2QFY2019 Result Update | Pharmaceutical

November 17, 2018

Aurobindo Pharma

ACCUMULATE

CMP

`780

Performance Highlights

Target Price

`855

Y/E march (` cr)

2QFY19 1QFY19

% chg (QoQ) 2QFY18

% chg (yoy)

Net sales

4667

4182

11.6

4354

7.2

Investment Period

12 months

Other income

111

113

(1.8)

19.0

Operating profit

875

642

36.2

1036

(15.5)

Sector

Pharm aceutical

Market Cap (` cr)

45,715

Interest

19.8

104.9

Net debt (` cr)

3,265

Adj. Net profit

632

456

38.8

781

(19.1)

Beta

1.3

Source: Company, Angel Research

52 Week High / Low

895/504

Avg. D aily Volum e

67,116

For 2QFY2019, Aurobindo Pharma (APL), the company posted sales of `4,667cr

Face Value (`)

BSE Sensex

35,457

v/s. `4,354cr in 2QFY2018, a yoy growth of 7.2%. On the operating front, the

Nifty

10,682

EBITDA margin came in at 18.8% v/s. 23.8% in 2QFY2018. YoY decline is on the

Reuters Code

AR BN .BO

Bloom berg Code

AR BP@IN

back of sales of certain high margin products in 2QFY18. Sequentially EBDITA

margins expanded by ~340bp. Consequently, the Adj. PAT came in at `632cr v/s.

Shareholding Pattern (%)

`781cr in 2QFY2018, a yoy de-growth of 19.1%. We recommend our accumulate

Prom oters

51.9

rating on the stock.

MF / Banks / Indian Fls

18.4

FII / NRIs / OCBs

19.7

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

Indian Public / Others

10.0

`4,667cr v/s `4,354cr in 2QFY2018, posting a yoy growth of 7.2%. The formulation

sales (`3,935cr) posted a yoy growth of 7.4%, while API (`817cr) posted a yoy

Abs . (% )

1 yr

3 yr

growth of 5.8%. Europe & ROW (`1,464cr) posted a yoy growth of 7.9%, while

Sensex

(6.4)

7.1

37.6

Aurobindo

27.8

9.4

(4.9)

company’s key market USA (`2,227cr) posted a growth of 6.1% yoy. On the

operating front, the EBITDA margin came in at 18.8% v/s. 23.8% in 2QFY2018. YoY

decline is on the back of sales of certain high margin products in 2QFY18.

Sequentially EBDITA margins expanded by ~340bp. Consequently, the Adj. PAT

came in at `632cr v/s. `781cr in 2QFY2018, a yoy de-growth of 19.1%.

3-year daily price chart

1,000

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

~20% & net profit to grow at ~17% CAGR during FY2018-20E, due to increased

800

R&D expenditure. However, valuations of the company are cheap V/s its peers

600

and own fair multiples of 17-18x.We recommend a Accumulate rating on the

400

stock.

200

Key financials (Consolidated)

Y/E March (` cr)

FY2017

FY2018

FY2019E

FY2020E

Net sales

14,845

16,233

18,701

23,472

% chg

8.3

9.4

15.2

25.5

Source: Company, Angel Research

Adj. Net profit

2,302

2,423

2,641

3,329

% chg

13.7

5.3

9.0

26.1

EPS (`)

39.4

41.5

45.2

57.0

EBITDA margin (%)

21.5

21.6

20.9

20.8

P/E (x)

19.8

18.8

17.3

13.7

RoE (%)

27.6

23.0

20.6

21.5

RoCE (%)

23.1

20.6

19.3

22.5

Sarabjit Kour Nangra

P/BV (x)

4.9

3.9

3.3

2.7

+91 22 3935 7800 Ext: 6806

EV/Sales (x)

3.3

3.0

2.6

2.0

[email protected]

EV/EBITDA (x)

15.1

14.0

12.4

9.8

Source: Company, Angel Research; Note: CMP as of November 16, 2018

Please refer to important disclosures at the end of this report

Aurobindo Pharma | 2QFY2019 Result Update

Exhibit 1: 2QFY2019 performance (Consolidated)

% chg

Y/E March (` cr)

2QFY2019

1QFY2019

2QFY2018

1HFY2019 1HFY2018

(QoQ)

(yoy)

Net sales

4,667

4,182

11.6

4,354

7.2

8,849

7,975

11.0

Other income

111

113

(1.8)

19.0

224

174

28.4

Total income

4,778

4,294

11.3

4,447

7.4

9,072

8,149

11.3

Gross profit

2,624

2,274

15.4

2,586

1.5

4,899

4,713

3.9

Gross margins

56.2

54.4

59.4

55.4

59.1

Operating profit

875

642

36.2

1,036

(15.5)

1,518

1,815

(16.4)

OPM (%)

18.8

15.4

22.1

23.8

17.1

22.8

Interest

19.8

104.9

90.2

Dep & amortisation

164

155

5.9

132

23.9

318

263

20.9

PBT

787

571

37.8

979

(19.7)

1,358

1,692

(19.8)

Provision for taxation

175

116

51.8

198

(11.4)

291

389

(25.2)

Net profit

611

456

34.2

781

(21.8)

1,067

1,299

(17.9)

Less : Exceptional items (gains)/loss

MI & share in associates

(0)

PAT after Exceptional items

611

456

34.2

781

(21.7)

1,067

1,300

(17.9)

Adjusted PAT

632

456

38.8

781

(19.1)

1,088

1,300

(16.3)

EPS (`)

10.8

7.8

13.3

18.6

22.2

Source: Company, Angel Research

Revenue up 7.2% yoy; driven by formulations: On sales front, the company

posted sales of `4,667cr v/s `4,354cr in 2QFY2018, posting a yoy growth of 7.2%.

The formulation sales (`3,935cr) posted a yoy growth of 7.4%, while API (`817cr)

posted a yoy growth of 5.8%. Europe & ROW (`1,464cr) posted a yoy growth of

7.9%, while company’s key market USA (`2,227cr) posted a growth of 6.1% yoy.

Overall, formulations now contribute around 82.8% of sales, while the balance is

accounted by APIs.

The formulation sales (`3,935cr) posted a yoy growth of 7.4%. Within which US

business contributed 46.9% to the gross sales. On a constant currency basis, sales

declined by 2.6% YoY. The decline is on back of a high base, which included higher

sales of Renvela. US accounted for 46.9% of total revenues. The company filed 25

ANDAs with USFDA including 8 ANDAs for injectable products.Received final

approval for 13 ANDAs and tentative approval for 2 ANDAs. The company has 510

approved ANDAs including 29 tentative approvals. In Euro terms, sales declined by

3.6% YoY. As on 30th September 2018, it has transferred manufacturing of 97

products from Europe to India. Company has maintained its guidance of 2x Industry

growth (0-5%) rate in the EU market.

ARV business sales increased by 17.6% YoY to `244cr compared to `207.5cr in

Q2FY18 and accounted for

5.1% of revenues. Sales from growth markets

formulations posted a strong growth of 26.3% YoY to `307.5crr in 2QFY2019 and

accounted for ~6.5% of revenues.

API business posted a growth of 5.8% to `816.6cr & contributed 17.2% of the total

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

Betalactum segment. The company filed 4 DMFs with USFDA during the quarter

taking total DMFs filing to 235 as on 30th Sep 2018.

November 17, 2018

Aurobindo Pharma | 2QFY2019 Result Update

Exhibit 2: Sales break-up (Consolidated)

(` cr)

2QFY2019 1QFY2019

% chg (qoq) 2QFY2018

% chg (yoy) 1HFY2019 1HFY2018

% chg

Formulations

3935

3501

12.4

3663

7.4

7436

6714

10.7

2227

1890

17.8

2099

6.1

4116

3794

8.5

Europe & ROW

1464

1456

0.6

1357

7.9

2920

2468

18.3

ARV

244

156

56.8

208

17.6

400

452

(11.6)

API

817

748

9.2

772

5.8

1565

1397

12.0

SSP

513

492

4.4

514

(0.2)

1005

923

8.9

Cephs

303

256

18.4

258

17.7

559

474

18.0

Total Sales

4751

4249

11.8

4438

7.1

9000

8111

11.0

Source: Company, Angel Research

OPM comes in at 18.8%; QoQ expansion: on the operating front, the EBITDA

margin came in at 18.8% v/s. 23.8% in 2QFY2018. YoY decline is on the back of sales

of certain high margin products in 2QFY18.Sequentially EBDITA margins expanded

by ~340bp. Employee cost and R&D cost increased (up ~150bp/ ~100bp YoY, as

% of sales), respectively. This was partially offset by lower other expenses by 200bp

(as % of sales). Research & Development (R&D) spend at `216.8cr, 4.6% of sales. In

addition, during the quarter, the company had posted Forex losses of `39.7cr;

adjusting which EBDITA margins would have been 19.6%.

Exhibit 3: OPM Trend

25.0

23.8

23.0

21.0

22.5

18.8

19.0

18.2

17.0

15.4

15.0

2QFY2018

3QFY2018

4QFY2018

1QFY2019

2QFY2019

Source: Company, Angel Research

Consequently, net profit dips: Consequently, the Adj. PAT came in at `632cr v/s.

`781cr in 2QFY2018, a yoy de-growth of 19.1%. Tax as a percentage of PBT was

22.3% v/s 20.2% of PBT in 2QFY2018.

November 17, 2018

Aurobindo Pharma | 2QFY2019 Result Update

Exhibit 4: Adj. net profit

900

781

800

700

632

595

600

529

456

500

(`cr)

400

300

200

100

2QFY2018 3QFY2018 4QFY2018 1QFY2019 2QFY2019

Source: Company, Angel Research

Management takeaways

 In US adjusting for potential launches in 2QFY2018, the price erosion has been

to the extent of 5-6% QoQ price erosion.

 Company is confident of growing 30% in FY2019 in the Injectables segment,

with ramp up of Ertapenem, and launch of new products, including

Vancomycin.

 Specifically,

injectable

sales

stood at US$50mn/US$86mn in

2QFY2019/1HFY2019.

 It has acquired DPI inhalation asset from Advent Pharma for US$12.5mn. The

product is ready for starting clinical trials. Aurobindo guided to file product for

the US market in 2020-21.

 Company has guided for strong pace of filings over the next 4-5 years.

 It maintained its guidance of closing the Sandoz deal in 1QFY2020.

 Aurobindo Pharma reduced debt by ~US$20mn during the quarter, and

guided for further debt reduction to US$450mn (US$551mn currently).

Recommendation rationale

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

(has filed 510 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,

over the next six months, 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

November 17, 2018

Aurobindo Pharma | 2QFY2019 Result Update

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. Overall USA will grow at 25.1% CAGR over

FY2018-20E.

 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 FY2018-20E, 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 ~20% & net profit to grow at

~17% CAGR during FY2018-20E, due to increased R&D expenditure. However,

valuations of the company are cheap V/s its peers and own fair multiples of 17-

18x.We recommend accumulate rating on the stock.

Exhibit 5: Key assumptions

FY2019E

FY2020E

Sales Growth (%)

15.2

25.5

Operating Margins (%)

20.9

20.8

Capex (`cr)

1,388

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).

November 17, 2018

Aurobindo Pharma | 2QFY2019 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018

FY2019E FY2020E

Gross sales

12,221

13,937

15,084

16,493

18,986

23,830

Less: Excise duty

178

227

239

260

285

357

Net Sales

12,043

13,710

14,845

16,233

18,701

23,472

Other operating income

245

267

Total operating income

12,121

13,955

15,090

16,500

18,968

23,739

% chg

49.6

15.1

8.1

9.3

15.0

25.2

Total Expenditure

9,557

10,931

11,656

12,728

14,800

18,582

Net Raw Materials

5,506

6,162

6,434

6,753

7,761

9,976

Other Mfg costs

1,204

1,371

1,484

1,623

1,870

2,347

Personnel

1,302

1,543

1,768

2,131

2,493

2,992

Other

1,545

1,856

1,969

2,222

2,676

3,267

EBITDA

2,486

2,779

3,189

3,505

3,901

4,890

(% of Net Sales)

20.1

11.8

14.8

9.9

11.3

25.4

Depreciation& Amort.

333

392

428

558

678

769

EBIT

2,154

2,386

2,762

2,947

3,222

4,121

(% of Net Sales)

17.9

17.4

18.6

18.2

17.2

17.6

Interest & other Charges

Other Income

205

121

105

Recurring PBT

2,227

2,744

3,061

3,241

3,520

4,438

Tax

596.6

720.7

759.6

818.3

879.9

1109.6

(% of PBT)

27.5

26.3

24.8

25.2

25.0

PAT after MI (reported)

1,576

2,025

2,302

2,423

2,641

3,329

ADJ. PAT

1,576

2,025

2,302

2,423

2,641

3,329

% chg

21.5

25.1

13.7

5.3

9.0

26.1

Basic EPS (`)

27.7

34.6

39.3

41.4

45.1

56.9

% chg

21.5

25.1

13.7

5.3

9.0

26.1

November 17, 2018

Aurobindo Pharma | 2QFY2019 Result Update

Balance sheet (Consolidated)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018

FY2019E FY2020E

SOURCES OF FUNDS

Equity Share Capital

Share Application Money

Reserves & Surplus

5,127

7,229

9,313

11,622

13,953

16,893

Shareholders Funds

5,156

7,287

9,372

11,680

14,012

16,951

Minority Interest

Long-term provisions

Total Loans

3,864

4,415

3,084

4,483

3,000

2,500

Deferred Tax Liability

211

(182)

(118)

Total Liabilities

9,280

11,546

12,362

16,297

17,089

19,529

APPLICATION OF FUNDS

Gross Block

6,095

6,093

7,625

8,998

10,386

11,586

Less: Acc. Depreciation

1,794

2,186

2,614

3,172

3,850

4,619

Net Block

3,752

3,907

5,011

5,826

6,535

6,966

Capital Work-in-Progress

310

Goodwill

812

971

1,968

Investments

123

246

312

Long-term loans and adv.

486

269

338

343

343.32

395.52

Current Assets

8,279

10,294

9,206

12,188

12,978

16,301

Cash

469

834

513

1,262

392

507

Loans & Advances

831

409

Other

7,802

8,629

8,284

10,916

12,576

15,784.18

Current liabilities

3,634

4,168

3,720

4,649

5,356.17

6,723

Net Current Assets

4,645

6,127

5,487

7,539

7,622

9,578

Mis. Exp. not written off

Total Assets

9,280

11,546

12,362

16,297

17,089

19,529

November 17, 2018

Aurobindo Pharma | 2QFY2019 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018

FY2019E FY2020E

Profit before tax

2,168

2,744

3,061

3,241

3,520

4,438

Depreciation

333

392

428

558

678

769

(Inc)/Dec in Working Capital

(757)

(1,333)

388

(1,298)

(953)

(1,790)

Less: Other income

205

121

105

Direct taxes paid

(597)

(721)

(760)

(818)

(880)

(1,110)

Cash Flow from Operations

1,066

877

2,996

1,577

2,260

2,203

(Inc.)/Dec.in Fixed Assets

(1,989)

(1,532)

(1,374)

(1,388)

(1,200)

(Inc.)/Dec. in Investments

103

123

Other income

205

121

105

Cash Flow from Investing

(1,908)

311

(1,288)

(1,203)

(1,282)

(1,095)

Issue of Equity

Inc./(Dec.) in loans

552

(1,331)

1,398

(1,483)

(500)

Dividend Paid (Incl. Tax)

(171)

(309)

(389)

Others

1,209

(1,204)

(527)

(854)

(56)

(104)

Cash Flow from Financing

1,133

(823)

(2,030)

373

(1,847)

(993)

Inc./(Dec.) in Cash

291

365

(321)

748

(869)

115

Opening Cash balances

179

469

834

513

1,262

392

Closing Cash balances

469

834

513

1,262

392

507

November 17, 2018

Aurobindo Pharma | 2QFY2019 Result Update

Key ratios

Y/E March

FY2015

FY2016

FY2017

FY2018 FY2019E FY2020E

Valuation Ratio (x)

P/E (on FDEPS)

28.2

22.5

19.8

18.8

17.3

13.7

P/CEPS

11.9

18.9

16.7

15.3

13.8

11.1

P/BV

4.4

6.3

4.9

3.9

3.3

2.7

Dividend yield (%)

0.6

0.3

0.6

0.7

EV/Sales

2.2

3.6

3.3

3.0

2.6

2.0

EV/EBITDA

10.5

17.7

15.1

14.0

12.4

9.8

EV / Total Assets

2.8

4.3

3.9

3.0

2.8

2.4

Per Share Data (`)

EPS (Basic)

27.7

34.6

39.3

41.4

45.1

56.9

EPS (fully diluted)

27.7

34.6

39.3

41.4

45.1

56.9

Cash EPS

65.4

41.3

46.6

50.9

56.7

70.0

DPS

4.5

2.5

4.5

5.7

Book Value

176.6

124.5

160.1

199.6

239.4

289.7

Dupont Analysis

EBIT margin

17.9

17.4

18.6

18.2

17.2

17.6

Tax retention ratio

72.5

73.7

75.2

74.8

75.0

Asset turnover (x)

1.5

1.4

1.3

1.2

1.3

ROIC (Post-tax)

19.2

18.3

18.7

16.7

15.4

17.5

Cost of Debt (Post Tax)

1.6

1.7

1.3

1.5

Leverage (x)

0.8

0.6

0.4

0.3

0.2

Operating ROE

33.4

27.9

25.4

20.8

18.7

19.9

Returns (%)

ROCE (Pre-tax)

25.3

22.9

23.1

20.6

19.3

22.5

Angel ROIC (Pre-tax)

27.6

26.5

27.4

25.3

23.7

26.4

ROE

36.4

32.5

27.6

23.0

20.6

21.5

Turnover ratios (x)

Asset Turnover (Gross Block)

2.4

2.3

2.2

2.0

2.2

Inventory / Sales (days)

100

101

113

104

105

Receivables (days)

107

Payables (days)

126

119

114

112

WC cycle (ex-cash) (days)

119

124

130

125

Solvency ratios (x)

Net debt to equity

0.7

0.5

0.3

0.2

0.1

Net debt to EBITDA

1.4

1.3

0.8

0.9

0.7

0.4

Interest Coverage (EBIT / Int.)

25.5

25.8

41.4

37.9

43.1

74.9

November 17, 2018

Aurobindo Pharma | 2QFY2019 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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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)

November 17, 2018