Aurobindo Pharma

Long-term investments can be considered in the stock of Aurobindo Pharma, a leading API (active pharmaceutical ingredient) and formulations manufacturer.

Improving financial performance, likely ramp-up in MNC contracts including the long-term supply agreement with Pfizer and a sales mix tilted towards high-margin formulations business, suggest healthy growth potential for the company.



At the current market price of Rs 850, the stock trades at an attractive valuation of about 9 times its likely FY11 per share earnings, at a discount to both the market as well as the sector.

For the coming year, the company has guided towards a revenue growth of over 22-23 per cent. This appears achievable given its strong product pipeline and the likely ramp-up in revenues from the Pfizer deal. During the year, the company had filed 22 abbreviated new drug applications in the US, taking its cumulative filings to 169. It had also filed 100 dossiers in Europe. Aurobindo has managed to grow it revenues at a compounded rate of over 21 per cent in the last four years. Profit growth during the same period was higher at 68 per cent, helped by significant expansion in operating margins (currently at 23 per cent from 10.5 per cent in FY06).

Aurobindo has over the years built up its strength in the high-margin formulations business. This explains its margin expansion as the company was traditionally a strong player in semi-synthetic penicillins (SSP) and cephalosporins only. The formulations business now accounts for little more than half its revenues and is touted to be its growth driver; its contribution was just about 11 per cent in FY05. Margins may also get a lift from improving capacity utilisation and geographic mix, as sales to developed markets can be expected to ramp up over the years. Sales in US and Europe have grown from over 23 per cent of revenues in FY09 to 31 per cent in FY10. This could further increase helped by the increasing supplies to Pfizer and growing number of product approvals.

As for its outstanding FCCBs, while the first tranche due for conversion at Rs 522 may get converted (outstanding $23.06 million only), the remaining debt that is convertible in two tranches in May 2010 at Rs 879.1 ($33 million) and Rs 1014.1 ($106.2 million) could pose a challenge. However, improving cash flows from the Pfizer deal and operations may perhaps help the company build its cash bank in case it has to redeem the debt. Besides with a debt:equity of 1.2, the company may also be a position to tap other financing options to partly fund the redemptions if need be.

via BL