Aurobindo Pharma: Multiple growth triggers to improve Street sentiment

Rebound in injectable sales, multiple product launches, strong European outlook and reduction in net debt are key earning triggers

Shares of Aurobindo Pharma, which had corrected by more than 20 per cent after hitting a fresh 52-week high in August, have rebounded over 12 per cent in the last 10 days. The company, which has seen a strong growth trajectory, however, posted a sequential decline in revenue and net profit in the June quarter (Q1) principally because of Covid-19 disruption, thereby affecting Street sentiment. During Q1, injectables and OTC (over the counter) sales in the US had remained soft, affected by lower hospital procedures amid the pandemic, while those in Europe and the rest of the world (after channel stocking in the previous quarter), too, had been lower.

The trend, though, is to go into reverse and injectables and OTC sales have been improving gradually since July, say analysts. Those at Elara Capital expect the generics injectables business to normalise in the next one-two quarters. Recovery in sales of injectables in the US will be a key catalyst, said analysts at HSBC. And, this is a key reason for the recent improvement in sentiment.

The growth drivers for the US business otherwise remain intact. The oral solids business is doing well and it was this segment’s growth that in Q1 had compensated for the sequential decline in injectables sales. The growth momentum in oral solids is expected to continue. New product approvals and the launch scenario remain strong. While Aurobindo had received approval for 10 product launches (six, including an injectable, launched) in Q1, the run rate is to pick up and about 50 product launches are expected in the US during FY21. Increased launches in the high-margin injectables business should improve the product mix. 

Channel checks by analysts suggest slight improvement in realisations in the US due to shortages of drugs and this should benefit Aurobindo. Analysts at Motilal Oswal Securities (MOSL) expect Aurobindo to deliver 10 per cent annual growth in US earnings from 2019-20 to 2021-22.

The company, which has a diversified mix (oral solids/injectable/dietary supplements/OTC) and a strong pipeline of products pending approval (about 166), is working on differentiated complex and specialty products. There is a range of margin-accretive products in oncology, injectables, respiratory inhalers, biosimilars, vaccines, topical products, and patches in the pipeline. While it has filed for one Metered Dose Inhaler (MDI) and one nasal spray, it is expected to file its first transdermal with the US Food and Drug Administration in FY21.

While the US contributes slightly more than half its revenue, Europe remains the next key geography, contributing almost a fourth of it in Q1, despite softness. The higher stocking in the March quarter affected Q1 sales, but the growth trajectory is expected to remain strong in subsequent quarters. 

Aurobindo has turned acquired entities in Europe around, and grown earnings by transferring product manufacturing to India and this process should continue. Analysts at Elara Capital expect consolidated margins to improve by 100 bps during the period from FY20 to FY23, to 22 per cent for Europe.

The company’s debt profile is improving with better cash flows and working capital management. Net debt, which had reduced from Rs 5,008 crore in FY19 to Rs 2,718 crore by end of FY20, has come down to Rs 1,448 crore at the end the June quarter (net debt/equity ratio of 0.08:1.0). Analysts expect Aurobindo to achieve net debt-free status in one-two years.

Overall, the correction has offered a good opportunity to investors to accumulate stocks. Analysts at HSBC, after the Q1 performance, had said Aurobindo can sustain US growth despite a high base on a large product portfolio with the cost advantage of highly integrated manufacturing. The outlook remains steady for other segments despite short-term volatility. The target prices of HSBC, MOSL, and Elara go up to Rs 1,030 for the stock, trading at Rs 843.40.