Aurobindo Pharma up 5% on heavy volumes

Since February 6, the stock has underperformed the market by falling 2% as compared to 2.5% rise in Sensex till yesterday.

Aurobindo Pharma has surged 5% to Rs 508 on back of heavy volumes on the bourses. The stock opened at Rs 487 and touched a high of Rs 509 on the NSE. At 1125 hours, a combined 4.26 million shares have already changed hands, as against an average of around 5 million shares that were traded daily in past two weeks on the BSE and NSE.

Since the announcement of December quarter (Q3FY14) earnings on February 6, the stock has underperformed the market by falling 2% as compared to 2.5% rise in benchmark S&P BSE Sensex till yesterday.

Aurobindo Pharma reported a strong set of numbers for Q3FY14 that were above analysts' expectations.  The company achieved strong growth of 81% year-on-year (y-o-y) in the US formulation segment.

The company’s net profit for the quarter grew by 354% y-o-y to Rs 418 crore due to strong margin improvement and lower interest cost. The launch of generic Cymbalta has helped 1360bps improvement in margins, analysts suggest.

"Entry into new segments of penam and peptides will help improve margins further," points out an analyst from Centrum Broking in a report dated February 8.

The management expects good revenues from generic Cymbalta in Q4FY14 and expects competition from two more generic players from Q1FY15 onwards. The management has given margin outlook for 22-23% for FY15 and expects 2.5% drop in margin due to the integration of Actavis business, added report.

Meanwhile, analysts maintain Buy rating on the scrip with a target price of Rs 690 based on 11x Dec’15 EPS of Rs 63. A delay in integration of acquired Actavis formulations business and regulatory risks for its various manufacturing facilities are key risks to analysts' assumptions.