Aurobindo Pharma has growth levers, but stock factors brighter picture
- Aurobindo’s shares trade at 17 times estimated FY25 earnings, which is slightly on the higher side given its relatively lower margins versus peers.
In a welcome relief, Aurobindo Pharma Ltd's subsidiary Eugia Pharma Specialities Ltd has resumed production at its terminally sterilized product lines at Unit-III.
The company had temporarily suspended operations at Unit III when the US Food and Drug Administration (USFDA) issued a Form 483 with nine observations in early February.
The closure of lines in Eugia Unit-III could cost Aurobindo $20 million in sales in the March quarter (Q4FY24) and $2-3 million in remediation costs per month, the management said in its Q3 earnings call. However, Aurobindo expects to streamline the entire production by the end of FY24.
Eugia's Unit-III plant, which manufactures injectables and ophthalmics, contributes about 40% of its revenue. Injectables are seen as a growth lever for Aurobindo. Specialty and injectables accounted for 25% of the total US revenue in Q3FY24. The US sales stood at $451 million, forming 51% of Aurobindo's consolidated sales.
“Going ahead, Aurobindo targets for double-digit growth in base injectables sales led by new launches (with >50 pending injectables) and steady progress in its oral solid operations (127 pending approvals)," said a PhillipCapital (India) report dated 4 March.
Aurobindo is the largest supplier of generics to the European Union (EU) from India and can benefit from the supply opportunity. Currently, Aurobindo supplies approximately 60 out of the listed 260 molecules facing shortages in the EU. “The new China plant and the Vizag plant will help to scale up injectable supplies in the EU market and will aid to improve EU margins of mid-teens," according to Axis Securities.
The commercialization of the Penicillin-G (Pen-G) plant, approved under the production-linked incentive scheme, can drive better profitability for Aurobindo. Commercialization is expected in H1FY25. Nearly half the capacity will be used internally, potentially cutting costs and boosting margins. Moreover, the new pipeline of approvals includes high-margin products.
For FY24, Aurobindo has guided for an Ebitda margin of 20%. “A possible demerger of the injectables business could provide a value-unlocking opportunity, which seems unlikely in the next two years" said Foram Parekh, analyst at Sharekhan by BNP Paribas.
In the past year, Aurobindo’s shares have surged 127% and trade at 16 times estimated FY25 earnings, which is slightly on the higher side given its relatively lower margins versus peers. Generic drug companies with high margins like Dr Reddy’s Laboratories trade at 19 times estimated FY25 earnings, Parekh pointed out.
Moving forward, besides commissioning of the Pen-G plant, traction in the US business that has a substantial pipeline of injectables, and filings and approvals of biosimilar products should be closely tracked.
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