Aurobindo Pharma's Q1 a miss, but much better than peers

Europe, second largest contributor to revenue (25%) did support with sales growing 10.4% y-o-y

Aurobindo Pharma's performance for the June quarter missed expectations. US sales (nearly half of revenue) declined by half a per cent year-on-year compared to analysts expectation of a flat to three per cent year-on-year growth. However, it is the rupee appreciation that played a spoilsport, as US sales in constant currency terms grew three per cent year-on-year and seven per cent sequentially.

Nevertheless, Europe, the second largest contributor to revenue (25 per cent) did support with sales growing 10.4 per cent year-on-year and 18.1 per cent sequentially. The business acquired from Actavis continues to contribute to profitability as Aurobindo has transferred manufacture of 71 products from Europe to India, leading to cost savings. It also completed acquisition of Genesis Farmaceutica S.A to boost Portugal business.

It is the ARV (HIV treatment) and Active Pharmaceuticals Ingredients (API) businesses, which fell 19.3 per cent and 14.9 per cent year-on-year. These businesses contribute seven and 17 per cent to overall revenues, respectively and pulled down overall performance. The lumpy nature of ARV business (being tender based) and API seeing some GST impact, were the key reasons.

Thus, overall revenues at Rs 3,679 crore fell 2.3 per cent year-on-year, and missed Bloomberg consensus estimates of Rs 3,873 crore. Earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 842 crore fell 5.3 per cent year-on-year, and was also lower than estimates of Rs 869 crore. Net profit at Rs 518.5 crore was also bound to miss estimates of Rs 567 crore.

Positively, even though Aurobindo's US business may not have grown, its performance remains much better than larger peers such as Lupin, Dr Reddy's and Taro (Sun's US subsidiary), which have seen significant declines. Pricing pressure, however, is also hurting Aurobindo. But, it is the 15 new generic launches that cushioned the decline. Sarabjit Kour Nangra at Angel Broking says that in the current pricing pressure environment, regular launches in the US holds key. The company has strong product pipeline and no regulatory concerns presently. A well-diversified portfolio means not much dependence on any single product's contribution in the US, thereby lesser risks due to price erosion. The company has received 17 approvals in June quarter and filed 13 new drug applications.

 

The new launches also helped maintain its gross margins, say analysts, and operating profit margins at 22.9 per cent were only marginally lower than 23.6 per cent in June 2016 quarter. In fact, they have improved substantially from 19.8 per cent in previous quarter. The kidney treatment Renvela generics approval and its recent launch (ahead of larger peers) proves Aurobindo's capabilities for complex generics. Also, Renvela will provide good momentum moving forward and Ranbir Singh at Sytematix Shares expects few more big launches in the September quarter driving growth. The European business is also growing well, and all this is keeping analysts bullish on Aurobindo.

Not surprisingly, the Aurobindo stock gained four per cent in early trade on Thursday (results announced on Wednesday evening) before closing flat as it was pulled down with selling in broader indices.