Lack of near-term triggers to cap upsides in Aurobindo Pharma

Upsides from capex and investments across segments are at least three years away

The Aurobindo Pharma stock was down 2.74 per cent after its March quarter results missed street expectations. Further, the stock does not have any near term triggers while its valuations are trending higher than its historical average. 

The Q4 disappointment was largely due to the weak show in the European operations which reported a revenue fall of 6 per cent while rest of the world business was down 19 per cent. Revenue from the US, its largest geography, was flat on a sequential basis and up 5 per cent after adjusting for the divestment of the Natrol business.

Though injectables and branded oncology segments saw flattish performance and over the counter business posted steady growth, the company faced pricing pressures in its oral solid business. Its antiretroviral segment, the third largest after the US and European businesses posted a strong 29 per cent growth 

While its global injectables business stood at $395 million at the end of FY21, the company expect this to grow to $650-700 million in the next three years on the back of 54 pending abbreviated new drug applications and 91 approved products, European penems (antibiotic) and oncology injectables, and two additional injectable plants.

In addition to injectables, the company is spending on capex and research and development projects on vaccines, biosimilars and inhalers to drive growth in the long term. Meaningful contribution from these opportunities will however be backended with gains coming in FY24. This means limited room for the company to outperform in the near term. 

Say Kunal Dhamesha and Anas Dadarkar of Emkay Research, “The near-term pipeline seems more commoditized and offers limited room for outperformance on growth and on margin fronts. Moreover, heavy capex for active pharmaceutical ingredients (API) and formulations capacity and API production-linked scheme would also put pressure on free cash flow generation in the near term.” 

Given a muted March quarter performance, near term performance likely to be hampered due to the pandemic and growth opportunities a couple of years away, some brokerages have cut their FY22 earnings estimates by 3-10 per cent. With valuations too at higher than historical averages and little upside from current target prices, investors should await an attractive entry point.