Buy Aurobindo Pharma, target price Rs 880: Motilal Oswal

Motilal Oswal has given a buy rating to Aurobindo Pharma with a target price of Rs 880 based on 13 times 12 month forward earnings. The share price moved down by -0.19 per cent from its previous close of Rs 759.45. The last traded stock price is Rs 758.

Despite slowdown in ANDA approvals due to regulatory hurdles, ARBP delivered better -than - expected earnings on increased market share in existing products. With the VAI classification at Unit-4 and an increasing number of filings from sites under successful compliance, the brokerage expects the pace of launches to improve in the US market going forward. Turnaround in Apotex and continuous effort to better margins in the EU business would further boost overall profitability, says the brokerage.

Investment Rationale

Aurobindo Pharma’s 4QFY20 sales were up 16.4 per cent year on year to Rs 61.6 billion against the brokerage estimate of Rs 58.2 billion). Growth was largely led by: a) US formulations (48.6 per cent of sales; 17 per cent year on year constant currency growth to $413 million) and b) the Europe business (27 per cent of sales; 26 per cent year on year growth). The gross margin at 59.4 per cent was up 290bp year on year due to a superior product mix.

The brokerage raised the company’s EPS estimate for FY20/FY21 by 4.4 per cent/9 per cent, and expects a 9 per cent earnings CAGR over FY20–22, led by new launches and increased market share in key markets (US/EU). Continuing to value ARBP at 13x 12M forward earnings, the brokerage arrived at a price target of Rs 880. It remains positive on Aurobindo Pharma on account of a robust ANDA pipeline, pending approval, as well as a niche product pipeline build-up for the developed markets.

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.