Aurobindo Pharma: high expectations
The Aurobindo Pharma stock trades at about 18 times its FY17 estimated earnings per share, according to the mean of analyst estimates
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Aurobindo Pharma Ltd’s share rose 7% on Wednesday, reacting to its June quarter results. The spike was somewhat surprising, as its sales growth and improvement in profitability was not unexpected.
Perhaps, Aurobindo’s ability to hit the target at a time when front line pharmaceutical companies are finding the going difficult is being rewarded. Or, it could be expectations that these growth rates will sustain, as it launches more products, especially in the US market. It could even be partly attributable to the management’s response to questions asked by a large investor Rakesh Jhunjunwala on a conference call, on the company’s long-term plans. The management expressed confidence on its ability to succeed in long-gestation categories such as vaccines and oncology, according to a report in Economictimes.com.
In the June quarter, Aurobindo’s sales rose by 12.9% from a year ago. This was a bit below what some analysts had expected but sales of formulations, which contribute to 80% of revenue, was up by 15.9%. The sale of APIs (active pharmaceutical ingredients, the main elements in a formulation) rose by only 1.6%. In formulations, US sales growth was 20.5%. In Europe, sales rose by 12.1% but profitability improved, according to the company.
The sales mix, higher formulation sales and higher US market growth would have partly contributed to better margins. The company’s Ebitda (earnings before interest, tax, depreciation and amortization) margin rose 1.9 percentage points to 23.9%. It launched seven new products during the quarter in the US. The production of four more products was shifted from Europe to India to lower costs.
In FY17, Aurobindo intends to invest Rs.1,200 crore on capital expenditure to expand capacity, which will decline to Rs.500 crore next year. There is talk about a fresh equity issue too, to raise funds. In the past three months, its share has gained by 8% but the gain would be marginal if we ignored Wednesday’s increase.
The stock trades at about 18 times its FY17 estimated earnings per share, according to the mean of analyst estimates compiled by Reuters. That could be reasonable once there is clarity on how much dilution can happen, if an equity-raising actually takes place. That and Aurobindo’s ability to sustain this quarter’s performance in the next few quarters is what investors will be keeping an eye on.