RESULTS REVIEW 3QFY17 10 FEB 2017

Aurobindo
BUY
INDUSTRY PHARMA
Weak quarter
ARBPs topline grew ~12% YoY to Rs 38.6bn in price erosion in the base business. Forecast 15% US
CMP (as on 10 Feb 2017) Rs 679 rev. CAGR over FY17-19E.
3QFY17. The EBITDA margin declined ~170bps QoQ
Target Price Rs 900 and 45bps YoY to 23.2% on account of heightened R&D expenses are now expected to increase
significantly to fuel potential filings in biosimilars and
Nifty 8,794 pricing pressure (13%YoY) in the US. Reported PAT complex injectable products. We believe costs will
Sensex 28,334 stood at Rs 5.8bn, up ~6%YoY. The increased pricing push up to ~6-7% of sales, further increasing the
KEY STOCK DATA pressure in the US base business and the scale up in pressure on ARBPs margins.
Bloomberg ARBP IN R&D spends on account of planned clinical trials for Highlights of the quarter
No. of Shares (mn) 585 biosimilars and other complex products are likely to
Concall takeaways: (1) Base business has faced price
MCap (Rs bn) / ($ mn) 398/5,948 keep improvement in margins muted over FY18-19E.
erosion of ~13% YoY, ~7% sequentially, (2) Launched
6m avg traded value (Rs mn) 1,780 Hence, we have cut our earnings estimates by 8-9% 11 new products in 3QFY17, incl. 3 injectables. 13
STOCK PERFORMANCE (%) (FY18-19E). At CMP, ARBP is trading at 14.5x FY18E launches planned for 4QFY17, (3) 9 ANDAs filed incl. 4
52 Week high / low Rs 895/582 and 12.4x FY19E, still a ~35% discount to the sector injectables, 19 approvals received incl. 2 injectables (4)
3M 6M 12M average. Maintain BUY rating with a revised TP of Rs Injectables sales expected to grow at 50% YoY for next
Absolute (%) (14.3) (8.9) (1.7) 900 (18x Dec-18E). 2-3 years, (5) Acquired biosimilar products will address
At present, ~45% of ARBPs revenues come from the US$ 20bn market opportunity, (6) Launches: gEpzicom
Relative (%) (17.2) (10.9) (21.0)
US generics business. Although the base is high at ~US$ - 1QFY18, gViread 4QFY18, Dolutagravir (ARV FDF)
SHAREHOLDING PATTERN (%)
1bn, ARBP still has ~140 ANDAs pending with the US 1QFY18, Vancomycin 2QFY18 (7) Natrol biz growth to
Promoters 46.76 be ~15% YoY for the next 2-3 years, (8) Debt will
FDA (37 injectables) and is likely to launch 40-45
FIs & Local MFs 7.40 ANDAs in FY18. The shift from plain vanilla generics to increase to US$ 600mn in 4Q due to EU acquisition.
FIIs 34.86 more niche categories will be the key for ARBP to Near-term outlook: Pick up in complex generic
Public & Others 10.83 maintain double-digit growth and to tackle increased approvals will be the significant driver for ARBP.
Source : BSE
Financial Summary
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Amey Chalke Net Sales 38,640 34,635 11.6 37,355 3.4 1,38,111 1,53,061 1,72,806 1,95,048
amey.chalke@hdfcsec.com EBIDTA 8,948 8,177 9.4 9,292 (3.7) 32,056 36,651 40,677 47,083
+91-22-6171-7321 APAT 5,784 5,443 6.3 6,056 (4.5) 19,820 23,739 26,172 30,387
Diluted adj. EPS (Rs) 9.9 9.3 6.3 10.3 (4.5) 33.9 40.6 44.7 51.9
Siddhant Mansukhani P/E (x) 20.2 16.9 15.3 13.2
siddhant.mansukhani@hdfcsec.com RoE (%) 32.5 29.1 24.9 23.0
+91-22-6639-2476 Source: Company, HDFC sec Inst Research # Consolidated
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
 AUROBINDO: RESULTS REVIEW 3QFY17

Quarterly Financials Snapshot (Consolidated)

Particulars 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) 3QFY17E Var (%)
Revenues grew ~12% YoY,
Net Sales 38,640 34,635 11.6 37,355 3.4 39,614 (2.5)
more or less in line with
Material Expenses 16,675 15,088 10.5 15,899 4.9 17,311 (3.7)
expectations
Employee Expenses 4,456 4,016 11.0 4,266 4.5 4,358 2.3
Other Expenses 8,560 7,355 16.4 7,898 8.4 8,398 1.9
ARBP also took chargeback
EBITDA 8,948 8,177 9.4 9,292 (3.7) 9,547 (6.3)
amounts to 4% of total sales
Depreciation 1,111 994 1,102 1,150
in 3Q
EBIT 7,837 7,184 9.1 8,190 (4.3) 8,397 (6.7)
Other Income 79 75 83 200
Interest Cost 143 227 175 200
Gross margin was down
FX Gains / (Loss) 158 140 202 (140)
sequentially due to significant
PBT 7,932 7,172 10.6 8,299 (4.4) 8,257 (3.9)
price erosion in the US base
Tax 2,177 1,742 2,239 2,400
business
RPAT 5,755 5,430 6.0 6,061 (5.0) 5,857 (1.7)
Minority Interest (29) (13) 5 (15)
APAT 5,784 5,443 6.3 6,056 (4.5) 5,872 (1.5)
Source: Company, HDFC sec Inst Research

Margin Analysis
EBITDA margin came in at 3QFY17 3QFY16 YoY (bps) 2QFY17 QoQ (bps) 3QFY17E Var (bps)
23.2%, below expectations by Material Expenses % Net Sales 43.2 43.6 (41) 42.6 59 43.5 (34)
~55bps. This was mostly on Employee Expenses % Net Sales 11.5 11.6 (6) 11.4 11 11.3 23
account of price erosion in the Other Expenses % Net Sales 22.2 21.2 92 21.1 101 21.5 65
US market EBITDA Margin (%) 23.2 23.6 (45) 24.9 (172) 23.7 (54)
Tax Rate (%) 27.4 24.3 315 27.0 47 26.2 126
APAT Margin (%) 15.0 15.7 (75) 16.2 (124) 15.0 (2)
Source: Company, HDFC sec Inst Research

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 AUROBINDO: RESULTS REVIEW 3QFY17

US Formulations Growth - Trend EU & RoW Growth - Trend

EU & RoW sales (Rs bn) % YoY growth
US Sales (Rs bn) % YoY growth

29.0 30 250
28.1 10
25.8 10
24.3 201 10
10 10
19.2
17.4
9
20.1 9
12.0 9
9

1 12 12 6 10
(2) (5)
12 13 14 15 16 17 17 17 17

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

EBITDA & Gross Margins - Trajectory API Revenues - Trend

EBITDA margin (%) Gross margin (%)
API Sales (Rs bn) % YoY growth
57
57 57 15 12
57 56
56 56 11
22 8
24 25
23 24 24 23 3
21 55 1 2
19

51
(9) (10)

7 7 7 7 7 8 7 8 8
3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 AUROBINDO: RESULTS REVIEW 3QFY17

Segmental Quarterly Performance

US business grew 12%YoY,
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) 3QFY17E Var (%)
which was below our
US 17,451 15,581 12.0 17,039 2.4 18,690 (6.6)
estimates.
Europe &RoW 10,432 9,457 10.3 10,252 1.8 10,184 2.4
This was primarily on ARVs 3,419 3,054 12.0 3,030 12.8 3,268 4.6
account of the higher Formulation (sub-total) 31,302 28,092 11.4 30,321 3.2 32,142 (2.6)
sensitivity of ARBPs business Betalactum 5,250 4,493 16.8 4,950 6.1 4,917 6.8
to the major headwinds in Non Betalactum 2,509 2,458 2.1 2,390 5.0 2,754 (8.9)
the US customer APIs (sub-total) 7,759 6,951 11.6 7,340 5.7 7,671 1.1
consolidation, increased Total 39,061 35,043 11.5 37,661 3.7 39,814 (1.9)
competition etc. Source: HDFC sec Inst Research

Assumptions
FY16 FY17 FY18E FY19E
European business grew 8% US 61,440 70,349 79,472 93,334
in constant currency terms Growth (%) 31.5 14.5 13.0 17.4
Europe 31,304 33,495 38,855 41,186
Growth (%) (2.0) 7.0 16.0 6.0
We expect US revenue ARV 11,999 12,599 14,867 17,543
growth to settle at 15% Growth (%) 24.5 5.0 18.0 18.0
CAGR over FY17-19E. RoW 6,914 7,951 9,541 11,450
Growth (%) 21.7 15.0 20.0 20.0
SSPs - API 8,708 9,753 10,241 10,753
Growth (%) (5.0) 12.0 5.0 5.0
ARV segment will grow Ceph - API 9,858 10,548 11,181 11,852
relatively quickly on the back Growth (%) 6.0 7.0 6.0 6.0
of important product ARVs - API 10,271 10,066 10,569 11,097
launches Growth (%) 12.6 (2.0) 5.0 5.0
Total 1,40,494 1,54,761 1,74,725 1,97,214
Growth (%) 14.6 10.2 12.9 12.9
Source: HDFC sec Inst Research
Overall top line is expected
to grow at 13% CAGR over
FY17-19E

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 AUROBINDO: RESULTS REVIEW 3QFY17

Income Statement (Consolidated) Balance Sheet (Consolidated)

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 1,20,432 1,38,111 1,53,061 1,72,806 1,95,048 SOURCES OF FUNDS
Growth (%) 49.8 14.7 10.8 12.9 12.9 Share Capital - Equity 584 585 585 585 585
Material Expenses 55,056 61,575 66,526 74,227 82,395 Reserves 50,975 69,982 92,258 1,16,967 1,45,891
Employee Expenses 13,023 15,508 17,556 19,817 22,168 Total Shareholders Funds 51,559 70,567 92,843 1,17,552 1,46,476
SG&A Expenses 10,975 6,893 9,240 10,082 10,594 Minority Interest 258 596 607 620 632
Other Expenses 16,515 22,929 24,023 29,030 33,939 Long-term Debt 13,615 8,472 6,354 4,766 3,574
EBITDA 25,636 32,056 36,651 40,677 47,083 Short-term Debt 25,021 32,290 33,790 32,101 30,496
EBITDA Margin (%) 21.3 23.2 23.9 23.5 24.1 Total Debt 38,636 40,762 40,144 36,866 34,070
EBITDA Growth (%) 12.3 25.0 14.3 11.0 15.7 Net Deferred Taxes 2,058 2,365 2,412 2,460 2,509
Depreciation 3,326 3,926 4,536 4,948 5,728 Long-term Provisions & Others 629 746 850 950 950
EBIT 22,310 28,130 32,115 35,729 41,355 TOTAL SOURCES OF FUNDS 93,139 1,15,036 1,36,856 1,58,448 1,84,637
Other Income (Incl EO Items) 808 682 500 650 750 APPLICATION OF FUNDS
Interest 843 927 815 602 554 Net Block 38,112 41,758 51,722 59,774 67,046
PBT 22,275 27,885 31,800 35,777 41,551 CWIP 3,352 11,038 10,850 5,950 5,950
Tax (Incl Deferred) 5,966 7,444 8,762 9,660 11,219 Intangible assets 640 640 9,640 9,640 9,640
RPAT 16,309 20,441 23,039 26,117 30,332 Investments 198 2 2 2 2
Minority Interest (45) (39) (50) (55) (55) LT Loans & Advances 3,701 3,210 4,150 5,050 5,050
EO (Loss) / Profit (Net Of Tax) 596 660 (650) - - Total Non-current Assets 46,003 56,647 76,364 80,416 87,688
APAT 15,758 19,820 23,739 26,172 30,387 Inventories 36,113 40,881 41,921 44,740 49,663
APAT Growth (%) 19.1 25.8 19.8 10.3 16.1 Debtors 35,392 41,719 46,410 50,007 56,435
Adjusted EPS (Rs) 27.0 33.9 40.6 44.7 51.9 Other Current Assets 6,898 9,401 8,500 9,500 9,500
Source: Company, HDFC sec Inst Research Cash & Equivalents 4,692 8,344 4,909 15,784 26,363
Total Current Assets 83,095 1,00,346 1,01,739 1,20,031 1,41,962
Creditors 20,511 25,268 27,947 28,499 31,512
Other Current Liabilities &
15,447 16,690 13,300 13,500 13,500
Provisions
Total Current Liabilities 35,958 41,958 41,247 41,999 45,012
Net Current Assets 47,136 58,388 60,492 78,032 96,949
TOTAL APPLICATION OF FUNDS 93,139 1,15,036 1,36,856 1,58,448 1,84,637
Source: Company, HDFC sec Inst Research

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 AUROBINDO: RESULTS REVIEW 3QFY17

Cash Flow Key Ratios

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 21,467 27,202 31,300 35,127 40,801 PROFITABILITY (%)
Non-operating & EO items 47 (1,555) 95 91 92 GPM 54.3 55.4 56.5 57.0 57.8
Interest expenses 843 927 815 602 554 EBITDA Margin 21.3 23.2 23.9 23.5 24.1
Depreciation 3,326 3,926 4,536 4,948 5,728 APAT Margin 13.1 14.4 15.5 15.1 15.6
Working Capital Change (2,515) (6,939) (6,426) (7,564) (8,338) RoE 35.4 32.5 29.1 24.9 23.0
Tax Paid (5,966) (7,444) (8,762) (9,660) (11,219) RoIC (or Core RoCE) 19.3 19.9 20.1 19.7 20.8
OPERATING CASH FLOW ( a ) 17,202 16,119 21,559 23,544 27,618 RoCE 19.3 19.7 20.4 19.4 20.5
Capex (14,388) (13,399) (14,262) (8,000) (13,000) EFFICIENCY
Free cash flow (FCF) 2,814 2,720 7,297 15,544 14,618 Tax Rate (%) 26.8 26.7 27.6 27.0 27.0
Investments (1,065) (1,045) 14 24 24 Fixed Asset Turnover (x) 2.2 2.2 2.0 1.9 1.9
Non-operating Income 808 682 500 650 750 Inventory (days) 109.4 108.0 100.0 94.5 92.9
INVESTING CASH FLOW ( b ) (14,646) (13,761) (13,749) (7,326) (12,226) Debtors (days) 107.3 110.3 110.7 105.6 105.6
Debt Issuance/(Repaid) 2,296 2,127 (618) (3,278) (2,796) Other Current Assets (days) 20.9 24.8 20.3 20.1 17.8
Interest Expenses (843) (927) (815) (602) (554) Payables (days) 62.2 66.8 66.6 60.2 59.0
FCFE 4,010 3,557 6,377 12,338 12,042 Other Current Liab & Provns (days) 46.8 44.1 31.7 28.5 25.3
Share Capital Issuance (386) 359 - 0 - Cash Conversion Cycle (days) 128.6 132.3 132.5 131.5 132.1
Dividend (1,314) (1,170) (1,463) (1,463) (1,463) Debt/EBITDA (x) 1.5 1.3 1.1 0.9 0.7
FINANCING CASH FLOW ( c ) (247) 388 (2,896) (5,343) (4,814) Net D/E (x) 0.7 0.5 0.4 0.2 0.1
NET CASH FLOW (a+b+c) 2,309 2,746 4,914 10,875 10,579 Interest Coverage (x) 26.5 30.3 39.4 59.3 74.6
EO Items, Others (596) (660) 650 - - PER SHARE DATA (Rs)
Closing Cash & Equivalents 2,905 3,406 4,264 10,875 10,579 EPS 27.0 33.9 40.6 44.7 51.9
Source: Company, HDFC sec Inst Research Dividend 2.3 2.0 2.5 2.5 2.5
Book Value 88.3 120.6 158.7 200.9 250.3
VALUATION
P/E (x) 27.8 22.1 16.9 15.3 13.2
P/BV (x) 8.5 6.2 4.3 3.4 2.7
EV/EBITDA (x) 18.4 14.7 11.9 10.4 8.7
EV/Revenues (x) 3.9 3.4 2.8 2.4 2.1
OCF/EV (%) 3.6 3.4 4.9 5.6 6.8
FCF/EV (%) 0.6 0.6 1.7 3.7 3.6
FCFE/Mkt Cap (%) 0.9 0.8 1.6 3.1 3.0
Dividend Yield (%) 0.3 0.3 0.4 0.4 0.4
Source: Company, HDFC sec Inst Research

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 AUROBINDO: RESULTS REVIEW 3QFY17

RECOMMENDATION HISTORY
Date CMP Reco Target
Aurobindo TP
1,000 25-Aug-16 790 BUY 925
16-Nov-16 734 BUY 980
900 23-Jan-17 715 BUY 950
10-Feb-17 679 BUY 900
800

700

600

500 Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Apr-16
Feb-16

Sep-16

Feb-17
Jun-16

Jul-16
Mar-16

Dec-16
Oct-16
Aug-16

Nov-16

Jan-17
May-16

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 AUROBINDO: RESULTS REVIEW 3QFY17

Disclosure:
We, Amey Chalke, MBA and Siddhant Mansukhani, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect
our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,
Senapati Bapat Marg, Lower Parel, Mumbai - 400 013
Board : +91-22-6171-7330 www.hdfcsec.com

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