4QFY2017 Result Update | Pharmaceutical

June 2, 2017

Aurobindo Pharma

BUY

CMP

`580

Performance Highlights

Target Price

`823

Y/E march (` cr)

4QFY17

3QFY17

% chg (QoQ)

4QFY16

% chg (yoy)

Investment Period

12 months

Net sales

3582

3844

(6.8)

3674

(2.5)

Other income

102

46.4

108

(6.0)

Stock Info

Operating profit

662

833

(20.6)

794

(16.7)

Sector

Pharmaceutical

Interest

(2)

Market Cap (` cr)

33,981

Adj. Net profit

532

579

(8.0)

555

(4.0)

Net debt (` cr)

2,593

Source: Company, Angel Research

Beta

1.1

For 4QFY2017, Aurobindo Pharma (APL) posted numbers which were lower than

52 Week High / Low

895/504

expectations on sales, OPM & net profit fronts. On sales front, the company

Avg. Daily Volume

1,01,877

posted sales of `3,582cr (v/s. `4,460cr expected) v/s. `3,674cr in 4QFY2016,

Face Value (`)

posting a yoy de-growth of 2.5%. On the operating front, the EBITDA margin

BSE Sensex

31,138

came in at 18.5% (v/s. 23.4% expected) v/s. 21.6% in 4QFY2016. Consequently,

Nifty

9,616

the Adj. PAT came in at `532cr (v/s. `754cr expected) v/s. `555cr in 4QFY2016,

Reuters Code

ARBN.BO

a yoy de-growth of 4.0%. We maintain our Buy rating on the stock, on the back

Bloomberg Code

ARBP@IN

of attractive valuations.

Results much lower than expectation: On sales front, the company posted sales

Shareholding Pattern (%)

of `3,582cr (v/s. `4,460cr expected) v/s. `3,674cr in 4QFY2016, posting a yoy

Promoters

51.9

de-growth of 2.5%. The formulation sales (`2,879cr) posted a yoy de-growth of

MF / Banks / Indian Fls

16.0

2.9%, while API (`762.8cr) posted a yoy de-growth of 1.5%. On the operating

FII / NRIs / OCBs

24.7

front, the EBITDA margin came in at 18.5% (v/s. 23.4% expected) v/s. 21.6% in

Indian Public / Others

10.7

4QFY2016. While the gross margins came in at 58.0% v/s 55.7% in 4QFY2016,

but a 13.9% and 12.6% rise in the employee and other expenses respectively,

lead to the margin contraction. Consequently, the Adj. PAT came in at `532cr

Abs. (%)

3m 1yr

3yr

(v/s. `754cr expected) v/s. `555cr in 4QFY2016, a yoy de-growth of 4.0%.

Sensex

7.4

16.6

26.1

Outlook and valuation: We estimate the company’s net sales to log a CAGR of

Aurobindo

(14.6)

(26.5)

81.4

14.5% over FY2017-19E to `19,478cr on the back of US formulations, which

will be supplemented through its acquisitions of the Western European

formulation businesses of Actavis and US’ Natrol. We recommend a Buy rating

3-year daily price chart

with a target price of `823.

1,000

800

Key financials (Consolidated)

600

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

400

Net sales

13,651

14,845

17,086

19,478

% chg

13.3

8.7

15.1

14.0

200

Adj. Net profit

1,982

2,302

2,611

3,004

% chg

22.4

16.1

13.5

15.0

EPS (`)

33.9

39.4

44.7

51.4

EBITDA margin (%)

21.7

21.5

22.1

22.0

Source: Company, Angel Research

P/E (x)

16.9

14.6

12.8

11.2

RoE (%)

31.9

27.6

24.7

22.7

RoCE (%)

24.7

23.1

24.3

25.3

P/BV (x)

4.6

3.6

2.8

2.3

EV/Sales (x)

Sarabjit Kour Nangra

2.7

2.4

2.1

1.7

EV/EBITDA (x)

+91 22 3935 7800 Ext: 6806

12.6

11.3

9.4

7.8

Source: Company, Angel Research; Note: CMP as of June 2, 2017

[email protected]

Please refer to important disclosures at the end of this report

Aurobindo Pharma | 4QFY2017 Result Update

Exhibit 1: 4QFY2017 performance (Consolidated)

% chg

Y/E March (` cr)

4QFY2017

3QFY2017

4QFY2016

% chg (YoY)

FY2017

FY2016

% chg (YoY)

(QoQ)

Net sales

3,582

3,844

(6.8)

3,674

(2.5)

14,845

13,710

8.3

Other income

102

46.4

108

(6.0)

366

451

(18.8)

Total income

3,684

3,914

(5.9)

3,782

(2.6)

15,211

14,160

7.4

Gross profit

2,079

2,135

(2.6)

2,048

1.5

8,411

7,548

11.4

Gross margins

58.0

55.5

55.7

56.7

55.1

Operating profit

662

833

(20.6)

794

(16.7)

3,189

2,779

14.8

OPM (%)

18.5

21.7

(14.8)

21.6

21.5

20.3

Interest

(2)

(43.1)

(28.0)

Dep & amortisation

100

111

(10.0)

111

(10.1)

428

392

9.0

PBT

649

793

(18.1)

766

(15.2)

3,061

2,744

11.5

Provision for taxation

117

218

(46.2)

206

(43.2)

760

721

5.4

Net profit

532

575

(7.5)

555

(4.0)

2,301

2,024

13.7

Less : Exceptional items (gains)/loss

MI & share in associates

(0)

(2)

PAT after Exceptional items

532

579

(8.0)

555

(4.0)

2,301

2,025

13.7

Adjusted PAT

532

579

(8.0)

555

(4.0)

2,301

2,025

13.7

EPS (`)

9.1

9.9

9.5

39.3

34.7

Source: Company, Angel Research

Exhibit 2: Actual v/s Estimate

(` cr)

Actual

Estimate

Variation %

Net sales

3582

4460

(19.7)

Other operating income

102

10.1

Operating profit

662

1045

(36.7)

Tax

117

256

(54.3)

Adj. Net profit

532

754

(29.4)

Source: Company, Angel Research

Revenue down 2.5% yoy; lower than our expectation: On sales front, the company

posted sales of `3,582cr (v/s. `4,460cr expected) v/s. `3,674cr in 4QFY2016, a

yoy de-growth of 2.5%. The formulation sales (`2,879.4cr) posted a yoy de-growth

of 2.9%, while API (`762.8cr) posted a yoy de-growth of 1.5%. The US business,

which contributed 45% to the gross sales, witnessed a flat growth.

In the formulation segment, the US (`1,643cr) posted a yoy flat growth of 0.6%,

while Europe (`777cr) & ROW (`197cr) posted a yoy de-growth of 7.6% and

growth of 20.9% respectively. ARV (`262cr) posted a yoy de-growth of 20.2%.

Overall, formulations now contribute around 80% of sales, while the balance is

accounted by APIs. The company has 314 approved ANDAs including 38 tentative

approvals.

During 4QFY2017, the company filed 8 ANDAs with the USFDA, i.e. 5 in the oral

category and 3 in the injectable category. The company received 16 ANDA

approvals from the USFDA including 14 final approvals and 2 tentative approvals

during the quarter.

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

As on 31st March, 2017, on a cumulative basis, the company filed 429 ANDAs

with USFDA and received approvals for 314 ANDAs including 38 tentative

approvals.

Exhibit 3: Sales break-up (Consolidated)

(` cr)

4QFY2017

3QFY2017

% chg (qoq)

4QFY2016

% chg (yoy)

FY2017

FY2016

% chg

Formulations

2,879

3,130

(8.0)

2,966

(2.9)

12,045

11,064

8.9

1643

1745

(5.8)

1634

0.6

6827

6079

12.3

Europe & ROW

974

1043

(6.6)

1004

(2.9)

4033

3777

6.8

ARV

262

342

(23.4)

328

(20.2)

1185

1209

(2.0)

API

763

776

(1.7)

775

(1.5)

3,042

2,893

5.2

SSP

512

525

(2.5)

502

2.0

2043

1866

9.5

Cephs

251

(0.1)

273

(8.1)

999

1027

(2.8)

Total

3,642

3,906

(6.8)

3,741

(2.6)

15,087

13,957

8.1

Source: Company, Angel Research

OPM comes in at 18.5%: On the operating front, the EBITDA margin came in at

18.5% (v/s. 23.4% expected) v/s. 21.6% in 4QFY2016. While the gross margins

came in at 58.0% v/s. 55.7% in 4QFY2016, but a 13.9% and 12.6% rise in the

employee and other expenses respectively, lead to the margin contraction.

Exhibit 4: OPM Trend

24.0

23.0

23.4

21.7

22.0

21.6

22.6

21.0

20.0

19.0

18.5

18.0

17.0

16.0

15.0

4QFY2016 1QFY2017 2QFY2017 3QFY2017 4QFY2017

Source: Company, Angel Research

Net profit lower than estimate: Consequently, the Adj. PAT came in at `532cr (v/s.

`754cr expected) v/s. `560cr in 4QFY2016, a yoy de-growth of 4.9%. The lower

than estimated net profit growth was aided by lower than expected OPM.

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

Exhibit 5: Adj. net profit

620

606

600

585

579

580

562

560

(`cr)

540

532

520

500

480

4QFY2016 1QFY2017 2QFY2017 3QFY2017 4QFY2017

Source: Company, Angel Research

Management takeaways

 At the end of 4QFY2017, the company had filed 429 ANDAs, with 314 final

approvals, and 38 tentative approvals.

 Single-digit price erosion expected in the US in FY2018.

 R&D as % of sales to be 4-5% in FY2018/FY2019.

 Naidupet plant inspection over with zero 483s.

 Capex guidance of US$120mn in FY2018.

 Guided for improvement in EBITDA margin in FY2018.

Recommendation rationale

 US and ARV formulation segments - the key drivers for base business: APL’s

business will primarily be driven by the US and ARV segments on the

formulation front. The company has been an aggressive filer in the US market

with 429 ANDAs filed until 4QFY2017. Amongst peers, APL has emerged as

one of the top ANDA filers. The company has aggressively filed ANDAs in the

last few years and is now geared to reap benefits, even though most of the

filings are for highly competitive products. Going ahead, with US$70bn going

off-patent in the US over the next three years, we believe APL is well placed to

tap this opportunity and is one of the largest generic suppliers. The company

enjoys high market share, as it is fully integrated in all its products apart from

having a larger product basket. Also, the company plans to launch

injectables in the next 2 years, which would drive its growth and profitability.

Going forward, the US business of the company is expected to post a CAGR of

14% over FY2017-19E.

 Acquisitions to augment growth and improve sales mix: APL announced the

signing of a binding offer to acquire commercial operations in seven Western

European countries from Actavis. The net sales from the acquired businesses

were around EUR320mn in 2013 with a growth rate of over 10% yoy. With

this, the European sales of the company would now be ~EUR400mn.

Although these businesses are currently loss-making (by around EUR20mn),

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

APL expects them to return to profitability in combination with its vertically

integrated platform and existing commercial infrastructure.

The acquisition will make APL one of the leading Indian pharmaceutical

companies in Europe with a position in the top 10 in several key markets,

which it plans to leverage to supply or widen its product portfolio through

introduction of its own products, especially high margin products like

injectiables.

Also, in December 2014, Aurobindo USA, spent US$132.5mn to acquire the

assets of Natrol with an agreement to take on certain liabilities. With this

acquisition, the company gets an entry into the nutraceutical markets.

Aurobindo USA believes that Natrol is an excellent strategic fit and provides

the right platform for creating a fully-integrated OTC platform in the USA and

in other international markets. Natrol, which manufactures and sells nutritional

supplements in USA and other international markets, provides Aurobindo

with-strong brand reputation and presence in a variety of attractive

supplement markets. Natrol has a proven performance in the mass market,

health food and specialty channels, and has existing long term relationships

with key distribution and retail partners. It addresses a broad range of

consumers and has an effective growth strategy to expand market penetration.

Outlook and valuation

We estimate the company’s net sales to log a CAGR of 15.1% over FY2016-18E to

`19,478cr on the back of US, which accounts for the largest portion of its product

pipeline. This, along with the recent acquisitions of the Western European

formulation businesses of Actavis and US’ Natrol, has lead APL to become a

~ 80% of sales being accounted by formulations. We maintain our Buy rating on

the stock.

Exhibit 6: Key assumptions

FY2018E

FY2019E

Sales Growth (%)

15.1

14.0

Operating Margins (%)

22.1

22.0

Capex (`cr)

500

Source: Company, Angel Research

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

Exhibit 7: One-year forward PE

900

800

700

600

500

400

300

200

100

10x

15x

20x

Source: Company, Angel Research

Exhibit 8: Recommendation summary

Company

Reco

CMP

Tgt. price

Upside

FY2018E

FY16-18E

FY2018E

(`)

% PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

532

648

21.7

20.9

2.4

11.5

(10.8)

27.5

25.3

Aurobindo Pharma

Buy

580

823

41.9

13.0

2.1

9.5

14.8

24.3

24.7

Cadila Healthcare

Neutral

471

24.5

3.8

17.8

13.5

23.6

27.1

Cipla

Reduce

515

465

(9.7)

21.0

2.4

14.2

12.2

13.9

Dr Reddy's

Neutral

2,520

23.8

2.8

15.2

(13.7)

10.8

13.6

Dishman Pharma

Under Review

301

26.6

2.8

12.7

16.3

13.0

13.5

GSK Pharma*

Neutral

2,460

49.6

6.2

38.4

6.0

22.3

21.3

Indoco Remedies

Buy

193

240

24.4

12.0

1.4

7.8

33.2

19.1

20.1

Ipca labs

Buy

510

613

20.2

26.6

1.8

11.9

34.8

8.6

9.5

Lupin

Buy

1,150

1,809

57.3

16.6

2.7

10.2

17.2

24.4

20.9

Sanofi India

Neutral

4,111

29.4

3.4

20.1

16.8

22.5

26.4

Sun Pharma

Buy

509

847

66.6

14.4

2.9

8.8

26.5

18.9

20.1

Source: Company, Angel Research; Note: *December year ending

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E FY2019E

Gross sales

8,198

12,221

13,878

15,084

17,346

19,775

Less: Excise duty

159

178

227

239

260

297

Net Sales

8,038

12,043

13,651

14,845

17,086

19,478

Other operating income

245

Total operating income

8,100

12,121

13,896

15,090

17,331

19,723

% chg

38.3

49.6

14.6

8.6

14.9

13.8

Total Expenditure

5,968

9,557

10,691

11,656

13,310

15,193

Net Raw Materials

3,606

5,506

6,158

6,434

7,005

7,986

Other Mfg costs

804

1,204

1,365

1,484

1,709

1,948

Personnel

832

1,302

1,551

1,768

2,033

2,338

Other

726

1,545

1,617

1,969

2,563

2,922

EBITDA

2,071

2,486

2,960

3,189

3,776

4,285

% chg

153.5

20.1

19.1

7.7

18.4

13.5

(% of Net Sales)

25.8

20.6

21.7

21.5

22.1

22.0

Depreciation& Amort.

313

333

393

428

551

586

EBIT

1,758

2,154

2,567

2,762

3,225

3,698

% chg

209.5

22.5

19.2

7.6

16.8

14.7

(% of Net Sales)

21.9

17.9

18.8

18.6

18.9

19.0

Interest & other Charges

108

159

112

Other Income

121

(% of PBT)

1.3

3.6

2.5

4.0

3.5

3.0

Share in profit of Asso.

Recurring PBT

1,735

2,227

2,722

3,061

3,479

4,004

% chg

222.7

28.4

22.2

12.4

13.7

15.1

Extraordinary Exp./(Inc.)

203.1

59.6

PBT (reported)

1,532

2,168

2,722

3,061

3,479

4,004

Tax

363.5

596.6

744.4

759.6

869.9

1,001.1

(% of PBT)

23.7

27.5

27.3

24.8

25.0

PAT (reported)

1,168

1,571

1,978

2,301

2,610

3,003

Less: Minority int. (MI)

(4)

(5)

(4)

(0)

(2)

(1)

PAT after MI (reported)

1,172

1,576

1,982

2,302

2,611

3,004

ADJ. PAT

1,333

1,619

1,982

2,302

2,611

3,004

% chg

208.6

21.5

22.4

16.1

13.5

15.0

(% of Net Sales)

14.6

13.1

14.5

15.5

15.3

15.4

Basic EPS (`)

22.8

27.7

33.9

39.3

44.6

51.3

% chg

208.6

21.5

22.4

16.1

13.5

15.0

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

Balance sheet (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E FY2019E

SOURCES OF FUNDS

Equity Share Capital

Share Application Money

Reserves & Surplus

3,721

5,127

7,229

9,313

11,754

14,587

Shareholders Funds

3,750

5,156

7,287

9,372

11,812

14,646

Minority Interest

(0)

Long-term provisions

Total Loans

3,769

3,864

4,415

3,084

2,500

500

Deferred Tax Liability

205

211

(182)

(118)

Total Liabilities

7,760

9,280

11,546

12,362

14,194

15,027

APPLICATION OF FUNDS

Gross Block

4,107

6,095

6,093

7,625

8,125

8,625

Less: Acc. Depreciation

1,461

1,794

2,187

2,614

3,165

3,752

Net Block

2,645

3,752

3,907

5,011

4,959

4,873

Capital Work-in-Progress

310

Goodwill

812

971

Investments

123

246

Long-term loans and adv.

789

486

269

338

Current Assets

5,631

8,279

10,294

9,206

11,651

13,169

Cash

179

469

834

513

492

674

Loans & Advances

789

692

831

409

1,625

1,626

Other

4,664

7,118

8,629

8,284

9,534

10,869

Current liabilities

1,730

3,634

4,168

3,720

4,281

4,881

Net Current Assets

3,901

4,645

6,127

5,487

7,370

8,289

Mis. Exp. not written off

Total Assets

7,760

9,280

11,546

12,362

14,194

15,027

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E FY2019E

Profit before tax

1,532

2,168

2,722

3,061

3,479

4,004

Depreciation

313

333

393

428

551

586

(Inc)/Dec in Working Capital

(457)

(757)

(1,333)

388

(1,905)

(736)

Less: Other income

121

Direct taxes paid

(363)

(597)

(744)

(760)

(870)

(1,001)

Cash Flow from Operations

1,001

1,066

969

2,996

1,135

2,732

(Inc.)/Dec.in Fixed Assets

(455)

(1,989)

(1,532)

(500)

(Inc.)/Dec. in Investments

(2)

103

123

Other income

121

Cash Flow from Investing

(435)

(1,908)

174

(1,288)

(379)

Issue of Equity

Inc./(Dec.) in loans

385

552

(1,331)

(584)

(2,000)

Dividend Paid (Incl. Tax)

(102)

(171)

Others

(879)

1,209

(1,159)

(527)

(22)

Cash Flow from Financing

(596)

1,133

(778)

(2,029)

(777)

(2,171)

Inc./(Dec.) in Cash

(30)

291

365

(321)

(21)

182

Opening Cash balances

208

179

469

834

513

492

Closing Cash balances

179

469

834

513

492

674

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

Key ratios

Y/E March

FY2014

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation Ratio (x)

P/E (on FDEPS)

25.5

21.0

17.1

14.7

13.0

11.3

P/CEPS

11.4

8.9

14.3

12.4

10.7

9.5

P/BV

4.5

3.3

4.7

3.6

2.9

2.3

Dividend yield (%)

0.1

EV/Sales

2.5

1.7

2.8

2.5

2.1

1.7

EV/EBITDA

9.9

8.2

12.7

11.5

9.5

7.9

EV / Total Assets

2.6

2.2

3.3

3.0

2.5

2.2

Per Share Data (`)

EPS (Basic)

22.8

27.7

33.9

39.3

44.6

51.3

EPS (fully diluted)

22.8

27.7

33.9

39.3

44.6

51.3

Cash EPS

51.0

65.4

40.6

46.6

54.0

61.4

DPS

0.5

Book Value

128.8

176.6

124.5

160.1

201.9

250.3

Dupont Analysis

EBIT margin

21.9

17.9

18.8

18.6

18.9

19.0

Tax retention ratio

76.3

72.5

72.7

75.2

75.0

Asset turnover (x)

1.2

1.5

1.4

1.3

1.4

ROIC (Post-tax)

20.1

19.2

19.5

18.7

19.2

20.0

Cost of Debt (Post Tax)

2.3

1.6

2.8

1.3

3.0

Leverage (x)

1.1

0.8

0.6

0.4

0.2

0.1

Operating ROE

39.5

33.4

29.0

25.4

22.8

21.4

Returns (%)

ROCE (Pre-tax)

25.4

25.3

24.7

23.1

24.3

25.3

Angel ROIC (Pre-tax)

28.5

27.6

28.5

27.4

28.1

29.0

ROE

41.9

36.4

31.9

27.6

24.7

22.7

Turnover ratios (x)

Asset Turnover (Gross Block)

2.2

2.4

2.3

2.2

2.4

Inventory / Sales (days)

Receivables (days)

Payables (days)

114

117

WC cycle (ex-cash) (days)

145

119

124

125

134

Solvency ratios (x)

Net debt to equity

1.0

0.7

0.5

0.3

0.2

(0.0)

Net debt to EBITDA

1.7

1.4

1.2

0.8

0.5

(0.0)

Interest Coverage (EBIT / Int.)

16.3

25.5

16.2

41.4

28.9

61.6

June 2, 2017

Aurobindo Pharma | 4QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement

Aurobindo Pharma

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

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Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

June 2, 2017