Positive surprise on margins front, sustainability likely, maintainBUY &revisetarget price upward from Rs 252 to Rs 343
Robust growth from USA (+53% y-o-y in USD term), higher contribution fromformulation business, and better product mix lead to substantial improvement inmargins of the company. Aurobindo’s revenue grew ~28% y-o-y (11.6% q-o-q) toRs 18,970 mn (V/s INSPL est=Rs 19,940 mn) slightly below our estimates but betterthan consensus. EBITDA margins increased ~620 bps y-o-y to 23.1% level (V/s INSPLest 18.4%) & EBITDA grew 75% y-o-y to Rs 4,384 (V/s INSPL est= Rs 3,674 mn).Adjusting forforex losses of Rs 683 mn in Q2FY14 V/s forex gain of 1,177 mn inQ2FY13, net profit grew 189% y-o-y to Rs 3,022 mn (V/s INSPL est= Rs 2,135 mn).
Healthy revenue growth across the segments & geographies:
Company’s revenue increased ~28% y-o-y (11.6% q-o-q) to Rs 1,897 mn (V/s INSPLestimates = Rs 1,954 mn) in Q2FY14. Formulation business (Excluding ARVs) grew53% y-o-y to Rs 9,952 mn (contributed 51% of total revenue in Q2FY14 V/s 42.3% oftotal revenue in Q2FY13) on the back of 72% y-o-y growth from US business (~53%in USD term) & 17% y-o-y growth in European & RoW business. However, ARVformulations (contributed 11.9% of total revenue) declined 7.6% y-o-y to Rs 2,331mn mainly on higher base. Growth in API business was relatively lower comparedto Formulation business and contributed 36.8% of revenue in Q2FY14 compared to40.5% of revenue in Q2FY13. API business grew ~15.4% y-o-y to Rs 7,180 mn on theback of ~32% y-o-y growth in SSPs & ~27% y-o-y growth in ARV & others, partiallyoffset by ~8.3% decline in Cephs business. Company reported dossier income ofRs 63 mn in Q2FY14 compared to Rs 117 mn in Q2FY13. (See the table given below).
Better product mix and improved operating leverage lead toimprovement in margins:
Gross margins increased ~264 bps y-o-y (~400 bps q-o-q) to 51.6% level mainly dueto change in product mix & higher contribution from US formulation business,partially linked with change in accounting policy for inventories (from First in FirstOut method to Moving Average basis), which increased gross profit by Rs ~71 mn inQ2FY14 & Rs 16mn in Q1FY14. Company’s EBITDA margins also expanded ~620 bpsy-o-y (~500 bps q-o-q) to 23.1% level in Q2FY14 (V/s INSPL est = 18.4% ) mainly dueto decline in material cost linked with change in product mix & better operatingleverage.
During the quarter positive surprise was from the margins front but we believethat company’s investment in its subsidiaries to expand front ended teams hasstarted paying dividends and likely to be sustainable. Its most of subsidiaries areturning break even or higher EBITDA positive. Additionally, favorable product mix islikely to be positive for gross margins also. In our view, considering robustperformance of the company in the last few quarters & promising outlook, re-ratingof the stock seems on the cards. We continue to maintain strong BUY on the stock& increase target price from Rs 252 to Rs 343, valuing at 10x of FY15E. (Earliervalued at 9x of FY15E).
At CMP of Rs 260, the stock is trading at P/E multiple of 10.4x of FY14E &7.6x ofFY15E earnings estimates.
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