Improving margins, reducing debt key challenges for Aurobindo Pharma

While revenue growth is expected to be strong, improving margins and reducing debt could be challenging

Even as peers struggled to maintain their revenue growth, Aurobindo Pharma has been able to navigate the tough generic market in the US, given its diversified product basket, differentiated portfolio, and new launches.

The company, which is one of the few to have significant presence both in the US and Europe, is expected to maintain its outperformance in the coming quarters.

Of its twin growth engines, the company’s US prospects will be driven by difficult-to-make injectables, which account for a fifth of the US revenues.

The company, which has launched 14 products during the July-September quarter in the US market and beaten sales growth, has 125 products in line for approval, against 117 in the April-June quarter.

The company has been successful in increasing the profitability of its European business by transferring the manufacture of 97 products from Europe to India.

Successful turnaround of acquisitions done earlier should have a significant impact on the company’s consolidated operations, as Europe accounts for a fourth of overall sales.
 

In addition, its active pharmaceutical ingredients business is also picking up, mainly on firm prices of Valsartan (used in treating heart conditions).

On the anti-retroviral drugs business, the company is expecting a ramp-up in triple combination drugs to help it beat competition in the upcoming tender next month.

While these are positives, debt reduction may be challenging, given the billion-dollar acquisitions announced during the past months (Sandoz Unit in the US, Apotex’s Europe business, and Advent R&D assets).

While the successful integration of acquisitions may help drive future growth, near-term margin expansion may get restricted.

Analysts such as Ranvir Singh at Systematix Shares says debt reduction would be challenging, as funds to the tune of $1 billion will be required for closing recently announced acquisitions. Till the same is achieved, margin gains would be tough, Singh adds.

Sarabjit Kour Nangra at Angel Broking expects net profit to grow at 17 per cent annually during 2018-20 estimates due to increased R&D expenditure. Nangra has accumulated ratings on the stock, with a target price of Rs 855, indicating 7.5 per cent upside from here on.