Strong Q4 performance, debt reduction show Aurobindo Pharma in good health

Despite an over 150 per cent rise since March lows, the stock can see more gains

Aurobindo's strong performance for the quarter ending March 2020 (Q4FY20) was driven by good execution across geographies and business segments. Revenues at Rs 6,158 crore grew 16.4 per cent year-on-year beating the consensus estimate of Rs 5,938 crore.

The US business, which contributes almost half to revenues, was the highlight and set the tone for the performance beat. The 20.5 per cent growth in the US was remarkable given last year's high base and absence of big product launches, which also suggests that it was entirely driven by base business, say analysts. Drug shortages in the US and channel re-stocking (as in case of peers) may have also benefited Aurobindo. For example, the 10 per cent sequential growth in sales of oral solids is likely to have been driven by higher channel re-stocking, point out analysts. The US growth, in fact, was better than many peers such as Lupin and Sun Pharma, which posted a y-o-y decline in North American sales.

European sales, now more than fourth of revenues, too, grew by 26 per cent. Credit Suisse says that Europe had a good double-digit constant currency growth, even after adjustment of acquisition of Apotex Inc's operations in five European countries. Europe has become a consistent growth driver, points out Ranvir Singh at Sunidhi Securities, which is a great positive, he says. The company has continued driving European sales by turning around acquisitions, including Actavis' portfolio and some other smaller Portugal-based businesses, by transferring manufacturing to India.

While growth markets and anti-retroviral products (for HIV treatment) contributed just 6 per cent each to revenue, they too, posted over 30 per cent growth. Active pharmaceutical ingredient (API) was the exception, with sales down 17.5 per cent. Analysts say, if companies have higher formulation supply options, the low-margin API sales usually decline. However, higher formulation and specially developed market sales are positive for margins.

Gross margins at 59.4 per cent were the highest in the last 10 quarters, led by better product mix – high US growth, lower API sales, new ARV tenders at higher margin, according per analysts.

Operating profit at Rs 1,342.4 crore grew 26.6 per cent year-on-year beating estimate of Rs 1,200 crore – margins at 21.8 per cent grew 180 basis points. Net profit at Rs 850 crore surged 45.2 per cent, and came significantly ahead of Rs 700 crore estimated by analysts.

The fall in net debt was another key positive. Net debt declined by $87 million in Q4, and halved during FY20 to $359 million ($724 million in FY19). Net debt-equity ratio is now at 0.16, and net debt/Ebitda has improved from 1.27x in FY19 to 0.56x in FY20. The company having called off the $1 billion deal with Sandoz in the US earlier, also bodes well as it would have stretched Aurobindo's balance sheet.

Analysts at Emkay Research say that strong execution and debt reduction should continue to drive the stock’s outperformance and Aurobindo is one of their top large cap picks. Some analysts though believe that new drug launches are necessary to push up growth rates on a large revenue base.

Meanwhile, the company also received OAI (official action indicated) classification for a US facility, which however contributes only two per cent to revenues. Analysts say that the earlier clearance to Aurobindo’s injectables facility (Unit IV) in India has removed the overhang.

The stock, which has gained more than 150 per cent from March lows post reduction in regulatory overhang and improved growth prospects, was up 1.1 per cent on Thursday. The results were announced on Wednesday evening. Analysts, however, say that at about 17 times FY21 estimated earnings, it is still trading at a discount to peers.