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.

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