Stock Market Result Update on Aurobindo Pharma for 2QFY2012

Stock Market Result Update on Aurobindo Pharma for 2QFY2012 with a Buy recommendation and a Target Price of `166 (12 months).

For 2QFY2012, Aurobindo Pharma (APL) posted lower-than-expected results on the top-line, operating and PAT fronts. Lower growth in the company’s top line was on account of lower-than-expected growth in the formulation segment. However, we maintain our Buy view on the stock.

Revenue growth disappoints: Net sales grew modestly by 3.1% yoy to `1,075cr, mainly on the back of pressure on the formulation segment. The US market and ARV segment reported lower-than-expected growth. The US market declined by 4.1% yoy, while the ARV segment grew only by 1.9% yoy. The API segment, on the other hand, grew by 8.5% yoy. Gross margin came in at 44.3%, impacted by higher raw-material costs. OPM declined to 10.7%, lower than our estimate of 16.7%, impacted by lower gross margin and increased employee and other expenses. Adjusted net profit came in at `42cr during the quarter.

Outlook and valuation: Commencement of operations at the Hyderabad SEZ and incremental contribution from the Pfizer deal would boost APL’s earnings with better growth visibility going forward. We estimate net sales to log a 12.7% CAGR to `5,243cr over FY2011–13E on the back of supply agreements and the US and ARV formulation contracts. Even after factoring in lower profitability going forward, the stock trades at attractive valuations. Hence, even after the downtrend, we maintain Buy on the stock with a revised price target of `166.