Near-term growth issues and cost pressure could impact Aurobindo Pharma

While valuations are now attractive, product approvals and progress on the injectable guidance are among key long-term term triggers

Pegged back by a weak showing in the US and EU markets and cost pressures, Aurobindo Pharma delivered a weaker-than-expected performance in the March quarter (Q4). The muted performance and near-term margin outlook led to a downward revision of earnings estimates by up to 15 per cent.

The stock is down 4 per cent from the high touched on Wednesday, and is underperforming the broader market. Its trajectory will depend on the pace of approvals and uptick in the base business.

The company reported a 3.3 per cent year-on-year (YoY) fall in overall sales, largely on account of a 4.5 per cent decline in the US market, which accounted for 47 per cent of consolidated sales. The US sales were lower than expected on account of sharper-than-expected price erosion and lack of meaningful launches.

Though there was 11 per cent price erosion in Q4, for financial year 2021-22 (FY22) it was pegged at 9 per cent. Sales in the European market (27 per cent of revenue), too, was weak, falling 1 per cent, while its growth markets and active pharmaceutical ingredients (API) reported a 15-28 per cent uptick.

The company has guided for double-digit growth in the specialty (injectable) business aided by 15 new launches. After closing FY22 with sales of $438 million, it has retained its guidance of achieving sales of $650-700 million from the segment over the next couple of years on the back of a strong product pipeline. The company has 166 pending abbreviated new drug applications in the US. However, in the near term (next two quarters) there could be pricing pressures for its base business, which, coupled with higher costs, could impact the margins.

Param Desai and Akshaya Shinde of Prabhudas Lilladher Research say: “We expect cost pressures to remain in the near term and margin trajectory should improve from the second half of FY23. However, pick up in US sales hinges on timely niche approvals along with stabilisation of pricing pressure in base business.”

The brokerage believes that the company has multiple growth drivers in place with investments in vaccines, injectables, biosimilars, and the production-linked incentive scheme, which should reflect in its financials from FY24.

At the current price, the stock is trading at an attractive valuation of just under 11 times its FY23 earnings estimate. Most brokerages have a ‘buy’ or ‘accumulate’ rating on the stock. In addition to valuations, Motilal Oswal Research is positive on the company’s robust complex product pipeline comprising injectables/biosimilars, comprehensive product offering in the generics space, and a healthy free cash flow generation. Investors can consider the stock on dips.