Aurobindo Pharma - The Smart Investor

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Overall, the transformation to a formulation player has benefited APL in dual ways - most of the API is now utilised for internal consumption making it cost competitive as well as insulating the company from the high price volatility witnessed in the API business Aurobindo Pharma | Initiating Coverage Going ahead, increase in contribution from formulations to 67% in FY2012 from 55% in FY2010 and gradual scale up in capacity utilisation at its new facilities are likely to increase its OPM to 20.4% in FY2012 from 18.3% in FY2010. On a comparative basis, APL’s OPM would be on par with the sector average. This is on back of backward integration on the formulation front. Overall, the transformation to formulation player has benefited APL in dual ways - most of the API is now utilized for internal consumption (more than 90% of its formulation is backward integrated) thereby making it cost competitive in the formulation space as well as insulating the company from the high price volatility (seen especially between 2008-09 where gains of the formulation business was offset by price volatility on the API front) witnessed on the API business. Further, APL does not have a significant presence in the branded generic segment (including India) owing to which its expenditure for sales promotion and advertisements are on the lower side. Exhibit 20: OPM comparison (FY2012) (%) 40.0 30.0 20.0 10.0 0.0 33.5 Sun Pharma 21.5 21.0 20.4 19.5 19.4 Cipla Cadila Healthcare Source: Company, Angel Research. Note: Ranbaxy’s base business OPM considered. Recurring PAT (ex other OI) to increase by 29.1% CAGR over FY2010-12 Recurring PAT (ex other OI) registered CAGR of 46.0% to `304cr during FY2006- 10 driven by sales growth and margin expansion. Going ahead, interest expense is expected to rise as the company raises debt to repay the FCCBs (including premium) to the tune of `938cr in May 2011. We estimate interest expense to increase from `73cr to `91cr in FY2012. Depreciation cost is also expected to increase from `149cr in FY2010 to `208cr in FY2012 due to the new facilities (Unit VII (SEZ), NJ and Trident). In the last two years (FY2009 and FY2010), the company clocked other OI of `142cr and `206cr on the back of sale of dossiers to Europe and under the Pfizer contract, which has resulted in strong cash flows for the company. On a conservative basis, we expect the company to clock dossier income of `140cr both in FY2011 and FY2012 primarily from the supply agreements. October 18, 2010 14 7.8 APL Lupin Dr Reddy's Ranbaxy
Excluding the dossier income, recurring PAT is estimated to record strong CAGR of 29.1% to `506cr in FY2012 Exhibit 21: Other operating income and Recurring PAT (ex other OI) (` cr) 250 200 150 100 50 0 6.4 3 3.4 13 11 3.6 Source: Company, Angel Research 142 44.2 Aurobindo Pharma | Initiating Coverage Overall, we expect recurring PAT to increase by 16.6% to `617cr assuming lower income from the sale of dossiers. Excluding the dossier income, recurring PAT is estimated to record strong CAGR of 29.1% to `506cr in FY2012. 31.9 30.0 206 22.6 17.4 20.0 140 140 10.0 FY2006 FY2008 FY2010 FY2012E Other Op Income % of PBT APL has been on aggressive capex spree in the last five years with capex of `1,721cr To address capacity constraints on the NPNC front, APL commercialised Unit VII (SEZ) in FY2010 50.0 40.0 0.0 (%) Capex spend to moderate The company has been on an aggressive capex spree in the last five years incurring capex of `1,721cr (73% of FY2010 fixed assets), which was largely spent on the formulation segment. However, capacity utilisation has been subdued especially in tablets/capsules at 46% in FY2010 primarily due to lower utilisation at the Unit VIB (Cephs) and Unit XII (SSP). However, going ahead, we expect the utilisation to increase at these facilities on the back of injectable product launches in the US and pick up in volume under the supply agreements. Exhibit 22: Formulation facilities Units Product Capacity Utilisation (%) Unit VIB Cephs oral & sterile < 25 Unit XII SSP oral and sterile 85 Unit VII (SEZ) NPNC Newly commenced USA NJ NPNC Newly commenced Trident Injectables (NPNC) To commence in 2HFY2012 Source: Company, Angel Research Further, to address the capacity constraint in Unit III (NPNC), APL built a facility near Hyderabad (Unit VII SEZ) in FY2010. APL spent around `250cr to set up this facility, which is spread across 10 acres of the total 75 acres land. The unit has the capacity to produce to 1,000mn tablets and 100mn capsules per month, which has almost doubled the company’s tablets/capsules production. The company expects the unit to meet the increasing demand in the regulated markets and emerging markets. October 18, 2010 15 (` cr) 600 400 200 0 67 189 230 169 304 355 506 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Recurring PAT
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Aurobindo Pharma - The Smart Investor

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