Attractive prospects despite FDA overhang

The Aurobindo Pharma stock has lost over 20 per cent of its value since February 22 due to import alert imposed by the US pharmaceutical regulator, Food and Drug Administration (FDA) for products manufactured at the company’s Unit VI facility in Hyderabad. Analysts say sales to the tune of $2-2.5 million per month ($24-30 million annually) will be affected. This translates to about 3 per cent of Aurobindo’s estimated 2010-11 revenues. They have cut their earnings estimate for 2011-13 by 3-8 per cent on account of the import alert. However, given the sharp fall in its share price, which analysts believe is unwarranted, and robust revenue prospects, the stock is available at attractive levels.

Impact
The dedicated facility on which the import alert was issued manufactures cephalosporin antibiotics. The company currently has five formulation facilities that cater to the US market. Of these, four are based in India. While inventories that had already been exported will not be affected, approvals for eight new abbreviated new applications will get delayed. The US FDA import alert, the company believes, will not affect the supply of products to other markets. While the timeline for resolving the situation is unclear, the management which has submitted the compliance report to the FDA is hoping to resolve the situation over the next three-four months.

Financials
Despite the import alert, the company is eyeing a turnover of roughly a billion dollars for 2010-11. Sales for the 9 months of 2010-11 grew 25 per cent year-on-year to Rs 2,941 crore. Exports, which account for 71 per cent of total sales, grew 29 per cent in the same period. The company is expected to grow 22-25 per cent for 2010-11 and about 20 per cent in 2011-12.
 

GOOD TOP LINE GROWTH
in Rs crore	FY10	FY11E	FY12E
Revenue	3,575	4,375	5,219
% change	16.2	22.4	19.3
Ebitda	823	1,001	1,123
Ebitda (%)	23.0	22.9	21.5
Adj. net profit	545	539	633
% change	309.0	-1.1	17.4
P/E (x)	-

9.0 7.9 E: Estimates                                Source: Edelweiss Research

Valuations
Edelweiss analysts believe there is growth visibility in the long term due to the Pfizer deal, which will help the company ramp up its sales in the markets in Europe and the rest of the world. Given the growth prospects, analysts have pegged Aurobindo’s share price targets between Rs 226 and Rs 285, which offer an upside of over 29 per cent from the current levels of Rs 175.