Initiating CoverageBUY A U RO B IND O P HA RMA L TD (APL) …transforming growth June 25, 2010 Investment Highlights EBIDTA margins to get boost EBIDTA margins, which saddled in the range of 13-17% in FY06-09, are set to improve further on account of higher proportion of formulations, assured offtake from Pfizer and growing supply agreements with MNCs, triggered by dossier filing activities. To augment capacity utilization The capacity utilization as on date in case of formulations is still a low of ~1530%. The company is vertically integrated with 95% of the key intermediates and APIs required for formulations are made in-house. EBIDTA margins will also improve on account of improved capacity utilization. Monetization of ANDAs in the US to facilitate sustainable cash flows As on 31st March 2010, the company has filed 169 ANDAs. Out of which it has received 84 final approvals and 29 tentative approvals. We expect the US business to grow by 50% to Rs.18bn between FY09 to FY12 on the back of monetization. Pfizer Deal APL entered into a licensing & supply arrangement with Pfizer Inc. to sell over 100 oral and sterile products in various markets including the USA and France, the top 2 markets for Pfizer. This deal has demonstrated company’s superior capabilities. ARV business to become EBIDTA accretive The ARV business (Anti-Aids), which is entirely tender, based, is up for major reshuffle. The company will be selective in bidding for global tenders and more and more revenue will come from US ANDAs and commercial tenders, which will improve margins. US Healthcare bill to have positive impact on generic players Passing of US Healthcare Bill has thrown up huge opportunities for Indian Generic players. With huge product basket, approved facilities and good filing run-rate together with vertically integrated business model, the company is well poised to reap the benefits of the same. Valuation & Recommendation The scrip is currently trading at ~5x FY12 EV/EBIDTA, a substantial discount vis-à-vis industry peers because on its legacy API model. But with the kind of transformation, vertically integrated business model, capacity build up in niche segments plus deals with the MNCs as the one with Pfizer, we believe the scrip has the potential for re-rating. We have ascertained a target of Rs. 1334, based on 7x FY12 EV/EBIDTA for 12-15 months investment horizon. Rsm P.E x 19.4 19.3 10.0 9.1 6.4 EV / EBITDA x 18.8 13.9 8.6 6.7 4.9 EV/Sales x 2.7 2.3 2.0 1.6 1.2 ROCE 8% 19% 17% 16% 24% Ratings CMP (INR) Price Target (INR) Return (%) Key Data BSE Code Reuters Code Sensex No.of Shares,mn (Diluted) Face Value Mcap,Rs mn Mcap,USD mn @ 46.50 52 week H/L (Rs.) 2W Avg. Qty Share holding, Mar'10 Promoters FII DII Others Total Holding >1% (Non Promoter) HSBC Global Investment Funds Life Insurance Corporation of India Artha EM Fund Mauritius Sundaram BNP Paribas Mutual Fund Caam Funds India Kotak India Focus Fund The India Fund Inc BUY 862 1334 55 524804 17730 ARBN.BO 57.8 T % Holding COR 5.0 50402 1083.9 990 / 406 25231 56.9 23.9 10.2 9.0 100 4.3 2.8 1.3 1.2 1.0 2.6 1.7 EBIDTA 3518.1 5164.6 8231.5 9960.8 EBIDTA Adj NP 2385.9 2405.0 4817.6 5451.6 7734.4 Growth 19% 1% Adj EPS Rs. 44.4 44.7 86.4 94.3 14% 17% 23% 24% 25% http://www.aurobindo.com Siddhant Khandekar
[email protected] Ph. - +91-022-66318634 M - +91-9819071425 P. 12695.2 Exibit-1: Financial Snapshot YE Mar. FY08A FY09A FY10A FY11F FY12F Revenues 24465.9 30773.1 35754.0 41984.8 50320.2 Growth 15% 26% 16% 17% 20% Source: Company & Sunidhi Research LTD 100% 13% 42% 133.8 The Trident facility (acquired for about Rs. Although it is true that margins got boost from higher Dossier sales.1bn of business a year from this facility in couple of years. We expect margins to remain in the range of 23-25% for FY10-FY12.2bn) is expected to start commercial production in FY12. The SEZ unit VII has already gone on stream. the single largest therapeutic group globally. we believe that the main growth will only come from this paradigm shift as the Dossier income is expected to be more or less constant in the coming years. other than its traditional segments of Antibiotics and ARVs. in fact the results are already visible. we also observe that the company will remain committed to Antibiotics. APL’s formulation facilities have been backed by its own API facilities. Margins have improved by ~ 700 bps to 23% during FY07-10. Going forward. Since then it has consciously moved up the value chain by expanding into formulations and for FY10 formulations to API ratio for the base business stood at 54:46 (Exhibit 2). The company was predominantly an API supplier with close to 70% of the sales coming from APIs in FY07. we believe formulations will constitute more than 70-75% of the base sales and maximum APIs will be used for conversion into high margin formulations. Exibit-2: API: formulation ratio – FY07-FY10 69 70 60 50 40 31 46 61 54 54 46 Formulations to constitute ~66% and ~ 73% of base business in FY11 and FY12 39 30 20 10 FY07 FY08 Formulations % Source: Company & Sunidhi Research FY09 APIs % FY10 The shift towards formulations will also improve EBIDTA margins. especially high-end ones such as Cephalosporins (3rd & 4th generation) and Penams. This has facilitated the company to enter into other niche segments such as Cardiovascular (CVS). The company in recent years has ramped up global filing activities and it has positioned itself as one of the largest generics suppliers from India. Sunidhi Research | 2 To expand into niche formulations . Also in ARVs the company will be selective in tender selection (discussed latter). The business model is vertically integrated with ~95% of the key intermediates and APIs required for formulations are made in-house. Central Nervous System (CNS) and Gastroenterologicals (GI). Aurobindo expects some Rs.Aurobindo Pharma Ltd Investment Rationale Change in Revenue Mix in favour of formulations to improve Margins. Aurobindo has added two more formulations facilities (one acquired facility and one SEZ) in FY10. Having said this. The plant is expected to manufacture general injectable range of formulation products. 8 25. Overall capacity utilization in case of most of the formulation plants is still bellow 30%.Aurobindo Pharma Ltd Overall the company has invested nearly Rs. It ranks the highest in terms of DMF filings by any Indian company and is the second largest globally.7 0.2 New Facility addition and additional Capex APL will add three more formulations facilities New multipurpose liquid injectable facility near Hyderabad.0 48. Since more and more APIs will be used for formulations.25bn on capex in FY11 on the following activities Exibit-4: Capex Activity Amt (Rsbn) Entire planed capex will be for formulations Maintenance Capex CRAMS Upgradation of US facility Facility for Oral Contraceptives High end Antibiotic Penam injectibles Total Source: Company & Sunidhi Research 1. The additional three facilities are expected to go on-stream by FY12-13.0 23.7 FY12 100. Exibit-3: Common size statement % Total Sales Raw Materials (incl.8 76.10bn. specializing in manufacture of general injectable range including glass vials for lyophilized sterile powder and liquids and ampoules High end antibiotic Penams powder injectable facility near New Delhi and Oral Contraceptive facility near Hyderabad.14 are in India and one each in US and China.8 0.1 9.9 22. The recently acquired Trident facility and SEZ unit VII are yet to start commercial production.8 FY10 100.0 53. The company is a leading player in APIs and has a strong presence in Antibiotics such as Semi-Synthetic Penicillins (SSPs) and Cephalosporins (Cephs).7 77.2 19.3 23.3 Sunidhi Research | 3 .2 16.0 48.0 0. this will further boost the formulations basket. Stk adj) Staff Cost Other expenditure Total Expenditure EBITDA Source: Company & Sunidhi Research Incremental APIs will be used for captive purpose Better capacity utilization improve EBIDTA margins to FY09 100. The company has filed a total of 1557 DMF filings globally of which 145 pertain to the US market 1036 in EU and 295 in ROW. The augmented capacity utilization will strengthen the EBIDTA margins as shown in the common-size statement.0 48.5 0.0 9.4 17.1 9.3-3.1 83.4 18.2 7. in the last five years to build up the formulations capacities. we see the share of APIs to net sales to go down to ~27-30% by FY12. It intends to spend additional Rs.0 FY11 100.4 3. Domestic sales are predominantly API Sales.4 74. To augment large un-used Formulation Capacity Utilization Aurobindo currently owns 16 manufacturing facilities. Antiretrovirals (ARVs). By Sunidhi Research | 4 . Out of these filings. We expect the US business to grow by 50% to Rs. Wall mart etc. Kaiser. The contribution from US Sales to the base business is also expected to grow from 18% to 37% between FY09-FY12. Cardiovascular (CVS) Central Nervous System (CNS). It intends to file another 125 ANDAs in the next 2-3 years. The dedicated Crams facility will act as a separate division with dedicated workforce catering to Chemicals and formulation Research. In July 2006. at least 60 are para IV filings. which will include more than 60 para IVs. The company has already established strong relationships with marketing and distribution channels in the US such as McKesson. Exibit-5: ANDA filing 185 160 135 110 85 60 35 10 FY06 FY07 FY08 FY09 FY10 51 26 50 128 113 90 67 147 169 CRAMS business to start revenue generation post FY12 Tie-ups with major US distributors for generics sales 82 Cumulative ANDAs Source: Company & Sunidhi Research Approvals received Aggressive filing of ANDA in the US So far the company has launched more than 90% of products (out of 83 final approvals) in categories such as Antibiotcs.18bn between FY09 to FY12E on the back of monetization of huge ANDA pipeline and the Pfizer deal (which we will discuss separately). As on 31st March 2010 the company has filed as many as 169 ANDAs and has already received approvals for 113 (83 final + 30 tentative). 2) to exploit and optimize the commercial value of products on hand and 3) to fast track the launch of products and increase the product pipeline.1) to get a hold on huge Generic opportunities that would be available in this post patent /drying pipeline era. its new division for providing custom research and manufacturing services (Crams). The company intends to cash on the next up-cycle in the Crams space after almost 12-18 months of subdued activities across the globe. and Anti-Diabetic. Monetization of ANDAs in the US Aurobindo was relatively late entrant in the $350bn US market. This facility is been used for manufacturing as well as product distribution. Walgreen. Company’s strategy in the US market is. The company has also filed 145 DMFs cumulatively for APIs.Aurobindo Pharma Ltd Foray into CRAMS through new division ‘Aurosource’ In March Aurobindo launched AuroSource. Amerisource. Cardinal Health. Aurobindo acquired a US-based FDA compliant cGMP facility for Oral dosages in the state of New Jersey from a multinational major for $19Mn. 50bn. 2) getting some of its products manufactured at cost-effective rates at FDA approved facilities in other countries. arthritis and lupus. Norvasc for high blood pressure. This unit is part of its generics subsidiary Greenstone. Pfizer is trying to boost its Established Drugs Unit. With the alliances like Aurobindo.Size ($2. So the company is actually putting in place a de-risking model. which currently has 300 products in its basket. Canada. and 3) To acquire companies with proven capabilities. The company has already cut its CY12 revenue guidance by $800mn on account of US Healthcare legislation which is tilted towards generics. Pfizer also has got its task cut out after a $68bn acquisition of Wyeth.1) to partner with other companies and in-license their products.Size ($2. 30 countries in EU including France. In Q1CY10. If it does not ally with the generic players. Lyrica. Zithromax for bacterial infections and Medrol for inflammatory and immune conditions. Effexor. this unit contributed ~17% to Pfizer’s overall sales of $14. The deal covers exclusive.Size ($11bn).8bn). which was partly funded by $24bn unsecured notes. Exibit-6: US Business 20500 15500 Rsm 10500 5500 500 FY09 FY10E FY11E FY12E US Source: Company & Sunidhi Research Pfizer Deal In May 2009. Pfizer envisages this unit to be a major growth driver by 2011. Pfizer is getting ready for the off-patent regime. the global Established drugs market which was $270bn in CY2006 is expected to grow to at least $500bn by 5 Alliance with Pfizer-a win-win deal Pfizer is strengthening established product unit for off-patented products Sunidhi Research | . it would be under pressure from the same players in the generic market. The only way to maintain the profitability will be cost rationalization which will be achieved through alliances and partnerships.8bn) and ZosynSize ($1. Pfizer is under pressure as several of its blockbuster drugs covering 40% of its revenue will go off-patent in the next couple of years. the company entered into a licensing and supply agreement with Pfizer Inc. to sell over 100 products in the US. non-exclusive as well as co-exclusive agreements for various products. Australia-New-Zealand and almost 110 ROW countries. Pfizer management has chalked out a strategy to cut operating costs by at least $ 4-5bn by CY12. including former blockbusters such as Zoloft for depression.Aurobindo Pharma Ltd FY12 we expect US business to be the single largest contributor to the base business. Notable examples areLipitor. such as asthma. According to Pfizer.2bn) Pfizer is now contemplating three-pronged strategy to expand its portfolio. Cephs and SSPs. of a Dutch company Pharmacin International BV. At ~ €10Mn. Anti bacterial. Spain and erstwhile Yugoslav countries and 3) Supply agreements with MNCs including Pfizer across the region . a CAGR of ~53% between FY09-12. UK (UK MHRA). Pharmacin owns several product dossiers/market authorizations and IPRs. The MAs are well diversified into various segments – CNS. while reducing the time to market and enhance the relationships in the generic value chain in addition to building a broad and formidable product portfolio. by taking over the Italian operations of German pharmaceutical major TAD Pharmaceuticals. As of on 31st March 2010 the company has filled 764 dossiers (including multiple registrations) cumulatively and received approvals for 290 Dossiers. Pharmacin has a broad product portfolio in three key segments – CNS. We expect Europe to grow to Rs. it acquired 3rd company in EU. The traction will also come from scaling up of company’s own product portfolio as it intends to leverage upon the marketing network from its three acquisitions. In December 2006. NSAIDS etc. We expect Pfizer sales to grow almost 5 fold to ~$270-280 by FY12. Although the company does not share Pfizer numbers separately. Pfizer expects this market to go up to $250Bn by CY2011. the acquisition was in line with the other two acquisitions. EU and ROW businesses shaping up Currently European formulation business constitutes 7% of the base sales. which focuses on rest of the world markets covering emerging economies of Latin America. Globally Pfizer has just ~5% share in the Established drugs market and it wants to improve on this number. Anti fungal. boosted by 1) acquired businesses. CVS. mainly in the UK market. Sunidhi Research | 6 EU & ROW formulation business to constitute 24% of base sales by FY12 from 13% at present Acquisition and Dossier fillings to drive EU growth . Oncology. which is equivalent to Rs. To centralize the European operations the company has created a hub at Malta to cater to different European customers. which will speed up its entry into the Italian generic market. the generic formulation pharmaceutical company engaged in selling generic formulations. from $125Bn in CY 2008. In February 2006. owns over 100 approved Marketing Authorizations (MAs) by Medicines and Healthcare Products Regulatory Agency. the company acquired UK based Milpharm Ltd. Milpharm Ltd. The huge ramp-up will be in sync with Pfizer’s target of ~$4-5bn worth of cost savings globally. Eastern Europe and Asia (ex Japan) where demographic improvement is facilitating need for quality healthcare.6bn. Portulgal. CVS and Gastroenterological and the dossiers support over 200 product registrations for 63 customers in Netherlands and Europe. The share of this unit was ~12% of pfizer’s overall revenue for Q1CY10. 2) focus on new markets such as Germany. The alliances will also help Pfizer to boost its Emerging markets Unit.. anti diabetic. Pharmacin engaged in the business of supply and licensing of generic pharmaceuticals in the Netherlands and in select key markets in Europe. Reports from the media suggests that Pfizer deal has racked ~$50mn during FY10. The acquisition has given Aurobindo access to more than 70 ready-to-market products. In March 2008. Similarly the company has filled as many as 1036 DMFs cumulatively for APIs in the EU.13bn. it made another acquisition in Europe. This hub will operate as centralized quality control warehouse to take care of packaging and logistical activities. GI.Aurobindo Pharma Ltd CY2011. by CY12. is a generic formulation company. The tenders are for specific programs such as President's Emergency Plan For AIDS Relief (PEPFAR/Emergency Plan) Clinton Foundation. As on 31st March the company has filed 295 DMFs in various countries. ARV 7 Will remain selective in choosing gobal ARV tenders Sunidhi Research | . which currently forms 7% of base business. etc and country specific tenders. With nearly 33Mn people living with HIV/AIDS. the margins in most of the tenders are low. Going forward we see the company to follow a measured path for growth by selectively participating in the global government tenders and increasingly filing of ANDAs for the US market. will get boost from Pfizer deal and aggressive regulatory filings. given that the US government has spent nearly $19Bn between 2004 and 2008 for PEPFAR and has committed another $6Bn in 2010 for AIDS program. We expect ROW business to grow at a CAGR of 52% between FY09-12 Exibit-8: ROW Business 6200 4700 Rsm 3200 1700 200 FY09 FY10E FY11E FY12E ROW Source: Company & Sunidhi Research The ARV segment is tender based Although it is growing at a steady pace.Aurobindo Pharma Ltd Exibit-7: EU Business 6100 4600 Rsm 3100 1600 100 FY09 FY10E FY11E FY12E EU Source: Company & Sunidhi Research Similarly the ROW business. We don’t see a total de-focus happening in this vertical. this business will remain a steady cash generator for the company in the coming years. The company follows extensive participation in all global tenders. We expect the D/E ratio to come down from 1.2x in FY12E. Following table gives the details of the FCCBs Exibit-9: FCCBs FCCB $60 mn Conversion Price (Rs.95% 46.6x by FY12E.) 522 879 1014 O/S As on 31st Mar 10 $25 mn $33 mn $113 mn $171 mn Redemption Date Aug-10 May-11 May-11 Fx Rate per USD 43.1 mn 1.Secured Loan Rs. We believe the company’s debt position would improve significantly as more and more capacity utilization takes place.4 mn Coupon rate on redemption 39. Sales Tax Deferment Rs.879 and 46.7 mn 8.25Bn.7bn (~$171mn).67bn by FY12.1014 due in the month of May 2011.Rs.15bn. without any lien. Similarly company’s Debt/EBIDTA ratio should improve from a high 4.7. Sunidhi Research | 8 .9% premium on redemption of $33 FCCBs with a conversion price of Rs. Working Capital Finance and Unsecured Loans.29% FCCBs worth $139mn redemption in FY12 will hit $50 mn $150 mn $260 mn Source: Company & Sunidhi Research Will take hit of Rs. The company believes raising fresh money will not be a problem.55bn The break-up is as follows.Aurobindo Pharma Ltd forms the largest block of ANDA approvals received for the US market and majority of the approvals are for the above–mentioned programmes.15 Underlying shares o/s 2. The company plans to raise $100-125mn through ECB route for any shortfall on repayment. given the huge Gross Block of ~Rs.15 45. Taking into account the 46. ~ 9-10bn to redeem these FCCBs.879 and Rs. the company will require another Rs.7 mn 4. This vertical is slated to grow steadily at ~5-10% pa to Rs.0.9x in FY09 to 0.2915mn on account of premium on FCCB redemption in FY12 It is clear from the above table that the last 2 tranches of FCCBs (conversion price Rs. Consolidated Debt as on 31st March2010 at Rs.5x in FY09 to 1.99% 46. 1014) still remain out-of-money and the redemption looms around with less than 12 months time left.1bn and FCCBs Rs.7bn.21.3% premium on redemption of $113 FCCBs with a conversion price of Rs. The FCCBs form ~ 36% the total debt.5.12.39 45. but is expected to tap many clients for supply arrangements. Patent challenges remain on the rise. In Europe the time taken for filing these Dossiers and getting Marketing Approval (MAs) can be at least 24 months. creating huge opportunities for global Generic players.1.1. which are required to be submitted to different regulatory authorities.98bn. with 65 new first-to-file paragraph IV challenges initiated in 2009 (up from 43 and 51 in 2007 and 2008 respectively). In recent years patent challenges have become the rule rather than exception for generics. The incentive is clear: the first ANDA filer to make a paragraph IV certification receives 180 days of market exclusivity during which no other ANDA can be approved for that drug. the Dossier income stood at Rs. Companies with integrated model and strong track record will withstand pricing pressure in generics Sunidhi Research | 9 . The generic pharmaceutical companies are expected to grow on the back of strong filing momentum and increased volume growth and also drying pipelines from innovators. novel delivery systems and backing of own raw material sourcing would be able to gain sizeable market share and protect their margins at the same time. The company sales dossiersdetailed monographs of non-infringing processes of bio-equivalents. For FY10. Changing Industry Dynamics Drugs worth ~$ 50bn are slated to loose patent exclusivity during 2009-2014 globally.Aurobindo Pharma Ltd Exibit-10: D/E (x) and Debt / EBIDTA (x) Source: Company & Sunidhi Research Dossier filing activities to facilitate supply tie-ups Other Operating Income is entirely Dossier income for sale. This income will remain in the range of Rs. According to a study compiled by US based RBC Capital markets.50-1. Other Operating Income for the company includes out-licensing of dossiers to MNCs which trigger supply agreements. chronic segments. Companies with strong presence in branded formulations.60bn in the coming years. there are approximately 300 active first-to-file paragraph IV challenges. approved sights of manufacturing and procurement of raw materials. most of which have multiple filers. licensing and development of Dossiers. The stricter norms adopted by the USFDA for the generic companies along with rising pricing pressure in the regulated markets will enable only the stronger and established players to retain their market dominance. US Healthcare Reforms. Indian generic players could see runaway growth for the next 7-8 years bolstered by exports after the bill. This is why generic firms focus on first-to-file opportunities. the success rate for generics jumps to 76%. R&D cost structures and a high growth domestic market. India is going to be the obvious choice of US pharma companies when they go shopping for Generics. Indian pharma industry is fundamentally based on Generic products. We observe that Indian pharma companies are comfortable with respect to financial leverage and are likely to generate adequate cash to handle the capex requirements over the next two to three years.Aurobindo Pharma Ltd With very little downside and huge upside. The in-bound M&A activity by MNC Pharma companies is growing up in India. Drying pipeline of new drugs. they are likely to make up nearly 46-47% by 2013 when the bill will come into full effect. Overall the bill is positive for the Indian generic industry because generics are definitely going to get much better preferences there because ultimately the Obama administration is looking at wider coverage for people who cannot afford healthcare. the US House of Representatives passed the sweeping health care reform package. compared with 83% today. When fully phased in.Reddy's Source: Sunidhi Research Overall success (Cases Won/settled) 75% 67% 63% 61% Indian companies enjoy fair amount of overall success rate when it comes to settlements and dropping of cases in the US Generics market. we observe that majority of the companies have more or less completed the capex cycles mainly funded by external borrowings. Settlements provide clarity for the company and shareholders. Dr. Sun. The bill will have long lasting implications on the Indian Pharma industry. The overall success rate for the generic industry is 48% based on court decisions. increased R&D expenditure required to bring a drug to the market. has traditional advantages of competitive manufacturing.S. increased pressure in the developed nations to bring the health care costs down are some of the factors that are responsible for the big MNCs to fine-tune their business models. Incremental coverage of uninsured Americans under the health plan to boost generics demand Sunidhi Research | 10 . While generics form only 19-20% of the US market today. extending Medicare coverage to 32 million uncovered Americans. exclusivity is the driving force to the huge increase in first-to-file paragraph IV filings. On the Balance sheet front. However the benefit will not flow down overnight. Name Lupin Sun Pharma Ranbaxy Dr. Companies such as Lupin. India.The Bill Impact In a landmark legislation passed in the month of March. when one takes into account patent settlements and cases that were dropped. substantially in favor of challenging patents. This is why Indian pharmaceutical industry has generated a lot of interest among the Big Pharma MNCs. India was among the 14 countries named in the Congress discussion that can offer low-cost drugs to achieve lower health care costs. However. almost 95% of eligible Americans would have coverage. and also the highest number of molecules approved by US FDA. With the highest number of US FDA approved manufacturing facility outside of U. Reddy’s and Ranbaxy have established firm footing in this market not only because of wide product basket but also due to settlement success rate. having largest number of FDA approved plant after US. for which the companies had to report huge translation losses in FY09. Torrent. Glenmark. Reddy’s. Pfizer. the Innovator companies pay certain amount to the Para IV generic players to delay the generic launch. This situation was anticipated by many leading companies like Pfizer. Astra Zenecca.Aurobindo.Reddy’s Labs.Indoco to name a few. Thus both the players try to avoid lengthy trial processes hence bringing the Generics before the patent expiry. Dr. Ranbaxy.Germany is a prime example. Sun Pharma. well in advance. Torrent. Dropping the ban on 'pay-for-delay' settlements has come as a surprise for Indian generic companies.Dr. Sanofi etc. GSK. Another important point which was dodged by the bill is ban on pay-fordelay settlements between Branded and Generic drug-makers.Aurobindo Pharma Ltd The opportunity could be bigger as other developed nations could join the US initiative to cut healthcare costs.Nectar. Normally in such kind of arrangement. Elimination of “ban on pay for delay” clause from the bill to benefit Indian generic players Sunidhi Research | 11 . and Cadila will benefit in the long run. The recent in-bound tie-ups are testimony to thisGSK. Sanofi Aventis-Santha Biotech and Watson.Strides Arcolabs. GSK. HospiraOrchid. Aurobindo. Pfizer. We believe companies which have sizable presence in the US by virtue of ANDA filings and USFDA approved production facilities such as Lupin. Company owns one of the largest manufacturing bases in India that caters to the US market and until now there are no concerns or observations or warning letters from the USFDA. All the peers (exhibit) derive ~20-40% sales from domestic branded formulations where as most of Aurobindo’s domestic revenue comes from APIs. The likely success in the CRAMS foray is not ascertainable at this juncture but looking at the overall CRAMS scenario. a substantial discount vis-à-vis industry peers because on its legacy API model. capacity build up in niche segments plus deals with the MNCs as the one with Pfizer. Similarly because of export driven business model. Sunidhi Research | 12 . the company does not have strong domestic cushion. especially after the improved business sentiments in EU leading to improvement in the off-take. give the success rates of the Indian companies and the potential involved in exclusivity deals. The Pfizer deal has come as a short in arm at a time when the company is scaling up its capacities. we believe the scrip has the potential for re-rating. The scrip is currently trading at ~5x FY12 EV/EBIDTA. as discussed above. But with the kind of transformation. but this risk will be mitigated to some extend as the company follows natural hedge policy and the net forex exposure is ~30-35%. On the flip side the FCCBs redemption will remain an important factor for multiple. vertically integrated business model. Incremental capacity utilization will also act as an operating leverage to improve the overall profitability. The company does not want to go for FTF opportunities aggressively which we think is a bit dampener for the multiple. we see revival in 6-9 months time. the currency fluctuation risk is always there. which in the past was stamped with predominantly commoditized API business model. Dossier filing activity will lead to tapping of potential clients for supply arrangements. based on 7x FY12 EV/EBIDTA for 12-15 months investment horizon. Secondly unlike leading Generic peers. We have ascertained a target of Rs.Aurobindo Pharma Ltd Conclusion and valuation The revenue mix transformation augurs well for the company. It will improve the overall image and infuse steady and incremental cash flows going forward. CVS and lately into Oral Contraceptives and High end Penams will optimize the product offerings in the formulation space. Its foray into niche segments like CNS. besides improving the margins. 1334. The market potential of the company’s product pipeline of 300+ products is almost $200bln. Health Canada. ANVISA (Brazil) USFDA Waiting for approvals Capacity utlisation High Unit VIB Cephs (Oral & Sterlie) Low Unit XII SSPs (Sterile & Non-Sterile) Low Unit VII (SEZ) Trident US Formulation Units US NJ Indian API Units Unit I Unit IA Unit V Unit VIA Unit VIII Unit XIA Intermediates Unit IX Unit X Unit XIA China Non-Betalactum Liquid Injectibles Yet to start Yet to start Non-Betalactum (Oral) Product Type CNS. WHO. CNS and Gastroenterologicals supported by own R&D set-up. UKMHRA. WHO USFDA. MCC (SA). TGA. USFDA. ANVISA (Brazil). Aurobindo Pharma is vertically integrated and its product basket includes about 300+ products. WHO USFDA. UKMHRA. TGA. ARV ARV USFDA Approvals USFDA. MCC (SA). in over 125 countries. CGMP USFDA. UKMHRA. UKMHRA. MCC South Africa. ARVs. CVS. ANVISA (Brazil) USFDA. WHO USFDA. TGA. The Company is marketing these products globally. Health Canada. TGA. MCC (SA). Aurobindo Pharma Limited (APL) is an integrated pharmaceutical company which manufactures generic formulations and active pharmaceutical ingredients.Aurobindo Pharma Ltd Company Background Based in Hyderabad. It also owns three R&D centres with about 700+ scientists. UKMHRA. WHO Low High High High High High High Intermediates Intermediates Intermediates Fermentation Unit CGMP CGMP CGMP CGMP High High High High Source: Company & Sunidhi Research Sunidhi Research | 13 . Health Canada. TGA. Exibit-11: Manufacturing facilities Indian Formulation Units Unit III Product Type Non-Betalactum Approvals USFDA. UKMHRA. UK MHRA. The company's robust product portfolio is spread over 5 major therapeutic/product areas encompassing Antibiotics. Anti-allergic Cephs (Non-Sterlie) SSPs (Sterile & Non-Sterile) SSPs GI. ANVISA Brazil. CVS. The company's manufacturing facilities are approved by several leading regulatory agencies like US FDA. TGA. Health Canada. 0 4.bn 351 270 241 186 168 131 49 EV/Sales x 6.2 4.7 Core PE x 24 18 23 49 16 16 6 ROCE % 17 22 19 7 32 33 24 Source: Company & Sunidhi Research Exibit-13: Peer comparison – ANDA filings as on 31st March 2010 275 225 175 125 75 25 84 247 206 183 169 113 85 41 158 127 106 54 Ranbaxy Sun Pharma Aurobindo Dr.0 17.3 11.Reddy's Lupin Cadila Filled Source: Company & Sunidhi Research Approved Exibit-14: Base sales – segment breakup 120 100 80 % 60 40 20 0 FY09 US Form FY10 EU Form FY11 ROW Form ARV Form FY12 APIs Source: Company & Sunidhi Research Sunidhi Research | 14 .0 4.2 EV/EBIDTA x 18.4 2.4 5.0 3. Reddy's Ranbaxy (CY11) Lupin Cadila Aurobindo Market Cap Rs.0 25.6 1.valuations FY12 Consensus Estimates Sun Pharma Cipla Dr.8 2.9 P/BV x 4.0 2.Aurobindo Pharma Ltd Exibit-12: Peer comparison .0 2.5 5.0 17.8 1.0 12.0 3. 3 16881.2 8.3 29586.6 6. Rsm Gross Block.9 29652.In) % Adj NPM % Adj ROE % ROCE % D/E x Debt / EBIDTA x Interest Coverage x Turnover Ratios Asset Turnover Ratio x Inventory Days Debtors Days Source: Company & Sunidhi Research FY07 21362.4 35765.9 FY10 1. x DPS.4 19. x EV/Sales.6 104 106 FY10 35754.4 16988.0 2.9 3518.5 37.4 6. Rsm EPS.1 2385.6 5.9 2. Rs Dividend Payout % Growth Ratios Sales Growth EBIDTA Growth EBT (Before Fx chgs / fccb) Adj NP Growth Key Ratios EBIDTA % EBIDITA (Excl Ot. Rsm Net Debts.1 2.1 8% FY07 32% 64% 108% 184% FY07 15% 14% 9% 23% 7% 2.7 5. Rsm EBITDA.7 1.0 9.4 19.8 2.5 10.3 9. Rs Adj CEPS. Rsm Net profit.4 63.5 6% FY10 16% 59% 100% 100% FY10 23% 19% 13% 26% 17% 1.0 133.2 2.6 FY09 1.7 39880.4 4.5 230.7 4. Rs BVPS.3 122.0 8231.7 2009.8 94.2 12695.1 5164.6 8.0 44.0 4.7 13.4 14681.7 46.4 113.9 100.6 30051.9 22.6 993.4 101.Aurobindo Pharma Ltd Valuation Summary Revenues.3 11769.9 1.5 44.0 6.3 28% FY09 26% 47% 10% 1% FY09 17% 13% 8% 19% 11% 1.8 FY08 1.4 164.2 95 90 Sunidhi Research | 15 .1 207.9 429. x EV/EBITDA.0 8.6 113 98 FY11F 41984.8 9960.7 100 95 FY12F 50320.5 9% FY08 15% 12% 41% 19% FY08 14% 14% 10% 21% 8% 1.Op.0 2.7 68.6 2.6 50842.9 17179.1 19736.8 5826.1 86.9 4.2 5548.6 112 107 FY08 24465.2 18.4 1.4 22.6 119 99 FY09 30773.0 7% FY12F 20% 27% 42% 42% FY12F 25% 23% 15% 26% 24% 0.5 4. x Adj PE.7 2.0 6.9 5. Rsm Capital Employed.2 6.2 21.2 3.3 20817.9 16157.3 22053.6 9.8 FY07 1.8 160.5 5633.3 3.6 96.7 37.7 56.1 FY11F 1.0 7% FY11F 17% 21% 12% 13% FY11F 24% 21% 13% 22% 16% 1.6 19.0 25099. Rs P/E.3 3.0 3154. Rs Adj EPS.6 518.2 328.3 5.6 FY12F 2.0 33551. x P/Bv.6 9.6 4.6 1.2 18.2 46990.4 44. 0 16000.7 10927.2 601.0 12407.8 50.3 3713.2 36562.3 30051.5 896.8 12135.0 22809.0 24508.4 36562.9 18470.3 8897.5 9560.1 33.7 6334.9 17187.0 13097.7 5230.4 30254.6 18725.0 0.4 265.4 6728.3 12135.0 11502.8 0.3 19736.4 8776.3 3.3 5748.6 24797.0 8961.6 9118.5 12905.0 2145.6 33551.9 27180.6 21.0 29940.8 10881.2 3164.6 13987.0 323.5 40833.0 1000.0 51842.7 391.2 21545.6 FY12F 289.0 7950.3 FY10 278.3 0.9 13003.0 23108.0 1000.3 30254.3 3500.0 7476.1 5436.4 3446.9 4176.9 24878.7 13453.1 2313.0 5546.3 4952.0 17179.9 11150.0 Sunidhi Research | 16 .0 47990.7 2.1 25099.Aurobindo Pharma Ltd Balance Sheet Rsm Sources of Funds Equity Share Capital Reserves & Surplus Net Worth Secured Loans Unsecured Loans Loan Funds Deffered Tax Liabilty Total Liabilities Application of Funds Gross Block Less: Depreciation Net Block WIP Net Fixed Assets Investments Differed Tax Assets Current Assets Inventories Debtors Cash and Bank Loans and Advances Other Current Assets Current Liabilities Provisions Net Current Assets Total Assets Source: Company & Sunidhi Research FY08 268.0 1000.0 8640.7 47990.9 17979.0 29651.1 728.0 19350.9 6650.0 23329.0 24659.1 12403.0 26000.9 9876.4 18291.0 17000.0 21159.7 5363.6 1276.0 7275.0 23108.5 40833.3 FY09 268.5 0.7 11024.5 3869.3 7242.5 FY11F 289.0 14209.3 10443.0 351.7 797.6 18012.7 953.1 3450.2 70.6 50.1 391.5 51842.3 8892.1 0.8 41.0 17857.3 2.5 15148.3 2. 5 389.248) 156 1.231 (297) (1.2 0.484 (1.4 3441.0 717.378 (1.0 2382.1 86.5 -0. EPS Source: Company & Sunidhi Research FY08 24465.182 (3.120 0 0 (1.993 FY10 8.9 2385.5 27522.0 2918.164 1. At the end of the year Source: Company & Sunidhi Research 15 30 0 (1.5 536.0 -3. Int.6 503.0 5548.0 1165.Aurobindo Pharma Ltd Income Statement Rsm Total Revenues Raw Materials Manufacturing Expenses Employment Costs Administrative expenses Operating Expenditure EBIDTA Other Income Finance and Interest Costs Depreciation Forex Gains / losses Prem on FCCB Redemption EBT Tax Profit after Tax Extraordinary items Min.0 4714.2 1913.1 836.0 7522.063) (663) (2.0 17210. Tax paid Net Cash from Financing activities © Net Inc/Dec in cash & cash equivalants (A+B+C) Cash & Cash Equ.278 729 1.351 (4.377) 7.0 2915.406) (692) 1.586) 12.6 0.0 838.958 FY12F 13.571) (3.314 1.0 5816.1 16367.117 8.0 4500.0 -500.2 24160.588 (883) (1.6 5451.2 5633.9 -3.2 3281.8 3519.480) 3.0 5000.272) 2.3 2436.0 3928.0 12695.5 993.5 0.0 7364.609 Sunidhi Research | 17 .0 32024.8 Cash Flow Rsm Operating Profit before WC changes Movements in WCInc/Dec in Drs Inc/Dec in Inventory Inc/Dec in Loans & Advances Inc/Dec in Current Liab & Prov Working Capital Changes Cash Generated from operations Tax paid Net Cash from operating activities (A) Net Cash from Investing activities (B) Cash Flow from Financing ActivitiesProceeds from issuance of Equity Proceeds from long term borrowings Proceeds from/ Repurchase of FCCBs Repayment of long term borrowings Proceeds from short term borrowings Interest Paid FCCB Issue Exp Dividend and div.790) (683) (807) (60) (3.2 7734.0 0.531 5.424 0 0 4.165) 0 (406) (10.4 1003.1 25608.4 2405.225 (4. Net Profit Shares Outstanding (nos.6 57.6 1939.0 5826.5 5164.0 53.4 57.488) (481) 3.6 167.936 (824) 0 (393) 1.2 1841.023 1.0 133.) EPS Adj.594) 4 1.0 213.8 100.390 FY11F 11.4 -489.2 300.278 2.952) (1.939 9.5 3272.119 5.888) 9.355) 0 (406) 4.500) FY08 3.676 (1.8 20212.4 FY09 30773.184) (1.4 1930.0 0.9 53.0 -25.0 -10.841 10.9 1493.4 -1072.047 459 1.4 44.7 3363.6 1276.367) (478) 262 789 (795) 11. Net Profit Adj.0 1355.454 0 (1.0 0.3 1650.480) (1.2 20947.0 37625.0 0.8 94.7 4817.6 432.5 44.784) 0 (678) 0 (326) (668) (549) 1.8 3518.4 677.8 300.0 3751.0 7755.124 (1.0 9960.0 2500.180) (259) (625) 0 (166) (2.5 8231.6 55.8 96.6 5608.363) (1.000) 0 (1.793 2.314 0 926 (1.482 (5.318 FY09 4.8 0.0 2222.0 5523.8 18.7 FY10 35754.4 2385.0 1551.8 44.653 302 1.013 1.340) 1.4 FY11F 41984.8 3519.6 0. At the beginning of the year Cash & Cash Equ.9 13514.6 -21.7 101.390 729 9.0 3384.036) 2.119 0 0 0 (9.3 FY12F 50320. 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