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Spark Capital: Aurobindo Pharma - 1Q FY15 review - maintain 'REDUCE'; TP: 742




Spark Capital Advisors(India) Private Limited


12 Aug 2014





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How does our one year outlook change? We maintain a ‘Reduce’ rating on Aurobindo Pharma post the company’s in-line results for Q1FY15 Generic Cymbalta has been the key driver for the company’s performance over the past 3 quarters. With exclusivity expiring on June 10th, multiple new players have entered the market. We expect EBITDA margin to decline ~500bps from Q2FY14 (in-line with guidance of ex Cymbalta ex Actavis margin of ~23%) Management guided for EBITDA loss of EUR 10mn for the acquired Actavis business in FY15 and EBITDA breakeven by end of FY16. Our FY15/16 EPS estimates are revised by 9%/6% on account of higher US base sales on the back of cephalosporins, Aurolife and generic Depakote ER and lower interest expense Our target price of Rs. 742 is 14x FY16E EPS of Rs. 53. We believe a valuation discount to other midcap pharma stocks is warranted given the business mix, return profile and inferior balance sheet (despite the recent deleveraging). Maintain ‘Reduce’ rating How does our 3 year outlook change? Investments in injectables, oncology and hormonal products, OTC drugs, penems and peptides are interesting long-term drivers for Aurobindo. The company is vertically integrated in most of these segments providing a significant cost advantage Margin improvement at the acquired Actavis business is likely to be gradual. Management guided for EBITDA loss of EUR 10mn in FY15 and breakeven by end of FY16 Aurobindo has reduced leverage substantially partially aided by cash flows from generic Cymbalta (net debt of Rs. 27bn as of June 2014). Increase in capex (~Rs. 6bn in FY15 vs. Rs. 6.6bn in FY13-FY14) is likely to limit further improvement in the near-term

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