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Aurobindo Pharma: Bruised on all fronts

Nov 16, 2011

Aurobindo Pharma has announced second quarter results of financial year 2011-2012 (2QFY12). The company has reported a 3% YoY drop in sales and net loss of Rs 802 m. Here is our analysis of the results.

Performance summary
  • Revenues fall by 3% YoY in 2QFY12 largely due to a dip in revenues from the formulations business.
  • EBDITA margins plunge 12.1% during the quarter due to a surge in all cost heads (as percentage of sales).
  • Decline in operating profits, reduction in other income and forex losses this quarter all combine to push the bottomline into the red.

Consolidated snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 11,126 10,753 -3.4% 20,349 21,522 5.8%
Expenditure 8,584 9,607 11.9% 16,089 18,736 16.5%
Operating profit (EBDITA) 2,542 1,146 -54.9% 4,260 2,786 -34.6%
EBDITA margin (%) 22.8% 10.7%   20.9% 12.9%  
Other income 106 60 -43.6% 137 89 -35.1%
Interest (net) 193 207 7.4% 322 353 9.5%
Depreciation 407 462 13.5% 808 914 13.1%
Profit before tax 2,048 537 -73.8% 3,267 1,608 -50.8%
Exceptional items - -   - (3,199)  
Forex loss/(gain) (762) 1,854   (344) 1,822  
Tax 830 (516)   1,115 (1,383)  
Profit after tax/(loss) 1,980 (802)   2,496 (2,030)  
Net profit margin (%) 17.8% -7.5%   12.3% -9.4%  
No. of shares (m)       291.1 291.1  
Diluted earnings per share (Rs)*         14.8  
Price to earnings ratio (x)         6.3  
* On a trailing 12 months basis

What has driven performance in 2QFY12?
  • Aurobindo's topline during the quarter dipped by 3% YoY largely on account of the 4% YoY fall in sales from its formulations business. Regards the latter, the company was hit in the US market as the US FDA had issued a warning letter with respect to Aurobindo's cephalosporins unit (Unit VI), the full impact of which was felt during the quarter. The company did not receive any new approvals from the US FDA during this quarter. As a result, growth from the US business declined by 4% YoY. The Europe business was not spared either and subdued demand environment in the region meant that sales fell by 10% YoY.

  • The API business was the only saving grace as sales managed to grow by 8.5% YoY. This was largely due to its anti-retroviral (ARV) business, whose sales almost doubled during the quarter. Having said that, other segments of the API business witnessed a fall in revenues.

  • Revenue breakup
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    USA 2,955 2,833 -4.1% 5,116 5,573 8.9%
    Europe & ROW 1,485 1,342 -9.6% 2,793 3,296 18.0%
    ARV (anti-retroviral) 1,717 1,744 1.6% 3,182 3,276 3.0%
    Total formulations 6,157 5,919 -3.9% 11,091 12,145 9.5%
    SSPs 1,602 1,502 -6.2% 2,922 3,069 5.0%
    Cephalosporins 2,062 1,704 -17.4% 3,914 3,647 -6.8%
    ARVs and Others 853 1,695 98.7% 1,798 2,775 54.3%
    Total APIs 4,517 4,901 8.5% 8,634 9,491 9.9%
    Dossier Income 699 153 -78.1% 1,086 342 -68.5%
    Grand total sales 11,373 10,973 -3.5% 20,811 21,978 5.6%

  • Aurobindo's operating margins plunged by 12.1% during the quarter led by a surge in all expenditure (as percentage of sales). Raw material costs soared on account of change in the sales mix. While there was a significant growth in ARV sales, this business enjoys low margins and hence overall margins were impacted. Staff costs increased on account of new people recruited. Increase in other expenditure was a result of rising cost of power & fuel, stores & spares and repairs & maintenance. As a result, operating profits fell steeply by 55% YoY.

  • Aurobindo suffered a loss at the net level to the tune of Rs 802 m as against a net profit of Rs 1.9 bn in 2QFY11. Besides lower other income, forex losses of Rs 1.8 bn this quarter led by the sharp depreciation of the rupee as compared to gains of 762 m in 2QFY11 further compounded woes. This is despite the fact that the company had a tax refund this quarter.

What to expect?
At the current price of Rs 94, the stock is trading at a multiple of 4.1 times our estimated FY14 earnings per share. The stock has taken a severe beating in recent times on account of the issues the company is facing with respect to the warning letter that the US FDA has issued on its Unit VI cephalosporins facility. Hence, an element of uncertainty exists as to when this issue will get resolved. On the other hand, the company's supply agreements with Pfizer and AstraZeneca are expected to drive growth from the Europe and the Rest of the World (ROW) markets going forward.

We had factored in lower sales growth from the US market and do not feel the need to revise our sales estimates for the year as the actual growth so far has been in line with our estimates. But the operating margins have been much lower than what we had estimated and so we will have to downgrade the same for the full year. Thus, although this will result in a reduction in the target price, we maintain our positive view on the stock from a long term perspective.

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