Aurobindo Pharma Equity Research

Date of Research – 12 January 2016

Price – Rs. 840.70

About the Company

Aurobindo Pharma Limited (“Aurobindo Pharma” or the “Company”) is a leading manufacturer of Active Pharmaceutical Ingredients (APIs) and finished dosage formulations. The Company has presence in key therapeutic segments such as neurosciences, cardiovascular, anti-diabetics, and gastroenterology.

STRENGTH

[1] Strong U.S. Product Pipeline Aurobindo Pharma has been an aggressive filer in the US market with 379 ANDAs filed until Q1 FY2016. Amongst peers, the company has emerged as one of the top ANDA filers. With U.S. $92 billion going off-patent in the U.S. by the end of year 2016, Aurobindo Pharma is well placed to tap this opportunity with it being one of the largest U.S. generic suppliers.

[2] Inorganic Strategy The company adopts a strategy of strong acquisitions to augment growth and improve sales mix. Recently, it signed 2 big deals (acquisition) with – Actavis (Europe) and Natrol (U.S.).

CHALLENGES

[1] Intense Competition Competes with various pharmaceutical companies that have similar products in the same market but manufactured at facilities which have been approved by the highest regulatory authorities in the United States and Europe.

[2] Regulatory Environment Risk due to adverse developments in regulatory environment and statutory provisions. National Pharmaceutical Pricing Authority (NPPA) controls and regulates the prices of pharmaceutical drugs in India. Price controls imposed by the authority are unpredictable and have a negative impact on company’s profitability margins.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations5,855.318,099.7912,120.5213,896.08 15,089.86
Expenses4,966.245,966.989,556.9010,690.50 11,655.58  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)889.072,132.812,563.623,205.58 3,434.28  
Depreciation248.74312.53332.61392.62 427.63  
Finance Costs131.33311.00143.9192.73 66.72  
Other income28.5423.2480.7668.23 115.89  
Exceptional items163.4466.00 – 
PBT374.101,532.522,167.862,722.46 3,055.82  
Tax82.71363.45596.60744.37 759.64  
Extraordinary items– – 
PAT (before Minority Interest and share of Associates)291.391,169.071,571.261,978.09 2,296.18  
Profit/ (loss) attributable to Minority Interest(2.46)(3.78)(4.51)(3.91) (0.47) 
Consolidated Profit / (Loss) for the year293.851,172.851,575.771,982.00 2,301.67  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio15.1826.3321.1523.07 22.76 
Net Profit Margin Ratio4.9814.4312.9614.23 15.22 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital29.1129.1229.1529.2058.52
Reserves & Surplus2,310.542,576.643,721.005,126.716,998.21
Net worth (shareholders funds)2,339.652,605.763,750.155,155.917,056.73
Minority Interest10.2111.0025.6725.8259.55
Long term borrowings964.631,148.261,279.361,361.47847.20
Current liabilities2,915.053,435.824,220.046,136.407,475.88
Other long term liabilities and provisions4.249.009.1824.3523.54
Deferred Tax Liabilities3.8568.00205.42210.53236.45
Total Liabilities6,237.637,277.849,489.8212,914.4815,699.35

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets2,840.062,857.383,031.394,125.275,263.54
Noncurrent Investments19.8622.2419.760.140.14
Current assets3,264.044,136.755,631.188,298.8010,001.47
Long term advances and other noncurrent assets108.24261.47807.44485.52434.11
Deferred Tax Assets5.430.054.750.09
Total assets6,237.637,277.849,489.8212,914.4815,699.35

Efficiency Analysis

 (%)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE11.7123.6142.1939.1840.25
ROE / RONW(5.28)11.2831.2730.5628.03

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)5,855.318,099.7912,120.5213,896.08 15,089.86
Growth (%)26.54 %38.33 %49.64 %14.65 % 8.59 %
PAT (Rs. Cr.)293.851,169.071,571.261,978.09  2,296.18  
Growth (%)337.92 %299.13 %34.40 %25.89 % 16.08 % 
Earnings Per Share – Basic (Rs. )10.0940.2754.0033.93 39.33 
Earning Per Share – Diluted (Rs. )10.0940.2254.0033.92 39.33 
Price to Earnings14.4615.5024.1521.96 16.33 

Dividend History

The Company has maintained an average dividend yield of 1.34 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. APL’s average current ratio over the last 5 financial years has been 1.24 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

APL’s average long term debt to equity ratio over the last 5 financial years has been 0.33 which indicates that the Company is operating with a low level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

APL’s average interest coverage ratio over the last 5 financial years has been 10.27 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Aurobindo Pharma reported a promoter holding of 51.87 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 34.97% (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.