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Aurobindo Pharma - Recalibrating Itself

| 3/7/2013 9:02 PM Thursday

Recovering from a setback in 2012, Aurobindo Pharma has showed a decent performance in 2013. Shrikant Akolkar sheds some light on the company and its plans to focus on certain areas of growth in the near future.

Sentiments change quickly in the world of investments. Investors lose money as the stocks are sold when companies face issues on several fronts. Once shattered, an investor’s confidence takes a long time to return to such counters. The result is, investors ignore such companies until they see a sharp run up in the stock price and participate in the rally when it is just about to end. This is a perfect recipe for disaster. If there is no steam in the stock, all you will see is stagnation or wealth erosion. On the other hand, there is every possibility that you would catch up with some returns even if you enter such a counter at a later stage of the rally if the company is really worth its salt.

This happened in case of Wockhardt, which we had recommended some time ago and are glad that investors did make decent money out of that recommendation. But cases like these are rare. Here is another case where the stock has run up quite a bit until now, but there still seems to be enough steam left in it to give you some good returns going forward. We are talking about the pharmaceutical company Aurobindo Pharma. This is another pharma stock which will, in all probability, go the Wockhardt way.

Aurobindo Pharma put up a poor business performance in FY12 due to the import alert on its two facilities from the US FDA. It has now come back with a superior performance in FY13. Strikingly, the high debt levels of the company have been brought within the management’s control and therefore Aurobindo is now worth having a fresh look at. Here is how the company’s future looks like and the reasons why we are recommending this stock to you.

The Business

There are companies and then there are pharma companies. Operating in this sector calls for a tremendous wherewithal on the technological side and a will to invest in Research & Development. Aurobindo is a 25-year-old company which manufactures and markets Active Pharmaceutical Ingredients (APIs) and finished dosage formulations (generics). It has a total of 14 manufacturing facilities located in India, approved by regulatory bodies from countries like USA, UK, Australia, Brazil, South Africa, Canada and WHO as well. It operates in over 100 countries with a major focus on the USA, UK, Spain, Japan, Australia, Brazil and Russia.

Broadly, the company derives 56 per cent of its revenues from Formulations including its Anti-Retroviral (ARV) business and 44 per cent comes through APIs.

The Right Formulations

Formulations are the main growth engine of the company. It has two subsegments in this - the Anti-retroviral (ARV) business and the Formulations business (this again is divided into two parts; the US and the rest of the world). The US formulations business, RoW formulations and the ARV business bring in 27 per cent, 15 per cent and 14 per cent of its consolidated topline respectively.

Patent expiry in the US is the main driver of growth for the formulations business. It has augmented well for a host of companies in India which have utilised their capability of delivering cheaper copy cats of erstwhile patented drugs to the developed world. The four-year compounded annual growth rate of Aurobindo Pharma’s formulations business (ex-ARV) at the end of FY12 stood at 32 per cent. Over the years, its US revenues have played a key role in its overall financials as the contribution of its US revenues in its total revenues has increased from nine per cent in FY08 to 27 per cent as of 9MFY13.

 

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