Edelweiss Securities on Aurobindo Pharma

Aurobindo Pharma’s (ARBP) recent entry into CRAMs with a new division, Aurosource, is a positive, enabling the company to participate in the growing outsourcing opportunity. Besides, ARBP is favourably placed to garner contracts, given its relatively low-risk strategy for US, low cost of manufacturing and current relationships with innovators. Initial focus will be on pre-clinical and late phase IV candidates, with revenues expected to commence from late 2010-11.
Current stock price performance partially alleviates market concerns on FCCBs, which is the key overhang to higher valuations. ARBP has $37 million of FCCBs scheduled for redemption/conversion in August 2010 at a conversion price of Rs 522. Total FCCB conversion could lead to an 8.3 per cent dilution in equity.

ARBP’s valuations are at a 40-60 per cent discount to peers, likely affected by key concerns on $200 million of FCCBs to be redeemed in May 2011, and which offset potential upsides due to the Pfizer contract ramp up and likely upsides from recent CRAMs initiatives. Edelweiss has maintained its outperformer rating on the stock.