Analysts see correction in Aurobindo as an entry point

Concerns on US inspections of the company's units seem unjustified, say analysts

Aurobindo Pharma has fallen from a peak of Rs 891 in December to Rs 654, a 37 per cent fall compared with 11 per cent in the Sensex. This, despite a good performance in the December quarter, when revenues grew 9.2 per cent, Ebitda (earnings before interest, tax, depreciation, and amortisation) grew 29 per cent, and net profit surged 39  per cent year-on-year.

Though some may have been disappointed with the single-digit revenue growth, there can be a few quarters of subdued growth because of high base effect. IIFL says, “We look beyond a subdued quarter and forecast 25 per cent compound annual growth in earnings per share over FY15-18 on sizable launches.”

Aurobindo’s growth in the US (40 per cent of revenue) continues to be strong and visibility remains good. US sales at Rs 1,571 crore grew 31 per cent year-on-year in the quarter. Aurobindo received 16 approvals (including four tentative ones) in the quarter, taking the total to 30 in the first nine months of FY16. Motilal Oswal Securities expects US sales to grow at this robust pace on launches (Integrilin, Isosulfan, etc) and coming ones like Meropenem, Valgancyclovir, Angiomax, and Nexium.

The acquisition of Natrol in the US is also accruing benefits and is likely to drive the over-the-counter (OTC) business. Natrol added $25 million to sales in the December quarter. The injectables portfolio is also a big growth driver. With $23 million revenues in the quarter from US injectables, Aurobindo expects robust approvals of injectable from Unit-4 in Q4FY16 and FY17 (overall 33 approvals in injectables expected in 12 months). The firm’s forecast of 50 per cent year-on-year growth from US injectables in FY16 to $95 million is an indicator.

All these point to good growth ahead. Concerns popped up because of inspections of units by the US regulator. But there are no evident observations. Motilal says concerns on 483 observations at Unit-7 are unwarranted and the company received two approvals (on February 2 and 5) from this unit after inspection. Unless the concerns prove right, at these beaten levels, the stock seems a good bet. Target prices of Rs 884 (HSBC) to Rs 1,100 (MOSL) indicate 33-68 per cent upside.