Injectables consolidation could fetch higher valuations for Aurobindo

Separate listing could capture strong growth rates which is not the case in the current structure

The Aurobindo Pharma stock gained about 3 per cent after the company announced that it will transfer its injectable assets to a wholly owned subsidiary, Eugia Pharma Specialities. The transfer of Unit IV, which makes generic injectables and ophthalmics, has been done for a consideration of Rs 876 crore. The unit had revenues of Rs 926 crore in FY21 and accounted for 5.86 per cent of the company’s turnover on a standalone basis. 

The company said that the reorganisation of assets would increase the operational synergies of the unit and enable it to tie-up with companies to improve capabilities and eye new growth opportunities. Any move which would lead to new investors or listing of the unit could unlock value. 

Says an analyst at a domestic brokerages, “The sum-of-theparts valuations for the company is at a discount to peers even though the injectables has stellar margins, enjoys strong pricing especially given shortages and its stiff compliance requirements.” Profitability should remain strong given limited competition as a new plant takes about four years to commision. 

While Aurobindo trades at 17 times its FY22 price to earnings (P/E) estimates, valuations of pure play injectables players such as Gland Pharma are pegged at 36 times. The consolidated injectables unit could get valuations of at least 30 times one-year forward estimates, says analysts. The balance business with Aurobindo is the plain vanilla oral solids which could fetch 10-12 P/E. 

For FY21, Aurobindo’s global injectable business had revenues of just under $500 million, a fifth of which is branded injectables. The company has guided that its generic injectables business which ended FY21 with revenues of $395 million should hit the $700 million mark in three years. This would be led by a new facility in the US, upcoming unit at Visakhapatnam to supply to European Union and rest of the world markets, expansion of unit IV facility and scale up in Eugia Pharma. 

Analysts at JP Morgan had pegged the value of the generic injectables business at $4.3 billion (about Rs 32,000 crore). Given the growth pipeline they expect the business to be valued at $7 billion (Rs 52,000 crore) by FY23. Aurobindo’s current market cap is around Rs 58,000 crore, which gives little incremental valuation for the generic business of the company; separate listing could thus unlock significant value. 

The company has also received approvals under the production-linked incentive (PLI) scheme for three of its fermentation-based products. Say Param Desai and Ankeet Pandya of Elara Capital, “Given China +1 strategy, and the company being a key player in the US generic antibiotic market, long-term potential from these products could be significant.” They expect annual operating profit run-rate of Rs 800-Rs 1,000 crore, including incentives, FY24 onwards. 

Aurobindo has underperformed its peers with a return of 27 per cent over the last year. However, given its plan to consolidate injectables business, PLI scheme-related gains, outsourcing opportunity in vaccines and improved  balance sheet position after the sale of Natrol, there could be more upsides going ahead. Investors can consider the stock on dips.