Buy Aurobindo Pharma, target price Rs 870: ICICI Securities

ICICI Securities maintains a buy rating to Aurobindo Pharma with a target price of Rs 870 based on 14 times FY22E earnings.

Aurobindo Pharma’s Q4 performance was above the brokerage estimates of revenue/ EBITDA/ adjusted PAT by 5.1 per cent/13.1 per cent/21.0 per cent respectively. Revenues grew 16.4 per cent year on year to Rs 61.6 billion against brokerage estimate of Rs 58.6 billion).

Aurobindo reported an EBITDA margin of 21.8 per cent, a jump of 180bps year on year and 130 bps quarter on quarter, primarily driven by better gross margin. Gross margin improved 420 year on year and 190bps quarter on quarter with revenue mix incorporating higher US sales and lower API business. The brokerage expects the EBITDA margin to remain stable around 21-22 per cent considering higher operating expenses. Adjusted PAT grew 40.3 per cent driven by improved margin, lower interest cost and reduced effective tax rate.

Investment Rationale

The brokerage expects Aurobindo to register 9.0 per cent revenue and 12.4 per cent PAT CAGRs over FY20-FY22E with EBITDA margin stable around 21-22 per cent. Positive surprise was debt reduction of $87 million in the fourth quarter of FY20 to $359 million from $446 million quarter on quarter, taking cumulative net debt reduction to $365 million for FY20.

As the acquisition of Sandoz has been called-off, the brokerage expects net debt reduction to continue and the company could become debt free by FY22E.

The brokerage has raised its earnings estimates by 5-6 per cent to factor in higher revenue in US & emerging markets with better gross margin. It maintains buy rating on the stock with a revised target price of Rs870/share (earlier Rs824/share).

Key downside risks: regulatory hurdles, currency volatility and delay in US launches.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 6063.40 crore, up 4.55 per cent from last quarter sales of Rs 5799.44 crore and up 16.56 per cent from last year's same quarter sales of Rs 5201.98 crore. The company reported net profit after tax of Rs 868.30 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 52.01 per cent stake in the company as of March 31, 2020, while FIIs held 22.26 per cent, DIIs 12.45 per cent and public and other 13.16 per cent.