Aurobindo Pharma (AURPHA)

CMP: | 632 Target: | 770 (22%) Target Period: 12 months BUY

April 21, 2020

Unit IV receives VAI status from USFDA at last…

In a surprising example of changed fortunes, the USFDA has re-classified
the inspection conducted at the company’s general injectable formulation

Company Update
facility (Unit IV) at Pashamylaram, Hyderabad as voluntary action indicated
(VAI). In February 2020, USFDA had rescinded the VAI status issued to the
facility within three days of issue. The facility had earlier received 14
Particulars
observations after the inspection conducted by USFDA in November 4-13,
P a rticu la r Am o u n t
2019. The flip flop of events notwithstanding, this augurs well for the Mark et C apitalis ation | 37035 crore
company, as it has 46 pending filings (~30% of total pending filings) D ebt (F Y 19) | 6967 crore
including 50-60% of pending injectables that have been filed from this plant C as h (F Y 19) | 1957 crore
that is a key driver for the company's US growth. EV | 42045 crore
52 week H /L (|) 838/281
Exhibit 1: Recent regulatory update E quity capital | 58.6 crore
S ite L o ca tio n De ta ils L a st In sp e cte d S ta tu s F ace value |1

Un it IV Hyd e ra b a d In je cta b le s & O p h th a l 21-Ap r-20 V AI R e -issu e d Price Performance

U nit V III H yderabad AP I O ct-19,26-F eb-20 4 obs , E IR +V A I
U nit IV H yderabad Injectables & O phthalm ics 21-F eb-20 R es cinded V A I 1000 12000
U nit IV H yderabad Injectables & O phthalm ics 18-F eb-20 E IR +V A I 800 10000
U nit IV H yderabad Injectables & O phthalm ics Nov-19 14 obs ervations 8000
600
U nit V II (S E Z) Telangana O ral F orm ulations S ep-19, Jan-20 7 obs ervations , O A I 6000
400
U nit V H yderabad AP I O ct-19 4 obs ervations 4000
U nit XI S rik ak ulam AP I F eb-19 W arning L etter 200 2000

ICICI Securities – Retail Equity Research

U nit I Telangana AP I F eb-19 O AI 0 0

Oct-17

Oct-18

Oct-19
Apr-17

Apr-18

Apr-19

Apr-20
U nit IX Telangana A P I/Interm ediates Jan-19 O AI
Source: ICICI Direct Research

Valuation & Outlook Aurobindo Pharma(L.H.S)

NSE500(R.H.S)
Whilst four plants continuing to be under USFDA scrutiny [Unit XI has
warning letter, Unit VII, Unit I, Unit IX have official action indicated (OAI)
status from the USFDA], re-assignment of VAI status for Unit IV despite 14 Research Analyst
observations (that too for an injectable plant where cGMP requirements are
Siddhant Khandekar
even more stringent) came in as a huge positive surprise to us. Unit IV is a siddhant.khandekar@icicisecurities.com
critical plant for the company, given most of its pending injectables are filed
from this plant. Injectable segment is one of the key drivers for the Mitesh Shah, CFA
company’s future growth and margins. We expect the US injectable mitesh.sha@icicisecurities.com
segment to grow at 22% CAGR in FY19-22E to US$385 million. This is likely Sudarshan Agarwal
to provide much needed sentimental boost to the stock, which is getting sudarshan.agarwal@icicisecurities.com
valued at commodity multiple. The now defunct Sandoz deal also had its
share of negative sentiments for having foregone one of the cheapest M&A
bargains in the US generics space. While the recent chain of setbacks on the
cGMP front will continue to weigh, a positive outcome like this is likely to
provide a silver lining to a stock that is available at ~11x FY22E (~30-40%
discount to its historical band and ~50% discount to Nifty Pharma). We
ascribe a target price of | 770 valuing it 13x FY22E EPS of | 59.4. We upgrade
the stock from HOLD to BUY to incorporate the significant booster.
Key Financial Summary
(Ye a r E n d Ma rch ) F Y19 F Y20E F Y21E F Y22E C AG R (F Y19-22E ) %
R evenues (| crore) 19563.5 22958.5 25296.3 27138.2 11.5
E B ITD A (| crore) 3843.2 4828.4 5378.3 5815.2 14.8
E B ITD A m argins (% ) 19.6 21.0 21.3 21.4
Net P rofit (| crore) 2452.8 2867.3 3189.8 3459.2 12.1
E P S (|) 42.1 49.2 54.8 59.4
P E (x) 15.6 13.0 11.5 10.6
E V /E B ITD A (% ) 10.8 8.5 7.4 6.4
R O E (% ) 17.7 17.4 16.4 15.3
R O C E (% ) 15.9 17.8 18.1 17.8
Source: ICICI Direct Research; Company
 Company Update | Aurobindo Pharma ICICI Direct Research

Financial Summary

Exhibit 1: Profit & Loss (| crore) Exhibit 2: Cash Flow Statement (| crore)
(Ye a r-e n d Ma rch ) F Y19 F Y20E F Y21E F Y22E (Ye a r-e n d Ma rch ) F Y18 F Y19 F Y20E F Y21E F Y22E
R e ve n u e s 19,563.5 22,958.5 25,296.3 27,138.2 P rofit/(L os s ) after taxation 2,321.5 2,828.9 3,189.8 3,459.2
G rowth (% ) 18.6 17.4 10.2 7.3 A dd: D epreciation & A m ortiz ation668.0 991.1 1,085.0 1,221.0
R aw Material E xpens es 8,712.7 9,678.9 10,498.0 11,262.3 Net Increas e in C urrent A s s ets-1,661.3 -2,068.8 -2,190.7 -1,308.6
E m ployee E xpens es 2,584.9 3,199.7 3,444.9 3,663.7 Net Increas e in C urrent L iabilities151.0 670.9 542.7 492.7
O ther Manufacturing E xpens es 4,422.8 5,251.5 5,975.2 6,397.0 C F fro m o p e ra tin g a ctivitie s 1,622.0 2,589.4 2,742.8 3,954.3
Total O perating E xpenditure15,720.3 18,130.1 19,918.0 21,323.0
E B IT DA 3,843.2 4,828.4 5,378.3 5,815.2 (P urchas e)/S ale of F ixed A s s ets
-2,856.8 -1,703.1 -1,000.0 -1,000.0
G rowth (% ) 1.9 25.6 11.4 8.1 (Inc)/dec in Inves tm ents -46.3 0.0 0.0 0.0
Interes t 162.7 167.3 116.0 90.0 O thers 57.6 -11.4 -12.7 -12.8
D epreciation 668.0 991.1 1,085.0 1,221.0 C F fro m in ve stin g a ctivitie s -2,845.5 -1,714.5 -1,012.7 -1,012.8
O ther Incom e 166.1 98.4 74.7 106.8
P B T before E xceptional Item s3,178.7 3,768.4 4,251.9 4,611.0 Is s ue of E quity S hares 0.1 0.0 0.0 0.0
L es s : F orex & E xceptional Item s88.1 38.4 0.0 0.0 Inc / (D ec) in D ebt 2,230.4 -1,506.3 -1,000.0 -1,000.0
P BT 3,090.6 3,730.0 4,251.9 4,611.0 D ividend & D ividend Tax -159.9 -206.1 -232.4 -252.1
Total Tax 726.9 901.2 1,063.0 1,152.7 others -151.5 -167.3 -116.0 -90.0
P A T before MI 2,363.8 2,828.8 3,188.9 3,458.2 C F fro m fin a n cin g a ctivitie s 1,919.1 -1,879.7 -1,348.4 -1,342.0
Minority Interes t -0.3 -0.8 -0.9 -0.9
P AT 2,364.8 2,828.9 3,189.8 3,459.2 Net C as h flow 695.6 -1,004.9 381.8 1,599.5
A djus ted P A T 2,452.8 2,867.3 3,189.8 3,459.2 O pening C as h 1,261.6 1,957.2 952.3 1,334.1
G rowth (% ) 1.2 16.9 11.2 8.4 C lo sin g C a sh 1,957.2 952.3 1,334.1 2,933.6
E P S (Dilu te d ) 40.6 48.6 54.8 59.4 F re e C a sh F lo w -1,234.8 886.3 1,742.8 2,954.3
Source: ICICI Direct Research Source: ICICI Direct Research

Exhibit 3: Balance Sheet (| crore) Exhibit 4: Key Ratios (| crore)

(Ye a r-e n d Ma rch ) F Y19 F Y20E F Y21E F Y22E (Ye a r-e n d Ma rch ) F Y18 F Y19 F Y20E F Y21E F Y22E
E quity C apital 58.6 58.6 58.6 58.6 P e r sh a re d a ta (|)
R es erve and S urplus 13,832.2 16,455.0 19,412.3 22,619.4 A djus ted E P S (D iluted) 42.1 49.2 54.8 59.4
Total S hareholders funds 13,890.8 16,513.5 19,470.9 22,678.0 B V per s hare 238.6 283.6 334.4 389.5
Total D ebt 6,966.8 5,460.5 4,460.5 3,460.5 D ividend per s hare 3.0 3.5 4.0 4.3
D eferred Tax L iability 281.3 309.4 340.4 374.4 C as h P er S hare 33.6 16.4 22.9 50.4
Minority Interes t 1.6 1.8 2.0 2.2 O p e ra tin g R a tio s (%)
L ong term P rovis ions 46.5 52.1 58.4 65.4 G ros s P rofit Margins 55.5 57.8 58.5 58.5
O ther Non C urrent L iabilities 11.3 11.9 12.5 13.1 E B ITD A m argins 19.6 21.0 21.3 21.4
S o u rce o f F u n d s 21,198.3 22,349.2 24,344.6 26,593.6 Net P rofit m argins 12.5 12.5 12.6 12.7
G ros s B lock - F ixed A s s ets 9,665.1 11,165.1 12,765.1 14,365.1 Inventory days 135.2 135.2 145.0 145.0
A ccum ulated D epreciation 2,022.8 3,013.9 4,098.9 5,319.9 D ebtor days 63.7 63.7 63.7 63.7
Net B lock 7,642.3 8,151.2 8,666.2 9,045.2 C reditor days 49.9 49.9 49.9 49.9
C apital W IP 1,668.5 1,871.5 1,271.5 671.5 A s s et Turnover 2.2 2.2 2.1 1.9
Net F ixed A s s ets 9,310.8 10,022.8 9,937.7 9,716.7 E B ITD A C onvers ion R ate 42.2 53.6 51.0 68.0
G oodwill on C ons olidation 832.5 831.5 831.5 831.5 R e tu rn R a tio s (%)
Inves tm ents 360.2 360.2 360.2 360.2 R oE 17.7 17.4 16.4 15.3
Inventory 7,245.6 8,503.0 10,049.2 10,780.9 R oC E 15.9 17.8 18.1 17.8
C as h 1,957.2 952.3 1,334.1 2,933.6 R oIC 18.5 20.1 20.2 20.4
D ebtors 3,413.8 4,006.2 4,414.1 4,735.5 V a lu a tio n R a tio s (x )
L oans & A dvances & O ther C2,747.9
A 2,966.9 3,203.5 3,458.9 P /E 15.6 13.0 11.5 10.6
Total C urrent A s s ets 15,364.5 16,428.4 19,000.9 21,908.9 E V / E B ITD A 10.8 8.5 7.4 6.4
C reditors 2,677.1 3,141.7 3,461.6 3,713.7 E V / Net S ales 2.1 1.8 1.6 1.4
P rovis ions & O ther C L 2,579.0 2,785.3 3,008.1 3,248.8 Mark et C ap / S ales 1.9 1.6 1.5 1.4
Total C urrent L iabilities 5,256.1 5,927.0 6,469.7 6,962.4 P rice to B ook V alue 2.6 2.2 1.9 1.6
Net C urrent A s s ets 10,108.4 10,501.4 12,531.2 14,946.5 S o lve n cy R a tio s
L T L & A , O ther A s s ets 403.1 435.3 470.1 507.7 D ebt / E quity 0.5 0.3 0.2 0.2
D eferred Tax A s s ets 183.3 198.0 213.8 230.9 D ebt / E B ITD A 1.8 1.1 0.8 0.6
Ap p lica tio n o f F u n d s 21,198.3 22,349.2 24,344.6 26,593.6 C u rre n t R a tio 2.6 2.6 2.7 2.7
Source: ICICI Direct Research Source: ICICI Direct Research

ICICI Securities | Retail Research 2

 Company Update | Aurobindo Pharma ICICI Direct Research

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Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as
the analysts' valuation for a stock

Buy: >15%;
Hold: -5% to 15%;
Reduce: -5% to -15%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

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 Company Update | Aurobindo Pharma ICICI Direct Research

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