research retail equity research aurobindo pharma ltd....

Well placed to monetise the product pipeline…

Aurobindo Pharma (Auro) is one of the largest vertically integrated pharmaceutical companies with API (active pharmaceutical ingredient) integration for over 75% of its products. Over the past few years, the company has drastically shifted its focus from APIs business to generic formulations.

US business (44% of the total revenues) to grow at 21.6% CAGR over FY16-18E on account of key launches and ramp up in production from Natrol acquisition (Nutritional products).

The company is expected to launch 30-40 products (including high margin products in Injectables, Controlled substances) which have a market size of USD19bn.

The EBITDA margin of Actavis business (witnessed turnaround in FY16) is expected to further expand as the company shifts its manufacturing base from Europe to India.

APIs integration allows Auro to roll out new products quickly thus, offsetting the impact of price erosion.

We initiate Auro Pharma with a “BUY” rating valuing the stock at 18.5x FY18E EPS arriving at a target price of Rs924.

13th June, 2016

Transformation from API driven model to generic formulations Since FY13, the company has drastically shifted its business focus from being a mere API supplier to a formulations player and started filing complex products in the US. This strategic shift in business led to significant improvement in earnings and scale up of revenues. Formulations contribution increased from 56% in FY13 to 79% in FY16 and is expected to increase to 83% of the total sales by FY18E.

Contribution of US sales to surge from 44% in FY16 to 48% in FY18E The company‟s total filed and approved ANDAs (Abbreviated New Drug Application) grew at CAGR of 13.6% & 15.9% respectively over FY12-16. The US product basket is impressive with 398 ANDAs including 215 final approvals, 36 tentative approvals and 147 pending approvals. We expect strong growth in US market on account of ramp-up of existing products and upcoming launches (market size of USD6.7bn). Hence, we expect US business to register CAGR of 21.6%over FY16-18E.

Europe: Turnaround of Actavis acquisition Auro acquired loss making Actavis‟ Europe product portfolio in 2014. It has successfully managed to turnaround Actavis in FY16 by shifting manufacturing base from Europe to India. Auro has already transferred 32 products to its Indian facility and is targeting to shift 50% of Actavis‟ products by FY18E. In FY16, Actavis reported mid-single digit EBITDA margin and the management has guided for a high single digit margin by FY18E.

Valuations - We expect revenues and PAT to grow at a CAGR of 16% and 21.4% respectively over FY16-18E. Further, we are factoring 150 bps gain in EBITDA margin to 24.6% by FY18E on account of new launches and improved operating performance of Actavis. Hence, we initiate Aurobindo Pharma with a BUY rating with a target price of Rs924 at 18.5x FY18E EPS.

RETAIL EQUITY RESEARCH

Aurobindo Pharma Ltd. Rating as per Large cap 12months investment period Pharmaceuticals

BSE CODE:524804 NSE CODE: AUROPHARMA CMP Rs745 TARGET Rs924 RETURN 24%

Bloomberg CODE: ARBP:IN SENSEX: 26,636

Company Data

Market Cap (cr) 43,592

Enterprise Value (cr) 47,570

Outstanding Shares (cr) 59

Free Float 46%

Dividend Yield (%) 0.6

52 week high 892

52 week low 582

6m average volume (units in lacs) 23

Beta 1.3

Face value 1.0

Shareholding % Q2FY16 Q3FY16 Q4FY16

Promoters 53.9 53.9 53.8

Public 46.1 46.1 46.2

Others - - -

Total 100 100 100

Price Performance 3mth 6mth 1Year

Absolute Return 2.9 (7.4) 14.5

Absolute Sensex 8.2 5.5 (0.8)

Relative Return* (5.2) (12.9) 15.2

*over or under performance to benchmark index

Y.E Mar (Rscr) FY16 FY17E FY18E

Sales 13,896 16.187 18,685

Growth (%) 14.7 16.5 15.4

EBITDA 3,206 3,942 4,587

EBITDA Margins% 23.1 24.4 24.6

PAT Adj. 1,982 2,451 2,922

Growth (%) 25.8 23.7 19.2

Adj.EPS 33.9 41.9 49.9

Growth (%) 25.8 23.7 19.2

P/E 22.0 17.8 14.9

P/B 6.2 4.7 3.6

EV/EBITDA 14.8 11.9 9.8

ROE (%) 32.5 29.9 27.3

D/E 0.6 0.4 0.2

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AUROPHARMA Sensex (Rebased)

COMPANY INITIATING

REPORT

GEOJIT BNP PARIBAS

Research

GEOJIT BNP PARIBAS Research COMPANY INITIATING REPORT

BUY

Valuations Currently, Auro is trading at 18x FY17E & 15x FY18E earnings which is above its historical average (last 5yr Avg. 1yr Fwd P/E 13). Strategic shift in the business from APIs to Formulations led to re-rating of the stock since FY14. Formulations contribution increased from 56% in FY13 to 79% in FY16 and is further expected to increase to 83% of total sales by FY18E. Hence, we initiate Auro with a BUY rating with a target price of Rs924 based on 18.5x (in line with past 2yr avg. 1yr Fwd P/E) FY18E earnings.

P/E one year forward

Source: Company, Geojit BNP Paribas Research *SD-Standard Deviation

Revenue to grow at CAGR of 16% with EBITDA margin expansion of 150bps We expect Auro‟s revenue to grow at a CAGR of 16% driven by key launches in the US. Further, we expect 150bps improvement in EBITDA margin over FY16-18E led by high margin complex product launches & cost efficiencies due to relocation of manufacturing base from Europe to India. As a result, we expect EBITDA and PAT to grow at a CAGR of 19.6% and 21.4% respectively over FY16-18E.

Revenue to grow at 16% CAGR over FY16-FY18E

Source: Company, Geojit BNP Paribas Research

EBITDA & PAT margin to improve by 150bps and 130bps respectively


Return ratios trend


Healthy balance sheet The company is expected to deleverage its balance sheet on account of strong free cash flow generation to the tune of Rs2,260cr over FY17-18E. This will reduce the D/E ratio from 0.6 in FY16 to 0.2 by FY18E. Working capital cycle remains stable at 142 days in FY16 (143 days in FY15) with receivables stands at 108 days (105 in FY15), inventory stands at 242 days (239 in FY15) and payables stands at 139 days (125 days in FY15). We expect ROCE to improve by 210bps to 29.1% on account of margin improvement while ROE is declining as a result of lower leverage.

Investment Rationale… Robust product pipeline to drive US growth at a CAGR of 21.6% over FY16-18E US generics has been the growth driver for the company over the past three years and is the largest contributor to the company's revenues and profitability. US formulations contributed 55% to the total formulations revenue and 44% to overall revenues in FY16. US business grew at a stellar 39% CAGR over FY11-16 benefitted by the company‟s strategy to focus on formulations instead of APIs. The US product basket is impressive with 398 ANDAs including 215 final approvals, 36 tentative approvals and 147 pending approvals (including 37 injectables). During FY16, the company filed 22 ANDAs with USFDA and received approval for 58 (49 final, 9 tentative). Of 49 approvals, 28 products have been launched. The company‟s total filed and approved ANDAs grew at CAGR of 13.6% & 15.9%, respectively over FY12-16. The company is expected to launch 30-40 products in the US in FY17. Additionally, it has also received approval for generic Nexium (used to treat symptoms of gastro esophageal reflux disease) in April 2016 and is expected to be launched in H2FY17 (market size of USD4.2bn). Therefore, we expect US sales to grow at 21.6% CAGR over FY16-18E.

Auro enjoys the benefits of API integration A large product basket and competitive cost structure (backward integration in 75% of its products) make it an ideal supplier for customers. Moreover, being the largest vertically integrated player with huge API capacity allows it to act on any shortage situation in the market.

Injectables review progressing well AuroMedics (markets injectable products in USA) is experiencing a significant FDA activity with respect to the review and approvals on filed ANDAs. Further, the company has filed 79 ANDAs with USFDA under injectables segment, of which, 42 have already received approvals. In FY16, Auromedics reported sales of USD95mn (10% of US sales) an increase of 39% YoY. Moreover, it is expected that USFDA would accelerate the pending ANDAs approval process benefitting the likes of Auro owing to its huge pipeline.

US Revenue to grow at 21.6% CAGR over FY16-18E


Traction in Specialty products According to industry reports, the global market for cancer drugs could reach USD147bn by 2018. Sales of generic oncology drugs are expected to be around USD20bn by 2018, of which, developed markets will account for lion‟s share of the market. To capture this market, the company acquired 60% stake in Eugia in FY14. The company develops and markets niche Hormonal and Oncology generic formulations for the regulated markets. Currently, the company is working on 15 Oncology products. The portfolio of oncology and hormonal products are at an advanced stage with potential launches in 2017 & 2018.

Increasing demand for Controlled substances The company supplies Controlled substances in the US market through its subsidiary (Aurolife) and it contributes 15% to US formulations. Aurolife continues to witness rising demand from government. The company has sixteen ANDA filings for Controlled substances (with an addressable market of USD3bn), pending with the USFDA.

Natrol acquisition to compliment the US business The company acquired the assets of nutritional supplement maker Natrol Inc. for USD132.5mn in 2014. Natrol manufactures and sells quality nutritional supplements in the US and select international markets. During FY16, Natrol Inc. posted sales of USD110mn (12% of US sales) an increase of 13% YoY. Natrol acquisition has fast tracked Aurobindo‟s entry into the nutraceuticals markets with niche and differentiated products. Currently, the company is focusing on enhancing Natrol‟s product portfolio and market share. We expect Natrol business to grow at a CAGR of 14.5% over FY16-18E.

ANDAs pipeline

Source: Company, Geojit BNP Paribas Research ANDAs filed by Therapeutic area with total market size of USD77bn


Key ANDAs pipeline

Source: Company, Geojit BNP Paribas Research Europe: Expansion through Acquisitions Aurobindo has expanded its presence in Europe by acquiring Milopharm in 2006, Pharmacin in 2007 and Actavis in 2014. Actavis business is spread over 7 countries in Europe – France, Germany, Netherlands, United Kingdom, Spain, Italy, and Portugal. Actavis acquisition brought a pipeline of 1200 products and 1,250 dossier license rights. Actavis acquisition has

provided front end infrastructure in four segments including generics, branded products, over-the-counter products and generics tenders. Further, this has strengthened the company‟s presence in Western Europe (with full-fledged sales force) and has provided Auro with ready hospital market to launch its own injectable and specialty portfolio. Turnaround of Actavis acquisition After Actavis acquisition in 2014, the sales contribution from Europe has increased from 8% in FY14 to 21% in FY16. Further, the company is expected to leverage its ability to source lower cost APIs by shifting manufacturing base from Europe to India. This will significantly improve the profitability of business in the coming years. The company has already transferred 32 Actavis products to its Indian facility and targeting to shift 50% of products by FY18. Acquired business reported mid-single digit EBITDA margin in FY16 and the management has guided for a high single digit operating margin by FY18.

While, Actavis acquisition will strengthen its position in key therapy areas of CNS (Central nervous system), Dermatology, Digestives, CVS (Cardio vascular system), Respiratory and Anti-infectives, it also offers huge growth potential for Auro as the penetration of generics is lower in Italy, Spain & France. We expect Europe business to grow at steady pace of 7.5% CAGR during FY16-18E on account of consolidation in the medium term.

Revenue to grow at CAGR of 7.5% during FY16-18E


ARVs: New launches to drive revenues & margin ARVs (Antiretroviral) business contributed 8.5% to overall revenue in FY16 and grew at a CAGR of 12% over FY11-16. Contribution of low margin ARVs business to total sales declined from 15.5% in FY11 to

Molecule Brand Sales (USD mn)

Rosuvastatin Crestor 3,160

Emtricitabine Truvada 2,000

Atazanavir Reyataz 770

Tenofovir Disporoxil Viread 570

Abacavir Epzicom 490

Palonosetron Aloxi 450

Atomoxetine Strattera 380

Paricalcitol Zemplar 300

Dexmedetomidine Precedex 150

Tygecycline Tygacil 130

8.5% in FY16 as a result of company‟s focus on US formulations. The company provides cost effective generic version of ARV products catering to more than 100 countries. Currently, the company is focusing on global tenders floated by Multi-Lateral organizations and govt. agencies. The company has filed an ANDA application for Dolutegravir 50mg (DTG) with USFDA under the PEPFAR (President's Emergency Plan for AIDS Relief) program and is currently developing a Triple drug combination (high margin products) containing DTG (Market size USD2bn in 2017). WHO announced DTG as a first line reserve drug in its 2015 HIV treatment guidelines. Currently, it has filed 38 ANDAs in ARVs segment with an addressable market size of USD4.8bn. We expect Dolutegravir launch (sales to begin in CY2017/FY2018) and increasing demand from multi-lateral organizations globally to drive revenue growth and improve margins of the segment going forward. Hence, we expect ARV business to grow at a CAGR of 25% during FY16-18E.

Key ARV products


ARVs revenue to grow at 25% CAGR over FY16-18E


RoW (Rest of the World) markets: In expansion mode

RoW markets contributed 5% to overall revenue and grew at 22% in FY16. The company‟s focused markets include Brazil, South Africa, Ukraine, Mexico and it is further expanding into select markets of Asia Pacific, Africa and Middle East. The company is planning to

enhance its penetration through local manufacturing units with increased therapeutic focus on Oncology and specialty injectables. We expect RoW business to grow at a CAGR of 22.5% over FY16-18E.

To sustain the current momentum in RoW markets


APIs: Captive consumption to increase significantly

APIs accounted for 20.5% of overall revenues and reported a growth of 6.6% in FY16 due to increasing captive consumption. Currently, the company has 376 API filings focusing on high value specialty products for regulated markets. We expect APIs business to report a muted CAGR of 7% on account of increasing captive consumption (nearly 75%). However, the company is targeting the non-beta lactam (broad class of antibiotics) segment for growth, where it can develop high value specialty products that are complex in nature.

APIs to grow at a CAGR of 5.5% over FY16-18E


1. Efavirenz + Lamivudine + Tenofovir

2. Lamivudine + Zidovudine Tabs

3. Abacavir Sulfate Tabs

4. Lopinavir + Ritonavir Tabs

5. Efavirenz + Emtricitabine + Tenofovir Tabs

6. Zidovudine + Lamivudine + Nevirapine Tabs

Aurobindo Pharma Limited: Company Overview

Aurobindo is one of the largest vertically integrated pharmaceutical companies with API integration for over 75% of its products. Over the past few years, the company has drastically shifted its focus from API business to formulations. Hence, the formulations‟ share in the total revenues has increased from 54% in FY11 to 79% in FY16. The company has strong global presence with more than 80% of its revenues coming from international operations. Further, it owns a network of 19 manufacturing facilities (eight formulations and 11 API & intermediates) in India and abroad. The company has robust product portfolio with high value generics and complex sterile products.

Revenue breakup (FY16)


Business break-up (FY16)


Key Risks: Escalation of Form-483 (Unit VII) and delay in

key ANDA approvals.

USFDA scrutiny against company‟s other manufacturing plants regarding CGMP (Current Good Manufacturing Practices).

Further price erosion in the US business due to channel consolidation and new players.

Consolidated Financials Profit & Loss Account

Y.E March (Rs cr.)

FY14

FY15

FY16

FY17E

FY18E

Sales 8,100 12,121 13,896 16,187 18,685

% change 38.3% 49.6% 14.7% 16.5% 15.4%

EBITDA 2,134 2,564 3,206 3,942 4,587

% change 147.8% 20.2% 25.1% 23.0% 16.4%

Depreciation 313 333 393 512 563

EBIT 1,821 2,231 2,813 3,430 4,024

Interest 310 160 159 136 100

Other Income 22 97 68 65 79

PBT 1,533 2,168 2,723 3,358 4,003

% change 309.6% 41.5% 25.6% 23.3% 19.2%

Tax 363 597 744 907 1,081

Tax Rate (%) 23.7% 27.5% 27.3% 27.0% 27.0%

Reported PAT 1,173 1,576 1,982 2,451 2,922

Adj. - - - - -

Adj. PAT 1,173 1,576 1,982 2,451 2,922

% change 299.1% 34.4% 25.8% 23.7% 19.2%

No. of shares (cr.) 59 59 59 59 59

Adj. EPS (Rs) 20.0 26.9 33.9 41.9 49.9

% change 299.1% 34.4% 25.8% 23.7% 19.2%

DPS (Rs) 3.0 4.5 2.5 3.0 3.5

Cash flow

Y.E March (Rs cr.)

FY14

FY15

FY16

FY17E

FY18E

Pre-tax profit 1,533 2,168 2,723 3,358 4,003

Depreciation 313 333 393 512 563

Changes in W.C (1,057) (842) (576) (919) (999)

Others 200 131 91 71 21

Tax paid (344) (496) (744) (907) (1,081)

C.F.O 644 1,295 1,885 2,116 2,508

Capital exp. (374) (746) (1,442) (1,200) (600)

Change in inv. 1 - - - -

Other invest.CF (445) (663) 68 65 79

C.F - investing (819) (1,409) (1,374) (1,135) (521)

Issue of equity 3 7 65 - -

Issue/repay debt 267 341 126 (700) (1,029)

Dividends paid (60) (180) (146) (176) (205)

Other finance.CF (94) (74) (159) (136) (100)

C.F - Financing 118 93 (114) (1,012) (1,334)

Chg. in cash (57) (21) 397 (31) 653

Closing cash 179 469 834 803 1,456

Balance Sheet

Y.E March (Rs cr.)

FY14

FY15

FY16

FY17E

FY18E

Cash 179 469 834 803 1,456

Accounts Receivable 2,637 3,539 4,172 4,859 5,609

Inventories 2,368 3,611 4,088 4,628 5,264

Other Cur. Assets 448 660 907 1,040 1,184

Investments 20 20 0 0 0

Gross Fixed Assets 4,198 5,459 6,819 8,008 8,808

Net Fixed Assets 2,737 3,718 4,686 5,363 5,599

CWIP 295 407 489 500 300

Intangible Assets 0 0 89 89 89

Def. Tax (Net) -205 -206 -236 -236 -236

Other Assets 807 486 434 456 479

Total Assets 9,284 12,704 15,463 17,501 19,745

Current Liabilities 1,730 3,047 3,747 4,208 4,762

Provisions - - - - -

Debt Funds 3,769 4,451 4,576 3,876 2,847

Other Liabilities 9 24 24 25 26

Equity Capital 29 29 59 59 59

Reserves & Surplus 3,721 5,127 6,998 9,274 11,992

Shareholder‟s Fund 3,750 5,156 7,057 9,333 12,050

Minority Interest 26 26 60 60 60

Total Liabilities 9,284 12,704 15,463 17,501 19,745

BVPS* (Rs) 64.1 88.1 120.6 159.5 205.9 *: BVPS for FY14 & FY15 is adjusted for bonus shares

Ratios

Y.E March

FY14

FY15

FY16

FY17E

FY18E

Profitab. & Return

EBITDA margin (%) 26.3 21.2 23.1 24.4 24.6

EBIT margin (%) 22.5 18.4 20.2 21.2 21.5

Net profit mgn.(%) 14.5 13.0 14.3 15.1 15.6

ROE (%) 36.9 35.4 32.5 29.9 27.3

ROCE (%) 27.2 27.1 27.0 28.0 29.1

W.C & Liquidity

Receivables (days) 116.5 105.3 108.3 108.3 108.3

Inventory (days) 159.7 159.8 159.1 157.1 155.3

Payables (days) 82.7 78.3 86.3 86.4 86.4

Current ratio (x) 3.3 2.7 2.7 2.7 2.8

Quick ratio (x) 1.9 1.5 1.6 1.6 1.7

Turnover &Levg.

Gross asset T.O (x) 2.0 2.5 2.3 2.2 2.2

Total asset T.O (x) 1.0 1.1 1.0 1.0 1.0

Int. covge. ratio (x) 5.9 14.0 17.7 25.2 40.2

Adj. debt/equity (x) 1.0 0.9 0.6 0.4 0.2

Valuation ratios

EV/Sales (x) 5.8 3.9 3.4 2.9 2.4

EV/EBITDA (x) 22.1 18.6 14.8 11.9 9.8

P/E (x) 37.2 27.7 22.0 17.8 14.9

P/BV (x) 11.6 8.5 6.2 4.7 3.6

Recommendation Summary (last 3 years)


Large Cap Stocks; Mid Cap and Small Cap;

Buy - Upside is 10% or more. Hold - Upside or downside is less than 10%. Reduce - Downside is 10% or more.

Buy - Upside is 15% or more. Accumulate* - Upside between 10% - 15%. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute „Accumulate‟ as Buy and „Reduce‟ as Sell.

The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL.

Geojit BNP Paribas Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant

disclosures are available hereunder. However, Geojit BNP Paribas's research desk have reviewed this report for any untrue statement of material fact or any

false or misleading information.

General Disclosures and Disclaimers

CERTIFICATION

I, Abhishek Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views

expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities.

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REGULATORY DISCLOSURES:

Dates Rating Target 13-June-16 BUY 924

Geojit BNP Paribas, 34/659-P, Civil Lane Road, Padivattom, Kochi – 682024 Toll Free Number: 1800-425-5501 / 1800-103-5501, Paid Number: 91 – 0484 – 3911777, Email id: [email protected] Research Entity SEBI Registration Number: INH200000345

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(i) It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein at the time of

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Further, the Research Analyst confirms that:

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