Aurobindo Pharma: Strong prospects offset by valuation concerns

Since the start of this financial year (FY24), the stock of Aurobindo Pharma has been one of the top pharma gainers, enhancing investor wealth by over 68 per cent, with a third of those gains coming in the last three months.

The stock is riding on multiple triggers given its investments in the production-linked incentive or PLI scheme, biosimilars, injectables and vaccines, which should drive revenues and profits over the medium term.

Better than expected performance after the June quarter results led to a revision of earnings estimates for FY24 and FY25.

Prabhudas Lilladher Research has increased the net profit estimates for the next two years by 7-12 per cent to factor in higher margins.

The company's operating profit of about Rs 1,151 crore was up 15 per cent on a sequential basis, while operating profit margins at 16.8 per cent were up 130 basis points.

The company has guided for an operating profit margin of 18 per cent (excluding upside from the generic version of the cancer drug Revlimid).

This is 120 basis points higher than the current levels and is on the back of better business prospects in the key markets of the US and Europe.

Param Desai of the brokerage expects the margin trajectory to improve further; the pick-up in US sales will depend on timely approvals for niche products along with the stabilisation of pricing pressures in the base business.

A benign pricing environment in the US and drug shortages are major triggers for the company.

Given its broad portfolio, ARBP is well-positioned to capitalise on drug shortages in the US and be the biggest beneficiary from a stable pricing environment, say Kunal Randeria and Aashita Jain of Nuvama Research.

While oral solids and injectables saw sequential improvement in the June quarter, its launch pipeline, comprising 60 launches (40 oral solids, 20 injectables) and the Revlimid launch in October, should drive growth in the medium term, they add.

The strong triggers have led Macquarie Research to project an earnings growth of 28 per cent over the next three years.

The gains would be on account of strong product launch momentum in the US and key launches such as the generic version of the cancer drug Revlimid and the commercialisation of Penicillin G (Pen G) active pharmaceutical ingredient or API under the production-linked incentive scheme. Pen G is an injectable form of penicillin that contains potassium and sodium.

The country currently imports its requirements of Pen G from China, and a local unit will be able to meet the requirements of the domestic pharma players.

The Street will also track progress on the company's plans to sell a majority stake (60 per cent) in the injectable portfolio of its subsidiary Eugia, which is currently valued at about $2 billion.

While there are multiple triggers, a number of brokerages have downgraded the stock or cut their ratings given the sharp stock rally. Post the June quarter results, BOB Capital Markets had downgraded the stock to hold.

The brokerage highlighted the low upside potential at prevailing valuations of 10.2 times and 8.8 times its FY24 and FY25 enterprise value to operating profit.