Aarti Drugs nears 5-year high; stock rallies 26% in 5 days in a weak market

Analysts believe the firm's API business will continue its growth momentum driven by capacity expansion and gain in market share in existing products

Shares of Aarti Drugs rallied 9 per cent to near five-year high of Rs 813 on the BSE on Thursday in an otherwise weak market on expectation of strong volume growth to continue and reflect in revenue and earnings.

The pharmaceutical firm's stock was trading at its highest level since April 15, 2015. In the past five days, the stock has surged 26 per cent, as compared to 4.4 per cent decline in the benchmark S&P BSE Sensex. The stock hit an all-time high of Rs 874 in April 2015.

In the October-December 2019 (Q3FY20) quarter, Aarti Drugs recorded consolidated quarterly revenue of Rs 474 crore with year-on-year (YoY) growth of 24.6 per cent. The entire 19.4 per cent YoY growth of the API segment was driven by volume growth. Formulation segment revenues grew by around 72 per cent on YoY basis.

The EBITDA (earnings before interest, tax, depreciation, and amortization) margin during the quarter expanded 61 basis points YoY at 14.3 per cent, while absolute EBITDA grew 30 per cent to Rs 67.5 crore. The company's net profit rose 52 per cent to Rs 31.7 crore on YoY basis.

The company expects to improve on its gross margins in the near future due to better efficiencies in production. It recently expanded its anti-diabetic capacity and successfully scaled up its production quantities for the same. As expected, export markets are opening up for the formulation division and it will drive the margins for that division, it said.

“Going forward, we believe API business will continue its growth momentum driven by the capacity expansion and gain in market share in existing products. Formulation business is expected to perform better on all fronts driven by new filings with simultaneous launches and increased capacity utilization. The company is looking to explore the export market, which may bring in additional revenue for the company,” analysts at Indsec Securities and Finance said in Q3 results update.

The Tarapur plant (under import alert) is likely to be re-inspected by the US Food and Drug Administration (USFDA) in the near term as one of its customers filed an ANDA using Aarti’s Drug Master Files (DMF), which would trigger an inspection, according to analysts at Anand Rathi Share and Stock Brokers.

With added capacities in place, the brokerage firm expects the company's volume growth to continue and reflect in revenue and earnings. However, the stock has already crossed its target price of Rs 796 per share.

At 10:34 am, Aarti Drugs was trading 5 per cent higher at Rs 787 on the BSE, as compared to 1 per cent decline in the S&P BSE Sensex. The trading volumes on the counter jumped multi-fold with a combined 356,842 shares changing hands on the NSE and BSE so far.