Home / Markets / Mark To Market /  Aurobindo on firm ground but valuations reflect near-term gains

Aurobindo Pharma Ltd’s exclusive pact with Covaxx, the American company to develop a covid-19 vaccine, opens up a large business opportunity. The vaccine once developed is meant for supplies in India, to the United Nations Children’s Fund (Unicef) and for non-exclusive supplies to other emerging markets.

Aurobindo is a leading injectables and peptides manufacturer. The agreement thereby leverages Aurobindo’s existing development, commercial and manufacturing infrastructure for the first Multitope Peptide-based vaccine that utilizes normal refrigeration. With the vaccine being in the first phase of trials, the positives, however, may take 6-9 months to accrue, analysts said. The news has enthused the Street and the stock gained more than 2% on Thursday. Meanwhile, Aurobindo’s prospects continue to see regular improvement. The firm derives majority of its revenues from the US and Europe. The US revenues that account for almost half of consolidated revenue in Q2FY21 witnessed a 12.5% year-on-year growth. The rebound in injectable sales has boosted investor confidence. In fact, the stock has gained close to 20% post September quarter results.

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Source: Motilal Oswal Financial Services Ltd
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Source: Motilal Oswal Financial Services Ltd

Injectables are difficult to manufacture and remain an important growth driver for the company’s US sales. Complex products see lower competition and hence lower price pressure and better margins. The company also has a diversified range of products and lower dependence on any specific product. This means the company’s growth remains insulated from rising competition in any particular product.

Aurobindo’s strategy has not only led to minimal price erosion in its base business but also enabled it to build a complex portfolio in the injectables/biosimilars/inhaler space, wrote analysts at Motilal Oswal Financial Services in a note.

Further, the completed sale of its US subsidiary Natrol Llc in early December, at good valuations, will help Aurobindo attain net cash positive status too. The company had net debt of 1,445 crore (gross debt of 4,777 crore) as on 30 June. Notably, Aurobindo had acquired Natrol in December 2014 at valuations of 2 times enterprise value to sales (EV/sales). It has now divested the business at 3.5 times EV/sales with handsome gains.

Aurobindo is among the few Indian pharmaceutical companies who have scaled up their European business successfully. The company’s ability to turnaround European acquisitions has helped. The transfer of manufacturing for acquired entities from Europe to India drives the gains. The European sales accounting for about a fourth of consolidated sales too had rebounded 14.6% sequentially.

Overall Aurobindo’s forward prospects remain firm. The stock priced at 910.3 levels trades at 14.7 times one year forward earnings estimates and analysts believe most of the positives reflect in the valuations.

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