1QFY2017 Result Update | Pharmaceutical

August 25, 2016

Aurobindo Pharma

ACCUMULATE

CMP

`788

Performance Highlights

Target Price

`877

Y/E march (` cr)

1QFY17 4QFY16

% chg (QoQ) 1QFY16

% chg (yoy)

Investment Period

12 months

Net sales

3,664

3,675

(0.3)

3,242

13.0

Other income

(15.9)

(9.5)

Stock Info

Operating profit

828

810

2.1

668

23.8

Interest

(33.9)

(56.7)

Sector

Pharmaceutical

Adj. Net profit

585

562

4.1

472

23.8

Market Cap (` cr)

43,086

Source: Company, Angel Research

Net debt (` cr)

3,265

Beta

1.0

For 1QFY2017, the company’s sales came in at `3,664cr V/s `3,900cr

52 Week High / Low

892/582

expected and V/s `3,664cr in 1QFY2017, a yoy growth of 13.0%, mainly

Avg. Daily Volume

166,432

driven by formulations. Formulations (`3,032cr) posted a yoy growth of

Face Value (`)

15.9% and constituted around 80% of overall sales, while API (`735cr)

BSE Sensex

26,636

posted a yoy growth of 1.6%. On the operating front, the EBITDA margin

came in at 22.6% V/s 22.8% expected and V/s 20.6% in 1QFY2016. The yoy

Nifty

8,170

improvement in the operating margin was on the back of gross margin

Reuters Code

ARBN.BO

expansion (55.3% in 1QFY2017 V/s 53.4% in 1QFY2016). Thus, the Adj. net

Bloomberg Code

ARBP@IN

profit came in at `585cr V/s `576cr expected and V/s `472cr in 1QFY2016.

We maintain our Accumulate rating.

Shareholding Pattern (%)

Sales marginally lower than expected: For 1QFY2017, the company’s sales

Promoters

53.8

came in at `3,664cr V/s `3,900cr expected and V/s `3,664cr in 1QFY2017, a

MF / Banks / Indian Fls

10.5

yoy growth of 13.0%, mainly driven by formulations. Formulations (`3,032cr)

FII / NRIs / OCBs

26.6

posted a yoy growth of 15.9% and constituted around 80% of overall sales, while

Indian Public / Others

9.1

API (`735cr) posted a yoy growth of 1.6%. On the operating front, the EBITDA

margin came in at 22.6% V/s 22.8% expected and V/s 20.6% in 1QFY2016. The

yoy improvement in the operating margin was on the back of gross margin

Abs. (%)

3m 1yr

3yr

expansion (55.3% in 1QFY2017 V/s 54.6% in 1QFY2016). Thus, the Adj. net

Sensex

9.4

(0.0)

50.9

profit came in at `585cr V/s `576cr expected and V/s `472cr in 1QFY2016.

Aurobindo

8.3

67.0

609.0

Outlook and valuation: We estimate the company’s net sales to log a 15.1%

CAGR over FY2016-18E to `18,078cr on back of US formulations, which will be

3-year daily price chart

supplemented through the recent acquisitions of the Western European

900

800

formulation businesses of Actavis and US’ Natrol. The acquisitions have also led

700

Aurobindo Pharma (APL) to become a >US$2bn sales company, with ~80% of

600

500

sales being accounted by formulations. We recommend a Accumulate rating.

400

300

Key financials (Consolidated)

200

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

100

Net sales

12,043

13,651

15,720

18,078

% chg

49.8

13.3

15.2

15.0

Adj. Net profit

1,619

1,982

2,418

2,763

% chg

21.5

22.4

22.0

14.2

Source: Company, Angel Research

EPS (`)

27.7

33.9

41.4

47.3

EBITDA margin (%)

20.6

21.7

23.7

P/E (x)

28.4

23.2

19.0

16.6

RoE (%)

36.4

32.5

29.6

26.1

RoCE (%)

25.3

24.8

24.0

22.5

P/BV (x)

4.5

6.5

4.9

3.9

Sarabjit Kour Nangra

EV/Sales (x)

2.2

3.6

3.1

2.7

+91 22 3935 7800 Ext: 6806

EV/EBITDA (x)

10.6

16.6

13.3

11.5

[email protected]

Source: Company, Angel Research; Note: CMP as of August 24, 2016

Please refer to important disclosures at the end of this report

Aurobindo Pharma | 1QFY2017 Result Update

Exhibit 1: 1QFY2017 performance (Consolidated)

Y/E March (` cr)

1QFY2017

4QFY2016

% chg (QoQ) 1QFY2016

% chg (YoY)

FY2016 FY2015

% chg (YoY)

Net sales

3,664

3,675

(0.3)

3,242

13.0

13,651

12,043

13.3

Other income

(15.9)

(9.5)

314

158

98.5

Total income

3,742

3,767

(0.7)

3,328

12.4

13,964

12,201

14.5

Gross profit

2,027

2,048

(1.0)

1,730

17.2

7,493

6,538

14.6

Gross margins

55.3

55.7

53.4

54.9

54.3

Operating profit

828

810

2.1

668

23.8

2,960

2,486

19.1

OPM (%)

22.6

22.1

20.6

21.7

20.6

Interest

(33.9)

(56.7)

159

89.0

Dep & amortisation

106

111

(4.5)

19.4

393

333

17.9

PBT

786

771

1.9

634

23.9

2,722

2,227

22.2

Provision for taxation

201

210

(4.2)

163

22.9

744

597

24.7

Net profit

585

561

4.1

471

24.3

1,978

1,630

21.4

Less : Exceptional items (gains)/loss

(1)

(4)

MI & share in associates

(1)

(2)

PAT after Exceptional items

585

563

3.9

472

23.8

1,982

1,576

25.8

Adjusted PAT

585

562

4.1

472

23.8

1,979

1,620

22.2

EPS (`)

10.0

9.6

8.1

33.9

27.7

Source: Company, Angel Research

Exhibit 2: Actual v/s Estimate

(` cr)

Actual

Estimate

Variation %

Net sales

3,664

3,900

(6.1)

Other operating income

167.5

Operating profit

828

889

(6.9)

Tax

201

210

(4.2)

Adj. Net profit

585

576

1.6

Source: Company, Angel Research

Revenue up 13.0% yoy; marginally lower than our expectation: For 1QFY2017,

sales came in at `3,664cr V/s `3,900cr expected and V/s `3,242cr in 1QFY2016,

a yoy growth of 13.0%, mainly driven by formulations. Formulations (`3,032cr)

posted a yoy growth of 15.9% and constituted around 80% of overall sales, while

API (`735cr) posted a yoy growth of 1.6%. The US business, which contributed

45% to the gross sales, witnessed a 20.5% yoy growth in 1QFY2017. This is due to

the new launches in the oral and injectable segment.

In the formulation segment, the US (`1,704cr) posted a yoy growth of 20.5%,

while Europe & ROW (`1,026cr) posted a yoy growth of 13.1%. ARV (`303cr)

posted a yoy growth of 2.6%. Overall, formulations now contribute around 80.0%

of sales, while the balance is accounted by APIs. The company has 269 approved

ANDAs including 41 tentative approvals.

During 1QFY2017, the company filed 5 ANDAs with the USFDA, i.e. 3 in the oral

category and 2 in the injectable category. The company received 20 ANDA

approvals from the USFDA including 13 final approvals and 7 tentative approvals

during the quarter.

August 25, 2016

Aurobindo Pharma | 1QFY2017 Result Update

Exhibit 3: Sales break-up (Consolidated)

(` cr)

1QFY2017

4QFY2016

% chg (qoq)

1QFY2016

% chg (yoy)

FY2016

FY2015

% chg

Formulations

3,033

3,011

0.7

2,616

15.9

11,166

9,559

16.8

1,704

1,666

2.3

1414

20.5

6,144

4,832

27.2

Europe & ROW

1,026

1,016

0.9

907

13.1

3,822

3,763

1.6

ARV

303

328

(7.7)

295

2.6

1,200

964

24.5

API

735

775

(5.2)

723

1.6

1,857

1,794

3.5

SSP

495

502

(1.4)

478

3.6

1,366

864

58.1

Cephs

240

273

(12.1)

245

(2.2)

491

930

(47.2)

NPNC

3,767

3,786

(0.5)

3,339

12.8

13,022

11,353

14.7

Source: Company, Angel Research

OPM expands to 22.6%: On the operating front, the EBITDA margin came in at

22.6% V/s 22.8% expected V/s 20.6% in 1QFY2016, mainly driven by gross

margin expansion (55.3% in 1QFY2017 V/s 53.4% in 1QFY2016). Employee costs

and other expenses rose by 18.4% yoy and 6.2% yoy respectively.

Exhibit 4: OPM Trend

23.0

22.6

22.5

22.1

22.0

21.5

21.8

21.0

20.6

20.5

20.0

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Net profit marginally lower than estimate: Thus, the Adj. net profit came in at

`585cr V/s `576cr expected and V/s `472cr in 1QFY2016. The growth in net

profit was on back of expansion in the OPM.

August 25, 2016

Aurobindo Pharma | 1QFY2017 Result Update

Exhibit 5: Adj. net profit

700

585

600

562

525

500

451

432

400

300

200

100

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Management takeaways

 At the end of 1QFY2017 the company had filed 403 ANDAs, with 228 final

approvals, and 41 tentative approvals.

 Unit VII continues to face risk of regulatory action by USFDA which may

negatively impact top-line. However, as we expect new product approvals and

recent launches to result in top-line and profit growth in the near term.

 Launch of key injectable products is expected to drive the top-line and expand

margin in FY2017.

 R&D as % of sales to be ~4-4.5% in FY2017.

 Tax rate to be ~26-27% in FY2017.

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 403 ANDAs filed until 1QFY2017. 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.

The US revenue has grown at a CAGR of 31% over FY2009-2015 to

`4,832cr. Going forward, the US business of the company is expected to post

a CAGR of 15% over FY2016-18E.

 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 for the acquired businesses

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

August 25, 2016

Aurobindo Pharma | 1QFY2017 Result Update

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

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

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 market, 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 15.1% CAGR over FY2016-18E to

`18,078cr 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, will led APL to become a

>US$2bn sales company, with ~ 80% of sales being accounted by formulations.

We maintain our accumulate rating on the stock.

Exhibit 6: Key assumptions

FY2017E

FY2018E

Sales Growth (%)

15.2

15.0

Operating Margins (%)

23.7

Capex (`cr)

800

Source: Company, Angel Research

August 25, 2016

Aurobindo Pharma | 1QFY2017 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

640

21.0

2.8

13.2

(10.8)

27.5

25.3

Aurobindo Pharma Accumulate

788

877

11.4

16.6

2.7

11.5

18.1

22.5

26.1

Cadila Healthcare

Accumulate

377

400

6.2

18.8

2.8

12.9

15.8

24.3

26.6

Cipla

Reduce

566

490

(13.4)

20.8

2.6

14.3

20.4

13.5

15.2

Dr Reddy's

Neutral

3,039

19.3

2.8

11.3

6.9

18.1

17.1

Dishman Pharma

Sell

174

(74.1)

15.4

1.8

7.9

3.1

10.3

10.9

GSK Pharma*

Neutral

3,047

51.3

6.6

35.1

15.9

35.8

31.8

Indoco Remedies

Sell

317

225

(29.1)

20.3

2.4

13.0

31.5

19.1

19.2

Ipca labs

Buy

544

613

12.7

27.6

1.9

12.5

36.5

8.8

9.4

Lupin

Accumulate

1,521

1,809

18.9

21.9

3.6

13.5

17.2

24.4

20.9

Sanofi India

Neutral

4,311

25.5

3.2

18.3

21.2

24.9

28.4

Sun Pharma

Buy

771

944

22.4

23.5

4.7

15.2

22.0

33.1

18.9

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

August 25, 2016

Aurobindo Pharma | 1QFY2017 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Gross sales

5,863

8,198

12,221

13,878

15,959

18,353

Less: Excise duty

159

178

227

239

275

Net Sales

5,783

8,038

12,043

13,651

15,720

18,078

Other operating income

245

Total operating income

5,855

8,100

12,121

13,896

15,965

18,323

% chg

26.5

38.3

49.6

14.6

14.9

14.8

Total Expenditure

4,966

5,968

9,557

10,691

12,001

13,802

Net Raw Materials

2,792

3,606

5,506

6,158

6,288

7,231

Other Mfg costs

578

804

1,204

1,365

1,572

1,808

Personnel

663

832

1,302

1,551

1,783

2,051

Other

932

726

1,545

1,617

2,358

2,712

EBITDA

817

2,071

2,486

2,960

3,718

4,276

% chg

53.2

153.5

20.1

19.1

25.6

15.0

(% of Net Sales)

14.1

25.8

20.6

21.7

23.7

Depreciation& Amort.

249

313

333

393

532

588

EBIT

568

1,758

2,154

2,567

3,187

3,689

% chg

38.8

209.5

22.5

19.2

24.1

15.7

(% of Net Sales)

9.8

21.9

17.9

18.8

20.3

20.4

Interest & other Charges

131

108

159

192

220

Other Income

(% of PBT)

5.3

1.3

3.6

2.5

2.1

1.8

Share in profit of Asso.

Recurring PBT

538

1,735

2,227

2,722

3,309

3,782

% chg

62.3

222.7

28.4

22.2

21.5

14.3

Extraordinary Exp./(Inc.)

163.4

203.1

59.6

PBT (reported)

374

1,532

2,168

2,722

3,309

3,782

Tax

82.7

363.5

596.6

744.4

893.4

1,021.2

(% of PBT)

22.1

23.7

27.5

27.3

27.0

PAT (reported)

291

1,168

1,571

1,978

2,416

2,761

Less: Minority int. (MI)

(2)

(4)

(5)

(4)

(3)

(2)

PAT after MI (reported)

294

1,172

1,576

1,982

2,418

2,763

ADJ. PAT

432

1,333

1,619

1,982

2,418

2,763

% chg

118.5

208.6

21.5

22.4

22.0

14.2

(% of Net Sales)

5.1

14.6

13.1

14.5

15.4

15.3

Basic EPS (`)

7.4

22.8

27.7

33.9

41.4

47.3

% chg

8.9

208.6

21.5

22.4

22.0

14.2

August 25, 2016

Aurobindo Pharma | 1QFY2017 Result Update

Balance sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

SOURCES OF FUNDS

Equity Share Capital

Share Application Money

Reserves & Surplus

2,577

3,721

5,127

6,998

9,246

11,838

Shareholders Funds

2,606

3,750

5,156

7,057

9,304

11,896

Minority Interest

Long-term provisions

Total Loans

3,384

3,769

3,864

4,076

5,500

Deferred Tax Liability

205

211

236

Total Liabilities

6,069

7,760

9,280

11,452

15,098

17,688

APPLICATION OF FUNDS

Gross Block

3,316

4,107

6,095

7,195

7,995

8,795

Less: Acc. Depreciation

1,140

1,461

1,794

2,187

2,718

3,306

Net Block

2,175

2,645

3,752

4,865

5,277

5,490

Capital Work-in-Progress

645

310

Goodwill

Investments

Long-term loans and adv.

243

789

486

434

436

Current Assets

4,128

5,631

8,279

10,001

12,249

15,113

Cash

208

179

469

834

2,089

2,275

Loans & Advances

332

789

692

784

409

1,625

Other

3,587

4,664

7,118

8,383

9,751

11,213

Current liabilities

1,200

1,730

3,634

4,247

3,261

3,750

Net Current Assets

2,928

3,901

4,645

5,755

8,988

11,363

Mis. Exp. not written off

Total Assets

6,069

7,760

9,280

11,452

15,098

17,688

August 25, 2016

Aurobindo Pharma | 1QFY2017 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Profit before tax

374

1,532

2,168

2,722

3,309

3,782

Depreciation

249

313

333

393

532

588

(Inc)/Dec in Working Capital

(191)

(457)

(757)

(796)

(1,979)

(2,188)

Less: Other income

Direct taxes paid

(83)

(363)

(597)

(744)

(893)

(1,021)

Cash Flow from Operations

321

1,001

1,066

1,507

900

1,093

(Inc.)/Dec.in Fixed Assets

(283)

(455)

(1,989)

(1,100)

(800)

(Inc.)/Dec. in Investments

(16)

(2)

(20)

Other income

Cash Flow from Investing

(271)

(435)

(1,908)

(1,051)

(732)

Issue of Equity

Inc./(Dec.) in loans

288

385

213

1,424

Dividend Paid (Incl. Tax)

(17)

(102)

(171)

Others

(183)

(879)

1,209

(132)

(167)

(4)

Cash Flow from Financing

(596)

1,133

(90)

1,086

(175)

Inc./(Dec.) in Cash

138

(30)

291

365

1,255

186

Opening Cash balances

208

179

469

834

2,089

Closing Cash balances

208

179

469

834

2,089

2,275

August 25, 2016

Aurobindo Pharma | 1QFY2017 Result Update

Key ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

106.5

34.5

28.4

23.2

19.0

16.6

P/CEPS

42.3

15.4

12.1

19.4

15.6

13.7

P/BV

8.8

6.1

4.5

6.5

4.9

3.9

Dividend yield (%)

0.1

EV/Sales

4.5

3.3

2.2

3.6

3.1

2.7

EV/EBITDA

32.0

12.8

10.6

16.6

13.3

11.5

EV / Total Assets

4.3

3.4

2.8

4.3

3.3

2.8

Per Share Data (`)

EPS (Basic)

7.4

22.8

27.7

33.9

41.4

47.3

EPS (fully diluted)

7.4

22.8

27.7

33.9

41.4

47.3

Cash EPS

18.6

51.0

65.4

40.7

50.5

57.4

DPS

0.5

Book Value

89.5

128.8

176.6

120.8

159.3

203.7

Dupont Analysis

EBIT margin

9.8

21.9

17.9

18.8

20.3

20.4

Tax retention ratio

77.9

76.3

72.5

72.7

73.0

Asset turnover (x)

1.0

1.2

1.5

1.4

1.3

ROIC (Post-tax)

8.0

20.1

19.2

19.5

20.0

19.2

Cost of Debt (Post Tax)

3.2

2.3

1.6

2.9

Leverage (x)

1.3

1.1

0.8

0.6

0.4

0.3

Operating ROE

14.0

39.5

33.4

28.9

27.1

24.4

Returns (%)

ROCE (Pre-tax)

9.9

25.4

25.3

24.8

24.0

22.5

Angel ROIC (Pre-tax)

11.5

28.5

27.6

27.5

27.9

26.7

ROE

17.5

41.9

36.4

32.5

29.6

26.1

Turnover ratios (x)

Asset Turnover (Gross Block)

1.8

2.2

2.4

2.1

2.2

Inventory / Sales (days)

101

108

Receivables (days)

129

Payables (days)

114

119

WC cycle (ex-cash) (days)

159

145

119

135

159

Solvency ratios (x)

Net debt to equity

1.2

1.0

0.7

0.5

0.4

0.3

Net debt to EBITDA

3.9

1.7

1.4

1.1

0.9

0.8

Interest Coverage (EBIT / Int.)

4.3

16.3

25.5

16.2

16.6

16.8

August 25, 2016

Aurobindo Pharma | 1QFY2017 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)

August 25, 2016