Street picks Aurobindo Pharma ahead of larger peers on injectibles business

25 approved ANDAs, 115 pending ANDAs likely to be huge growth boosters

Aurobindo Pharma is among the few companies that are confident about growth in the US. It believes launches and higher volume will drive growth there, despite pricing pressure in the base business. The management confidence, in a sector jittery about US prospects, helped the stock rebound from its May 25 low and gain 10.5 per cent since then. 

Its March quarter performance, like peers, was impacted by price erosion in the US. The US formulation sales, contributes 45 per cent to overall revenue, are expected to grow only 1.4 per cent over a year due to pricing pressure in oral solids, which is expected to continue in FY18. However, pending launches and a range of injectable and other complex portfolios are expected to drive revenue and net profit growth. 

Since April 2015, while it has received 110 final Abbreviated New Drug Application (ANDA) approvals, more than 25 are yet to be launched and these together with 115 pending ANDAs should provide strong growth visibility, say analysts at Elara Capital. 

Analysts at Reliance Securities, too, expect Aurobindo's US business to drive growth on the back of ramp-up in injectable products, incremental shifting of focus to the high-growth/high-margin complex segment, new launches and growth in the Natrol business, acquired in 2014.  

The company on Wednesday announced approval for the launch of a drug used in treating attention disorder. Aurobindo along with Glenmark and two more players will be launching generics of this product worth $1.1 billion. 

Europe remains the second important geography for the firm, contributing slightly more than a fifth to revenue. There was some disappointment in the March quarter as European operating income declined 7.8 per cent over a year. Europe saw one-time inventory write-off worth Rs 50 crore and coupled with other exceptional items, its operating profits, too, saw some pressure and margins at 19.8 per cent come lower than 23.1 per cent in the year-ago quarter. 

However, Europe is also likely to see growth and profitability driven by the drug portfolio acquired from Actavis. The company has transferred the manufacture of 69 products from Europe to India, to aid profitability. For supplies to Europe, it has commissioned unit XV in March and strengthened presence in Portugal, where it had made an acquisition in January this year. 

With all this, analysts see valuations at attractive levels but have tweaked their target prices, given the pressure in the US market. Analysts believe the stock is trading at a 25-30 per cent discount to peers. While Motilal Oswal Securities has given a revised target price of Rs 800, Reliance Securities and Elara Capital have pegged their target prices at Rs 700 and Rs 722, respectively, translating to an upside of 22-40 per cent from the current levels.