12 november 2020 results review 2qfy21 aurobindo pharma

12 November 2020 Results Review 2QFY21

Aurobindo Pharma

HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters

Pipeline progress lifts outlook Recovery in US injectables (+26% QoQ), good performance across markets and

favorable product mix offset increased R&D spend (+200bps QoQ), driving

EBITDA beat of 7%. The progress on complex/specialty pipeline development

remains on track (4 biosimilars are in clinics, vaccines monetization from

FY22/23). We remain positive on Aurobindo’s capabilities to monetize these

opportunities over the next few years. Management also guided for strong

growth outlook (~20%) for the generic injectables business (~11% of revenues)

over the next three years. Despite higher R&D investments (~6% vs. 4.3% in

FY20), company’s endeavor to maintain EBITDA margin is noteworthy.

Balance sheet remains comfortable (net debt/equity at 0.08x). We trim our EPS

forecast by 1-2% over FY21-23e to factor Natrol divestment. Revise TP 1,005/sh.

Maintain BUY.

Steady margins despite higher R&D: Revenues at Rs64.8bn grew by 16%

YoY as strong traction in US (+7% YoY, +4% QoQ, injectables led), ARVs

(+100% YoY, shift towards TLD), RoW (+40% YoY) offset muted growth in

API (+3% YoY). Higher gross margin (+350bps YoY, +180bps QoQ, favorable

product mix) offset increased R&D cost (+235bps YoY, +203bps QoQ) which

led to steady EBIDTA margin of 22.1% (+125bps YoY, -14bps QoQ).

Pipeline update: Generic injectables – to grow from USD380mn to

USD650-700mn in 3 years; Biosimilars – Plans to file 5 products by end of

2022 (3 in EU, 2 in US); Vaccines – Covid vaccine- capacity of 400-450mn

doses to be ready by Mar-Apr 21, bacterial vaccine – PCV to be filed in India

in FY22, viral vaccine – in the clinical phase.

Key call highlights: a) Guidance – R&D at 5.5-6% of sales (ex-biosimilar

phase III trials); Europe biz achieved double digit margins in Q2; injectables

margin – to moderate over time; to maintain growth momentum in US

generics; b) Debt reduction – to be net debt free by FY22, net proceeds from

Natrol divestment to be utilized for strategic initiatives; c) Unit 1, IX, XI, VII

– completed remediation, awaiting FDA response on re-inspection; Aurolife

–will be submitting response by mid Nov; d) Capex – USD180-200mn (excl

PLI investment) to be funded through internal accruals and proceeds from

Natrol divestment.

Maintain BUY, risks: We trim our earnings estimates by ~1-2% for

FY21/22/23e to incorporate Natrol divestment (Jan 2021). We revise TP to

Rs1,005 based on 16x Sep 22e EPS. Key downside risks: higher price erosion

in the US, delay in plant resolution (Unit I, IX, XI, VII, AuroLife) and lower

margin improvement in EU business.

Financial Summary

Summary Q2

FY21

Q2

FY20

% YoY

chg

Q1

FY21

% QoQ

chg FY20 FY21E FY22E FY23E

Net Revenues 64,834 56,005 15.8 59,248 9.4 2,30,985 2,49,592 2,58,487 2,79,014

EBIDTA 14,328 11,675 22.7 13,174 8.8 48,643 54,486 55,575 61,040

APAT 8,016 6,760 18.6 8,070 (0.7) 28,493 32,781 35,044 38,551

Recurring EPS (Rs) 13.7 11.5 18.6 13.8 (0.7) 48.6 55.9 59.8 65.8

P/E (x) 17.3 15.0 14.0 12.8

EV / EBITDA (x) 10.7 8.8 8.1 7.0

RoCE (%) 16.8 16.4 15.2 14.4

Source: Company, HSIE Research

BUY

CMP(as on 12 Nov 2020) Rs 839

Target Price Rs 1,005

NIFTY 12,691

KEY

CHANGES OLD NEW

Rating BUY BUY

Price Target Rs 1,015 Rs1,005

EPS % FY21E FY22E

-2% -2%

KEY STOCK DATA

Bloomberg code ARBP IN

No. of Shares (mn) 586

MCap (Rs bn) / ($ mn) 492/6,588

6m avg traded value (Rs mn) 3,647

52 Week high / low Rs 968/281

STOCK PERFORMANCE (%)

3M 6M 12M

Absolute (%) (10.2) 21.4 91.7

Relative (%) (23.2) (16.8) 84.2

SHAREHOLDING PATTERN (%)

Sep-20 Jun-20

Promoters 52.01 52.01

FIs & Local MFs 13.67 12.56

FPIs 23.01 22.63

Public & Others 11.31 12.80

Pledged Shares 4.86 3.21

Source : BSE

Bansi Desai, CFA

[email protected]

+91-22-6171-7341

Karan Vora

[email protected]

+91-22-6171-7359

Page | 2

Aurobindo Pharma: Results Review 2QFY21

Quarterly Financial Snapshot

INR mn Q2FY21 Q2FY20 % YoY chg Q1FY21 % QoQ chg

Net Sales 64,834 56,005 15.8 59,248 9.4

EBITDA 14,328 11,675 22.7 13,174 8.8

Other Income 472 206 128.8 934 (49.5)

Interest 157 409 (61.6) 211 (25.4)

Depreciation 2,573 2,433 5.8 2,555 0.7

PBT 12,135 8,911 36.2 10,964 10.7

Tax 3,873 2,244 72.6 3,037 27.5

Tax Rate (%) 32 25 6.7 28 4.2

Minority (6) (3) 75.8 1 (680.0)

PAT (Adj.) 8,016 6,760 18.6 8,070 (0.7)

EO Items (66) 128 (151.5) 378 (117.4)

PAT (Reported) 8,062 6,671 20.9 7,806 3.3


Margin Analysis

Margin Analysis Q2FY21 Q2FY20 YoY (bps) Q1FY21 QoQ (bps)

Gross Margins 60.6 57.1 347 58.7 181

Employee Expenses % Net Sales 14.1 13.9 19 15.0 (92)

R&D Expenses % Net Sales 6.4 4.0 235 4.4 203

Other Expenses % Net Sales 25.0 23.0 204 22.1 289

EBITDA Margin (%) 22.1 20.8 125 22.2 (14)

Tax Rate (%) 31.9 25.2 674 27.7 422

APAT Margin (%) 12.4 12.1 29 13.6 (126)


Segmental Quarterly Performance

Sales break-up Q2FY21 Q2FY20 % YoY chg Q1FY21 % QoQ chg

US 31,898 28,355 12.5 31,071 2.7

EU 15,148 14,013 8.1 13,222 14.6

ARV 5,027 2,379 111.3 4,255 18.1

Growth Markets 4,465 3,192 39.9 2,896 54.2

Formulations 56,538 47,939 17.9 51,444 9.9

Betalactam 4,344 5,175 (16.1) 5,003 (13.2)

Non-Betlactam 3,946 2,883 36.9 2,798 41.0

API 8,290 8,058 2.9 7,801 6.3

Gross sales 64,834 56,005 15.8 59,248 9.4


Revenues grew by 16% YoY

driven by strong across

markets.

Gross margins increased

by 350bps YoY and 180bps

QoQ led by favourable

product mix

R&D spends increased to

6.4% of sales (~4.4% in

Q1); company expects to

maintain 5.5-6% run-rate

p.a.

EBITDA margins were flat

QoQ as higher R&D was

offset by higher gross

margin

US biz grew ~4% QoQ

primarily driven by

sequential recovery in the

injectables biz (+26%

QoQ)

Europe recovered (+10%

QoQ, -3% YoY, in cc terms)

from Q1 lows which was

impacted by Covid-led

stocking up

ARV (+100% YoY, cc terms)

growth was led by shift

towards TLD

(tenofovir/lamivudine/dolu

tegravir) from TLE.

Market share in TLD is at

20%

API – Low margin

betalactum business

declined by 16% YoY,

however, non-betalactum

reported strong growth of

37% YoY

Page | 3


Financials Income Statement

Year to March (INR mn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Total Revenues 1,38,961 1,50,899 1,64,998 1,95,636 2,30,985 2,49,592 2,58,487 2,79,014

Growth (%) 14.6 8.6 9.3 18.6 18.1 8.1 3.6 7.9

Material cost 61,575 63,793 67,527 87,126 97,352 98,807 1,02,102 1,10,211

Gross margin (%) 54.6 56.2 59.1 55.5 57.9 60.4 60.5 60.5

Employee Benefits Expense 15,508 17,678 21,308 25,849 32,192 35,570 36,188 39,062

Other Expenses 29,821 34,536 38,277 43,141 52,798 60,728 64,622 68,702

Total expenditure 1,06,905 1,16,006 1,27,113 1,56,116 1,82,342 1,95,105 2,02,912 2,17,974

EBITDA 32,056 34,893 37,885 39,520 48,643 54,486 55,575 61,040

Margins (%) 23.1 23.1 23.0 20.2 21.1 21.8 21.5 21.9

Depreciation 3,926 4,276 5,580 6,680 9,667 9,558 9,861 10,970

EBIT 28,130 30,617 32,305 32,840 38,976 44,928 45,714 50,070

EBIT margin (%) 20.2 20.3 19.6 16.8 16.9 18.0 17.7 17.9

Other income 682 538 1,020 1,157 1,919 2,272 2,601 2,445

Interest 927 667 777 2,626 3,051 962 954 586

PBT 27,225 30,558 32,380 30,138 37,582 45,926 47,427 51,929

Extraordinary Items (EO) -660 71 -168 -1,233 -261 -312 66 -

PBT after EO items 26,565 30,629 32,213 28,905 37,321 45,614 47,493 51,929

Tax 7,444 7,596 8,183 7,269 9,135 12,845 11,840 12,982

Tax rate 28.0 24.8 25.4 25.1 24.5 28.2 24.9 25.0

Minority Interest -39 -55 -34 -30 137 519 497 396

Reported PAT 19,820 23,017 24,231 22,899 28,310 32,562 35,090 38,551

Adj. PAT 20,282 22,967 24,349 23,762 28,493 32,781 35,044 38,551


Balance Sheet


Share Capital 585 586 586 586 586 586 586 586

Reserves & Surplus 72,288 93,133 1,16,218 1,38,322 1,67,518 1,97,971 2,30,952 2,67,394

Shareholders' Funds 72,873 93,719 1,16,804 1,38,908 1,68,104 1,98,557 2,31,538 2,67,979

Minority Interest 26 21 18 16 1 -5 -14 -18

Other long term liabilities

Long Term 7,428 1,814 4,512 1,800 - - - -

Short Term 42,983 31,827 43,187 67,862 55,620 40,620 27,495 14,370

Total Debt 50,411 33,641 47,700 69,662 55,620 40,620 27,495 14,370

Deferred Tax Liability (net) 1,060 758 2,353 2,813 3,025 3,025 3,025 3,025

Total Equity and Liabilites 1,24,369 1,28,139 1,66,875 2,11,398 2,26,750 2,42,196 2,62,043 2,85,356

Net Block 41,797 48,338 65,207 84,749 93,965 80,657 85,596 88,626

Capital WIP 8,481 14,581 15,830 16,685 19,859 19,859 19,859 19,859

Current Assets 1,03,981 93,450 1,23,634 1,55,389 1,66,259 2,08,643 2,28,196 2,55,300

Inventories 40,561 43,305 58,584 72,456 76,999 92,315 95,605 1,05,503

Receivables 46,067 27,653 30,844 34,138 43,152 46,499 48,157 53,516

Cash & Bank Balances 8,003 5,135 12,616 19,572 28,422 51,929 66,299 77,888

Other Curr Assets & Advances 9,350 17,357 21,590 29,223 17,687 17,900 18,135 18,393

Current Liabilities 34,833 34,355 44,177 53,145 62,514 76,144 80,789 87,611

Sundry Creditors 24,570 24,883 26,274 26,771 28,969 39,661 41,075 44,342

Provisions 10,263 9,473 17,903 26,374 33,545 36,483 39,714 43,269

Net current assets 69,148 59,095 79,456 1,02,243 1,03,745 1,32,499 1,47,407 1,67,689


Page | 4


Cash Flows


Net Profit Before Tax 27,443 30,608 32,412 30,914 37,430 45,926 47,427 51,929

Depreciation 3,924 4,276 5,580 6,680 9,667 9,558 9,861 10,970

Other non-cash items 951 -472 -230 1,460 1,245 437 448 186

Cash flow before WC changes 32,318 34,413 37,762 39,053 48,342 55,921 57,736 63,085

WC changes -10,794 6,110 -10,690 -14,845 2,509 -5,247 -537 -8,694

Taxes paid -7,326 -7,737 -7,524 -7,698 -7,298 -12,845 -11,840 -12,982

Others

Cash flow from operations 14,198 32,786 19,548 16,510 43,554 37,829 45,358 41,409

Net capex -15,657 -16,846 -12,406 -15,369 -14,121 3,750 -14,800 -14,000

Others 1,205 -1,024 -7,163 -13,657 -1,556 - - -

Cash flow from investing -14,452 -17,870 -19,570 -29,026 -15,676 3,750 -14,800 -14,000

Equity capital issues 72 67 2 1 2 - - -

Borrowings (net) 6,033 -17,279 12,022 22,304 -15,300 -15,000 -13,125 -13,125

Dividends paid -1,616 -1,372 -2,641 -1,599 -1,884 -2,109 -2,109 -2,109

Interest expense -835 -568 -742 -1,515 -1,266 -962 -954 -586

Others 41 0 304 0 -1,024 0 - -

Cash flow from financing 3,695 -19,153 8,945 19,191 -19,472 -18,072 -16,188 -15,820

Net Increase/(Decrease) in Cash and Equivalents 3,441 -4,237 8,924 6,674 8,405 23,507 14,371 11,588

Opening cash balance 4,038 7,435 3,196 12,099 18,756 28,422 51,929 66,299

Closing cash balance 7,479 3,198 12,120 18,774 27,161 51,929 66,299 77,888


Key Ratios

Year to March FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

PROFITABILITY (%)

GPM 54.6 56.2 59.1 55.5 57.9 60.4 60.5 60.5

EBITDA Margin 23.1 23.1 23.0 20.2 21.1 21.8 21.5 21.9

APAT Margin 14.6 15.2 14.8 12.1 12.3 13.1 13.6 13.8

RoAE 32.6 27.6 23.1 18.6 18.6 17.9 16.3 15.4

RoIC (or Core RoCE) 18.4 18.2 16.4 13.2 13.5 13.8 13.6 13.7

RoACE 18.8 18.5 16.9 13.6 14.1 14.5 14.4 14.4

EFFICIENCY

Tax Rate (%) 27.3 24.9 25.3 24.1 24.3 28.0 25.0 25.0

Fixed Asset Turnover (x) 2.8 2.4 2.0 1.9 2.0 2.5 2.5 2.6

Inventory (days) 107 105 130 130 122 135 135 138

Debtors (days) 121 67 68 68 69 68 68 70

Payables (days) 65 60 58 50 40 58 58 58

Working capital days (X) 163 111 140 148 151 145 145 150

Net Debt/EBITDA (x) 1.3 0.8 0.9 1.3 0.6 -0.2 -0.7 -1.0

Net D/E (x) 0.6 0.3 0.3 0.4 0.2 -0.1 -0.2 -0.2

Interest Coverage (x) 30 46 42 13 13 47 48 85

PER SHARE DATA (Rs)

Adj. EPS 34.7 39.2 41.6 40.6 48.6 55.9 59.8 65.8

Dividend 2 3 3 3 3 3 3 3

Book Value 125 160 199 237 287 339 395 457

VALUATION

P/E (x) 24.2 21.4 20.2 20.7 17.3 15.0 14.0 12.8

P/BV (x) 6.7 5.2 4.2 3.5 2.9 2.5 2.1 1.8

EV/EBITDA (x) 16.6 14.9 13.9 13.7 10.7 8.8 8.1 7.0

EV/Revenues (x) 3.8 3.4 3.2 2.8 2.2 1.9 1.8 1.5

OCF/EV (%) 2.7 6.3 3.7 3.0 8.4 7.9 10.0 9.7

FCF/EV (%) -1.5 -2.6 -0.1 0.6 2.5 11.6 11.4 14.9

Dividend Yield (%) 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4


Page | 5


Rating Criteria

BUY: >+15% return potential

ADD: +5% to +15% return potential

REDUCE: -10% to +5% return potential

SELL: > 10% Downside return potential

Date CMP Reco Target

13-May-20 691 BUY 790

5-Jun-20 759 BUY 835

28-Jul-20 791 BUY 835

13-Aug-20 881 BUY 980

29-Sep-20 803 BUY 1,015

12-Nov-20 839 BUY 1,005

RECOMMENDATION HISTORY

250

350

450

550

650

750

850

950

1,050

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-20

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Aurobindo TP

Page | 6


Disclosure:

We, Bansi Desai, CFA and Karan Vora, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research

report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this

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the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material

conflict of interest.

Any holding in stock –No

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12 november 2020 results review 2qfy21 aurobindo pharma

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