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Spark Capital: Aurobindo Pharma - 2Q FY14 result review - Gross margin expansion unlikely to sustain; downgrade to ‘Reduce’




Spark Capital Advisors(India) Private Limited


12 Nov 2013





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Gross margin expansion unlikely to sustain; downgrade to ‘Reduce’ Aurobindo Pharma reported strong results in Q2FY14 with revenue growth of 28% yoy and EBITDA margin expansion of 660bps yoy. Continuing momentum in US formulations sales ($118mn vs. $112mn in Q1FY14), strong non-betalactam API sales (up 27% yoy) and gross margin expansion (290bps yoy, 390bps qoq) were highlights of the quarter. However, we believe the current quarter’s currency-aided gross margin expansion is unlikely to sustain going forward. Though free cash generation has improved (stable net debt in spite of rupee depreciation) we believe debt reduction will be modest in the near-term given the likely increase in capex from FY15 and the company’s stretched working capital cycle. In our view, the recent improvement in performance is adequately captured at current valuation (stock up ~30% in the past 1 month). We downgrade the stock to ‘Reduce’ with a revised target price of Rs. 275 (7x FY15E EBITDA of Rs. 16.4bn) Takeaways from post-results conference call: Auromedics (injectables) sales of $8mn for the quarter. Company guided for $30-35mn sales from injectables in FY14 and $45-50mn in FY15 Cephalosporins re-launched from Unit VI accounted for sales of $8mn for H1FY14. Company expects cephalosporin sales of ~$25 in FY14 In Europe, the company’s subsidiaries in UK, Germany, Spain and Netherlands are now EBITDA positive The company currently has 3 products in the controlled-substances category and expects to launch 4 more by the end of FY14. The company has 15 controlled-substance ANDAs pending (from Aurolife subsidiary). The company has filed for one penem product from Auronext subsidiary EBITDA margin (ex dossier income) improved 660bps yoy and 490bps qoq driven by the topline growth and significant improvement in gross margin. Gross margin improved 390bps qoq and 260bps yoy on the back of currency benefits, better capacity utilization and improvement in product mix Gross debt at the end of the quarter was Rs. 36.8bn (net debt of Rs. 33.8bn). Net debt increased Rs. 1.5bn vs. Mar 2013. Working capital cycle declined to 152 days (vs. 163 days in Mar 2013) Forex loss of Rs. 683mn (vs. Rs. 1.7bn in Q1). Tax rate for the quarter was 15% (20% in H1FY14)

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