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.

Stock views on Hikal, HCL Technologies, UltraTech Cement

Sunidhi Securities on Hikal - Target Rs 400

Sunidhi Securities & Finance has recommended a buy rating on Hikal with a target price of Rs 400 in its research report.

"Hikal is committed to creating a world class, customer focused, innovative organisation and becoming partner of choice to the life science industry. In its long association, Hikal is supplying agro chemicals and intermediates to the top four global agro- and fine-chemical players such as Pfizer, Syngenta, Bayer and Degussa. The pharma division is now expecting stupendous growth and is very optimistic about contract research and manufacturing services (CRAMS). Hikal wants to establish itself as among the top companies in the world in the CRAMS business. We recommend 'BUY' with a target price of Rs 400 in the medium term, says Sunidhi Securities & Finance's research report.


Anand Rathi on HCL Tech - Target Rs 375

Anand Rathi Securities has maintained its buy rating on HCL Technologies with a target price of Rs 375 in its research report.

"HCL Tech’s US$-revenue grew 7.6%, margin was up 82bps and profit up 52% sequentially. Pricing strength and IMS growth were surprising. The BPO business turned around from the negative to positive growth zone. We maintain our target multiple of 15x average FY11e earnings of Rs25, thus raising our target price to Rs 375. We maintain our Buy rating. In the past, the stock has traded at a 28% discount to Infosys," says Anand Rathi Securities' research report.

Sharekhan on UltraTech Cement - Target Rs 850

Sharekhan has maintained its buy rating on UltraTech Cement with a target price of Rs 850 in its research report.

"Despite the overall slowdown in the economy the revenue of the company on a stand-alone basis grew by an impressive 16% in FY2009. The strong revenue growth was achieved on the back of capacity addition ahead of peers and a revival in the cement demand in the second half of the fiscal year. We maintain our 'Buy' recommendation on the stock with a price target of Rs 850 (valued at EV/tonne of USD87)," says Sharekhan's research report.

Stock views on Divis Labs, South Indian Bank, Tata Tea

Hem Securities on Divis Labs - Target Rs 1370

Hem Securities has initiated a buy rating on Divi's Laboratories with a target price of Rs 1370 in its research report.


"Being a pioneer in the API and CRAMS segment, Divi’s Laboratories has posted tremendous growth over the past few years. With the leadership in dextromethorphan, phenyleffrine, nabumetone and lopamidol, the com-pany is expected to witness surge in its business. Further, with almost completion of massive capex, the company is expected to continue to post excellent financial performance on the back of its successful entry into the high margin nutraceuticals segment. In wake of the growth of the phar-maceutical sector, Divi’s Laboratories Ltd seems to be extremely attrac-tive investment opportunity."


"Presently, the stock is trading at Rs 1088.60 which is at 16.92 times to its earnings and 5.68 times to its book value of Rs 191.72. Since the stock offers good opportunity, we initiate a ‘BUY’ signal on the stock with a target price of Rs 1370 in medium to long term investment horizon ex-pecting an appreciation of about 26% from the current level of Rs 1088.60", says Hem Securities' report

FinQuest Securities on South Indian Bank - Target Rs 120

FinQuest Securities has recommended a buy rating on South Indian Bank, with price target of Rs 120, in its report.

"South Indian Bank is trading at an attractive valuation of 0.7x FY10E ABV. Peer banks like KTK Bank, KVB etc continue to trade at 1x FY10 ABV, although operational parameters are comparable with SIB. We therefore believe that SIB’s valuations will catch up with peer banks. Our target price of Rs 120 for the stock (based on DDM model) discounts 1x FY10E ABV. We recommend Buy on the stock," says FinQuest Securities' report.

KRChoksey on Tata Tea - Target Rs 859

KRChoksey has maintained its buy rating on Tata Tea, with price target of Rs 859, in its report.

"More than 70% revenues and 80% of EBIT come from tea business, which is likely to face margin pressure in FY10 as tea prices are likely to remain firm on account of decline in production by 5%. However, with company planning to leverage its tea & coffee brands in other beverage products would help it to diversify and become a complete beverage company. The company plans to focus on six key geographies - Great Britain and Africa, Europe and Middle East, the U.S., Canada and South America, South Asia and Asia Pacific, innovation and distribution going ahead to integrate the business, take advantage of economies of scale. Its recent launch T!ON - an active drink made from fruit juice, tea extracts and ginseng in Chennai has been performing well. At CMP of Rs 728, we maintain our ‘BUY’ recommendation on Tata Tea with a target price of Rs 859, which gives it an upside potential of 18%. At the CMP, the stock is trading at 5.1x FY10E earnings of Rs 143.8," says KRChoksey's report.