Strong Q4 & debt reduction show Aurobindo Pharma in good health

Despite over 150% surge since March lows, the stock can see more gains

Aurobindo Pharma’s strong performance for the quarter ended March 2020 (Q4) was driven by good execution across geographies and business segments. Revenues at ~6,158 crore grew 16.4 per cent year-on-year (YOY), beating consensus estimate of ~5,938 crore.

The US business, which contributes almost half the revenues, was the highlight and set the tone for the performance beat. The 20.5 per cent growth in the US was remarkable, given last year's high base and the absence of no big product launch, which also suggest that it was entirely driven by the base business, say analysts. Drug shortages in the US and channel re-stocking (as in case of peers) may have also benefited Aurobindo. For example, 10 per cent sequential growth in sales of oral solids is likely to have been driven by higher channel re-stocking, point out analysts. Growth in the US, in fact, was better than many peers, such as Lupin and Sun Pharma, which posted a YOY decline in North American sales.

European sales, now more than fourth of revenues, too, grew 26 per cent. Credit Suisse says Europe had good double-digit constant currency growth, even after the adjustment of acquisition of Apotex Inc's operations in five European countries. Europe has become a consistent growth driver, which is a great positive, says Ranvir Singh of Sunidhi Securities. The company has continued driving European sales by turning around acquisitions, including Actavis' portfolio and some other smaller Portuguese-based businesses, by transferring manufacturing to India.

While growth markets and anti-retroviral products (for HIV treatment) contributed just 6 per cent each to revenue, they posted over 30 per cent growth. Active pharmaceutical ingredients (APIS) were the exception with sales down 17.5 per cent. Analysts say, if companies have higher formulation supply options, the low-margin API sales usually decline. However, higher formulation and specially developed market sales are positive for margins.

Gross margins at 59.4 per cent were the highest in the last 10 quarters, led by better product mix, high US growth, lower API sales, and new ARV tenders at a higher margin, according to analysts.

Operating profit at ~1,342.4 crore grew 26.6 per cent YOY beating the estimate of ~1,200 crore — margins at 21.8 per cent grew 180 basis points. Net profit at ~850 crore surged 45.2 per cent, and came significantly ahead of ~700 crore estimated by analysts.

The fall in net debt was another key positive. Net debt declined by $87 million in Q4, and halved during FY20 to $359 million ($724 million in FY19). The net debtequity ratio is now at 0.16, and net debt/ebitda has improved from 1.27x in FY19 to 0.56x in FY20. The company calling off the $1-billion deal with Sandoz in the US earlier also bodes well as it would have stretched Aurobindo's balance sheet.

Analysts at Emkay Research say strong execution and debt reduction should continue to drive the stock’s outperformance and Aurobindo is one of their top large-cap picks. Some analysts though believe that new drug launches are necessary to push up growth rates on a large revenue base.

The company also received OAI (official action indicated) classification for a US facility, which, however, contributes only 2 per cent to revenues. Analysts say the earlier clearance to Aurobindo’s injectables facility (Unit IV) in India has removed the overhang.

The stock, which has gained more than 150 per cent from March lows post reduction in the regulatory overhang and improved growth prospects, was up 1.1 per cent on Thursday. The results were announced on Wednesday evening. Analysts, however, say at about 17 times FY21 estimated earnings, it is still trading at a discount to peers.