1QFY19 Result Update Institutional Equities Aurobindo Pharma 13 August 2018 Reuters: ARBP.NS; Bloomberg: ARBP IN One-offs Impact Margin Aurobindo Pharma (APL) reported 1QFY19 revenues of Rs42,503mn which were 3.7% above our estimate, but EBITDA of Rs7,792mn was 8% below estimate. EBITDA margin stood at 18.3% which was impacted by one-time inventory write-off (Rs1,000mn) during the quarter. The write-off led gross margin to contract 360bps. Net earnings at Rs4,557mn were 12.3% below our estimate (Rs5,197mn). Excluding the impact of one-offs, adjusted net earnings would have been Rs5,300mn (flat QoQ). Earnings should gain strength in subsequent quarters as the recent launch of Ertapenem generic will gain momentum and should peak to US$40mn (annualised) by end of FY19. In addition, there were 14 ANDA launches during the quarter which should also gain meaningful size in the coming quarters. OTC gnexium 24hr launch will also scale up. Valuation & outlook: APL expects growth across geographies, and aims at 30-40 launches in the US. Injectables remain an important growth driver for APL as a very large portion of its pending ANDAs in the US comprises injectables. Unlike oral solids, injectables have been more resistant to price erosion and hence remain meaningful for a longer period compared to oral solids. Injectables also represent a high-margin business, and hence we have assumed 100bps improvement in gross margin YoY. The European operations are now posting double-digit EBITDA and the same should sustain over FY19. Key ANDA launches in FY19 will be Ertapenem, Toprol XL and Welchol generics. In addition to injectables in the US, APL is also ramping up its presence in the OTC category which represents a more sustainable business stream. APL is targeting 12-14 OTC launches in FY19. Once the OTC business attains critical mass, it will be a cash cow for the company. We have valued APL at Rs764, which is based on 16x FY20E earnings. We have also retained Buy rating on the stock. Earnings highlights US sales, at Rs18,896mn, witnessed a growth of 11.5% YoY. On constant-currency basis, sales grew 7%. Filed 7 ANDAs with the USFDA and launched 14 products during the quarter in the US which include two injectables. Sales from EU formulations in 1QFY19 stood at Rs11,991mn, an increase of 30.7% YoY. On constant-currency basis, sales grew 16.0% YoY. As of 30 June 2018, 94 products have been site transferred from Europe to India and it is working on another 18 products. Europe accounted for 28.2% of revenues during the quarter. Net debt increased from US$538mn (as of March 2018-end) to US$571mn (as of 30 June 2018) following an increase in working capital. NBIE Values your patronage- Vote for The Team in the Asia Money poll 2018. Click Here BUY Sector: Pharmaceuticals CMP: Rs610 Target Price: Rs764 Upside: 25% Vishal Manchanda Research Analyst vishal.manchanda@nirmalbang.com +919737437148 Madhurima Kane Research Associate madhurima.kane@nirmalbang.com +91-22-6273 8168 Key Data Current Shares O/S (mn) 585.9 Mkt Cap (Rsbn/US$bn) 357.5/5.2 52 Wk H / L (Rs) 809/527 Daily Vol. (3M NSE Avg.) 2,427,456 Price Performance (%) 1 M 6 M 1 Yr Aurobindo Pharma (1.2) 3.5 (11.0) Nifty Index 4.4 9.3 16.4 Source: Bloomberg Y/E March (Rsmn) 1QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) FY17 FY18 YoY (%) Net revenues 36,211 39,886 41,816 15.5 4.8 1,48,448 1,62,329 9.4 Other operating income 577 605 687 19.1 13.6 2,451 2,670 8.9 Total income 36,788 40,491 42,503 15.5 5.0 1,50,899 1,64,998 9.3 Total material costs 14,978 16,695 19,073 27.3 14.2 64,343 67,527 4.9 % of revenues 41.4 41.9 45.6 425bps 376bps 43.3 41.6 (174bps) Staff costs 4,902 5,813 5,961 21.6 2.6 17,678 21,308 20.5 % of revenues 13.5 14.6 14.3 72bps (32bps) 11.9 13.1 122bps R&D expenses 1,623 1,866 1,690 4.1 (9.4) 5,430 6,665 22.7 % of revenues 4.4 4.6 4.0 (44) bps (63) bps 3.6 4.0 44bps Other expenses 6,869 8,077 7,987 16.3 (1.1) 29,106 31,612 8.6 % of revenues 19.0 20.3 19.1 13 bps (115) bps 19.6 19.5 (13bps) EBITDA 8,416 8,040 7,792 (7.4) (3.1) 34,343 37,885 10.3 EBITDA margin (%) 22.9 19.9 18.3 (454bps) (152bps) 22.8 23.0 20bps Other income 333 438 437 31.5 (0.2) 1,159 1,020 (12.0) Interest costs 169 247 295 75.1 19.5 667 777 16.5 Depreciation 1,312 1,566 1,545 17.8 (1.3) 4,276 5,580 30.5 Forex (gain)/loss 188 159 682 - - - 168 - PBT 7,080 6,506 5,707 (19.4) (12.3) 30,558 32,381 6.0 Share of profit in JV 13 6 4 - (26.8) 50 31 (37.5) Tax 1,910 1,224 1,155 (39.5) (5.6) 7,596 8,183 7.7 Tax rate (%) 27.0 18.8 20.2 (673bps) 143bps 24.8 25.2 43bps Minority Interest 2 (3) (1) (138.9) (72.0) 5 3 (44.7) Reported PAT post MI 5,185 5,285 4,555 (12.1) (13.8) 23,017 24,232 5.3 PAT margin (%) 14.1 13.1 10.7 (157bps) (67bps) 15.3 14.7 (57bps)
Exhibit 1: Key financials Net sales 1,39,552 1,50,899 1,64,998 1,76,115 1,84,389 EBITDA 31,881 34,343 37,885 38,890 39,949 Net profit 20,221 22,962 24,198 24,729 27,520 EPS (Rs) 34.6 39.3 41.4 42.3 47.0 EPS growth (%) 28.5 13.7 5.3 2.2 11.3 EBITDA margin (%) 22.8 22.8 23.0 22.1 21.7 P/E (x) 17.5 15.4 14.6 14.3 12.9 P/BV (x) 4.9 3.8 3.0 2.5 2.1 EV/EBITDA (x) 12.3 11.1 10.2 9.6 9.0 RoCE (%) 39.5 35.4 28.1 24.2 22.8 RoE (%) 27.7 24.5 20.7 17.7 16.6 Earnings conference-call summary Gross margin: Write-offs related to inventory/product recall impacted cost of sales during the quarter. Going forward, gross margin should retrace to normal level. Major ANDA approvals: During the year, the company expects approval for Toprol XL generic and Prevacid ODT. Net debt reduction: Maintains guidance on net debt reduction of US$100mn during the year. ARV business: There is a delay in execution of ARV business and the order book of US$80mn should start reflecting in the numbers in 2HFY19. R&D expenses: R&D expenses stood at 4% of sales in 1QFY19 and the same should average to 5% of sales during the year as trials on complex drugs are expected to be initiated. Injectables sales: During the quarter, injectable sales have been flattish, around US$36mn. However, for the full year, APL looks forward to achieving US$210mn in sales which implies that for the rest of the year the company needs to garner US$175mn, which implies a quarterly run-rate of US$58.3mn. We presume a large part of this incremental growth will come from ramp-up of Ertapenem generic in the US. Apotex acquisition: APL expects to close the deal with Apotex for its EU business by 3QFY19. US launches: In FY19, the company expects to launch about 30-40 products in the US. Of this, it has already launched 14 products in 1QFY19. Exhibit 2: Actual performance versus our estimate and Bloomberg consensus estimate (Rsmn) Actual Our est. Var.(%) Cons. est. Var.(%) Revenues 42,503 40,971 3.7 41,210 3.1 EBITDA 7,792 8,462 (7.9) 8,790 (11.4) EBITDA margin (%) 18.3 20.7 (232bps) 21.3 (300bps) PAT 4,555 5,197 (12.4) 5,600 (18.7) PAT margin (%) 10.7 12.7 (197bps) 13.6 (287bps) 2 Aurobindo Pharma
Financial statement Exhibit 3: Income statement Net sales 1,39,552 1,50,899 1,64,998 1,76,115 1,84,389 % growth 15.1 8.1 9.3 6.7 4.7 Raw material costs 61,621 64,343 67,527 71,519 72,688 Staff costs 15,426 17,678 21,308 23,759 26,135 R&D expenses 4,699 5,430 6,665 7,805 9,086 Other expenditure 25,925 29,106 31,612 34,141 36,531 Total expenditure 1,07,671 1,16,556 1,27,113 1,37,224 1,44,440 EBITDA 31,881 34,343 37,885 38,890 39,949 % growth 24.4 7.7 10.3 2.7 2.7 EBITDA margin (%) 22.8 22.8 23.0 22.1 21.7 Other income 2,038 1,159 1,020 1,540 5,239 Interest costs 2,567 667 777 1,055 1,072 Gross profit 77,931 86,556 97,471 1,04,596 1,11,701 % growth 17.8 11.1 12.6 7.3 6.8 Depreciation 3,924 4,276 5,580 6,473 7,501 Profit before tax 27,429 30,558 32,381 32,903 36,615 % growth 26.5 11.4 6.0 1.6 11.3 Tax 7,207 7,596 8,183 8,174 9,095 Effective tax rate (%) 26.3 24.9 25.3 24.8 24.8 Share of MI and associates 30 5 34 3 3 PAT after share of MI & associates 20,251 22,967 24,232 24,732 27,523 % growth 28.7 13.6 5.4 2.2 11.3 EPS (Rs) 34.6 39.3 41.4 42.3 47.0 % growth 28.5 13.7 5.3 2.2 11.3 Exhibit 5: Balance sheet Equity 585 586 586 586 586 Reserves 72,288 93,133 1,16,218 1,39,222 1,65,018 Net worth 72,873 93,719 1,16,804 1,39,808 1,65,604 Minority interest 26 21 18 18 18 Net deferred tax liabilities 240 493 2,353 2,353 2,353 Short-term loans 36,727 29,027 40,313 42,827 43,992 Long-term loans 7,428 1,814 4,512 4,061 3,655 Other non-current Liabilities 234 391 559 559 559 Liabilities 1,17,527 1,25,465 1,64,560 1,89,626 2,16,181 Net block 33,804 40,831 47,366 54,893 61,392 CWIP 8,359 12,374 13,995 14,995 15,995 Intangible assets & goodwill 8,115 9,715 19,676 19,676 19,676 Other non-current assets 5,980 7,514 8,136 8,136 8,136 Inventories 40,561 43,305 58,584 62,047 63,061 Debtors 46,067 27,653 30,844 32,956 34,528 Cash 8,003 5,135 12,616 26,380 44,233 Other current assets 8,313 15,968 19,835 19,835 19,835 Total current assets 1,02,944 92,062 1,21,879 1,41,217 1,61,657 Creditors 24,570 21,547 26,274 27,827 28,282 Other current liabilities 17,105 15,482 20,218 21,465 22,393 Total current liabilities 41,675 37,029 46,492 49,292 50,675 Net current assets 61,268 55,033 75,386 91,925 1,10,981 Total assets 1,17,527 1,25,466 1,64,560 1,89,626 2,16,181 Exhibit 3: Exhibit 4: Cash flow EBIT 29,996 31,276 33,189 33,989 37,719 (Inc.)/dec. in working capital (9,804) 3,367 (12,872) (2,775) (1,203) Cash flow from operations 20,191 34,643 20,318 31,214 36,515 Other income (2,038) (1,159) (1,020) (1,540) (5,239) Other expenses 238 253 1,860 - - Depreciation 3,924 4,276 5,580 6,473 7,501 Tax paid (-) (7,207) (7,596) (8,183) (8,174) (9,095) Net cash from operations 15,108 30,417 18,554 27,973 29,682 Capital expenditure (-) (14,984) (16,917) (23,698) (15,000) (15,000) Net cash after capex 124 13,501 (5,144) 12,973 14,682 Other investment activities 1,170 (375) 398 1,540 5,239 Cash from financial activities 2,218 (15,994) 12,228 (749) (2,069) Opening cash balance 4,491 8,003 5,135 12,616 26,380 Closing cash balance 8,003 5,134 12,616 26,380 44,233 Change in cash balance 3,512 (2,868) 7,482 13,764 17,853 Exhibit 4: Exhibit 6: Key ratios Y/E March FY16 FY17 FY18 FY19E FY20E Profitability & return ratios EBITDA margin (%) 22.8 22.8 23.0 22.1 21.7 EBIT margin (%) 21.5 20.7 20.1 19.3 20.5 Net profit margin (%) 14.5 15.2 14.7 14.0 14.9 RoE (%) 27.7 24.5 20.7 17.7 16.6 RoCE (%) 39.5 35.4 28.1 24.2 22.8 Working capital & liquidity ratios Receivables (days) 106.5 89.2 64.7 66.1 66.8 Inventory (days) 226.7 237.9 275.4 307.8 314.1 Payables (days) 133.2 130.8 129.2 138.1 140.9 Current ratio (x) 2.5 2.5 2.6 2.9 3.2 Quick ratio (x) 1.5 1.3 1.4 1.6 1.9 Valuation ratios EV/sales (x) 2.8 2.5 2.3 2.1 1.9 EV/EBITDA (x) 12.3 11.1 10.2 9.6 9.0 P/E (x) 17.5 15.4 14.6 14.3 12.9 P/BV (x) 4.9 3.8 3.0 2.5 2.1 3 Aurobindo Pharma
Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 Jun-18 Jul-18 Aug-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 7 April 2016 Buy 746 894 31 May 2016 Buy 754 900 24 August 2016 Buy 737 900 17 November 2016 Buy 714 920 10 February 2017 Buy 679 920 31 May 2017 Buy 580 704 29 June 2017 Accumulate 675 704 19 July 2017 Accumulate 778 819 10 August 2017 Buy 685 819 10 November 2017 Accumulate 789 818 8 February 2017 Buy 616 792 13 August 2018 Buy 610 764 Rating track graph 900 850 800 750 700 650 600 550 500 Not Covered Covered 4 Aurobindo Pharma
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