Aurbindo -IC Centrum Aug 09

8/8/2019 Aurbindo -IC Centrum Aug 09

1/17

Buy

Target Price: Rs806

CMP: Rs639*Upside: 26%

*as on 4 Aug. 2009

Sriram [email protected] 22 4215 9643

Formulations Ripe for picking

Huge potential to ramp-up formulations: Aurobindo iswell placed to ramp-up its formulations business at a fastpace on the back of strong pipeline of regulatory filingsand approvals, dossier licensing, newer supply contractswith MNCs and huge unutilized capacity. We estimatecontribution of formulations to total revenue (excldossier licensing) to increase from 46.1% in FY09 to58.4% in FY11E.

Steady growth in APIs to continue:The APIs business isestimated to register steady 5% CAGR over FY09-11Epost strong presence in key APIs like Cephalosporins,Penicillins and ARVs. However, more APIs would be

manufactured for captive use in formulations whichwould provide cost efficiency.

FCCBs not a major concern: FCCBs worthUS$192.8mn does not seem a major concern and weexpect the company to redeem part of the FCCBsthrough additional debt and internal accruals. Post this,the companys debt/equity would fall to 0.8x in FY11E.We do not view raising debt to redeem FCCBs as aconcern, given our estimate of 2.1x debt/EBITDA forFY11, which is very much comfortable.

Strong growth momentum: Aurobindo is on a stronggrowth trajectory, thanks to the high marginformulations business. We expect consolidated revenueCAGR of 19.1% and PAT CAGR of 38.2% over FY09-11E.EBITDA margin is estimated to remain higher at 21% inFY11 on the back of higher formulations growth, verticalintegration and increasing capacity utilization.

Valuations attractive: Growth visibility and improvingfinancial strength render valuations attractive currently.We initiate coverage on Aurobindo with a Buy rating andtarget price of Rs806 per share based on 10xFY11Eearnings. As we have assumed conversion of August2010 FCCBs and redemption of May 2011 FCCBs, we have

factored in interest on May 2011 FCCBs.

Key Risks: Upside Buy back of FCCBs at discountwould be key positive. Downside Currency fluctuation,as about 60% of revenue is from exports and delays inlaunch of new products.

Key Data

Bloomberg Code ARBP IN

Reuters Code ARBN.BOCurrent Shares O/S (mn) 53.8

Diluted Shares O/S(mn) 64.6

Mkt Cap (Rsbn/USDmn) 34.3/718.9

52 Wk H / L (Rs) 655/101

Daily Vol. (3M NSE Avg.) 238,338

Face Value (Rs) 5

1 USD = Rs47.8

Shareholding Pattern

Foreign

13.6%

Non

Promoter

Corp. Hold.

6.7%

Institutions

9.9%

Public &

Others

9.9%

Promoters

59.8%

As on 31stMarch 2009

One Year Indexed Stock Performanc

0

50

100

150

200

250

Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Au g-09

AUR OBINDO PHAR MA NSE S&P CNX NIFTY INDEX

Price Performance (%)

1M 6M 1Yr

Aurobindo 27.3 348.3 111.5

NIFTY 6.5 68.1 7.2Source: Bloomberg, Centrum Research

* as on 4 Aug. 2009

Initiation 5 August 2009

Pharma

INDIA

Aurobindo Pharma

Please refer to important disclosures/disclaimers inside

Y/E Mar(Rsmn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) EPS ROE (%) ROCE (%) P/E (x) EV/EBITDA (x)

FY07 21,362 33.8 3,155 14.8 1,906 282.6 35.7 22.4 8.9 17.9 15.5

FY08 24,465 14.5 3,521 14.4 1,819 (4.6) 33.8 18.1 7.1 18.9 14.2

FY09E 31,243 27.7 5,732 18.3 2,840 56.1 52.8 24.4 10.5 12.1 9.8

FY10E 38,979 24.8 7,917 20.3 4,401 54.9 81.9 31.4 14.2 7.8 7.0

FY11E 44,333 13.7 9,300 21.0 5,425 23.3 93.2 27.3 15.1 6.9 5.6

Source: Company, Centrum Research Estimates


2/17

Aurobindo Pharma2

Shareholding Pattern (%)

Q209 Q309 Q409 Q110

Promoter 55.3 58.0 59.9 59.0

Foreign 24.6 16.6 13.2 19.0

Institutions 8.4 9.3 9.9 10.3

Public & Others 11.7 16.2 17.1 11.7

Total 100.0 100.0 100.0 100.0

Source: NSE

Company Background

Aurobindo Pharma forayed into the pharmaceutical sector asan API supplier focusing on antibiotics like Semi SyntheticPenicillins (SSPs) and Cephalosporins, emerging a marketleader in these segments. Over the years, the companydiversified into the cardiovascular (CVS), central nervoussystem (CNS), gastrointestinal (GI), anti-infective segments, etc.

After a strong presence in its core business of bulk actives, thecompany is now focusing on generic formulations. It has 14state-of-the-art manufacturing facilities spread across India,China, USA and Brazil. The companys operations are verticallyintegrated and formulations supported by in-house APIs.Aurobindo has a presence across US, Europe, India and otheremerging countries like Brazil, China, South Africa, etc. A higherproportion of the companys revenue is from APIs andformulations are likely to replace this, going forward.

Revenue break-up (FY09)

Source: Company, Centrum Research Source: Company, Centrum Research

Key management personnel

Mr. P.V. Ramaprasad Reddy Chairman A postgraduate in Commerce and has held management positions in various

pharmaceutical companies prior to incorporating Aurobindo Pharma in 1986.

He is actively involved in the strategic planning of the company and pilots the

successful implementation of joint ventures.

Mr. K. Nityananda Reddy Managing Director Mr. Nityananda has Masters degree in Science (Organic Chemistry) and is

versatile with the companys manufacturing technology. He supervises theoverall affairs of the company.

Mr. M. Madan Mohan Reddy Whole-time director Mr. Madan Mohan has a Master's Degree in Science (Organic Chemistry) and

has held top managerial positions in leading pharma companies. He has

experience in regulatory affairs of the industry. Before joining Aurobindo

Pharma, he was working as the Managing Director of M/s Srichakra Remedies.

Source: Company

46%

54%

Formulations APIs

44%

39%

17%

SSPs Cephs ARV and others

39%

14%

33%

14%

US Europe ARVs ROW


3/17

Aurobindo Pharma3

Investment Rationale Contribution from formulations to total sales to risecontinuously

Higher formulations revenue and higher capacityutilisation to improve profitability

Leverage ratios to turn comfortable with part of thedebt being met through internal accruals

Higher profitability and easing leverage to helpvaluation re-rating

31.2

39.4

46.1

54.658.4

5,000

10,000

15,000

20,000

25,000

30,000

FY07 FY08 FY09 FY10E FY11E

20

25

30

35

40

45

50

55

60

65

F ormu la ti on s Rev en ue % o f to ta l rev en ue

(Rsmn) (%)


Summary Financials


Y/E March (Rsmn) FY07 FY08 FY09E FY10E FY11E

Revenue 21,362 24,465 31,243 38,979 44,333YoY growth (%) 33.8 14.5 27.7 24.8 13.7

EBITDA 3,155 3,521 5,732 7,917 9,300

YoY growth (%) 74.3 11.6 62.8 38.1 17.5

EBITDA margin (%) 14.8 14.4 18.3 20.3 21.0

PBT 2,197 3,023 2,896 7,146 8,391

Provision for Tax 21 536 346 1,100 1,356

PAT (adjusted) 1,906 1,819 2,840 4,401 5,425

YoY growth (%) 282.6 (4.6) 56.1 54.9 23.3

PAT margin (%) 8.9 7.4 9.1 11.3 12.2

Key CF statement

Cash generated from operations 907 2,792 (1,086) 3,791 5,356

Cash flow from investing activities (1,809) (3,059) (4,000) (2,000) (500)

Cash flow from financing activities 6,441 (2,949) 2,603 (1,409) (1,493)

Net cash increase/decrease 5,539 (3,216) (2,483) 382 3,363

Key balance sheet data

Shareholders' fund 8,860 11,240 12,012 16,053 23,751

Debt 20,781 18,470 22,111 22,111 19,394

Total capital employed 30,359 30,475 34,947 38,987 43,968

Fixed assets 13,713 15,149 17,927 18,504 17,463

Investments 3 604 604 604 604

Net current assets 16,643 14,722 16,416 19,880 25,901

Total assets 30,359 30,475 34,947 38,987 43,968

Key ratio (%)

ROCE 8.9 7.1 10.5 14.2 15.1

ROIC 10.0 7.5 10.6 14.3 15.9

ROE 22.4 18.1 24.4 31.4 27.3

Per share ratio (Rs)

Basic EPS 35.7 33.8 52.8 81.9 93.2

Fully diluted EPS 29.5 28.1 43.9 68.1 83.9

Book value 166.1 209.1 223.4 298.6 408.0

Solvency ratio(x)

Debt/ Equity 2.3 1.6 1.8 1.4 0.8

Debt/EBITDA 6.6 5.2 3.9 2.8 2.1

Interest coverage 4.8 5.8 5.6 6.2 7.4

Shareholders' value

EVA per share (Rs) 5.2 2.8 29.4 43.4 50.1

Dividend payout (%) 7.0 9.7 6.8 7.0 7.0

Valuation parameters (x)

P/E (Basic) 17.9 18.9 12.1 7.8 6.9

P/BV 3.8 3.1 2.9 2.1 1.6

EV/EBITDA 15.5 14.2 9.8 7.0 5.6

EV/Sales 2.3 2.0 1.8 1.4 1.2

Leverage ratios to ease withhigher profitability and internalaccruals


4/17

Aurobindo Pharma4

Investment Argument

Huge potential to ramp up formulations

We expect Aurobindos formulations business to grow at a fast pace on the back of huge capacity,strong pipeline of regulatory filings and approvals, newer supply contracts with MNCs andcontinuous launch of new products. We estimate 34.3% revenue CAGR over FY09-11 to Rs25.4bnfrom the formulations segment. Cumulative 155 ANDA filings with 99 (including 29 tentativeapprovals) already approved would drive significant revenue growth for Aurobindo. The companyis currently operating at about 40% capacity utilization in the formulations segment, providinghuge scope to ramp up the business. Further, dossier licensing and supply contracts would alsoassist in maintaining the growth momentum, as is evident from its recent contract with Pfizer. Weestimate the proportion of formulations to total revenue (excluding dossier licensing) to increasefrom 31.2% in FY07 to 58.4% in FY11.

Exhibit 1: Contribution of formulations to total sales to rise continuously

31.2

39.4

46.1

54.6

58.4

5,000

10,000

15,000

20,000

25,000

30,000


20

25

30

35

40

45

50

55

60

65

Formulations Revenue % of total revenue

(Rsmn) (%)


Strong regulatory pipeline for formulations

Aurobindo has a strong regulatory pipeline of filings and we expect the momentum of filings tocontinue. The company made 155 ANDA filings in the US, of which it has already receivedapprovals for 99, including 29 tentative approvals. Out of 70 final approvals, it launched 50products in the US. We believe the company will regularly receive approvals on the back ofconsistent filings and will continue to launch new products, which would drive revenue growth,going forward.

The company has also registered 901 formulation dossiers for Europe and other semi-regulatedmarkets. This includes multiple registrations in Europe for same product. We expect productapprovals for the European market to increase at a rapid pace, given that more than 670 filingshave been made, of which more than 120 were in FY09 and more than 50 in Q1FY10. We expect

the approval and launch of products to follow the rapid pace at which regulatory filings havebeen made and thereby drive revenue growth.

Exhibit 2: ANDA pipeline

(Nos) Total filings Products approved

US 155 99

Europe 670 200

WHO 25 11

South Africa 206 47

Total 1,056 357

Source: Company

Base for generating growth hasalready been built up with largeregulatory filings


5/17

Aurobindo Pharma5

US and Europe to drive major growth

Aurobindo would see majority of its growth from the US and European markets on the back ofstrong product pipeline, huge generics opportunity in these markets, increasing customer base,dossier licensing and supply contracts coupled with huge unutilized capacity. We expectformulations revenue from the US and Europe to register 51.2% CAGR to Rs12.8bn and 32.6%CAGR to Rs3.4bn over FY09-11E, respectively. The company has built a strong regulatory pipelinefor these regulated markets and has the capability to launch products in these markets

immediately post approvals, thanks to its huge capacity and in-house availability of APIs. Thecompany recently ventured into dossier licensing and supply contracts of finished dosageproducts for the US and European markets, which would enhance its growth prospects in future.We believe the company would be able to garner more such licensing and supply contracts, goingforward.

Exhibit 3: Growing revenue from US and EU formulations

1.6 1.32.4 2.0

5.6

1.9

10.0

2.8

12.8

3.4

0

2

4

6

8

10

12

14

US Europe


(Rsbn)


Formulations - Operating at mere 40% capacityWe are optimistic on Aurobindos strategy of building strong API franchise and incurring capex todevelop huge formulation capacity (over last four to five years) and expect this along withregulatory product pipeline to increase business in future. The company currently operates atmere 40% capacity in formulations, which leaves huge scope for it to increase its formulationsbusiness at a rapid pace, especially given its large capacity and API strength.

Further, Aurobindo is also setting up a formulations facility at an SEZ near Hyderabad whichwould be ready to operate by Q4FY10E along with regulatory inspection. This facility would bebased on area of 55,000 sq mts with a capacity of about 10bn tablets and 1bn capsules. Thisfacility would primarily cater to European supply contracts and other export businesses. Weexpect Aurobindo to regularly register more product filings and utilize these capacities to cater toincremental business. The facility in SEZ would also drive tax and excise benefits, thereby

increasing profitability.Dossier licensing and supply contracts new growth drivers

The company has one more stream of business, which includes sale of dossiers to anothercompany (MNCs) and enter into long-term supply contracts for respective products with thatcompany. This provides the other company with ready dossier to start business and rewardsAurobindo in terms of milestone income for the dossier and regular supply contract for theproducts. Recently, Aurobindo entered into an agreement with Pfizer in March 2009 for dossierlicensing and long-term supply contracts. The agreement involves 44 finished dosage productsand 12 injectables. Aurobindo would receive milestone payment from Pfizer on the basis ofcommercialization of products and has also received supply contracts for these products.Aurobindo would manufacture and supply these products to Pfizer after patent expiry. Theagreement stands for 8 years and is renewable thereafter for 7 more years. We expect Aurobindo

to leverage on more such contracts, which would significantly drive its topline.In May 2009, Pfizer extended the deal by adding 60 (including 5 injectables) products across US,EU and emerging countries. The deal would benefit Aurobindo in terms of upfront milestoneincome and regular revenue through supply contracts.


6/17

Aurobindo Pharma6

Formulations to register 34.3% CAGR

We expect Aurobindos formulations business to witness 34.3% revenue CAGR to Rs25.4bn overFY09-11E. The growth would be driven by continuous regulatory filings and approvals coupledwith launch of products, dossier licensing and supply agreements and availability of largeunutilized capacity. We expect the US and European markets to contribute to majority of thisgrowth while ARV and Rest of the world (ROW) segments to grow at a steady pace. We expect theUS and Europe to constitute more than 60% of total formulations revenue in FY10E and FY11E

cumulatively and register 51.2% and 32.6% CAGR, respectively, over FY09-11E with ARV and ROWsegments estimated to witness 20.3% and 15.3% CAGR, respectively, over the same period.

Exhibit 4: Formulations revenue trend

0

3

6

9

12

15

US Europe ARV ROW

FY09 FY10E FY11E

(Rsbn)

51.2% CAGR

15.3% CAGR

20.3% CAGR

32.6% CAGR



7/17

Aurobindo Pharma7

Steady growth in APIs to continue

We expect the API segment to witness steady 5% CAGR over FY09-11E to Rs18.2bn after buildingstrong APIs, particularly in the semi synthetic penicillin (SSPs) and Cephalosporin (Cephs)segments. Lower growth in APIs is mainly on account of higher focus on increasing formulationsbusiness and more APIs being used for captive consumption. As in the case of formulations, thecompany has also built large capacities in API and currently operates at about 75% utilization.Apart from SSPs and Cephs, the company is also present in manufacturing of APIs for ARV

products. Increased focus on formulations and captive use of APIs would result in lower APIgrowth, in our view. However, we expect steady growth in this segment to continue, given itsleadership in some APIs and increasing demand of these products for exports.

Exhibit 5: Segmental revenue trend in API

5.96.4

3.0

8.0

5.9

1.5

7.4

6.3

2.7

7.7

6.7

2.9

8.1

7.0

3.0

0

1

2

34

5

6

7

8

9

SSPs Cephs ARV and others


(Rsbn)


Aurobindo is a leading player in APIs and has a strong presence in SSPs, CCPs, and ARVs.Aurobindo ranks the highest in terms of DMF filings by any Indian company and is the second

largest globally. The company has filed a total of 1,259 DMF filings globally of which 133 pertain tothe US market and remaining to Europe and other emerging markets. In FY09 alone, Aurobindofiled 242 DMFs for APIs, which reflects its strength in API manufacture and its ability to cater to theglobal demand. However, we see the proportion of API to total revenue declining, going forward,primarily due to higher formulation growth and not because of lesser API revenue.

Exhibit 6: Steady growth in APIs

68.8

60.6

53.9

45.441.6

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000


20

30

40

50

60

70

80

Revenue % of total sales

(Rsmn) (%)



8/17

Aurobindo Pharma8

Aurobindo has set up seven stateof-the-art manufacturing facilities and all have the necessaryregulatory approvals. Six of these facilities are situated in India near Hyderabad and one is inChina. The company currently operates at 75% capacity utilization. We expect the company to usepart of its capacity for captive use to manufacture formulations, which explains our view that thissegment would witness steady growth going forward.

Exhibit 7: Details of manufacturing facilities

Units Products Regulatory approvals

Unit 1 CVS, CNS, Anti-allergic USFDA, WHO, UKMHRA, TGA (Australia)

Unit 1A Cephs (non-sterile) USFDA, UKMHRA, TGA (Australia)

Unit VA SSPs USFDA, TGA (Australia)

Unit VI Cephs (Sterile) USFDA, WHO, Health Canada, EU-GMP

Unit VIII Gastro Intestinals, ARVs USFDA, WHO, UKMHRA, TGA (Australia)

Unit XIA ARVs USFDA, WHO, UKMHRA

Source: Company


9/17

Aurobindo Pharma9

Financial Analysis

FCCBs not a major concern

We do not see outstanding FCCBs worth US$192.8mn as a major concern for the company. Only apart of the total FCCBs are likely to get redeemed, in our view. We expect FCCBs worth US$53.6mndue for conversion in August 2010 to get converted at Rs522/share and the balance beingredeemed by the company. Of its total outstanding FCCBs of US$255.5mn at the beginning of

FY09, the company has already bought back FCCBs worth US$62.7mn at more than 15% discountto face value. It is scouting for opportunities to buy back more FCCBs, which if occurs, would be ahuge positive and provide further upside to our estimates.

Given its comfortable debt/EBITDA of 2.1x for FY11E, it is unlikely that the company would facetroubles raising debt to redeem its FCCBs. We expect the FCCBs to be redeemed through acombination of internal accruals and debt. Hence, we have considered equity dilution of 8.3%,assuming FCCBs due in August 2010 would get converted, with the remaining getting redeemed.

Exhibit 8: Outstanding FCCB details

MaturityAmount

($mn)Conversion price

(Rs)Redemption

premium (%)Redemption amount

($mn)

Aug-2010 53.6 522.0 40.0 75.0

May-2011 33.0 879.0 47.0 48.5

May-2011 106.2 1,014.1 46.3 155.4

Total 192.8 278.9

Source: Company

We estimate equity dilution to the tune of 20.2%, even if all FCCBs get converted. Full FCCBconversion would lead to issue of 10.9mn equity shares. In case FCCBs get converted on maturitydate, then 4.5mn equity shares would be issued in FY11E and the balance 6.4mn would be issuedin FY12E. However, in our estimates we have factored in conversion of August 2010 FCCBs andredemption of May 2011 FCCBs at respective premium (yield) on maturity date and thus debtraising and interest there after.

Exhibit 9: Dilution in case of conversion of FCCBs

MaturityAmount

($ mn)Conversion price

(Rs)Issue of Eq shares on

conversionDilution

(%)

Aug-10 53.6 522.0 4.5 8.3

May-11 33.0 879.0 1.7 3.2

May-11 106.2 1,014.1 4.7 8.8

Total 192.8 11.0 20.2

Source: Company, Centrum Research

19.1% revenue CAGR over FY09-11E

We estimate consolidated revenue CAGR of 19.1% over FY09-11E to Rs44.3bn mainly on the backof higher growth in formulations and steady growth in APIs. The formulation segment isestimated to register robust 34.3% sales CAGR over FY09-11E on the back of strong growthmomentum in the US and European markets. API, on the other hand, is estimated to post 5%revenue CAGR over the same period. The growth would be driven by strong product pipeline,dossier licensing and supply contracts and large unutilized capacity. The proportion offormulations would keep on rising while proportion of APIs would decline to total revenue onaccount of high growth in formulations and steady lower growth in APIs. We have estimatedincome from dossier licensing at US$35mn in both FY10E and FY11E and most of it would comefrom Pfizer.


10/17

Aurobindo Pharma10

Exhibit 10: Revenue break-up

(Rsmn) FY08 FY09 FY10E FY11E

Formulations 10,048 14,098 20,807 25,441

% of sales 39.2 43.9 52.5 56.4

% YoY 44.9 40.3 47.6 22.3

USA 2,359 5,584 10,028 12,759

Europe 2,011 1,923 2,763 3,380

ARV 4,044 4,640 5,714 6,711

ROW 1,634 1,951 2,302 2,591

APIs 15,476 16,466 17,289 18,154

% of sales 60.4 51.2 43.7 40.3

% YoY 1.1 6.4 5.0 5.0

SSPs 8,041 7,379 7,748 8,135

Cephs 5,918 6,344 6,661 6,994

ARVs & others 1,517 2,743 2,880 3,024

Dossier Licensing 106 1,584 1,645 1,610

Total 25,630 32,148 39,741 45,205

Less: Excise duty 1,164 906 762 872

Total Revenue 24,466 31,242 38,979 44,333


Higher formulations to improve EBITDA margin

EBITDA margin has expanded 390bp YoY to 18.3% in FY09 from mere 14.4% in FY08 on the backof higher formulations sales and revenues from dossier licensing. We expect this trend to continueand estimate EBITDA margin of 20.3% and 21% in FY10E and FY11E, respectively. Higher EBITDAmargin is on account of rising contribution of formulations to total revenue from 43.9% in FY09 to56.9% in FY11E and estimated steady revenue of US$35mn from dossier licensing both in FY10Eand FY11E. EBITDA in absolute terms is slated to register 27.4% CAGR to Rs9.3bn over FY09-11E.

In addition, the company is currently operating at 40% and about 75% capacity utilization informulations and APIs, respectively. We expect higher capacity utilization going forward on theback of increasing generics business and supply contracts, which would drive economies of scale.

Further, formulations in general, have higher margins compared to APIs and with Aurobindo nowexpanding into formulations; higher margins cannot be ruled out. Moreover, vertical integration,which aids in-house consumption of APIs to manufacture formulations, also provides cost benefit.

Exhibit 11: Operating margin expansion

14.814.4

18.3

20.321.0

2,500

3,500

4,500

5,500

6,500

7,500

8,500

9,500

10,500


10

12

14

16

18

20

22

EBITDA Margin (%)

Rsmn (%)



11/17

Aurobindo Pharma11

Adjusted PAT to register 38.2% CAGR

We expect adjusted PAT to register 38.2% CAGR over FY09-11E to Rs5.4bn on the back of higherrevenue growth and EBITDA margin expansion. The growth would be supported by strongEBITDA margin expansion of 70bp over FY09-11E and steady revenue from dossier licensing. As aresult of robust growth in adjusted PAT, net profit margin is also expected to improve to 12.2% inFY11E from 9.1% in FY09.

Exhibit 12: Adjusted PAT and NPM trend

12.2

9.1

11.3

8.9

7.4

1,500

2,500

3,500

4,500

5,500

6,500


6

8

10

12

14

Adjusted PAT NPM (%)

(Rsmn) (%)

Appreciation in

Indian currency

resulted lower

profitability


Strong return ratios

We expect strong return ratios going forward on the back of higher profitability and marginexpansion. We estimate ROE of 27.3% in FY11E compared with 18.1% in FY08. However, it wouldbe lower than FY10E ROE of 31.4% because of our assumption of conversion of August 2010FCCBs. However, we are not expecting any negative trend in net profit margin and Asset turnoverratio. Further, ROCE is expected to improve significantly from 10.5% in FY09E to 15.1% in FY11E.

The improvement in ROCE would be driven by higher internal accruals, which would be utilized inrepaying debt and redeeming FCCBs.

Exhibit 13: Stronger return ratios

0

5

10

15

20

25

30

35

FY07 FY08 FY09E FY10E FY11E

ROE ROCE ROIC

(%)



12/17

Aurobindo Pharma12

Valuation Analysis

Valuations attractive

We initiate coverage on Aurobindo Pharma with a Buy rating and target price of Rs806/share,which provides 26% upside potential from current levels. At CMP, the stock trades at FY10E andFY11E earnings of 7.8x and 6.9x and EV/EBITDA of 7x and 5.7x, respectively. Our target price isbased on 10x FY11E earnings assuming August 2010 FCCBs would get converted and the

company would have to redeem May 2011 FCCBs. We have assumed 10% interest on FCCBs worthUS$139.2mn plus YTM to arrive at our target value.

Exhibit 14: Valuation methodology

Rsmn

FY11E Adjusted PAT 5,425

10% interest on redeemable FCCBs including YTM 917

Post tax interest 734

Adjusted PAT post interest on FCCBs 4,691

EPS post interest on FCCBs (Rs) 80.6

P/E (x) 10

Target price (Rs) 806

Source: Centrum Research Estimates

Our positive view on the stock is based on superior growth visibility and the companys improvingfinancial strength. Attractive valuations and above-mentioned positive factors justify the ongoingre-rating in the stock. We expect valuations to improve further on the back of improving businessmodel and financial stability. The stock traded at low valuations mainly due to concerns ondebt/equity and huge MTM losses reported in FY09 on account of translation of FCCBs. However,we consider these MTM forex losses as exceptional items, as these losses are not operational innature and expect the companys financial position to improve, going forward, with debt/equityfalling to 0.8x in FY11E.

Exhibit 15: One year forward P/E

-

500

1,000

1,500

2,000

2,500

M

ay-06

A

ug-06

N

ov-06

Feb-07

M

ay-07

A

ug-07

N

ov-07

Feb-08

M

ay-08

A

ug-08

N

ov-08

Feb-09

M

ay-09

A

ug-09

N

ov-09

Feb-10

(Rs)

4x

22x

16x

10x

Source: Bloomberg, Centrum Research Estimates


13/17

Aurobindo Pharma13

Exhibit 16: One year forward EV/EBITDA

10,000

30,000

50,000

70,000

90,000

110,000

130,000

150,000

170,000

May-06

Aug-06

Nov-06

Feb-07

May-07

Aug-07

Nov-07

Feb-08

May-08

Aug-08

Nov-08

Feb-09

May-09

Aug-09

Nov-09

Feb-10

(Rsmn)

4x

16x

12x

8x

Source: Bloomberg, Centrum Research Estimates

Positive EVA reinforces our positive view

Until FY06, the company reported negative EVA, positive thereafter, once its formulationsbusiness picked up (higher EBITDA margin). We expect Aurobindo to report positive EVA ofRs2.3bn in FY10E and Rs2.9bn in FY11E translating in to EVA per share of Rs43.4 and Rs50.1,respectively, which reinforces our positive view on the stock. This high EVA is mainly on accountof high debt/equity, leading to lower weighted average cost of capital (WACC) of 10.8%.

Exhibit 17: Increasing EVA value for shareholders

5.22.8

29.4

43.4

50.1

(15.8)(10.2)

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY05 FY06 FY07 FY08 FY09E FY10E FY11E

(20)

(10)

-

10

20

30

40

50

60

EVA EVA per share

(Rsmn) (Rs)

Source: Company, Bloomberg, Centrum Research Estimates


14/17

Aurobindo Pharma14

Key Concerns

Upside risks

Further buy back of FCCBs at discount would result in savings of yield premium on FCCBs andalso provide positive sentiment through debt reduction, as current debt/equity is 1.8x. Thecompany has already bought back US$60.9mn worth FCCBs at a discount and the balanceUS$194.6mn is outstanding.

Downside risk

Currency fluctuation may impact topline growth and profitability margins as about 60% ofrevenue is from exports. The company also has FCCBs of US$194.6mn in its books andcurrency fluctuation would impact the reported net profit.

Delay in launch of approved products may impact our estimates negatively as our estimatesare based on strong product pipeline.

Delay in regulatory approvals of products may impact our revenue growth estimates. Lesser income from dossier licensing would have a negative impact on both topline and

profitability.


15/17

Aurobindo Pharma15

Financials (Consolidated)

Exhibit 18: Income Statement

Y/E March (Rsmn) FY 07 FY08 FY09 FY 10E F Y11E

Revenues 21,362 24,465 31,243 38,979 44,333

Growth in revenues (%) 33.8 14.5 27.7 24.8 13.7

Raw materials 12,216 13,514 16,283 19,601 22,216

% of Sales 57.2 55.2 52.1 50.3 50.1

Personnel expenses 1,5 04 1,930 2,4 35 3,173 3,6 31

% of Sales 7.0 7.9 7.8 8.1 8.2

Sel ling and other expenses 4,487 5,500 6,793 8,288 9,185

% of Sales 21.0 22.5 21.7 21.3 20.7

EBITDA 3,155 3,521 5,732 7,917 9,300

EBITDA Margin 14.8 14.4 18.3 20.3 21.0

Depreciation 997 1,004 1,221 1,424 1,541

PBIT 2,157 2,517 4,510 6,493 7,759

Interest expenses 454 432 811 1,049 1,049

PBIT from operations 1,704 2,084 3,700 5,445 6,711

Other income 366 246 1,743 1,701 1,680

PBT before extra-ordinary i tems 2,070 2,330 5,443 7,146 8,391

Extra-ordinary income/ (exp) 127 693 (2,547) - -PBT 2,197 3,023 2,896 7,146 8,391

Provision for tax 21 536 346 1,100 1,356

Effective tax rate 1.0 17.7 12.0 15.4 16.2

PAT 2,176 2,487 2,550 6,046 7,035

Minority Interest 11 (3) - - -

PAT after minority interest 2,165 2,491 2,550 6,046 7,035

Adjusted PAT 1,906 1,819 2,840 4,401 5,425

Growth in PAT (%) 282.6 (4.6) 56.1 5 4.9 23.3

PAT margin 8.9 7.4 9.1 11.3 12.2


Exhibit 19: Balance Sheet


Share Capital 267 269 269 269 291

Reserves 8,593 10,971 11,744 15,784 23,459

Shareholders' fund 8,860 11,240 12,012 16,053 23,751

Minority Interest 35 32 32 32 32

Debt 20,78 1 18 ,470 22,11 1 22 ,111 19,39 4

Deferred Tax Liability 682 732 792 792 792

Total Capital Employed 30,359 30,475 34,947 38,987 43,968

Gross Block 14,681 17,180 21,525 24,125 25,125

Accumulated depreciat ion 3,155 4,177 5,398 6,822 8,363

Net Block 11,526 13,003 16,127 17,304 16,763

Capital WIP 2,187 2,146 1,800 1,200 700

Total Fixed Assets 13,713 15,149 17,927 18,504 17,463

Investments 3 604 604 604 604

Inventories 6 ,544 7,950 9,0 86 11 ,063 12,47 7

Debtors 6,261 6,650 9,751 11,251 12,875

Cash and bank balances 5,825 2 ,826 343 725 4,088

L oans and Advances 2,71 9 3,1 65 3,836 4,82 9 5 ,526

Total current assets 21,349 20,591 23,016 27,869 34,967

Current l iabilities and provisions 4,706 5,869 6,600 7,989 9,066

Net current assets 16,643 14,722 16,416 19,880 25,901

Misc. Expenditure - - - - -

Total Assets 30,359 30,475 34,947 38,987 43,968


Exhibit 20: Cash flow


Cash flow from operating

Profit before tax 2,064 2,917 1,312 5,501 6,781

Depreciation 997 1,004 1,221 1,424 1,541

Interest expenses 454 432 811 1,049 1,049

Op. profit before WC change 3,515 4,354 3,344 7,973 9,370

Working capital adjustment (2,546) (1,078) (4,177) (3,082) (2,658)

Gross cash from operations 969 3,276 (833) 4,891 6,712

Direct taxes paid (62) (484) (254) (1,100) (1,356)

Cash from operations 907 2,792 (1,086) 3,791 5,356

Cash flow from investing

Capex (1 ,810) (2,4 57) (4,00 0) (2 ,0 00) (50 0)

Investment 0 (602) - - -

Cash from investment (1,809) (3,059) (4,000) (2,000) (500)

Cash flow from financing

Borrowings/ (Repayments) 7,051 (2,311) 3,641 - -

Interest paid (454) (432) (811) (1,049) (1,049)

Dividend paid (156) (206) (227) (360) (444)Cash from financing 6,441 (2,949) 2,603 (1,409) (1,493)

Net cash increase/ (decrease) 5,539 (3,216) (2,483) 382 3,363


Exhibit 21: Key Ratios

Y/E March FY07 FY08 FY09E FY 10E FY 11E

Margin Ratios (%)

EBITDA Margin 14.8 14.4 18.3 20.3 21.0

PBIT Margin 10.1 10.3 14.4 16.7 17.5

PBT Margin 10.3 12.4 9.3 18.3 18.9

PAT Margin 8.9 7.4 9.1 11.3 12.2

Return Ratios (%)

ROCE 8.9 7.1 10.5 14.2 15.1

ROIC 10.0 7.5 10.6 14.3 15.9

ROE 22.4 18.1 24.4 31.4 27.3

Turnover Ratios

Asset turnover ratio (x) 0.8 0.8 1.0 1.1 1.1

Working capital cycle (days) 96 104 106 102 103

Average collection period (days) 104 97 101 103 103

Average payment period (days) 121 119 117 119 122

Inventory holding (days) 113 126 122 118 123

Per share (Rs)

Basic EPS 35.7 33.8 52.8 81.9 93.2

Fully diluted EPS 29.5 28.1 43.9 68.1 83.9

CEPS 44.9 43.7 62.8 90.1 107.8

Book Value 166.1 209.1 223.4 298.6 408.0

Solvency ratios

Debt/ Equity 2.3 1.6 1.8 1.4 0.8

Interest coverage 4.8 5.8 5.6 6.2 7.4

Valuation parameters (x)

P/E (Basic) 17.9 18.9 12.1 7.8 6.9

P/BV 3.8 3.1 2.9 2.1 1.6

EV/ EBITDA 15.5 14.2 9.8 7.0 5.6

EV/ Sales 2.3 2.0 1.8 1.4 1.2

M-Cap/ Sales 1.6 1.4 1.1 0.9 0.8



16/17

Aurobindo Pharma16

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