Aurobindo Pharma good bet, but only for the long term

Investments across segments will take 2-3 years to play out

Aurobindo Pharma’s December-quarter results were largely in line with the Street estimates, given that growth was driven by the antiretroviral segment and the US business. While its injectables portfolio was steady, sales in the US market, which accounts for over half of its turnover, were driven by the oral portfolio. The disappointment was on account of muted revenues of active pharmaceutical ingredients (APIS), which were down 14 per cent over the year-ago quarter.

While sales were up 8 per cent and gross margins also expanded by 310 basis points over the year-ago quarter, the increase in operating profit margins was limited to 100 basis points due to higher research and development costs, according to analysts at Motilal Oswal Research.

The focus of the company after deleveraging following the sale of Natrol would be to develop its capability across segments of injectables, vaccines, biosimilars, inhalation and APIS to drive growth.

Among key segments, the Street will keep an eye on the injectables portfolio. The company has indicated it can hit $650-700 million in annual sales from its global injectable portfolio over the next three years, aided by 12-15 injectables per year over the next couple of years. For FY21, injectables revenue is pegged at about $380 million.

If the trials of the Covax vaccine are successful and it is able to manufacture multiple vaccines through collaboration, the segment could generate additional revenues. Given the higher capacities (480 million doses after June 2021), the segment, according to analysts at Edelweiss Research, has the potential to add 18-30 per cent to earnings per share for FY22 and FY23.

On the back of significant expansion including production-linked incentives, the firm expects to double its API business in the next five years.

While a strong balance sheet and capex on multiple segments are positives, given the three-year period for these investments to yield results, there may not be sharp sales growth in the near term.

The stock, which has gained 10 per cent in the past three months, has been flat after the results. Investors with a long-term time frame could consider the stock on correction.