Aurobindo has growth levers but stock factors in a brighter picture

In a welcome relief, Aurobindo Pharma Ltd’s subsidiary Eugia Pharma Specialities Ltd has resumed production at its sterilized product lines at Unit-III.

The company had temporarily suspended operations at Unit III when the US Food and Drug Administration (USFDA) issued a Form 483 with nine observations in February.

The closure of lines in Eugia UnitIII could cost Aurobindo $20 million in sales in the March quarter (Q4FY24) and $2-3 million in remediation costs per month, the management said in its Q3 earnings call. However, Aurobindo expects to streamline the entire production by the end of FY24. For Eugia business,itsUnit-IIIplantwhichmanufactures injectables and ophthalmics, contributes about 40% of revenue. Injectables are seen as a growth lever for Aurobindo. Specialty and injectables accounted for 25% of total US revenue in Q3FY24. US sales were $451 million, or 51% of Aurobindo’s consolidated sales.

“Going ahead, Aurobindo targets for double-digit growth in base injectables sales led by new launches (with >50 pending injectables) and steady progress in its oral solid operations (127 pending approvals),” said a PhillipCapital (India) report dated 4 March. Aurobindo is one of the largest generics supplier to the European Union (EU) from India and can benefit from the supply opportunity. Aurobi-ndo supplies 60 of the listed 260 molecules facing shortages in EU. “The new China plant and Vizag plant will help to scale up injectable supplies in EU market and will aid to improve EU margins of mid-teens,” Axis Securities said.

The commercialization of the Penicillin-G (Pen-G) plant, approved under the production-linked incentive scheme, can drive better profitability. Commercialization is expected in H1FY25. Nearly half the capacity will be used internally, potentially cutting costs and boosting margins.

For FY24, Aurobindo has guided for an Ebitda margin of 20%. “A possible demerger of the injectables business could provide a value-unlocking opportunity, which seems unlikely in the next 2 years,” said Foram Parekh, analyst at Sharekhan by BNP Paribas. In the past year, Aurobindo’s shares have surged 127% and trade at 16 times estimated FY25 earnings, which is slightly on the higher side given its relatively lower margins versus peers. Generic drug companies with high margins like Dr Reddy’s Laboratories trade at 19 times estimated FY25 earnings, Parekh pointed out.

Besides commissioning of the Pen-G plant, traction in US that has a big pipeline of injectables, and filings and approvals of biosimilar products should be closely tracked.

The closure of lines in Eugia Unit-III could cost Aurobindo $20 million in sales in the March quarter