Sales miss on few approvals, earnings beats on better revenue May 31, 2016 Surajit Pal surajitpal@plindia.com +912266322259 Rating BUY Price Rs786 Target Price Rs943 Implied Upside 2% Sensex 26,668 Nifty 8,160 (Prices as on May 31, 2016) Trading data Market Cap. (Rs bn) 459.7 Shares o/s (m) 585.2 3M Avg. Daily value (Rs m) 127.3 Major shareholders Promoters 53.90% Foreign 28.78% Domestic Inst. 6.50% Public & Other 10.86% Stock Performance (%) 1M 6M 12M Absolute 3.2 (3.1) 14.3 Relative (0.9) (5.1) 18.4 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 45.2 43.3 4.5 2018 55.4 51.7 7.2 Price Performance (RIC: ARBN.BO, BB: ARBP IN) (Rs) 1,000 800 600 400 200 0 May15 Jul15 Source: Bloomberg Sep15 Nov15 Jan16 Mar16 May16 Aurobindo reported 17% growth in sales to Rs36.7bn and 39% growth in PAT to Rs5.6bn with 22% EBITDA margin in. The company s sales were a tad below estimates as there were no major launches of the approved portfolio. With major number of approvals coming in second half of, Aurobindo plans to launch 7 new generics including major products such as Tramadol ER and Celecoxib. With a large portfolio of injectable overdue (27 pending ANDAs) for approvals, we expect the company s revenues to increase at a CAGR of 14% in FY1618E once these approvals are received. Management expects EBITDA margin to be above 23% in FY17E on the back of better revenue mix. Net debt decreased by US$22m to US$688m in. With increased approval of key drugs, there is strong visibility in earnings in FY17E and FY18E. We maintain BUY and retain TP at Rs943. Natrol, ARV to maintain 15% growth: With sales of US$110m, Aurobindo s acquired OTC brand Natrol achieved 13% YoY growth and being guided for 15% growth in FY17E and FY18E. Natrol s operating margin was higher than 23% and management expects to maintain the same in FY17E18E. ARV tender business expects to maintain 15% growth in FY17E18E and margin profile to improve with better product mix of ARV drugs. US pipeline remain robust: While robust revenues from injectables at US$95.2m (39% YoY growth) in FY16E, management expects strong flow of approvals of injectable from Unit4 to support better traction in FY17E and FY18E. Currently, Aurobindo is ranked 6 th in volume in US injectables and we expect US$200m injectable sales in FY17E and US$300m in FY18E on the back of strong flow of approvals and sales of high value products in liposomal, peptide and microsphere portfolio. The company received US$20m sales in Eptifibatide out of its sales of US$36.2m in as it received benefits of being only generic and supply shortage. Valuation: The stock currently trades at 17.4x and 14.2x FY17E and FY18E. We expect growth in the valuation will be triggered with approvals of large products and higher contribution from injectable in FY17E onwards. Maintain BUY with TP of Rs943. Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 121,205 136,506 159,035 176,579 Growth (%) 49.6 12.6 16.5 11.0 EBITDA (Rs m) 25,636 29,601 38,327 44,410 PAT (Rs m) 16,354 19,558 26,471 32,411 EPS (Rs) 27.9 33.4 45.2 55.4 Growth (%) 18.9 19.6 35.3 22.4 Net DPS (Rs) 2.2 4.5 4.5 4.5 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 21.2 21.7 24.1 25.2 RoE (%) 36.7 32.0 32.8 30.9 RoCE (%) 19.6 18.7 21.4 22.8 EV / sales (x) 4.1 3.7 3.1 2.7 EV / EBITDA (x) 19.5 16.9 12.8 10.7 PE (x) 28.1 23.5 17.4 14.2 P / BV (x) 8.9 6.5 5.1 3.9 Net dividend yield (%) 0.3 0.6 0.6 0.6 Source: Company Data; PL Research Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Key takeways from Conference call Increase in volume of Aurolife s products and launch of approved drugs since Feb 2016 to drive sales growth in FY17E. Major launches are Valcyte, Nexium, Crestor, Meropenem, Teramadol ER, Voriconazole and Celecoxib The product rationalisation in EU Actavis has helped the company to achieve net profit in last three quarters of FY16. Currently, EU Actavis s operating margin is at midsingle digit and expects to achieve high single digit operating margin by FY18E. The company has site transferred 12 products of EU Actavis generics to its Unit7. With termination of third party manufacturing costs by FY18E, EU Actavis generics will be able to reduce manufacturing and SGA costs. Management expects ramp up in Abilify and Raloxifen along with addition of new clients continue to drive its US sales growth in H1FY17E. The company filed 398 ANDAs, of which 147 ANDAs are pending with USFDA. Its injectable portfolio has 27 pending ANDAs and will add filing of 20 products in near to medium term. Management expects to launch 3040 products in FY17E. Natrol has been performing as per expectation of management and launched 6 new products in US OTC segments. The company is developing more such value added products in US With reduction of US$22mn QoQ, Aurobindo s net debt stood at US$688m in Capex was US$212m in FY16, of which intangible assets were US$18m. It plans a capex of Rs12bn in FY17E and Rs5bn in FY18E May 31, 2016 2
Exhibit 1: Result Overview (Rs m) Y/e March YoY gr. (%) FY16 FY15 YoY gr. (%) Net Sales 36,747 31,440 16.9 34,321 136,506 120,432 13.3 Raw Material 16,271 13,736 18.5 15,536 61,575 55,056 11.8 % of Net Sales 44.3 43.7 45.3 45.1 45.7 Personnel Cost 4,088 3,733 9.5 4,010 15,508 13,023 19.1 % of Net Sales 11.1 11.9 11.7 11.4 10.8 Others 8,285 7,591 9.1 7,179 29,821 27,490 8.5 % of Net Sales 22.5 24.1 20.9 21.8 22.8 Total Expenditure 28,644 25,060 14.3 26,725 106,905 95,569 11.9 EBITDA 8,103 6,380 27.0 7,596 29,601 24,863 19.1 Margin (%) 22.1 20.3 22.1 21.7 20.6 Depreciation 1,113 847 31.4 995 3,926 3,326 18.0 EBIT 6,990 5,533 26.3 6,601 25,675 21,537 19.2 Other Income 926 248 272.9 703 3,137 1,581 98.5 Interest 206 214 (4.0) 98 1,587 1,439 10.3 PBT 7,711 5,568 38.5 7,206 27,225 21,679 25.6 ExtraOrd. Inc./Exps. (14) (5) (3) (39) (45) Total Taxes 2,097 1,534 36.7 1,860 7,444 5,966 24.8 ETR (%) 27.2 27.6 25.8 27.3 27.5 Reported PAT 5,629 4,038 39.4 5,350 19,820 15,758 25.8 May 31, 2016 3
Exhibit 2: Major Sources of revenues (Rs m) Y/e March YoY gr. (%) FY16 FY15 YoY gr. (%) Formulations 30,110 25,174 19.6 28,368 111,657 95,595 16.8 % of Net Sales 79.4 78.7 80.3 79.4 77.9 USA 16,663 12,093 37.8 15,706 61,440 46,405 32.4 % of Net Sales 44.0 37.8 44.5 43.7 37.8 Europe & ROW 10,163 9,099 11.7 9,608 38,218 37,639 1.5 % of Net Sales 26.8 28.5 27.2 27.2 30.7 ARV 3,284 2,670 23.0 3,054 11,999 9,639 24.5 % of Net Sales 8.7 8.4 8.6 8.5 7.9 Natrol 1,313 NA 1,913 NA % of Net Sales 4.1 1.6 API 7,746 6,765 14.5 6,952 28,837 27,062 6.6 % of Net Sales 20.4 21.2 19.7 20.5 22.1 SSPs 5,020 2,048 145.1 4,493 18,566 8,640 114.9 % of Net Sales 13.2 6.4 12.7 13.2 7.0 Cephalosporins 2,360 NA 9,300 NA % of Net Sales 7.4 7.6 ARV & Others (NPNC) 2,726 2,357 15.7 2,459 10,271 9,122 12.6 % of Net Sales 7.2 7.4 7.0 7.3 7.4 Dossier Income 53 35 51.4 11 74 68 8.8 Gross Sales 37,909 31,974 18.6 35,331 140,568 122,725 14.5 May 31, 2016 4
Exhibit 3: Formulation sales, growth Sales (Rs m) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 12 10 8 6 4 2 2 Exhibit 4: US generic sales (US$ m), growth Sales (US$ m) 300 250 200 150 100 50 12 10 8 6 4 2 2 4 Exhibit 5: EU & ROW sales, growth Sales (Rs m) 12,000 10,000 8,000 6,000 4,000 2,000 30 25 20 15 10 5 5 May 31, 2016 5
Exhibit 6: API sales, growth Sales (Rs m) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 3 25.0 2 15.0 1 5.0 5.0 1 15.0 Exhibit 7: Overall sales, growth Sales (Rs m) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 8 7 6 5 4 3 2 1 1 Exhibit 8: EBITDA, margin EBITDA (Rs m) Margin (%) (RHS) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 35.0 3 25.0 2 15.0 1 5.0 May 31, 2016 6
Income Statement (Rs m) Net Revenue 121,205 136,506 159,035 176,579 Raw Material Expenses 55,056 61,575 69,498 74,958 Gross Profit 66,149 74,931 89,537 101,621 Employee Cost 13,023 15,508 16,699 17,658 Other Expenses 27,490 29,821 34,511 39,554 EBITDA 25,636 29,601 38,327 44,410 Depr. & Amortization 3,326 3,926 4,755 4,313 Net Interest 843 927 677 448 Other Income 808 3,137 3,325 3,525 Profit before Tax 22,275 27,885 36,221 43,174 Total Tax 5,966 8,365 9,780 10,794 Profit after Tax 16,309 19,519 26,441 32,381 ExOd items / Min. Int. (596) (660) (693) (728) Adj. PAT 16,354 19,558 26,471 32,411 Avg. Shares O/S (m) 585.2 585.2 585.2 585.2 EPS (Rs.) 27.9 33.4 45.2 55.4 Cash Flow Abstract (Rs m) C/F from Operations 12,368 17,213 19,403 26,540 C/F from Investing (14,085) (4,559) (6,800) (6,736) C/F from Financing 932 (8,816) (9,625) (13,778) Inc. / Dec. in Cash (785) 3,838 2,978 6,026 Opening Cash 5,275 4,506 8,344 11,322 Closing Cash 4,506 8,344 11,322 17,347 FCFF (3,361) 3,462 14,066 21,290 FCFE 3,610 6,462 7,900 13,107 Key Financial Metrics Growth Revenue (%) 49.6 12.6 16.5 11.0 EBITDA (%) 20.1 15.5 29.5 15.9 PAT (%) 18.9 19.6 35.3 22.4 EPS (%) 18.9 19.6 35.3 22.4 Profitability EBITDA Margin (%) 21.2 21.7 24.1 25.2 PAT Margin (%) 13.5 14.3 16.6 18.4 RoCE (%) 19.6 18.7 21.4 22.8 RoE (%) 36.7 32.0 32.8 30.9 Balance Sheet Net Debt : Equity 0.8 0.6 0.3 0.1 Net Wrkng Cap. (days) 210 204 202 197 Valuation PER (x) 28.1 23.5 17.4 14.2 P / B (x) 8.9 6.5 5.1 3.9 EV / EBITDA (x) 19.5 16.9 12.8 10.7 EV / Sales (x) 4.1 3.7 3.1 2.7 Earnings Quality Eff. Tax Rate 26.8 3 27.0 25.0 Other Inc / PBT 3.6 11.2 9.2 8.2 Eff. Depr. Rate (%) 6.1 5.9 6.5 5.2 FCFE / PAT 22.1 33.0 29.8 40.4. Balance Sheet Abstract (Rs m) Shareholder's Funds 51,560 70,567 90,707 119,309 Total Debt 44,754 47,754 41,589 33,405 Other Liabilities 2,316 2,959 1,842 517 Total Liabilities 98,630 121,280 134,138 153,232 Net Fixed Assets 41,253 46,142 51,520 57,861 Goodwill Investments 198 2 2 2 Net Current Assets 52,323 64,302 77,440 88,899 Cash & Equivalents 4,691 8,344 11,322 17,347 Other Current Assets 78,100 91,671 106,709 115,439 Current Liabilities 30,468 35,712 40,590 43,887 Other Assets 4,855 4,341 5,176 6,470 Total Assets 98,629 114,787 134,138 153,232 Quarterly Financials (Rs m) Y/e March Net Revenue 32,637 32,801 34,321 36,747 EBITDA 6,680 7,222 7,596 8,103 % of revenue 20.5 22.0 22.1 22.1 Depr. & Amortization 891 928 995 1,113 Net Interest 209 241 227 251 Other Income 602 71 832 972 Profit before Tax 6,182 6,125 7,206 7,711 Total Tax 1,865 1,622 1,860 2,097 Profit after Tax 4,324 4,518 5,350 5,629 Adj. PAT 4,324 4,518 5,350 5,629 Key Operating Metrics (Rs m) US Formulations 48,317 63,760 79,076 89,836 EU & ROW 37,630 36,788 40,134 43,796 ARV formulations 9,639 11,557 12,503 13,702 APIs 27,062 27,983 29,211 31,255. May 31, 2016 7
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