)
After the resolution of all US Food and Drug Administration (FDA)-related issues, Aurobindo’s US growth was expected to be strong, led by the re-launch of cephalosporins (anti-bacterial class of drugs) from unit-VI and market share gains by abbreviated new drug applications (ANDAs) launched during the last 12 months. But the company surprised many with a performance that beat Street expectations. Owing to the upbeat performance and improving revenue growth visibility, analysts are now upgrading their earnings estimates and target prices for the company.
Hitesh Mahida at Fortune Equity Brokers has already upgraded his earnings per share (EPS) estimates for FY14 and FY15 by 36.8 per cent and 23.1 per cent to Rs 30.9 and Rs 37.7, respectively. He has also scaled up the target price from Rs 266 to Rs 377. Sarabjit Kaur Nangra at Angel Broking estimates net sales to record a compounded annual growth rate of 17.4 per cent at Rs 7,970 crore through FY13–15 due to supply agreements in the US and antiretroviral (HIV related drug) formulation contracts. She has a ‘Buy’ rating on stock, with a target price of Rs 362.
Edelweiss analysts, who have also scaled up their earnings estimate at the target price---from Rs 280 to Rs 343---say, “We believe sustainable operational performance will restore confidence over execution, resulting in valuation re-rating. Reiterate ‘Buy’.” On Friday, the stock closed at Rs 260.5 (up 9.27 per cent) on BSE, after hitting a 52-week high of Rs 264.8, after the announcement of its results for the quarter ended September. On Monday, the stock touched a year’s high of Rs 274, before closing at Rs 268.45. Given the target prices, there is room for further upside.
Sep quarter results surprise
Revenues, at Rs 1,914 crore (up 27.6 per cent year-on-year and 11.6 per cent sequentially), were clearly ahead of expectations of Rs 1,811 crore, largely led by robust US formulations sales growth of 72 per cent at Rs 731 crore. A favourable exchange rate, better product mix and consistent improvement in capacity utilisation, after the company resolved the manufacturing issues with US FDA, helped post earnings before interest, tax, deprecation and amortisation of Rs 438 crore and margins of 22.9 per cent; these beat estimates of Rs 325 crore and 17.9 per cent, respectively. While margins improved 622 basis points annually and 497 basis points sequentially, net profit, at Rs 235 crore, was higher than the estimate of Rs 169 crore.
Robust growth in the US is likely to maintain its momentum. The company’s management expects growth in its US business to exceed 20 per cent in dollar terms. Analysts as Mahida believe high growth in the US will continue, as cephalosporin re-launches from unit-VI haven’t reached their potential highs. While the company clocked $4-5 million from cephalosporin sales in the September quarter and $8 million in first half of FY14, it expects to record $25 million in sales from the cephalosporin portfolio in FY14.
Growth in the US is likely to be further driven by the injectables portfolio. After the US FDA approval for unit-IV (specialised injectables-producing site), more ANDA approvals are expected. The company is expected to launch three injectables in the next 30-45 days, and these will address a cumulative market size of $68-80 million. Notably, all these three products are seeing a shortage in the US. While Aurobindo expects its injectable filings to cross the 100-mark in the next six months, against the current 43, analysts estimate injectable sales at $33 million and $45-50 million in FY14 and FY15, respectively. Reports suggest while the current monthly run for injectables from unit-IV is about $3 million, it may stand at $8-10 million in the next six-eight quarters. The company has invested around Rs 300 crore in unit-IV and has 36 injectable ANDAs pending approvals.
On a strong footing
The company’s chief executive, Arvind Vasudeva, said their European business had turned profitable in the UK, Germany, Spain and The Netherlands. The Portugal business, however, wasn’t profitable yet, though it was growing at a good pace. Operations in Italy, however, would take time to break even.
At Rs 405 crore, domestic sales grew just 7.9 per cent year-on-year during the quarter. It remains a weak area, dragging overall performance.
