Aurobindo Shares Gain On New Approvals

Shares of Aurobindo Pharma have been gaining on the bourses for quite long now. In last one month’s period its share price has appreciated about 25%. The CNX Pharma index during the same period has seen contraction of about 1%. Many Pharma stocks have also shown a decline as the investors are now parking money in risky stocks after government’s reforms. 

Aurobindo Pharma in September got four USFDA approvals which including one First to File (FTF) application as per its filing on the BSE. On the approval in the list is for generic of Lexapro, which according to its filing is a USD 2.8 billion antidepressant drug.  The first to file approval for US 433 million Actoplus Met of Takeda is also worth noting. The negative run on the stock market however has been in line with its financial performance last year.

In the June quarter results, company consolidated loss of Rs 129 crore, thanks to surge in the manufacturing costs like power & fuel that impacted its operating profits. In the earlier (march) quarter company had posted decline in the profit while for rest three quarters of the last fiscal it had posted loss. Its operating margins have been very inconsistent over the years and for the latest June quarter the margins have ran in to negatives.

Company in February last year received USFDA import alert on its unit-6 located at Chitkul village in Hyderabad. Again the same year it received a warning letter from USFDA with regard to its antibiotics manufacturing unit in Hyderabad. The range of its problems seems prolonged as in the recent quarter its manufacturing expenses also rose sharply.

Digesting all these negatives, the company has again started applying for the USFDA approvals. Last year company filed total 30 ANDAs in USA, 267 dossiers in Europe, 33 in South Africa, 16 in Australia and 10 in Canada. By end of the 31 March 2012, it had total 150 ANDA approvals which have grown to 160 by September end.

After its last years stint, the management has taken few measures and the company has now set a target to improve the EBITDA margins and return ratios. Last year it redeemed all its FCCBs at premium of over 146%. Strong rupee depreciation caused Aurobindo a forex loss of Rs 248 crore in FY12. In total Company incurred loss of Rs 123 crore last fiscal. Company still carries a long term foreign currency loan of Rs 800 crore. Its total debt has crossed Rs 2500 mark and its debt to equity ratio which is in excess of 1x indicates high debt leverage of the company.

All negative and positives seem to be priced in at the moment and the stock we believe is gaining on the expectations that the worst is over. One however has to watch the USFDA whip on the company. We believe that the stock is mainly gaining on the product approvals and one has to wait till  September quarter results for any improvement on the operating performance. Most large cap pharma stocks are slowing down recently hence we believe that at the current level one should wait to enter the stock.