Aurobindo Pharma

Aurobindo seems fairly valued

A CHANGING product mix has helped Hyderabad-based Aurobindo Pharma boost its fortunes. From being in the low-margin API manufacturing business, the company has now transformed itself into being a high-margin formulations player.

The company has also globalised its operations compared with being a domestic player earlier. On the product side, it has enriched its portfolio by adding lifestyle drugs from being an anti-infective player in the past. All this, along with a partnership deal with Pfizer, has catapulted the company into the league of leading generic companies in India.

As a result, the company’s stock price has witnessed a process of intense rerating. While the Sensex has nearly doubled over the past one year, Aurobindo’s stock price has appreciated by seven-and-a-half times during the same period. Expansion of manufacturing capacities, vertical integration, building of a strong product pipeline, the supply arrangement deal with Pfizer and the potential of similar deals with other MNCs are ensuring a ramp up in company’s revenues and earnings in the coming fiscals.

The company’s topline and bottomline have seen a marked improvement since the past three quarters (on a trailing four-quarter basis). The operating margin has also been improving consistently. The company’s high debt, on which there had been concerns, no longer looks challenging. Having expanded its manufacturing facilities, Aurobindo Pharma has no major capex requirements in the coming years.

Going forward, the company’s deal with Pfizer, under which it will supply generic formulations for developed markets, is likely to be one of the major growth drivers for the company. The company expects its revenues to touch $2 billion (around Rs 10,000 crore) by end-FY14. The company’s stock is currently trading at a consolidated price-to-earnings multiple of 11.6. Considering the run-up already seen, the stock seems to be fairly valued at the current price. The stock price seems to have discounted most of the forward earnings accruing from the company’s current strategic deals. Any significant jump in the price, in the absence of any fresh developments, therefore doesn’t seem to be justified.