: price: EPS: How does our one year outlook change? We maintain rating on Aurobindo post the company s 3QFY16 results. Revenue growth for the quarter was 10% yoy: US sales of $238mn (vs. estimate of $251mn and $227mn in 2QFY16). EU sales of EUR108mn (vs. estimate of EUR112mn, 3% yoy decline). ARV sales of Rs. 3.1bn (vs. estimate of Rs. 3.7bn). API sales of Rs. 7bn (in-line with estimate) YTD FY16, 18 products were launched (vs. 35 product approvals). Remaining products will be launched in the next 1-2 quarters Net debt was reduced by ~$50mn during the quarter USFDA issued a Form 483 with 4 observations post inspection of the company s Unit VII facility in Jan 2016. As per management, the Form 483 is unlikely to escalate into further actions Aurobindo has substantially improved its balance sheet (net debt/ EBITDA of 1.6x) and RoCE (~21%, in-line with large cap peers). We expect the discount to large cap peers to narrow further and value the stock at 20x FY18E of Rs. 50.8, to arrive at a target price of. Maintain How does our 3 year Outlook change? Aurobindo received 35+ product approvals over the last 12 months, which is the highest among peers. Recent approvals for gabilify, gbaraclude, gevista, gdilantin, injectables (eptifibatide, methylprednisolone) and olopatadine provides high visibility for growth in the medium-term The company s strong pipeline of 159 pending ANDAs and initiatives in newer segments such as peptides, penems and injectables provide comfort on long-term growth Topline growth across Aurobindo s ex US businesses (EU formulations, ARVs and APIs) will be modest as the company focuses on profitability in these segments. Margins at the acquired Actavis portfolio which accounts for ~20% of the company s business, should improve as the company shifts manufacturing of more products to India Key estimate revision Financial summary Year 3QFY16 Update Promoters 53.9 Institutions 35.2 Public 10.9 1m 3m 12m ARBP -18% -17% 34% Sensex -5% -8% -16% BSEHC -4% -4% 3% Revenues FY17E EBITDA margin % PAT FY18E Old New Change Old New Change Revenues 165,482 160,648-2.9% 187,464 180,147-3.9% EBITDA 41,017 39,776-3.0% 48,243 46,562-3.5% Margin (%) 24.8% 24.8% 25.7% 25.8% PAT 26,042 25,203-3.2% 30,829 29,647-3.8% EPS (Rs.) 44.6 43.2-3.2% 52.8 50.8-3.8% All figures in Rs. mn, except EPS, which is in Rs. Bloomberg Shares o/s Market Cap Feb 11 th, 2016 ARBP IN 585mn Rs. 404bn 52-wk High-Low Rs. 892-465 3m Avg. Daily Vol Index Rs. 1,481mn BSE100 EPS (Rs.) PE (x) ROE (%) FY15 121,205 21.2% 16,354 28.0 24.7 36.7% FY16E 137,547 23.2% 20,356 34.9 19.8 33.7% FY17E 160,648 24.8% 25,203 43.2 16.0 31.3% FY18E 180,147 25.8% 29,647 50.8 13.6 28.2% DR HARITH AHAMED harith@sparkcapital.in +91 44 4344 0052 KRISHNA KIRAN KONDURI krishna@sparkcapital.in +91 44 4344 0037 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1
Financials Quarterly financial results Rs. Mn 3QFY16 3QFY15 YoY Growth 2QFY16 QoQ Growth Revenue 34,955 31,662 10% 33,335 5% Raw material cost (15,536) (15,385) 1% (14,690) 6% Employee cost (4,010) (3,680) 9% (3,759) 7% Other expenditure (7,179) (6,474) 11% (7,129) 1% EBITDA 8,230 6,122 34% 7,756 6% % margin 23.5% 19.3% 23.3% Depreciation (995) (673) 48% (928) 7% EBIT 7,235 5,449 33% 6,828 6% Revenue break up (Rs mn) Dec-15 Dec-14 yoy Sep-15 qoq US 15,706 12,012 31% 14,775 6% Europe 7,786 8,609-10% 7,643 2% RoW 1,822 1,338 36% 1,680 8% ARV 3,054 3,338-9% 2,708 13% Formulations 28,368 25,297 12% 26,806 6% APIs 6,952 6,744 3% 6,911 1% Dossier revenue 11 21-48% 9 22% Gross revenue 35,331 32,062 10% 33,726 5% Excise duty (376) (400) -6% (391) -4% Net revenue 34,955 31,662 10% 33,335 5% Source: Company, Spark Capital Research ANDA pipeline Interest expense (227) (219) 4% (241) -6% Other income 69 359-81% 117-41% Forex / One-off 129.3 (202) NM (579) NM PBT 7,206 5,387 34% 6,125 18% Tax (1,860) (1,563) 19% (1,622) 15% Minority interest 3 20-85% 15-79% PAT (after MI) 5,350 3,843 39% 4,518 18% Source: Company, Spark Capital Research; 166 159 165 27 30 119 155 102 26 32 28 26 183 198 145 75 92 88 FY11 FY12 FY13 FY14 FY15 9MFY16 Final approval Tentative approval Pending approval Source: Company, Spark Capital Research Page 2
Financial Summary Abridged Financial Statements (Consolidated) Key metrics Rs. mn FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E Profit & Loss Growth ratios Revenue 80,998 121,205 137,547 160,648 180,147 Revenue 38.3% 49.6% 13.5% 16.8% 12.1% EBITDA 21,328 25,636 31,856 39,776 46,562 EBITDA 139.9% 20.2% 24.3% 24.9% 17.1% Depreciation (3,125) (3,326) (3,814) (4,565) (5,334) Adjusted PAT 200.9% 18.9% 24.5% 23.8% 17.6% EBIT 18,203 22,310 28,043 35,211 41,227 Margin ratios Other Income 232 808 576 628 719 EBITDA 26.3% 21.2% 23.2% 24.8% 25.8% Interest expense (1,079) (843) (926) (875) (809) Adjusted PAT 16.9% 13.4% 14.7% 15.6% 16.4% Forex gain / (loss) (2,031) (596) (706) 0 0 Performance ratios PBT 15,325 21,679 26,987 34,965 41,137 RoE 43.3% 36.7% 33.7% 31.3% 28.2% PAT (after minority interest) 11,729 15,758 19,650 25,203 29,647 RoCE 21.7% 19.9% 20.5% 21.8% 22.0% Adjusted PAT (after minority interest) 13,759 16,354 20,356 25,203 29,647 RoA 19.0% 17.2% 17.5% 18.9% 19.4% Balance Sheet Fixed asset turnover (x) 1.9 2.3 2.1 2.1 2.1 Net Worth 37,758 51,817 69,330 92,044 118,850 Total asset turnover (x) 1.1 1.3 1.2 1.2 1.2 Deferred Tax 2,054 2,058 2,058 2,058 2,058 Financial stability ratios Total debt 37,949 44,511 41,669 36,131 29,902 Net Debt to Equity (x) 0.9 0.8 0.5 0.3 0.1 Other liabilities and provisions 3,625 10,200 11,048 11,917 12,812 Net Debt to EBITDA (x) 1.5 1.6 1.1 0.7 0.4 Total Networth and liabilities 81,386 108,586 124,106 142,150 163,622 Current ratio (x) 3.4 2.7 2.7 2.7 2.7 Gross Fixed assets 44,927 58,658 69,658 80,158 91,658 Inventory and debtor days 228 217 222 222 222 Net fixed assets 30,314 41,253 48,439 54,374 60,540 Working capital days 166 155 157 157 157 Investments 198 198 198 198 198 Interest cover (x) 16.9 26.5 30.3 40.2 50.9 Cash and bank balances 5,795 4,691 5,319 6,943 13,284 Valuation metrics Loans & advances and other assets 8,550 11,451 12,023 12,625 13,256 Fully Diluted Shares (mn) 583.2 583.6 584.0 584.0 584.0 Net working capital 36,529 50,994 58,125 68,011 76,344 Market cap (Rs.mn) 404,256 Total assets 81,386 108,586 124,106 142,150 163,622 Adjusted EPS (Rs.) 23.6 28.0 34.9 43.2 50.8 Cash Flows P/E (x) 29.3 24.7 19.8 16.0 13.6 Cash flows from Operations 6,463 12,368 17,855 20,645 27,340 EV (Rs.mn) 440,836 Capex (3,905) (14,543) (11,000) (10,500) (11,500) EV/ EBITDA (x) 20.7 17.2 13.8 11.1 9.5 Cash flows from Investing (4,178) (14,085) (11,000) (10,500) (11,500) BV/ share (Rs.) 64.3 88.4 118.3 157.3 203.2 Cash flows from Financing 1,176 932 (6,227) (8,522) (9,499) Price to BV (x) 10.7 7.8 5.8 4.4 3.4 Page 3
Spark Disclaimer Rs. 1,200 Aurobindo 3 Year Price and History 1,000 800 600 400 200 0 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Jan-16 Price Report Date Price Reco. 04/Jan/16 881 1,056 Buy 17/Aug/15 744 869 Buy 15/Jun/15 639 869 Buy 11/v/14 511 555 Add 11/Aug/14 385 371 Reduce 27/Jun/14 363 351 Reduce 03/Jun/14 312 300 Reduce 10/Feb/14 254 238 Reduce 06/Jan/14 198 183 Reduce 11/v/13 134 138 Reduce 25/Sep/13 96 108 Add 14/Aug/13 94 113 Buy 03/Jun/13 89 114 Buy Report Date Price Reco. 12/Feb/13 91 122 Buy 13/Dec/12 96 103 Add Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time. Absolute Interpretation Stock expected to provide positive returns of >15% over a 1-year horizon ADD Stock expected to provide positive returns of >5% <15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% -10% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure advisory services. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Page 4
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