1QFY2012 Result Update | Pharmaceutical

August 8, 2011

Aurobindo Pharma
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Interest Adj. Net profit
Source: Company, Angel Research

BUY
CMP Target Price
1QFY2011 922 3 172 13 103 % chg (yoy) 16.8 96.8 (4.5) 12.7 (14.6) Angel est. 967 48 170 14 118

`158 `278
12 months

1QFY2012 1,077 6 164 15 88

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Pharmaceutical 4,589 1.1 275/153 789,074 1 16,990 5,119 ARBN.BO ARBP@IN

For 1QFY2012, Aurobindo Pharmas (APL) results were below expectations on the operating front, even after excluding the one-time payment of FCCB redemption premium. Although the companys performance was above our expectations on the top-line front, led by the formulation segments growth, performance on the operating and PAT levels was lower than our expectations. We maintain Buy on the stock. US and ARV formulation segments growth boosts revenue: Net sales grew strongly by 16.8% yoy to `1,076.9cr, driven by the US and ARV formulation segments. The US formulation segment grew by healthy 26.7% yoy to `274cr. The ARV formulation segment posted 44.4% yoy growth to `211.6cr. Gross margin came in at 46.8% (48.1%), impacted by higher raw-material costs. OPM fell to 15.2%, below our estimates of 17.6%, impacted by higher employee and other expenses. Adjusted net profit for the quarter came in at `88cr (`68.2cr). Outlook and valuation: Commencement of operations at the Hyderabad SEZ and incremental contribution from the Pfizer deal would boost APLs earnings with better growth visibility going forward. We estimate net sales to log a 12.7% CAGR to `5,243cr over FY201113E on the back of supply agreements and the US and ARV formulation contracts. We expect APLs recurring earnings (excluding other operating income) to post a 29.5% CAGR over FY201113E to `557cr on the back of sales growth and OPM expansion. We maintain our Buy view on the stock with a target price of `278. Key financials (Consolidated)
Y/E March (`cr) Net sales % chg Net profit % chg Recurring profit % chg EPS (`) Recurring EPS EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 54.4 17.0 19.9 8.7

Abs. (%) Sensex Aurobindo

3m (8.3) (13.6)

1yr (6.4)

3yr 12.0

(17.3) 162.7

FY2009 2,935 20.8 100 (58.0) 169 26.3 3.7 6.3 12.7 25.0 25.5 7.3 3.4 2.2 17.2

FY2010 3,370 14.8 563 463 304 79.4 20.2 10.9 18.3 14.5 29.6 12.1 2.4 1.9 10.5

FY2011E 4,126 22.4 563 (0.0) 332 9.2 19.3 11.4 17.1 13.8 24.6 11.7 1.9 1.7 9.7

FY2012E 4,519 9.5 569 1.0 451 35.8 19.5 15.5 17.8 10.2 20.7 12.0 1.5 1.4 7.7

FY2013E 5,243 16.0 636 11.7 557 23.6 21.8 19.1 18.3 8.2 19.0 13.8 1.3 1.2 6.4

Sarabjit Kour Nangra

+91 22 3935 7800 Ext: 6806 [email protected]

Please refer to important disclosures at the end of this report

Aurobindo Pharma | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance (Consolidated)

Y/E March (`cr) Net sales Other income Total income Gross profit Gross margins Operating profit OPM (%) Interest Dep & Amortisation PBT Provision for taxation Net profit Less : Exceptional items MI & share in associates PAT after Exceptional items EPS (`)
Source: Company, Angel Research

1QFY2012 1,077 6 1,083 504 46.8 164 15.2 15 45 110 (87) 197 (320) (123) -

1QFY2011 922 3 925 464 50.3 172 18.6 13 40 122 29 93 (42) 52 1.8

% chg (yoy) 16.8 96.8 17.0 8.6 (4.5) 12.7 12.7 (9.5) 111.1 -

FY2011 4,126 281 4,407 1937 46.9 704 17.1 62 172 751 225 526 37 563 19.6

FY2010 3,378 237 3,614 3614 49.0 625 18.5 68 149 645 191 454 109 563 20.8

% chg (yoy) 22.1 18.7 21.9 -46.4 12.6 (7.8) 14.8 16.4 17.6 15.9 (7.7) -

Exhibit 2: Actual vs. Estimates

(` cr) Net sales Other operating income Operating profit Tax Adj. Net profit
Source: Company, Angel Research

Actuals 1076.9 6.1 164 (89.3) 88

Estimate 967.5 48.0 170 35.2 118

Variation (%) 11.3 (87.3) (3.6) (25.0)

Revenue up 16.8%, driven by the US and ARV formulation segments: APL reported 16.8% yoy growth in net sales to `1,077cr (`968cr), led by growth in the formulations space, which grew by 26.2% yoy to `623cr (`498cr), majorly driven by growth in the US and ARV formulation segments. The US formulation segment grew by healthy 26.8% yoy to `274cr (`216cr). The ARV formulation segment reported 39.3% yoy growth to `212cr (`152cr). As a result, contribution of the formulations segment to net sales increased to 58% in 1QFY2012 from 55% in 1QFY2011. The API segment posted growth of 11.5% yoy to `459cr (`412cr), driven by SSP, which grew by 18.7% yoy. As of June 2011, the company had 138 approved ANDAs and 29 tentative approvals, with cumulative filings of 215.

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Aurobindo Pharma | 1QFY2012 Result Update

Exhibit 3: Sales break-up (Consolidated)

(`cr) Formulations US Europe ARV API SSP Cephs ARV & others
Source: Company, Angel Research

1QFY2012

4QFY2011

% chg (qoq)

1QFY2011

% chg (yoy)

FY2011

FY2010

% chg

623 274 137 212 459 157 194 108

670 350 140 180 483 136 233 115

(7.1) (21.7) (2.2) 17.4 (5.0) 15.3 (16.5) (5.7)

493 216 125 152 412 132 185 95

26.2 26.8 9.3 39.3 11.5 18.7 5.0 14.3

2423 1190 540 694 1802 565 847 390

1852 912 444 495 1602 615 679 308

30.9 30.4 21.6 40.0 12.5 (8.1) 24.7 26.9

OPM dips by 240bp for the quarter: During the quarter, gross margin came in at 46.8% (48.1%), impacted by higher raw-material costs. Gross margin came under pressure on account of unfavourable sales mix, with increased contribution of ARV sales in the overall sales mix. OPM declined to 15.2%, lower than our estimates of 17.6%, impacted by higher employee and other expenses.

Exhibit 4: OPM trend (Standalone)

20.0 19.0 18.0 17.0 16.0 (%) 15.0 14.0 13.0 12.0 11.0 10.0 4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012
Source: Company, Angel Research

17.1 17.7 15.1

18.6

16.6 16.5

Net profit lower than our estimates: For the quarter, APL reported losses on account of one-time payment of FCCB redemption premium. However, adjusting for the same, APLs net profit stood at `88cr (`103cr), for the quarter, lower than our estimate of `118cr, mainly due to lower-than-expected operating margin.

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Aurobindo Pharma | 1QFY2012 Result Update

Exhibit 5: Net profit trend (Standalone)

250 200 150 100 50 0 (50) (100) (150)
Source: Company, Angel Research

198 122 51

189 125

4QFY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012

(102)

Management takeaways
Overall growth for FY2012 is expected to be around 20%, with US, Europe and RoW, and ARV formulation sales growth expected to be ~20%, 2530% and ~20%, respectively. FY2012 OPM is expected to be higher than FY2011 OPM. Licensing income is expected to be around `125cr in FY2012. No clarity on the timelines with the resolution of the USFDA issue w.r.t. Unit III and VI. As of June 2011, gross debt on the books was ~`2,700cr, with cash of `90cr.

Recommendation rationale
Supply agreements to drive growth: On the global filings front (ANDAs and dossiers), APL has increased its filings dramatically from 313 in FY2008 to 1,171 in FY2010, as it proposes to scale up from SSP and Cephs to NPNC products. Further, the companys transformation from being a pure API supplier to becoming a formidable formulations player has increased its cost efficiencies, as 90% of its formulations are now backward integrated. Thus, to leverage on its cost efficiency and strong product filings, APL entered into long-term supply agreements with Pfizer (March 2009) and AstraZeneca (September 2010), which provide significant revenue visibility going ahead. APL is also in discussions with other MNCs for more supply agreements. US and ARV formulation segments The key drivers for base business: APLs business, excluding the supply agreements, would primarily be driven by the US and ARV segments on the formulation front. APL has been an aggressive filer in the US market, with 209 ANDAs filed and 134 approvals received until FY2011. Amongst peers, APL is the third-largest ANDA filer. The company has aggressively filed ANDAs in the last three years and is now geared to reap the benefits, even though most of the filings are for highly competitive products. APL expects to file 1520 ANDAs every year going forward. Going ahead,
August 8, 2011

Aurobindo Pharma | 1QFY2012 Result Update

during the next three years in the US with US$70bn going off-patent, one of the highest in history, we believe APL is well placed to tap this opportunity. We expect the base business (ex. Pfizer) to post a 36.0% CAGR over FY201012 and contribute US$268mn by FY2012, with revenue per product increasing to US$2.6mn from US$2.3mn in FY2010, as the company moves towards the high revenue-generating NPNC and injectable (SSP and Cephs) products. APL is one of the largest generic suppliers under ARV contracts, with a 35% market share. The company enjoys high market share as it is fully integrated in all its products apart from having a larger product basket. Overall, we expect the ARV segment to post a 21.4% CAGR over FY201012E to `730cr, with PEPFAR allocation for generic ARVs expected to increase.

Outlook and valuation

Commencement of operations at the Hyderabad SEZ and incremental contribution from the Pfizer deal would boost APLs earnings with better growth visibility going forward. We estimate net sales to log a 12.7% CAGR to `5,243cr over FY2011 13E on the back of supply agreements and the US and ARV formulation contracts. We expect APLs recurring earnings (excluding other operating income) to post a 29.5% CAGR over FY201113E to `557cr on the back of sales growth and OPM expansion. We maintain our Buy rating on the stock with a target price of `278.

Exhibit 6: Key assumptions

FY2012E API sales growth (%) Formulations sales growth (%) Operating margin (%) Capex (` cr)
Source: Company, Angel Research

FY2013E (2.3) 18.6 18.3 429

(0.4) 21.1 17.8 280

Exhibit 7: One-year forward PE

1,600 1,400 1,200 1,000

(`)

800 600 400 200 -

Source: Company, Angel Research

August 8, 2011

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
5x 10x 15x 20x

Aurobindo Pharma | 1QFY2012 Result Update

Exhibit 8: Recommendation summary

Company Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Neutral Buy Buy Buy Buy Neutral Buy Accumulate Buy Buy Accumulate Neutral CMP (`) 158 2,077 835 304 1,547 77 2,126 398 321 446 175 520 498 Tgt Price (`) 278 1,053 377 1,920 133 658 358 593 373 593 Upside % PE (x) 76.3 26.1 24.2 24.1 72.1 65.2 11.5 33.0 113.4 14.0 8.2 23.1 16.3 16.5 16.1 6.6 24.5 6.1 11.7 15.0 4.7 9.9 21.2 FY2013E EV/Sales (x) 1.2 2.9 2.6 3.0 2.8 1.2 5.6 0.8 1.7 2.5 1.2 1.6 5.3 EV/EBITDA (x) 6.4 18.7 12.8 14.1 11.1 6.9 15.8 4.7 8.1 12.5 5.5 6.8 16.9 FY11-13E CAGR in EPS (%) 29.5 15.6 21.6 23.8 22.7 8.6 14.6 25.8 14.8 24.0 29.6 43.1 15.8 FY2013E RoCE (%) 13.8 15.8 28.3 17.0 17.7 7.4 41.0 17.6 23.3 23.9 11.7 26.8 20.2 ROE (%) 19.0 17.1 35.2 18.2 25.2 9.2 30.7 19.3 24.9 30.8 23.4 25.9 20.4

Source: Company, Angel Research; Note: * December year ending;#CAGR in EPS is based on recurring EPS

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Aurobindo Pharma | 1QFY2012 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Adj EPS (`) % chg FY2008 2,547 117 2,430 11 2,441 14.3 2,089 1,412 267 193 217 341 13.2 14.0 100 241 19.3 9.9 69 110 37.6 292 41.8 292 53.6 18.4 238 (0) 239 239 19.1 9.8 8.9 8.9 17.8 FY2009 3,025 90 2,935 142 3,077 26.1 2,561 1,680 301 244 336 374 9.6 12.7 128 246 2.3 8.4 93 27 8.4 323 10.5 201.0 122 21.4 17.6 100 100 301 26.3 3.4 3.7 11.2 26.3 FY2010 3,446 76 3,370 206 3,575 16.2 2,752 1,777 338 327 310 617 65.1 18.3 149 468 90.0 13.9 73 44 6.9 645 100.0 (109.5) 754 191.4 25.4 563 (0) 563 454 50.7 16.7 20.2 16.3 45.4 FY2011 FY2012E FY2013E 4,225 100 4,126 256 4,381 22.5 3,422 2,189 411 429 804 704 14.0 17.1 172 532 13.8 12.9 62 25 3.4 751 16.4 (37.2) 788 225.1 28.6 563 (0) 563 526 15.9 13.7 19.3 18.1 10.9 4,588 69 4,519 150 4,669 6.6 3,714 2,232 475 602 404 806 14.5 17.8 206 600 12.7 13.3 54 43 5.8 739 (1.6) 739 170.0 23.0 569 569 569 8.2 12.6 19.5 19.5 8.2 5,322 80 5,243 100 5,343 14.4 4,283 2,576 550 696 460 960 19.1 18.3 232 728 21.2 13.9 54 52 6.3 826 11.8 826 190.7 23.1 636 636 636 11.7 12.1 21.8 21.8 11.7

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Aurobindo Pharma | 1QFY2012 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Share Application Money Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,601 418 1,184 278 53 60 2,059 283 316 1,460 526 1,534 3,109 1,869 575 1,294 536 105 0.3 2,289 128 394 1,767 570 1,719 3,654 2,312 697 1,615 570 96 0.3 2,506 73 375 2,058 708 1,798 4,079 2,774 882 1,892 502 48 39 3,392 188 505 2,699 886 2,506 4,987 3,280 1,087 2,192 352 48 0.28 3,537 211 642 2,684 1,104 2,433 5,026 3,709 1,320 2,389 352 48 0.28 4,017 219 721 3,077 1,271 2,746 5,536 27 1,097 1,124 3 1,908 73 3,109 27 1,214 1,241 3 2,333 77 3,654 28 1,801 1,829 4 2,155 91 4,079 29 2,416 2,445 9 2,414 118 4,987 29 3,021 3,050 9 1,834 133 5,026 29 3,612 3,641 9 1,735 150 5,536 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

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Aurobindo Pharma | 1QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in WC Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 292 100 (91) (49) (46) 305 (244) 113 (49) (181) 2 (141) (16) (268) (423) (300) 582 283 FY2009 73 128 (334) (180) (30) 16 (479) 48 (180) (611) 287 (39) 193 440 (155) 283 128 FY2010 FY2011E FY2012E FY2013E 752 149 (261) 44 (153) 443 (400) (9) 44 (365) 5 (1) (29) (109) (132) (54) 128 73 751 172 (593) 25 (180) 124 (470) (38) 25 (483) 1 297 (37) 261 (97) 73 188 739 206 96 43 (155) 842 (280) 38 43 (199) (580) (40) (620) 23 188 211 826 232 (305) 52 (174) 528 (429) 52 (377) (99) (45) (143) 8 211 219

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Aurobindo Pharma | 1QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 1.4 4.8 3.5 1.8 5.9 2.6 1.1 3.4 6.4 0.9 3.2 8.5 0.5 2.0 11.1 0.4 1.6 13.6 1.6 108 97 78 174 1.8 99 92 70 169 1.7 101 94 74 169 1.7 107 92 67 168 1.5 112 99 70 177 1.5 103 94 70 162 7.8 10.3 23.7 7.3 9 25.5 12.1 15 29.6 11.7 14 24.6 12.0 14 20.7 13.8 16 19.0 9.9 81.6 0.9 7.5 2.8 1.6 14.7 8.4 82.4 1.0 6.7 3.6 1.6 11.7 13.9 74.6 0.9 9.8 2.4 1.5 20.6 12.9 71.4 1.0 9.2 2.0 1.0 16.6 13.3 77.0 1.0 9.9 2.0 0.7 15.7 13.9 76.9 1.1 11.3 2.3 0.5 15.5 8.9 8.9 12.6 0.7 41.8 3.7 11.2 8.5 0.9 46.2 20.2 16.3 25.6 1.0 65.7 19.3 18.1 25.2 1.1 84.0 19.5 19.5 26.6 1.2 104.8 21.8 21.8 29.8 1.3 125.1 17.8 12.5 3.8 0.4 2.4 17.2 1.9 14.1 18.6 3.4 0.6 2.2 17.2 1.8 9.7 6.2 2.4 0.6 1.9 10.5 1.6 8.7 6.2 1.9 0.7 1.7 9.7 1.4 8.1 5.9 1.5 0.7 1.4 7.7 1.2 7.2 5.3 1.3 0.8 1.2 6.4 1.1 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

August 8, 2011

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Aurobindo Pharma | 1QFY2012 Result Update

Research Team Tel: 022 3935 7800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Aurobindo Pharma No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 8, 2011

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