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Aurobindo Pharma: Profitability gets a boost - Views on News from Equitymaster
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Aurobindo Pharma: Profitability gets a boost
Jun 3, 2010

Aurobindo Pharma has declared its full year FY10 results. The company has reported a 16% YoY growth in consolidated sales and a near six fold jump in net profits. Excluding extraordinary though, profit growth has come in at 50% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by 16% yoy during FY10. This has been driven by a similar growth in standalone topline.
  • Operating profits grow by 59% on a consolidated basis as margins expand by more than 6%,to 23%.
  • Lower interest and benign depreciation further add to the buoyancy as PBT nearly doubles.
  • Net profits go up nearly six fold on the back of strong PBT and an extraordinary income as opposed to a loss last fiscal. Excluding the same, bottomline grows 50% yoy. This is lower than PBT on account of huge surge in tax outgo.

Financial performance snapshot
  Standalone Consolidated
(Rs m) FY09 FY10 Change FY09 FY10 Change
Sales 27,948 32,523 16.4% 30,773 35,754 16.2%
Expenditure 22,781 25,027 9.9% 25,599 27,523 7.5%
Operating profit (EBDITA) 5,167 7,496 45.1% 5,174 8,232 59.1%
Operating profit margin (%) 18.5% 23.0%   16.8% 23.0%  
Other income 56 228 305.2% 167 389 133.2%
Interest 551 523 -5.0% 839 678 -19.2%
Depreciation 824 955 15.8% 1,276 1,493 17.0%
Profit before tax 3,849 6,246 62.3% 3,226 6,450 99.9%
Tax 321 1,866 480.7% 214 1,914 795.9%
Share of profit in associates NA NA   - -  
Minority interest NA NA   (1) (3) 540.0%
Extraordinary income/(expense) (2,242) 878 -139.1% (2,011) 1,095  
Profit after tax/(loss) 1,285 5,258 309.0% 1,003 5,634 461.9%
Net profit margin (%) 4.6% 16.2%   3.3% 15.8%  
No. of shares (m) 53.8 55.7   53.8 55.7  
Diluted earnings per share (Rs)   94.3     101.1  
P/E ratio (x)   8.8     8.2  

What has driven performance in FY10?
  • The company’s consolidated sales have gone up by 16% YoY during the fiscal. Formulations, which constituted 46% of sales in the previous fiscal, managed to grow by an impressive 33% YoY and thus, accounted for 54% of gross sales in FY10. Of the different geographies, US grew the most, being able to grow sales of formulations by a strong 70% yoy. The other geographies however, recorded a rather tepid growth.

  • What also augurs well for the future growth of its formulations business from the US is the increase in the number of ANDA filings to 169, up from about 147 in FY09. Considering the various opportunities in this market, we expect formulation sales from the US to grow at an average annual rate of 31% over the next three years.

  • As for the company’s other business segments, while dossier income recorded a good growth of 39% YoY, active ingredients business saw a decline of 2%.
    Cost break-up…
      Standalone Consolidated 
    (Rs m) FY09 FY10 Change FY09 FY10 Change
    Raw materials 16,127 17,303 7.3% 15,327 15,944 4.0%
    % sales 57.7% 53.2%   49.8% 44.6%  
    Staff cost 1,772 2,326 31.3% 2,437 3,273 34.3%
    % sales 6.3% 7.2%   7.9% 9.2%  
    Other expenditure 4,883 5,398 10.6% 7,836 8,306 6.0%
    % sales 17.5% 16.6%   25.5% 23.2%  

  • On the costs front, thanks to a lower raw materials cost as a percentage of sales, operating margins on a consolidated basis were seen higher by 6%. This led to near 60% growth in operating profits. Staff costs though came in higher than the growth in topline and exerted some negative pressure on margins. We expect the company’s operating margins to remain in the region of 20-22% in the near to medium term

  • Lower interest and benign depreciation charges have further boosted the company’s profitability, leading to a doubling of profits at the PBT level. Furthermore, with the forex changes on its huge FCCB loans also coming in favorable, the net profits of the company have gone up by a huge 462% YoY. However, the forex charges being notional and not regular in nature, the exclusion of the same has led to a 51% growth in the net profits of the company.

What to expect?
At the current price of Rs 834, the stock trades at a multiple of around 10 times our estimated FY12 earnings per share. Going forward, Aurobindo Pharma’s business will be driven by the increasing scale of its formulations business especially in the US and revenues from dossier licensing. The deal with Pfizer will go a long way in enhancing the performance of the company. Margins are also expected to improve with higher capacity utilization and the focus on niche products with limited competition. However, the company’s high debt equity ratio and considerable FII holdings remain a cause for concern.

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