Recommendation Range STOP LOSS Target 678 638 765 Aurobindo Pharma Sector - Pharmaceuticals Background & Business Aurobindo Pharma (ARBP) is a mid-sized Indian pharma company with one of the largest product portfolios in the US market. Formulation business contributes ~80% to its total sales, while the contribution of API business stands at ~20%. ARBP s product portfolio is comprises of 6 major therapeutic categories i.e. antibiotics, anti-retrovirals (ARVs), CVS, CNS, gastroenterological, pain management and anti-allergic. US business contributed 45% to its total sales in Q3FY17. Investment Rationale Business Transformation: Overall business mix changed towards high-growth and high-margin formulations complex segment i.e. depot injections, micro-sphere, peptides, ophthalmology, oncology and hormones. Formulations segment revenue (% to sales) increased from 55% in FY12 to 80% in Q3FY17 and we expect this mix to continue in the near future. Contribution of low margin API business (% to sales) has reduced from 44% in FY12 to 20% in Q3FY17. We believe this overall transformation has led to expansion in EBITDA margin (from 13% in FY12 to 23% in FY16). We expect this margin trend to continue, going forward as well (24.8% in FY19E). US Biz business (45% of Sales): US business has been a key growth driver for ARBP s overall revenue growth. The US business contribution has been increased from 25% in FY12 to 45% in Q3FY17, which we expect further increase to 51% in FY19E (CAGR of 19% over FY16-19) driven by launch of niche products in complex generic segment. Management has guided for strong 40-45 ANDA launches in FY18E (including Meropenem, 2 injectables & Vancomycin etc). ARBP guided for six oral and three injectables in 4QFY17. Natrol acquisition (sales contribution ~US$100mn per year) would further aid its US business. European Biz: Turnaround in ARBP s European business (22% of sales) came ahead of expectations with margin of 6-8% currently (one year ahead of the guidance in FY18E). ARBP plans to transfer 114 products (63 products already transferred to India and supply has started) to India, which we believe would further help in increasing margins. Outlook & Valuation We expect ARBP s US business to drive growth backed by ramp-up in extant products, new launches in complex segment (highgrowth / high-margin). Strong earnings growth, improving returns ratios, strong US product pipeline and comfortable leverage position (capex cycle ends in FY17E) in the next two years augur well for the Company. 1 Year Stock Price Performance Note: *CMP as on March 01, 2017 Key Figure Market Cap ( Rsbn/US$mn ) 397.4/58.4 Current Price 678 Target Price 765 Promoters / Public & Others 51.9/48.1 FY18E P/E (x) 13.8 Risks Revenues CAGR (FY16-18 %) 14.4 Higher-than-expected price erosion/market share in the US. Slower-than-expected turnaround of acquired EU business. PAT CAGR (FY16-18 %) 18.6 Any significant delay in US FDA approvals and regulatory risks. Mar (Rsmn) FY16 FY17E FY18E Key Ratios FY16 FY17E FY18E Revenues 138,960 161,961 181,735 P/E (x) 19.4 16.6 13.8 EBITDA 32,055 37,737 44,525 P/BV (x) 5.7 4.3 3.4 EBITDA MARGIN % 23.1 23.3 24.5 Adj. PAT 20,480 23,991 28,796 EV/EBITDA (x) 13.4 11.2 9.3 ROE (%) 29.0 25.9 24.0 Source: Company, RSec Estimates Research Team; Contact: (022) 33201202; Email: rsec.research@rcap.co.in 900 850 800 750 700 650 600 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 1
Recommendation Range STOP LOSS Target 83 78 94 NCC Background & Business NCC one of the largest construction companies in India is involved in varied construction works with presence in multiple segments i.e. Transportation, Water & Environment, Buildings, Irrigation and Electrical. The Company has also ventured into Power, Railways, Metals and Mining segments. Further, it is also undertaking works in Roads, Buildings, and Water segments in the Middle East markets. Investment Rationale Well-placed to Capitalize on Huge Opportunities in Infra Space: The Government of India has earmarked US$375bn investment for infrastructure in the next three years. We believe that NCC is best-placed to cash in on imminent opportunities with a balanced presence across infrastructure verticals (10 segments), geographical diversification and prequalification to undertake projects in most verticals. Prudent Approach to Streamline Balance Sheet Started Paying o: NCC has been consistently improving its working capital cycle without compromising its order execution capability and margins over the last couple of years. This along with a prudent divestment of its non-core assets aided NCC to reduce its gross debt from Rs24.7bn in FY14 to Rs18.8bn in FY16 (D/E at 0.5x). Pick-up in Order Book Lends Business Visibility: NCC s current order book stands at strong Rs204bn, which is 2.5x TTM revenue. With the pick-up in government s tendering, NCC has secured order worth Rs93.1bn in FY17E YTD vis-à-vis its own target of Rs120bn. Besides, the Company s L1 position currently stands at over ~Rs30bn. Notably, a large chunk of its order (85%) comes from government, which oers sovereign payment guarantee.. Outlook & Valuation We believe that debt reduction programme and improving operating margins with quality projects have started paying o. Further, the visible ease in working capital cycle and likely pick-up in infrastructure activities will aid NCC in reporting an earning CAGR of ~14% over FY16-FY19E. The stock currently trades at 13.8X FY19E EPS. Risks Slowdown in government s spending on infrastructure development. Political uncertainty. Major deterioration on working capital front. 1 Year Stock Price Performance 100 90 80 70 60 Sector - Construction Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Note: *CMP as on March 01, 2017 Key Figure Market Cap ( Rsbn/US$mn ) 46.1/6.8 Current Price 83.0 Target Price 94.0 Promoters / Public & Others 19.7/80.3 FY18E P/E (x) 16.3 Revenues CAGR (FY16-18 %) 3.0 PAT CAGR (FY16-18 %) 13.1 Mar (Rs mn) FY16 FY17E FY18E Revenues 83,252 83,443 88,302 Key Ratios FY16 FY17E FY18E EBITDA 7,374 7,383 8,166 P/E (x) 20.8 18.4 16.3 EBITDA MARGIN (%) 8.9 8.8 9.2 P/BV (x) 1.4 1.3 1.2 Adj.PAT 2,228 2,493 2,852 ROE (%) 6.7 7.1 7.6 EV/EBITDA (x) 8.4 8.6 7.5 Source: Company, RSec Estimates Research Team; Contact: (022) 33201202; Email: rsec.research@rcap.co.in 2
Recommendations Summary Open Positions Stock Symbol Sector Reco Date Reco Price CMP SL Target Remarks AUROPHARMA Pharma 02-Mar-17 678 678 638 765 BUY NCC Construction 02-Mar-17 83 83 78 94 BUY NIITTECH IT 17-Feb-17 424 417 395 485 HOLD DABUR FMCG 03-Feb-17 274 276 258 315 HOLD Closed Positions Stock Symbol Sector Reco Date Reco Price Exit Price Exit Date Return % Remarks NBCC Infrastructure 21-Jun-16 186 213 07-Jul-16 14.3 Booked Profit PERSISTENT IT 21-Jun-16 696 650 18-Jul-16 (6.6) Booked Loss SUNPHARMA Pharma 02-Jul-16 763 801 21-Jul-16 5.0 Booked Profit PFS NBFC 02-Jul-16 39 38 16-Aug-16 (2.1) Booked Loss CROMPTON Capital Goods 15-Jul-16 144 156 28-Jul-16 8.6 Booked Profit UPL Agrochemicals 15-Jul-16 566 616 29-Jul-16 8.9 Booked Profit ABFRL Retailing 30-Jul-16 145 162 18-Aug-16 11.6 Booked Profit KEC Capital Goods 30-Jul-16 143 133 07-Sep-16 (7.0) Booked Loss MGL Oil-Gas 17-Aug-16 537 595 23-Aug-16 10.8 Booked Profit SUNPHARMA Pharma 17-Aug-16 783 733 29-Sep-16 (6.4) Booked Loss INFY IT 01-Sep-16 1036 1064 19-Sep-16 2.7 Booked Profit BAJAJCORP Consumer 01-Sep-16 400 406 14-Oct-16 1.4 Booked Profit AUROPHARMA Pharma 16-Sep-16 783 859 23-Sep-16 9.6 Booked Profit Continued... 3
Closed Positions Stock Symbol Sector Reco Date Reco Price Exit Price Exit Date Return % Remarks NAVKARCORP Logistics 16-Sep-16 200 184 29-Sep-16 (8.0) Booked Loss ABFRL Retailing 03-Oct-16 138 148 21-Oct-16 6.9 Booked Profit AMBUJACEM Cement 03-Oct-16 252 238 03-Nov-16 (5.6) Booked Loss ASHOKLEY Auto 17-Oct-16 81 85 20-Oct-16 5.1 Booked Profit INFY IT 17-Oct-16 1027 980 02-Nov-16 (4.6) Booked Loss TECHM IT 16-Nov-16 431 454 17-Nov-16 5.2 Booked Profit CADILAHC Pharma 16-Nov-16 358 386 23-Nov-16 7.7 Booked Profit FEDERALBANK Banking 01-Dec-16 71 65 23-Dec-16 (8.5) Booked Loss ASHOKLEY Auto 16-Dec-16 78 80 30-Dec-16 3.2 Booked Profit TITAN FMCG 16-Dec-16 315 327 30-Dec-16 4.0 Booked Profit CADILAHC Pharma 04-Jan-17 355 377 06-Jan-17 6.2 Booked Profit CROMPTON Capital Goods 01-Dec-16 148 156 13-Jan-17 5.5 Booked Profit ASIANPAINT FMCG 04-Jan-17 897 958 17-Jan-17 6.8 Booked Profit JUBLFOOD FMCG 17-Jan-17 833 866 31-Jan-17 4.0 Booked Profit INOXWIND Capital Goods 17-Jan-17 182 173 17-Feb-17 (5.2) Booked Loss HCLTECH IT 03-Feb-17 827 854 22-Feb-17 3.3 Booked Profit ABFRL Retailing 17-Feb-17 150 160 28-Feb-17 6.9 Booked Profit 4
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