Aurobindo Pharma

Aurobindo Pharma has transformed from a low-margin API manufacturer to a high margin formulations player. Investors can consider the stock

EMERGING from a phase of transition, Aurobindo Pharma has registered a robust growth in the past three-four quarters. The company offers a promising business model consisting of manufacturing generic drugs and active pharmaceutical ingredients (APIs) and contract manufacturing. The company’s stock price has witnessed re-rating in the past one year and increased by nearly five times. Despite this run-up, the stock is an attractive buy for the long term given that the earnings upside likely to accrue from the long-term supply contracts signed with pharma MNCs.

BUSINESS: The Hyderabad-based drugmaker has transformed itself from a low-margin API manufacturer to a high margin formulations player. It has enriched its portfolio by adding life-style drugs to its traditional portfolio of antiinfective drugs. Aurobindo Pharma is an integrated low-cost manufacturer of generic drugs and APIs with globally approved manufacturing capabilities. It has a strong pipeline of abbreviated new drug applications (ANDAs) for generic formulations and drug master files (DMFs) for APIs in the US, Europe and South Africa. The drugmaker has a strong portfolio of anti-retroviral (anti-AIDS) drugs. It is leveraging its strength by actively supplying to global tenders. The company has entered into a partnership deal with Pfizer for supplying injectibles in developed markets, such as US and Europe, and 70 other emerging markets.

FINANCIALS: The company’s net sales have grown at a compounded annual growth rate (CAGR) of 14.2% over the past five financial years to reach around Rs 3,077 crore in FY09. Net profits have rather grown in an erratic manner during the same period. Forex losses, high depreciation due to higher capex and interest costs have put the net profit under pressure in the recent past. Despite this, the company has been consistently paying dividend. It has incurred higher capex over the past three years. With its high investment phase over, the company will generate more free cash flows going forward. Aurobindo’s topline and bottomline have seen a marked improvement in the nine months ended December 2009. The operating margin has also been improving consistently. The company’s high debt, repayment of which had been an issue for some time, no longer looks difficult. Having expanded its manufacturing facilities, the company has no major capex requirements in the coming years.

GROWTH OPPORTUNITIES: Expansion of manufacturing capacities, vertical integration, building of a strong product pipeline, supply arrangement deal with Pfizer and the potential of similar such deals with other MNCs are going to ensure significant ramp up in company’s revenues and earnings in the coming fiscals. Aurobindo Pharma has chalked out its near-term goals of continuing a strong performance in its addressable markets, shortening the time between product approvals and products launch, enhancing operating matrix at its manufacturing facilities and improving the cash flow. The company recently announced the creation of AuroSource — a new division focussed on providing contract research and manufacturing (CRAMS) services ranging from pre-clinical to commercial launch of products. Despite being a late-entrant in the generics and CRAMS segment, the company aims to achieve revenues of $ 2 billion or around Rs 10,000 crore by FY14.

VALUATIONS: Aurobindo Pharma’s stock is currently trading at an attractive consolidated price to earnings value of 10.5. It is valued at around on eand-a-half times its past 12-month consolidated revenues of over Rs 3,500 crore. These are attractive valuations indicating further scope for appreciation in the stock price, as pharma companies are typically valued at over twice their revenues. Investors with a long-term horizon can consider the stock.

SUN PHARMACEUTICAL

Sun Pharma has achieved a very good trade-off between its risks and returns. It is a safe bet for investors looking for the right mix of risk, growth and dividends
Beta: 0.29
Institutional Holding: 25.3%
Dividend Yield: 0.97%
P/E: 10.7
M-Cap: Rs 22,874 cr

SUN PHARMACEUTICAL — the largest and currently the most valuable domestic pharma company on the bourses — is a safe bet for investors looking for the right mix of risk, growth and dividends. The stock has depreciated by 9% during the year till date, compared to a 55% fall in the BSE Sensex.

BUSINESS:

Sun Pharma has established itself as a niche player in the chronic super-specialty therapeutic segments with a focus on the US and Indian generics market. Nearly 40% of the company’s total revenues are contributed by the US generics market and a similar proportion is accounted for by the domestic market.

The company has always followed a strategy of differentiation, which has paid rich dividends in the past. Be it venturing into neuro-psychiatry, acquiring US companies with manufacturing facilities, staying out of European markets or hiving off innovative research & development (R&D) into a separate company, Sun Pharma’s business model has proved to be superior to that of its peers.

The company earns around 55% of its revenues from its international businesses, with the US being its largest market. In the US, it is an integrated generic manufacturer with flexibility to manufacture onshore/offshore. The company’s strategy is to manufacture technically complex generics and it attempts to be the first to market these products. Taking calculated risks, the company has made several ‘at risk’ launches in the US market. As of end of September ’08, it had abbreviated new drug applications (ANDAs) for 96 products pending.

The company has a dominant presence in the domestic branded generics market. It is among the top three players for nearly half of the branded generics products in India. Despite this, Sun Pharma’s top 10 brands in the domestic market account for a modest 21% of its domestic sales.

GROWTH STRATEGY:

The company has largely grown organically, making 11 acquisitions till date, five of them being cross-border. It intends to achieve cost leadership through vertical integration from manufacturing active pharmaceutical ingredients (APIs) and finished dosages to marketing them. Sun Pharma’s acquisitions have been made to further this objective. It has been quite successful in turning around loss-making companies — be it US-based Caraco or yet-to-be-acquired Israeli company Taro.

Sun Pharma is now eyeing the key generic markets in Europe and is working on complex generic products, including injectibles. Its strategy is to use India as a manufacturing base for drugs approved in Europe.

The company is also developing strength in yet another niche area of controlled substances. In ’05, Sun Pharma acquired a facility in Hungary authorised to make controlled substance APIs, starting from the initial stage, i.e. poppy farming. In the same year, the company acquired a brand new manufacturing site in New Jersey, equipped with special suites for the manufacture of controlled substances finished dosages.

Last week, the company acquired a US-based registered narcotic API importer and producer. All these acquired units together will help the company to increase its presence in controlled substances due to vertical integration and help it to become an active player in the pain management segment in the US.

FINANCIALS:

The company’s net sales and profits have tripled in the past four years since FY05. Net sales have witnessed a compound annual growth rate (CAGR) of 27% to Rs 3,356.5 crore during the past five years. Likewise, the company’s profit has recorded a much faster CAGR of 43%.

The company, on an average, has distributed around 23% of its net profits as dividends in the past five years. The 36% growth in dividends has been lower than the growth in profits since FY03. Sun Pharma is in a growth phase and hence, prefers to maintain its payout ratio at around 25% of its profits.

While most pharma companies have been reeling under the pressure of foreign exchange losses on account of their forex borrowings in recent quarters, Sun Pharma has minimal exposure to forex derivatives and does not have any forex borrowings. Hence, it has managed to keep such extraordinary items out of its books. Rather, the company has been enjoying super-normal profits and profit margins of more than 40% since the past year due to 180-day marketing exclusivities on its products in the US.

VALUATIONS:

On a consolidated basis, the company is trading at a priceearnings (P/E) multiple of 10.7. This is attractive considering the valuations of its peers and the company’s historical growth in revenues and profits. Sun Pharma has achieved a very good tradeoff between its risks and returns. Even if the company registers normal growth in profit for FY09, it is still a safe and attractive bet for investors, who can consider picking up this stock on dips.

WELLNESS QUOTIENT

Sun Pharma has established itself as a niche player in the chronic super-specialty therapeutic segments with a focus on the US and Indian generics market The company has always followed a strategy of differentiation, which has paid rich dividends in the past It earns around 55% of its revenues from its international businesses, with the US being its largest market The company’s strategy is to manufacture technically complex generics and it attempts to be the first to market these products Sun Pharma is among the top three players for nearly half of the branded generics products in India It is now eyeing the key generic markets in Europe and is working on complex generic products, including injectibles The company is also developing strength in yet another niche area of controlled substances Its net sales and profits have tripled in the past four years since FY05

Stock views on Jaiprakash Associates, Jubilant Organosys, Bharat Electronics

Bonanza on Jaiprakash Associates - Target Rs 96

Bonanza has recommended a buy rating on Jaiprakash Associates with a target of Rs 96 in its research report. "The company's net sales were at Rs 1380.6 crore versus Rs 942.88 crore. Its other income was at Rs 66.5 crore versus Rs 58.7 crore. Its operating profit was at Rs 306.2 crore versus Rs 265.91 crore. Its OPM % was at 22.18% versus 28.2%. We recommend investors to buy on the counter with a target of Rs 96 in the medium term," says Bonanza's research report.


Emkay Global on Jubilant Organosys - Target Rs 187

Emkay Global Financial Services has maintained its buy rating on Jubilant Organosys with a target price of Rs 187 in its research report. "Jubilant Organosys Q3FY09 revenue was up by 42% to Rs 9.1 billion, in line with our expectations. Robust growth in revenues is driven 54% growth in Pharma and Life science (P&LS) on the back of 81.6% and 49.6% growth in DDDS and CRAMS segment. We maintain BUY with a target price of Rs 187," says Emkay Global Financial Services' research report.


Indiabulls Securities on Bharat Electronics - Target Rs 994

Indiabulls Securities Research has downgraded its rating on Bharat Electronics (BEL) from buy to hold with a target price of Rs 994 in its research report. "Bharat Electronics Limited (BEL)’s Q3’09 revenue moved up a meager 1.8% yoy to Rs. 6.84 billion, compared with a 10.1% yoy growth in the last quarter. Given the slow execution rate in 9M’09, we have reduced our revenue target for FY09 from 8.4% to 6.8%. However, we have upwardly revised our revenue target post FY10 as we believe the current concerns relating to the domestic security should significantly increase the demand for defence and security equipments. Consequently, we have increased our target price from Rs. 816 in our last report to Rs. 994, based on the DCF valuation and assuming a 16.2% WACC and a 5% terminal growth rate. Therefore, we have downgraded our rating from Buy to Hold," says Indiabulls Securities' research report.

Stock views on Jain Irrigation, Ranbaxy, Jubilant Organosys

Karvy on Jubilant Organosys - Target Rs 165

Karvy Stock Broking has maintained its buy rating on Jubilant Organosys with a price target of Rs 165 in its research report.


"Jubilant Organosys Limited (Jubilant) has given clarification (announcement dt.26.02.09) on both FCCBs (Foreign Currency Convertible Bonds) buyback resource funding and discount rate on USD 11.1 million FCCB issue that was bought back earlier. Jubilant has repurchased its FCCB issue worth USD 59.4 million, of which USD 3 million from second issue worth USD 75 million and USD 56.4 million from third issue worth USD 200 million."

"The company has converted total USD 57.04 million, of which, USD 34.7 from first issue worth USD 35 million and USD 22.34 million from second issue worth USD 75 million. We are upgrading our price target by 3.13% to Rs 165 maintaining our PE multiple constant at 6.8x based on FY10E diluted EPS at Rs 24.4. We continue to rate the stock as a "BUY," says Karvy Stock Broking's research report.

Angel Broking on Ranbaxy Laboratories - Target Rs 277

Angel Broking has maintained its buy rating on Ranbaxy Laboratories with target price of Rs 277 in its research report.

"The USFDA has invoked Application Integrity Policy (AIP) on Ranbaxy's Paonta Sahib facility citing that the company has falsified data and results in approved and pending ANDA filed from the facility. Prior on September 16, 2008, the USFDA had issued two warning letters and instituted an Import Alert barring entry of all finished drug products and active pharmaceutical ingredients (API) from Ranbaxy's Dewas, Paonta Sahib facilities due to violation of US current Good Manufacturing Practices requirements."


"The Ranbaxy stock has slipped by 18% post announcement of the USFDA action. We maintain a Buy on the stock, with a Target Price of Rs 277 wherein the Core business is valued at Rs 178 giving it a fair P/E of 16x CY2009E Core Earnings of Rs 11.1, Rs 24 for the Non-Core Income and NPV Rs 75 is ascribed to the FTF opportunities available to the company," says Angel Broking's research report.


IIFL on Jain Irrigation - Target Rs 377

IIFL has recommended a buy rating on Jain Irrigation with target price of Rs 377 in its research report.

"Our recent meeting with JISL’s management indicated that:
(a) the company has scaled back its capex estimates to Rs 1.5 billion annually from Rs 2 billion earlier; and
b) the company’s leverage levels (debt/equity) should decline over the next couple of years, following the company’s scaling back of capex and improvement in working capital conditions.

Furthermore, despite 60% of JISL’s long-term debt being denominated in forex, the rupee’s depreciation does not pose the threat of an imminent cash loss, since most of this is repayable during FY11-13.

The company is in talks with IFC to raise longterm funds of USD 30 million, of which USD 15 million could be in the form of equity (implying dilution of 2.8% at CMP). This should cushion the company’s debt/equity, taking peak net debt/equity to 0.9x. We remain bullish on growth in the micro-irrigation segment and expect 25% earnings CAGR for the company during FY09-11ii. Buy, target price of Rs 377," says IIFL's research report.