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AUROPHARMA is going global
We are LONG on AUROPHARMA and continue to remain positive in the medium-term.
AUROPHARMA, the world’s 7th largest generic drug maker by sales is based out of India. The company has significantly expanded its global foothold over the years, deriving almost 90% of topline from overseas markets, with geographies like the US & Europe comprising 76% of total revenues. AUROPHARMA is presently catering to 150+ countries through 29 manufacturing facilities.
Focus is on strengthening the formulations segment, with injectables serving as a moat
Product portfolio comprises formulations (86% revenue) and APIs (14% revenue). US formulations form the largest share (50% revenues), followed by Europe (26%), ARV (5%), and rest of the world (5%).
AUROPHARMA has been strengthening its injectables portfolio, a higher margin segment within formulations (the other being oral solids) and a complex product class. Injectables are difficult to manufacture, attract low competition and lower pricing pressure. Its share has increased from 6% of revenue in FY14 to 20% in FY20. This is further expected to enhance given planned capex of INR1,300-1,400cr phased over forward 2 years specifically for injectables, inhalers, and dermatology. The investment should support AUROPHARMA to serve growing European & emerging markets demand.
Global API market is expected to grow by 6.1% CAGR till 2024, giving a push to exports from India, thereby driving domestic production by 8.6% y-o-y over the same period. Local anti-Sino sentiment and production-linked incentives may serve as potential tailwinds. Moreover, AUROPHARMA management has already started making noise around potential API capacity expansion, albeit shying away from giving out any definitive plans.
Broader global generics are also anticipated to grow by 5% plus till 2025.
Investments & Divestments supporting current areas of focus
Natrol, the company’s US based nutritional supplement division, was divested in Oct 20 at a deal value of INR4,000cr. This division was deemed as non-core by the promoters.
Furthermore, AUROPHARMA acquired Mviyes Pharma Ventures at INR274cr. With this acquisition the company is expected to strengthen its position in oncology injectables.
AUROPHARMA has also entered a licensing arrangement with COVAXX, division of US based United Biomedical Inc., for developing & commercializing the latter’s COVID-19 vaccine (currently in Phase 2/3 trials). INR250cr incurred to-date on a new vaccine manufacturing facility.
Sound balance sheet and low leverage de-risk the investment profile
Revenue/EBITDA have witnessed a CAGR of 25%/18% during FY16-20 helping the company deliver a lofty 28% ROCE and 22% ROE on average over the last five years. Cash on balance sheet as at Dec 2020 stands at INR5,941cr (>10% of total assets) adequate to fund upcoming CAPEX plans.
The company turned net debt negative as at Q3 2021. Leverage is accommodative with interest coverage having increased to 63.5x as at 9M 2021 from 13.4x as at FY20.
Profit retention remains high at 90%, FCF generation looks strong.
AUROPHARMA released its Q3 2021 results yesterday with 9M revenue of INR18,773cr, 11% increase on Y-o-Y basis. Owing to exceptional gain of INR2,814cr from Natrol divestment, remeasurement of equity interest in Eugia Pharma and impairment charges, net profit was considerably higher at INR4,533cr as against INR1,980cr for 9M FY20. EBITDA margin is stable at 22%.
Valuation on absolute and relative terms looks fairly attractive
AUROPHARMA currently trades at 15.90x P/E and 9.26x EV/EBITDA on FY22F vs. sector avg. P/Es in range of 30x-40x and sector avg. EV/EBITDAs at 20-30x. Close comps Cipla (NSE: CIPLA) trades at a P/E of 25.40x and EV/EBITDA of 14.20x while Dr. Reddy’s Labs (NSE: DRREDDY) trades at 25.20x and 14.60x respectively on FY22F. The company has a strong balance sheet with low leverage. CAPEX plans for capacity expansions and internal accruals bode well for the stock.
Promoters own 51.94% of outstanding shares. FPIs own 24.99%.
We are LONG on the stock and continue to remain positive in the medium-term.