Higher volumes, launches help Aurobindo beat peers

Strong US product pipeline to help sustain the performance

While its peers continue to struggle with pricing and regulatory headwinds, Aurobindo Pharma's performance in the September quarter stood out, with operating and net profit growing at a strong 20-29 per cent, beating estimates. Growth across geographies and product segments helped boost revenue by 17.5 per cent. The only disappointment has been the anti-retroviral (ARV) or HIV drug sales (less than five per cent of overall revenue), which declined 17.6 per cent. Given that it is tender-based, revenue from the segment tends to be lumpy.

US formulations' sales (the largest segment, 47 per cent of revenue) grew 21 per cent over a year and 26 per cent in dollar terms. Most Indian pharma majors have seen pricing pressure in the US Aurobindo, too, saw some erosion in the base business (five per cent sequentially) but product launches and volume growth helped it tide over this. The company launched eight products, including two injectables (typically higher margin products) during the quarter, which included a generic version of limited competition kidney treatment drug Renvela, boosting incremental sales growth.

The pipeline for the US market, which includes complex generics (injectables), gives confidence about growth. Aurobindo has filed 21 Abbreviated New Drug Applications with the US drug regulator, 11 in oral and 10 in injectables. Further, it does not have major dependence on any single product in the US, which is positive, as it cushions the downside. Analysts at Emkay Global say Aurobindo has interesting growth opportunities in the US market over the next two years, including penems (anti-bacterials), recently launched over the counter drug Nexium and expected scale-up in the injectables business (from FY17 revenue of $150 million, at annual growth rate of 40 per cent).

The European business, fourth largest contributor to sales, grew 37 per cent. The company benefited from its Portuguese acquisition, though adjusting for the acquisition, the organic growth rates seems high, say analysts. The company has transferred the manufacturing of 74 products from Europe to India, to drive profitability.

Though its financials beat estimates, operational performance could have been better but for a number of unquantified provisions in both raw material cost and other expenditure that somewhat clouded the reported numbers, say analysts. While revenue was ~4,436 crore, operating and net profit stood at ~1,117 crore and ~781 crore, respectively.

Debt increased from $439 million at the end of FY17 to $616.4 million, due to acquisitions and higher working capital requirements. Analysst, expect this to come down to $475 million by the end of FY18, with strong cash flow. Ranjit Kapadia at Centrum Broking and Ranbir Singh at Sytematix Shares said they were positive on growth prospects.