launches, we reduce the Total 100.0 100.0 100.0
FY21E adj. EPS target multiple to 9x (vs 12x earlier) due to recent Promoters Pledge 3.5 3.8 4.2
observations from USFDA, with revised target price of Rs. 492.
Price Performance 3 Month 6 Month 1 Year
Absolute Return -23.8% -33.3% -42.9%
Steady operational performance Absolute Sensex 9.8% 3.5% 15.2%
Q2FY20 revenue grew strongly by 17.9% YoY to Rs. 5,600cr mainly driven by its Relative Return* -33.6% -36.8% -58.1%
formulations business in US (+27.3% YoY, ~50.6% of revenue) and Europe (+21.2% *over or under performance to benchmark index
YoY, ~25.0% of revenue). Overall, formulations segment grew strongly by 21.8% YoY 950 Aurobindo Sensex Rebased
to Rs. 4,794cr. Revenue from API business declined 1.3% YoY to Rs. 806cr.
750
Updates on USFDA observations and ANDA approvals
USFDA conducted an inspection of the company’s unit 7 manufacturing facility in 550
Telangana from September 19-27. As a result, the company received seven
observations from USFDA in the month of October. Additionally, the company has 350
Dec 18 Mar 19 Jun 19 Sep 19 Dec 19
received 14 observations from USFDA after inspection of its injectable manufacturing
facility in Hyderabad from November 4-13. The observations resulted in sharp decline
Consolidated (cr) FY19A FY20E FY21E
in stock prices. However, the company clarified that none of the observations is related Sales 19,564 23,298 26,792
to data integrity. During Q2FY20, the company had filed 20 ANDAs including 2 Growth (%) 18.6 19.1 15.0
injectable products. Separately, the company launched 10 products including 3 EBITDA 3,952 4,605 5,329
injectables and received final approval for 3 ANDAs in Q2FY20. EBITDA Margin (%) 20.2 19.8 19.9
Adj. PAT 2,453 2,643 3,206
Key concall highlights Growth (%) 1.2 7.8 21.3
 Revenue from AuroMedics (US), its injectable business witnessed a growth of Adj. EPS 41.9 45.1 54.7
49.0% YoY to USD 75million. Growth (%) 1.2 7.8 21.3
P/E 18.4 10.0 8.2
 Management expects R&D expenses to go up gradually from 4.0-4.5% to 6.0-6.5% P/B 3.2 1.6 1.4
of sales after the commencement of phase 2 trial of Biosimilars. EV/EBITDA 12.6 6.4 5.4
 The management is yet to decide on the adoption of lower corporate tax rate and ROE (%) 17.0 16.0 16.6
is currently evaluating the option. D/E 0.5 0.4 0.3
 In the US business, the company has discontinued 95% of sartan supply while it
maintains its market share for Losartan and Valsartan with no change in pricing.
 Apotex integration in Europe’s business to be completed in 3-4 months while it
already contributed to 20% YoY growth (constant currency) in Europe in Q2FY20.
Valuation
We expect ARBP to continue its steady performance in FY20E and post strong EPS
growth of 21.3% YoY in FY21E. Near term catalysts include strong pipeline, Sandoz
deal closure and potential approvals from USFDA. Hence we reiterate our BUY rating
but revise our target price to Rs. 492 based on 9x FY21E adj. EPS (vs. 12x earlier) due
to recent USFDA observations.

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Quarterly Financials (Consolidated)
Profit & Loss Account
YoY QoQ YoY
Q2FY20 Q2FY19 Q1FY20 H1FY20 H1FY19
Growth % Growth % Growth %
Revenue 5,600 4,751 17.9 5,445 2.9 11,045 9,002 22.7
EBITDA 1,167 1,026 13.7 1,146 1.8 2,313 1,805 28.1
EBITDA margins 20.8 21.6 (76bps) 21.0 (21bps) 20.9 20.1 89bps
Depreciation 243 164 48.6 241 1.0 484 318 52.2
EBIT 924 862 7.2 906 2.1 1,830 1,487 23.0
Interest 41 35 15.7 50 (17.9) 91 65 39.9
Other Income (7) (13) 50.9 16 -141.9 9 (38) -
Exceptional Items (13) (27) 52.5 (13) 0.5 (25) (27) 5.1
PBT 864 787 9.8 863 0.1 1,727 1,358 27.2
Tax 224 175 27.9 228 (1.5) 452 291 55.4
Share of profit from Associate 0 0 - 5 - 5 1 635.4
Minority Interest (0) 0 - (0) - (0) (0) -
Reported PAT 640 611 4.6 636 0.6 1,276 1,067 19.5
Adjustments 13 27 (51.9) 13 0.0 25 27 (7.4)
Adjusted PAT 653 638 2.2 649 0.6 1,301 1,094 18.9
No. of shares 58.6 58.6 - 58.6 - 58.6 58.6 -
EPS (Rs) 11.1 10.9 2.2 11.1 0.6 22.2 18.7 18.9

Segment Revenue
YoY QoQ YoY
Rs cr Q2FY20 Q2FY19 Q1FY20 H1FY20 H1FY19
Growth % Growth% Growth %
US 2,836 2,227 27.3 2,688 5.5 5,524 4,117 34.2
Europe 1,401 1,157 21.2 1,392 0.7 2,793 2,356 18.6
RoW 319 308 3.8 313 1.8 632 565 12.0
ARVs 238 244 (2.5) 319 (25.3) 557 400 39.2
Total Formulations 4,794 3,935 21.8 4,712 1.7 9,506 7,437 27.8
APIs 806 817 (1.3) 732 10.1 1,538 1,565 (1.7)
Total Sales 5,600 4,751 17.9 5,445 2.9 11,045 9,001 22.7

Change in Estimates
Old estimates New estimates Change %
Year / Rs. cr FY20E FY21E FY20E FY21E FY20E FY21E
Revenue 23,682 27,234 23,298 26,792 (1.6) (1.6)
EBITDA 4,944 5,576 4,605 5,329 (6.9) (4.4)
Margins (%) 20.9 20.5 19.8 19.9 (110bps) (60bps)
Adj. PAT 2,923 3,301 2,643 3,206 (9.6) (2.9)
EPS 49.9 56.3 45.1 54.7 (9.6) (2.8)

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PROFIT & LOSS BALANCE SHEET
Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E
Revenue 15,090 16,500 19,564 23,298 26,792 Cash 489 1,216 1,886 2,595 3,160
% change 8.6 9.3 18.6 19.1 15.0 Accounts Receivable 2,765 3,084 3,414 4,210 4,758
EBITDA 3,434 3,789 3,952 4,605 5,329 Inventories 4,331 5,858 7,246 7,810 9,683
% change 7.1 10.3 4.3 16.5 15.7 Other Cur. Assets 1,621 2,029 2,819 2,022 2,115
Depreciation 428 558 668 978 1,018 Investments 246 312 360 412 464
EBIT 3,007 3,231 3,284 3,628 4,311 Gross Fixed Assets 4,800 5,921 7,428 8,943 10,684
Interest 67 78 163 219 149 Net Fixed Assets 4,083 4,737 5,694 6,136 6,795
Other Income 121 88 58 83 83 CWIP 1,237 1,400 1,342 1,436 1,501
Exceptional Items - - (88) (25) - Intangible Assets 971 1,968 3,108 2,958 2,818
PBT 3,061 3,241 3,091 3,466 4,245 Def. Tax (Net) 168 159 183 214 262
% change 12.4 5.9 (4.6) 12.1 22.5 Other Assets 338 343 403 433 469
Tax 760 818 727 848 1,039 Total Assets 16,249 21,105 26,454 28,228 32,025
Tax Rate (%) 24.8 25.2 23.5 24.5 24.5 Current Liabilities 3,720 4,649 5,470 5,605 6,595
Reported PAT 2,302 2,423 2,365 2,618 3,206 Provisions 22 56 47 49 53
Adj* - - 88 25 - Debt Funds 3,084 4,483 6,753 5,901 5,601
Adj PAT 2,302 2,423 2,453 2,643 3,206 Other Liabilities 49 235 293 340 413
% change 16.1 5.3 1.2 7.8 21.3 Equity Capital 59 59 59 59 59
No. of shares (cr) 58.5 58.6 58.6 58.6 58.6 Reserves & Surplus 9,313 11,622 13,832 16,274 19,304
Adj EPS (Rs) 39.3 41.4 41.9 45.1 54.7 Shareholder’s Fund 9,372 11,680 13,891 16,332 19,362
% change 15.9 5.2 1.2 7.8 21.3 Minority Interest 2 2 2 1 1
DPS (Rs) 2.5 2.5 2.5 2.5 2.5 Total Liabilities 16,249 21,105 26,454 28,228 32,025
CEPS (Rs) 46.6 50.9 53.3 61.8 72.1 BVPS (Rs) 160 199 237 279 331

CASH FLOW RATIOS

Y.E March (Rs cr) FY17A FY18A FY19A FY20E FY21E Y.E March FY17A FY18A FY19A FY20E FY21E
Net inc. + Depn. 2,729 2,981 3,033 3,595 4,224 Profitab. & Return
Non-cash adj. (998) 49 (133) 1,173 207 EBITDA margin (%) 22.8 23.0 20.2 19.8 19.9
Changes in W.C 1,548 (1,075) (1,278) (1,395) (1,589) EBIT margin (%) 19.9 19.6 16.8 15.6 16.1
C.F. Operation 3,279 1,955 1,622 3,373 2,843 Net profit mgn.(%) 15.3 14.7 12.1 11.2 12.0
Capital exp. (1,685) (1,241) (1,537) (1,514) (1,741) ROE (%) 24.6 20.7 17.0 16.0 16.6
Change in inv. (118) (734) (1,366) 98 88 ROCE (%) 24.1 20.0 15.9 16.3 17.1
Other invest.CF 15 17 26 - - W.C & Liquidity
C.F – Investment (1,787) (1,957) (2,877) (1,416) (1,653) Receivables (days) 66.9 68.2 63.7 66.0 64.8
Issue of equity 7 0 1 - - Inventory (days) 245.7 316.7 303.5 273.8 288.6
Issue/repay debt (1,728) 1,202 2,230 (852) (300) Payables (days) 141.2 142.0 112.2 92.7 103.6
Dividends paid (137) (264) (160) (176) (176) Current ratio (x) 1.4 1.4 1.3 1.5 1.6
Other finance.CF (57) (74) (152) (219) (149) Quick ratio (x) 0.5 0.5 0.4 0.6 0.7
C.F – Finance (1,915) 864 1,920 (1,248) (625) Turnover & Leverage
Chg. in cash (424) 862 665 709 564 Gross asset T.O (x) 6.3 3.1 2.9 2.8 2.7
Closing cash 489 1,216 1,886 2,595 3,160 Total asset T.O (x) 0.9 0.9 0.8 0.9 0.9
Int. covge. ratio (x) 45.1 41.6 20.2 16.6 29.0
Adj. debt/equity (x) 0.3 0.4 0.5 0.4 0.3
Valuation
EV/Sales (x) 2.8 2.2 2.6 1.3 1.1
EV/EBITDA (x) 12.2 9.5 12.6 6.4 5.4
P/E (x) 17.0 13.4 18.4 10.0 8.2
P/BV (x) 4.2 2.8 3.2 1.6 1.4

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 Recommendation Summary

Dates Rating Target

900
10-Jun-16 Buy 924
23-Feb-17 Buy 801
700 1-Sep-17 Buy 817
13-Oct-17 Buy 865
13-Mar-18 Buy 644
500
27-Dec-18 Buy 811
27-Aug-19 BUY 676
300
11-Dec-19 BUY 492
Nov-16 May-17 Nov-17 May-18 Nov-18 May-19 Nov-19

Investment Rating Criteria

Large Cap Stocks; Mid Cap and Small Cap;
Buy - Upside is above 10%. Buy - Upside is above 15%.
Hold - Upside is between 0% - 10%. Accumulate - Upside is between 10% - 15%.
Reduce - Downside is more than 0%. Hold - Upside is between 0% - 10%.
Neutral - Not Applicable Reduce/Sell - Downside is more than 0%.
Neutral - Not Applicable
To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell.
The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return
basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of
valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded
to BUY or downgraded to a HOLD, REDUCE or SELL.
Neutral- The analyst has no investment opinion on the stock under review

General Disclosures and Disclaimers

CERTIFICATION
I, Dilish K Daniel, CFA®, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about a ny or all
of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit.

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FUNDAMENTAL DISCLAIMER: We have prepared this report based on information believed to be reliable. The recommendations herein are based on 12
month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possi ble that due to volatile price
fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit
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DILISH K DANIEL
2019.12.11 12:12:12 +05'30'
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