Aurobindo Pharma: Slow but steady

Dutch buy will not propel Aurobindo's turnover in the short term

Aurobindo Pharma appears to be accelerating its presence in the fast-growing European generics market, given the well known pricing pressures in the US. As part of this strategy, the company acquired Netherlands-based generic player Pharmacin International.

Although Aurobindo has not disclosed the cost of this acquisition, but this Dutch company is understood to have a turnover of over euro 6 million (approximately Rs 33 crore) for the year ended December 2006.

In early CY06, other Indian generic players such as Dr Reddy's and Ranbaxy Laboratories had made large-sized acquisitions in Europe, between 2.9 to 4 times enterprise value to trailing sales.

The Dutch acquisition will, however, not aggressively expand Aurobindo's turnover in the short term, considering that in H1 FY07 Aurobindo's net sales were Rs 918.5 crore.

Aurobindo operates in several product segments including cardiovascular, gastroenterological and anti-HIV, which is broadly in tune with the Dutch company which has a presence in CNS, cardiovascular and gasteroenterological segments.

Prior to this acquisition, Aurobindo had also acquired UK-based generics company Milpharm, which has over 100 marketing authorisations.

This Dutch acquisition will give Aurobindo a ready marketing presence in the continental European generics market. In addition, the management will also be keen to leverage operational synergies between Milpharm and Pharmacin International. In the September 2006 quarter, Aurobindo had grown its operating profit margins by 770 basis points y-o-y to 14.4 per cent.

In the next few quarters, Aurobindo's growth is also expected to be driven in two generic segments""simvastatin (branded medication Zocor) for which it has received final approval from US FDA and sertraline (branded medication Zoloft) which will be going off the exclusivity period soon.

Aurobindo is expected to also launch its medications in these two generic market segments, but it is expected to face pricing pressures as several other players could also enter too.

The Aurobindo stock has gained 12.2 per cent over the past three months as compared to a 10.7 per cent rise in the Sensex. Nevertheless, with the stock trading at 27 times estimated FY07 earnings and 20 times FY08 earnings, it is expensive

Automobile: Losing track

The BSE auto index has underpeformed the Sensex for the better part of calendar 2006. While the auto index gained around 30.3 per cent, the Sensex returned nearly 47 per cent.

Only in the last three months did the auto index do somewhat better than the market yielding a return of 29.2 per cent compared with 23 per cent for the Sensex. The key culprits were the two-wheeler makers Hero Honda and Bajaj Auto and commercial vehicle(CV) major Tata Motors.

The trend is not likely to be too different in 2007. Two-wheeler manufacturers have been feeling the heat of higher input costs, which have dented their margins: in the June quarter, Hero Honda saw its operating profit margin slip 120 basis points y-o-y even though it posted a reasonably good sales growth of 20 per cent.

And despite a strong 30 per cent top line growth in the September quarter, Bajaj Auto's operating profit margin slipped nearly 200 basis points to 15 per cent.

So, while demand remains robust, the keen competition will restrict pricing power while costs, including marketing spends on new launches, will continue to impact profitability. Thus, none of these stocks is likely to be a big winner in the near future.

Passenger car sales were strong in 2006 estimated at 19 per cent compared with 7 per cent in 2005 and the momentum should continue given the strong economy. With the diesel version of the Swift, Maruti is poised to tap into the robust demand which doesn't seem to have flagged despite higher fuel prices and interest rates.

However, it will see its share eroded, given the emerging competition. To some extent, the tie-up with Nissan for 200,000 vehicles, primarily for the export market, will help Maruti, but these exports are likely to take off only in FY09.

The stock trades at around 16 times FY08 and is reasonably valued. As for CVs, sales growth""estimated at around 30 per cent in 2006""could taper off somewhat from the new year.

Besides, despite strong top line growth, aggressive pricing continues to eat into the margins for both Tata Motors and Ashok Leyland.

With contribution from Amriteshwar Mathur and Shobhana Subramanian