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Aurobindo Pharma: The 'forex' impact - Views on News from Equitymaster
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Aurobindo Pharma: The 'forex' impact
Aug 9, 2010

Performance summary
  • Revenues grow by 8% YoY in 1QFY11 and are impacted by the decline in sales from the US formulations and the penicillin API business.
  • EBDITA margins contract by 4.3% during the quarter due to higher staff costs and other expenditure (as percentage of sales).
  • PAT declines by 69% YoY during the quarter largely due to forex losses of Rs 418 m (forex gain of Rs 575 m). Excluding the same, decline in net profits is lower at 14% YoY.


Consolidated snapshot
(Rs m) 1QFY10 1QFY11 Change
Net sales 8,528 9,223 8.2%
Expenditure 6,571 7,505 14.2%
Operating profit (EBDITA) 1,957 1,717 -12.2%
EBDITA margin (%) 22.9% 18.6%  
Other income 22 31 39.5%
Interest (net) 227 129 -43.0%
Depreciation 333 401 20.5%
Profit before tax 1,420 1,219 -14.2%
Forex loss/(gain) (575) 418  
Tax 331 285 -13.8%
Profit after tax/(loss) 1,665 516 -69.0%
Net profit margin (%) 19.5% 5.6%  
No. of shares (m) 53.8 56.5  
Diluted earnings per share (Rs)*   79.4  
Price to earnings ratio (x)   12.0  
* on trailing 12-months basis

What has driven performance in 1QFY11?
  • Aurobindo’s topline during the quarter grew by a subdued 8% YoY largely led by the decline in sales from the US formulations and the penicillin API businesses. The overall formulations business recorded a 5% YoY growth. While revenues from the US were down 6% YoY, the ARV and the Rest of the World segments grew by a mere 6.5% YoY and 2% YoY respectively. Europe was the only saving grace as revenues from this region recorded a healthy 60% YoY, albeit on a lower base.

  • The API business managed to do better as sales grew by a decent 15% YoY. Growth was driven by the cephalosporins (anti-infective) and the ARV segments. While the former grew by 33% YoY, the latter grew by 41% YoY. The penicillin API business, however, was the odd one out as revenues from this segment declined by 13% YoY.

  • Aurobindo’s operating margins contracted by 4.3% during the quarter due to an increase in staff costs and other expenditure (as percentage of sales). The increase in expenses was attributed to the operationalisation of 2 large formulations manufacturing facilities. Aurobindo’s bottomline fell by 69% YoY during the quarter. This was largely due to forex losses of Rs 418 m during the quarter (as against forex gains of Rs 575 m in 1QFY10). Excluding this forex loss, net profits declined by 14% YoY on account of the 12% YoY decline in operating profits. Even lower interest costs and higher other income could not do much in terms of arresting the fall in the bottomline.

What to expect?
At the current price of Rs 950, the stock is trading at a multiple of 11.5 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. We maintain our view on the stock.

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