3QFY2019 Result Update | Pharmaceutical

February 8, 2019

Aurobindo Pharma

BUY

CMP

`761

Performance Highlights

Target Price

`890

Y/E march (` cr)

3QFY19 2QFY19

% chg (QoQ) 3QFY18

% chg (yoy)

Net sales

5,175

4,667

10.9

4,269

21.2

Investment Period

12 months

Other income

161

111

45.2

100

60.4

Sector

Pharmaceutical

Operating profit

992

875

13.3

958

3.5

Market Cap (` cr)

45,715

Interest

34.8

152.9

Net debt (` cr)

3,277

Adj. Net profit

732

632

15.7

595

23.0

Beta

1.0

Source: Company, Angel Research

52 Week High / Low

830/527

Avg. Daily Volume

180,352

Face Value (`)

For 3QFY2019, Aurobindo Pharma (APL), the company posted sales of `5,175cr

BSE Sensex

35,457

v/s. `4,269cr in 3QFY2018, a yoy growth of 21.2%. On the operating front, the

Nifty

10,682

Reuters Code

ARBN.BO

EBITDA margin came in at 19.2% v/s. 22.5% in 3QFY2018. YoY decline is on the

Bloomberg Code

ARBP@IN

back of sales of certain high margin products in 3QFY18. Sequentially EBDITA

margins expanded by ~40bp. Consequently, the Adj. PAT came in at `732cr v/s.

Shareholding Pattern (%)

`595cr in 3QFY2018, a yoy growth of 23.0%. We recommend our buy rating on

Promoters

51.9

the stock.

MF / Banks / Indian Fls

17.7

FII / NRIs / OCBs

20.6

EBDITA Margins expands QoQ: On sales front, the company posted sales of

Indian Public / Others

9.8

5,175cr v/s. `4,269cr in 3QFY2018, a yoy growth of 21.2%. The formulation sales

(`4,348cr) posted a yoy growth of 21.8%, while API (`922cr) posted a yoy growth

Abs. (%)

3m 1yr

3yr

of 20.8%. Europe & ROW (`1,633cr) posted a yoy growth of 14.9%, while

Sensex

4.4

7.2

50.5

Aurobindo

(2.6)

23.4

1.9

company’s key market USA (`2,434cr) posted a growth of 27.4% yoy. On the

operating front, the EBITDA margin came in at 19.2% v/s. 22.5% in 3QFY2018. YoY

decline is on the back of sales of certain high margin products in 3QFY18.

Sequentially EBDITA margins expanded by ~40bp. Consequently, the Adj. PAT

came in at `732cr v/s. `595cr in 3QFY2018, a yoy growth of 23.0%.

3-year daily price chart

1,100

Outlook and valuation: We expect Aurobindo to report net revenue CAGR of

~22% & net profit to grow at ~19% CAGR during FY2018-21E, due to inorganic

900

growth. Valuations of the company at 12.9xFY2020E are cheap V/s its peers and

700

own fair multiples of 17-18x.We recommend a Buy rating on the stock.

500

300

Key financials (Consolidated)

Y/E March (` cr)

FY2018

FY2019E

FY2020E

FY2021E

100

Net sales

16,233

18,799

24,234

27,188

% chg

9.4

15.8

28.9

12.2

Adj. Net profit

2,423

2,575

3,438

3,856

Source: Company, Angel Research

% chg

5.3

6.3

33.5

12.2

EPS (`)

41.5

44.1

58.9

66.0

EBITDA margin (%)

21.6

19.6

21.9

21.8

P/E (x)

18.3

17.3

12.9

11.5

RoE (%)

23.0

20.1

22.2

20.6

RoCE (%)

20.6

17.0

22.1

22.3

P/BV (x)

3.8

3.2

2.6

2.2

EV/Sales (x)

2.9

2.5

1.9

1.7

Sarabjit Kour Nangra

EV/EBITDA (x)

13.6

12.9

8.8

7.6

+91 22 3935 7800 Ext: 6806

Source: Company, Angel Research; Note: CMP as of February 8, 2019

[email protected]

Please refer to important disclosures at the end of this report

Aurobindo Pharma | 3QFY2019 Result Update

Exhibit 1: 3QFY2019 performance (Consolidated)

% chg

Y/E March (` cr)

3QFY2019 2QFY2019

3QFY2018

9MFY2019 9MFY2018

(QoQ)

(yoy)

Net sales

5,175

4,667

10.9

4,269

21.2

14,024

12,244

14.5

Other income

161

111

45.2

100

60.4

273

267

2.3

Total income

5,336

4,778

11.7

4,369

22.1

14,297

12,511

14.3

Gross profit

2,785

2,624

6.1

2,451

13.6

7,684

7,161

7.3

Gross margins

53.8

56.2

57.4

54.8

58.5

Operating profit

992

875

13.3

958

3.5

2,644

2,778

(4.8)

OPM (%)

19.2

18.8

2.2

22.5

18.9

22.7

Interest

34.8

152.9

113

112.5

Dep & amortisation

163

164

(0.4)

138

18.1

481

401

19.9

PBT

942

787

19.7

902

4.5

2,324

2,591

(10.3)

Provision for taxation

205

175

16.7

307

(33.3)

496

696

(28.8)

Net profit

737

611

20.6

595

23.9

1,828

1,895

(3.5)

Less : Exceptional items (gains)/loss

MI & share in associates

(0)

(1)

PAT after Exceptional items

712

611

16.5

595

19.7

1,779

1,894

(6.1)

Adjusted PAT

732

632

15.7

595

23.0

1,820

1,894

(3.9)

EPS (`)

12.5

10.8

10.2

31.1

32.3

Source: Company, Angel Research

Revenue up 21.2% yoy; driven by both API & Formulations: On sales front,

the company posted sales of 5,175cr v/s. `4,269cr in 3QFY2018, a yoy growth of

21.2%. The formulation sales (`4,348cr) posted a yoy growth of 21.8%, while API

(`922cr) posted a yoy growth of 20.8%. Europe & ROW (`1,633cr) posted a yoy

growth of 14.9%, while company’s key market USA (`2,434cr) posted a growth of

27.4% yoy. Overall, formulations now contribute around 82.5% of sales, while the

balance is accounted by APIs.

The formulation sales (`4,348cr) posted a yoy growth of 21.8%. Within which US

business contributed 46.2% to the gross sales. On a constant currency basis, sales

grew by 14.7% YoY. The company filed 10 ANDAs with USFDA including 4 ANDAs

for injectable products.Received final approval for 14 ANDAs and tentative approval

for 1 ANDAs. The company has 519 approved ANDAs including 28 tentative

approvals. EU sales, inched up by 10.3% YoY. The business accounted for 24.5% of

revenues. In Euro terms, sales increased by 2.5% yoy.

ARV business sales increased by 17.8% YoY to `281cr compared to `239cr in 3QFY18

and accounted for 5.3% of revenues. Sales from growth markets formulations

posted a strong growth of 36.1% yoy to `341cr in 3QFY2019 and accounted for

~6.5% of revenues.

API business posted a growth of 20.4% to `922cr & contributed 17.5% of the total

revenue during the quarter. The growth was on the back of increase in Non-

Betalactum segment. The company filed 1 DMFs with USFDA during the quarter

taking total DMFs filing to 236 as on 31^st Dec 2018.

February 8, 2019

Aurobindo Pharma | 3QFY2019 Result Update

Exhibit 2: Sales break-up (Consolidated)

(` cr)

3QFY2019

2QFY2019

% chg (qoq)

3QFY2018

% chg (yoy)

9MFY2019

9MFY2018

% chg

Formulations

4348

3935

10.5

3570

21.8

11784

10284.3

14.6

2434

2227

9.3

1910

27.4

6550

5704

14.8

Europe & ROW

1633

1464

11.6

1422

14.9

4553

3890

17.1

ARV

281

244

15.3

239

17.7

681

691

(1.4)

API

922

817

12.9

766

20.4

2486

2163

14.9

SSP

558

513

8.6

537

3.9

1563

1460

7.1

Cephs

364

303

20.1

229

58.9

923

703

31.3

Total Sales

5270

4751

10.9

4336

21.5

14270

12447

14.6

Source: Company, Angel Research

OPM comes in at 19.2%; QoQ expansion: on the operating front, the EBITDA

margin came in at 19.2% v/s. 22.5% in 3QFY2018. YoY decline is on the back of sales

of certain high margin products in 3QFY18.Sequentially EBDITA margins expanded

by ~40bp. Research & Development (R&D) spend at `255cr, 4.8% of sales.

Exhibit 3: OPM Trend

25.0

22.5

18.8

19.2

20.0

18.2

15.0

15.4

10.0

5.0

3QFY2018

4QFY2018

1QFY2019

2QFY2019

3QFY2019

Source: Company, Angel Research

Net profit inches up: Insipte of moderate rise in operating profit, Adj. PAT came

in at `732cr v/s. `595cr in 3QFY2018, a yoy growth of 23.0%; mainly aided by growth

of other income. Other income rose by 60.4% yoy. In addition, there was a 33.3%

yoy dip in the tax expenses of the company.

February 8, 2019

Aurobindo Pharma | 3QFY2019 Result Update

Exhibit 4: Adj. net profit

800

732

700

632

595

600

529

500

456

400

(`cr)

300

200

100

3QFY2018 4QFY2018 1QFY2019 2QFY2019 3QFY2019

Source: Company, Angel Research

Recommendation rationale

 Well placed for challenging times in USA: Aurobindo has a robust pipeline

(has filed 519 ANDA’s; second highest amongst Indian companies) & is

investing to enhance its foray into complex generic (mainly injectables,

ophthalmic etc.) & biosimilar, which will drive its next leg of growth. In the

current price competitive market, company is well placed; given it is vertically

integrated with 70% of raw material requirements being meet through

internally. In addition, almost no single product of the company contributes

than 3% of sales; unlike others peers, who have high product concentration.

This is also evident from the performance of the company in USA in FY2018.

Company expects pricing pressure to stabilize at +/- 5% yoy over the

medium term. The company expects to launch ~30-40 products in the US,

which will aid growth in the US business.

During 2QFY2019, Aurobindo Pharmaceuticals (APL) has acquired

dermatology and oral solids businesses from Sandoz Inc., USA for an upfront

purchase price of US$0.9bn in cash. With this acquisition, Aurobindo adds

sales of US$0.9bn and would become the 2^nd largest generic player in the US

by number of prescriptions. Acquisition is funded by debt and values the

acquired company at 1.0xEV/sales, which we believe given the size and scope

of the business acquired is very attractive. The transaction will lead to net

debt to Equity reaching almost 0.6xFY2020E numbers and fully reflect in the

FY2021 financials. The acquired business, as guided by the Management has

EBDITA margins in line with APL (20-22%), making the deal attractive in terms

of payback also. Transaction is expected to be accretive to normalized EPS

from first full year of ownership.

In 3QFY2019, APL acquired portfolio of seven marketed oncology injectable

products from Spectrum Pharmaceuticals. Aurobindo Pharma Limited will be

acquiring the portfolio on a debt free and cash free basis. The acquisition will

help Aurobindo to enter the branded oncology market with a range of

products, which are well recognized by the oncology Industry. The portfolio

is expected to generate a revenue of around US$100mn for the first 12

months after completion of the transaction for Aurobindo. Acquisition will

February 8, 2019

Aurobindo Pharma | 3QFY2019 Result Update

be for an upfront purchase price of US$160mn in cash plus up to US$140mn

on achieving regulatory and sales-based milestones. Acquisition values the

acquired company at 1.6xMarketCap/sales (on upfront payment), which we

believe is attractive. The acquired business, as guided by the Management

has EBDITA margins better than APL (20-22%), making the deal attractive in

terms of payback also. Transaction is expected to be accretive to normalized

EPS from first full year of ownership and will augment the net profit growth

by 3% on a full year basis (as the acquired entity).

Overall, on back of these acquisitions, USA will grow at 21.4% CAGR over

FY2018-21E.

 Europe to grow steady, while ARV could provide extra boost: Europe,

which is another key region for the company, is expected to post CAGR of

20.0% during FY2018-21E, while ROW is expected to post a CAGR of 18.0%

during same period. However, growth during the period would be more

predominate in the ARV segment, where company has confirmed tenders of

US$80-100mn to be executed over next two years.

Outlook and valuation

We expect Aurobindo to report net revenue CAGR of ~22% & net profit to grow at

~19% CAGR during FY2018-21E, due to acquisitions. Valuations of the company at

12.9xFY2020E are cheap V/s its peers and own fair multiples of 17-18x.We

recommend a buy rating on the stock.

Exhibit 5: Key assumptions

FY2020E

FY2021E

Sales Growth (%)

28.9

12.2

Operating Margins (%)

21.7

21.6

Capex (`cr)

1,200

Source: Company, Angel Research

Company background

Aurobindo Pharma manufactures generic pharmaceuticals and APIs. The

company’s manufacturing facilities are approved by several leading regulatory

agencies like the USFDA, UK MHRA, WHO, Health Canada, MCC South Africa and

ANVISA Brazil among others. The company’s robust product portfolio is spread

over six major therapeutic/product areas encompassing antibiotics,

antiretrovirals, CVS, CNS, gastroenterological, and anti-allergics. The company has

acquired the generic business of Actavis, which has made it a US$2bn company and

a leading company in Europe. With this acquisition, formulations now contribute

around 83% to the company’s sales (as in FY2018).

February 8, 2019

Aurobindo Pharma | 3QFY2019 Result Update

Company background

Aurobindo Pharma manufactures generic pharmaceuticals and APIs. The company’s

manufacturing facilities are approved by several leading regulatory agencies like the

USFDA, UK MHRA, WHO, Health Canada, MCC South Africa and ANVISA Brazil

among others. The company’s robust product portfolio is spread over six major

therapeutic/product

areas

encompassing

antibiotics,

antiretrovirals, CVS, CNS, gastroenterological, and anti-allergics. The company has

acquired the generic business of Actavis, which has made it a US$2bn company and

a leading company in Europe. With this acquisition, formulations now contribute

around 83% to the company’s sales (as in FY2018).

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY2016

FY2017

FY2018

FY2019E FY2020E FY2021E

Gross sales

13,937

15,084

16,493

19,085

24,604

27,602

Less: Excise duty

227

239

260

286

369

414

Net Sales

13,710

14,845

16,233

18,799

24,234

27,188

Other operating income

245

267

Total operating income

13,955

15,090

16,500

19,066

24,501

27,455

% chg

15.1

8.1

9.3

15.6

28.5

12.1

Total Expenditure

10,931

11,656

12,728

15,119

18,934

21,257

Net Raw Materials

6,162

6,434

6,753

8,178

10,251

11,229

Other Mfg costs

1,371

1,484

1,623

1,880

2,423

2,719

Personnel

1,543

1,768

2,131

2,493

2,992

3,590

Other

1,386

1,426

1,555

1,710

1,881

2,069

EBITDA

2,486

2,779

3,189

3,505

3,901

4,890

(% of Net Sales)

20.3

21.5

21.6

19.6

21.9

21.8

Depreciation& Amort.

392

428

558

678

879

975

EBIT

2,386

2,762

2,947

3,002

4,422

4,956

(% of Net Sales)

17.4

18.6

18.2

16.0

18.2

Interest & other Charges

156

149

116

Other Income

205

121

105

Recurring PBT

2,744

3,061

3,241

3,217

4,646

5,213

Tax

720.7

759.6

818.3

643.5

1,207.9

1,355.4

(% of PBT)

26.3

24.8

25.2

20.0

26.0

PAT after MI (reported)

2,025

2,302

2,423

2,575

3,438

3,856

ADJ. PAT

2,025

2,302

2,423

2,575

3,438

3,856

% chg

25.1

13.7

5.3

6.3

33.5

12.2

Basic EPS (`)

34.6

39.3

41.4

44.0

58.7

65.9

% chg

25.1

13.7

5.3

6.3

33.5

12.2

February 8, 2019

Aurobindo Pharma | 3QFY2019 Result Update

Balance sheet (Consolidated)

Y/E March (` cr)

FY2016

FY2017

FY2018 FY2019E

FY2020E FY2021E

SOURCES OF FUNDS

Equity Share Capital

Share Application Money

Reserves & Surplus

7,229

9,313

11,622

13,895

16,931

20,336

Shareholders Funds

7,287

9,372

11,680

13,954

16,989

20,394

Minority Interest

Long-term provisions

Total Loans

4,415

3,084

4,483

5,000

4,000

3,000

Deferred Tax Liability

(182)

(118)

Total Liabilities

11,546

12,362

16,297

19,031

21,067

23,473

APPLICATION OF FUNDS

Gross Block

6,093

7,625

8,998

10,386

11,586

12,786

Less: Acc. Depreciation

2,186

2,614

3,172

3,850

4,729

5,704

Net Block

3,907

5,011

5,826

6,535

6,856

7,082

Capital Work-in-Progress

310

Goodwill

812

971

1,968

Investments

123

246

312

Long-term loans and adv.

269

338

343

343.32

397.59

512.55

Current Assets

10,294

9,206

12,188

14,948

18,165

21,077

Cash

834

513

1,262

2,296

1,858

2,783

Loans & Advances

831

409

Other

8,629

8,284

10,916

12,642

16,297

18,283

Current liabilities

4,168

3,720

4,649

5,384

6,941

7,786.93

Net Current Assets

6,127

5,487

7,539

9,563

11,224

13,290

Mis. Exp. not written off

Total Assets

11,546

12,362

16,297

19,031

21,067

23,473

February 8, 2019

Aurobindo Pharma | 3QFY2019 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr)

FY2016

FY2017

FY2018 FY2019E FY2020E FY2021E

Profit before tax

2,744

3,061

3,241

3,217

4,646

5,213

Depreciation

392

428

558

678

879

975

(Inc)/Dec in Working Capital

(1,333)

388

(1,298)

(990)

(2,044)

(1,026)

Less: Other income

205

121

105

Direct taxes paid

(721)

(760)

(818)

(643)

(1,208)

(1,355)

Cash Flow from Operations

877

2,996

1,577

2,157

2,167

3,701

(Inc.)/Dec.in Fixed Assets

(1,532)

(1,374)

(1,388)

(1,200)

(Inc.)/Dec. in Investments

103

123

Other income

205

121

105

Cash Flow from Investing

311

(1,288)

(1,203)

(1,282)

(1,095)

Issue of Equity

Inc./(Dec.) in loans

552

(1,331)

1,398

517

(1,000)

Dividend Paid (Incl. Tax)

(171)

(301)

(402)

(451)

Others

(1,204)

(527)

(854)

(56)

(109)

(230)

Cash Flow from Financing

(823)

(2,030)

373

160

(1,511)

(1,681)

Inc./(Dec.) in Cash

365

(321)

748

1,035

(439)

925

Opening Cash balances

469

834

513

1,262

2,296

1,858

Closing Cash balances

834

513

1,262

2,296

1,858

2,783

February 8, 2019

Aurobindo Pharma | 3QFY2019 Result Update

Key ratios

Y/E March

FY2016

FY2017

FY2018 FY2019E

FY2020E

FY2021E

Valuation Ratio (x)

P/E (on FDEPS)

22.0

19.3

18.4

17.3

13.0

11.5

P/CEPS

18.4

16.3

14.9

13.7

10.3

9.2

P/BV

6.1

4.8

3.8

3.2

2.6

2.2

Dividend yield (%)

0.3

0.6

0.8

0.9

EV/Sales

3.5

3.2

2.9

2.5

1.9

1.6

EV/EBITDA

17.3

14.8

13.6

12.9

8.8

7.6

EV / Total Assets

4.2

3.8

2.9

2.5

2.2

1.9

Per Share Data (`)

EPS (Basic)

34.6

39.3

41.4

44.0

58.7

65.9

EPS (fully diluted)

34.6

39.3

41.4

44.0

58.7

65.9

Cash EPS

41.3

46.6

50.9

55.6

73.8

82.6

DPS

2.5

4.4

5.9

6.6

Book Value

124.5

160.1

199.6

238.4

290.3

348.5

Dupont Analysis

EBIT margin

17.4

18.6

18.2

16.0

18.2

Tax retention ratio

73.7

75.2

74.8

80.0

74.0

Asset turnover (x)

1.4

1.3

1.2

1.4

ROIC (Post-tax)

18.3

18.7

16.7

15.3

18.4

18.6

Cost of Debt (Post Tax)

1.7

1.3

1.5

2.6

2.4

Leverage (x)

0.6

0.4

0.3

0.2

0.1

Operating ROE

27.9

25.4

20.8

18.3

21.0

19.7

Returns (%)

ROCE (Pre-tax)

22.9

23.1

20.6

17.0

22.1

22.3

Angel ROIC (Pre-tax)

26.5

27.4

25.3

22.1

28.2

28.0

ROE

32.5

27.6

23.0

20.1

22.2

20.6

Turnover ratios (x)

Asset Turnover (Gross Block)

2.3

2.2

2.0

2.2

2.3

Inventory / Sales (days)

100

101

113

120

113

117

Receivables (days)

107

Payables (days)

126

119

114

111

114

WC cycle (ex-cash) (days)

124

130

124

132

Solvency ratios (x)

Net debt to equity

0.5

0.3

0.2

0.1

0.0

Net debt to EBITDA

1.3

0.8

0.9

0.7

0.4

0.0

Interest Coverage (EBIT / Int.)

25.8

41.4

37.9

19.2

29.8

42.9

February 8, 2019

Aurobindo Pharma | 3QFY2019 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Angel Broking Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited, Bombay

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associates/analyst has not received any compensation / managed or co-managed public offering of securities of the company covered

by Analyst during the past twelve months.

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and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the

contrary view, if any

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Disclosure of Interest Statement

Aurobindo Pharma

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or

relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

February 8, 2019