ICICI Direct aurobindo_pharma_initiating coverage March 2011

ICICI Securities Limited
Initiating Coverage
March 9, 2011

Rating Matrix Aurobindo Pharma (AURPHA)
Rating : Strong Buy
Target : | 257 | 191
Target Period : 12-15 months
Potential Upside : 34%
USFDA issue overblown, time to cash in…
YoY Growth (%)
(YoY Growth) FY10 FY11E FY12E FY13E
Aurobindo Pharma (APL) is a leading formulations and API player. Over
Net Sales 16.2 20.8 15.6 14.6 the last five years it has transformed itself from a pure API supplier to a
EBITDA 59.4 18.4 17.9 20.0 generic formulations player. This transformation is still on and has
Net Profit 462.5 -0.6 14.7 29.4 improved the financials of the company. Henceforth, the next big
EPS (|) 462.5 -0.6 14.7 29.4 growth drivers will be capacity optimisation and monetisation of the US
ANDA pipeline. Recent deals with MNCs have given the company new
Current & target multiple
strength. Aurobindo, on account of its proven capabilities and huge
FY10 FY11E FY12E FY13E
capacities, is well equipped to cater to their incremental requirements.
P/E 9.9 10.0 8.7 6.7
The stock has corrected sharply with the import alert imposed by the
EV / EBITDA 9.3 7.9 6.5 5.3
Price to Book Value 3.0 2.3 2.0 1.6
USFDA for the Unit VI facility. We believe this was an overreaction. We
Target P/E 13.3 13.4 11.6 9.0 expect sales and adjusted PAT to grow at a CAGR of 17.0% and 19.9%
Target EV / EBITDA 11.6 9.9 8.2 6.7 to | 5720 crore and | 831 crore, respectively, in FY10-13E. We are
Target P/BV 4.1 3.1 2.7 2.2 initiating coverage on the stock with a STRONG BUY rating.

Stock Data Transformation, capacity optimisation to improve margins, cash flows
Bloomberg/Reuters Code ARBP.IN / ARBN.BO We expect the formulations-API ratio to improve from 46:54 in FY09 to
Sensex 18,439.7 66:34 by FY13E. Similarly, we also expect capacity utilisation to
Average volumes 149,189 improve on account of successful regulatory approvals for both facilities
Market Cap (| crore) 5,225.6 and products. We expect EBITDA margins to improve from 16.8% in
52 week H/L 272 / 161 FY09 to 24.1% in FY13E on account of these developments.
Equity Capital (| crore) 29.1
Promoter's Stake (%) 54.4 US business to continue to be major growth driver
FII Holding (%) 26.4 The passage of the US Healthcare bill and impending patent cliff will
DII Holding (%) 9.4 throw open good opportunities for generic players like Aurobindo. So
Comparative return matrix (%)
far, the company has filed 200 ANDAs with the USFDA and received
approvals for 132 products. We expect APL’s US business to grow at a
Return % 1M 3M 6M 12M
Aurobindo Pharma Ltd -21.1 -27.0 -10.7 -4.7
CAGR of 27% to | 1849 crore in FY10–13E on the back of monetisation
Ranbaxy Laboratories -8.5 -19.6 -11.0 -1.0 of the huge ANDA pipeline.
Sun Pharmaceuticals 6.5 -7.5 20.7 29.7
Dr Reddy's Labs 4.3 -12.8 14.3 37.4 Valuations
Price movement APL is currently trading at a steep discount to its industry peers due
to the recent melt down and legacy issues like API model and weak
7,000 300
balance sheet. Despite the import alert for one facility, we believe
6,000 250 other issues like transformation from API driven model to generic
5,000 formulations, incremental capacity utilisation, monetisation of the
200
4,000 growing ANDA pipeline and recent deals with leading MNCs will
150
3,000 remain intact. We expect the valuation gap to narrow down, going
100 forward. We value APL at | 257, based on 9x FY13E EPS of | 28.5.
2,000
1,000 50
0 0 Exhibit 1: Valuation Metrics
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 (Year-end March) FY09 FY10 FY11E FY12E FY13E
Price (R.H.S) Nifty (L.H.S) Net Sales (| crore) 3,077.3 3,575.4 4,318.1 4,991.9 5,720.1
EBITDA (| crore) 516.4 823.2 974.5 1,149.4 1,379.0
Net Profit (| crore) 100.2 563.4 559.8 641.8 830.8
Analyst’s name EPS (|) 3.4 19.4 19.2 22.0 28.5
P/E (x) 55.7 9.9 10.0 8.7 6.7
Siddhant Khandekar
siddhant.khandekar@icicisecurities.com Price / Book (x) 4.5 3.0 2.3 2.0 1.6
EV/EBITDA (x) 15.1 9.3 7.9 6.5 5.3
Krishna Kiran Konduri
RoCE (%) 10.9 16.9 16.0 19.8 21.5
krishna.konduri@icicisecurities.com
RoE (%) 8.1 30.8 23.0 23.6 24.0
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research


Share holding pattern (Q3FY11) Company background
Shareholder Holding (%)
Promoters 54.4
Aurobindo Pharma (APL) was set up by first generation entrepreneurs
Institutional Investors 35.8 PV Ramprasad Reddy and K Nithyananda Reddy in 1986. Based in
Other Investors 3.1 Hyderabad, APL is an integrated pharmaceutical company, which
General Public 6.8 started as an API manufacturer. In 2001, it moved up the value chain by
foraying into formulations while from 2007 onwards it started scaling up
the formulation business. APL's manufacturing facilities are approved by
several leading regulatory agencies like USFDA, UKMHRA, WHO, Health
FII & DII holding trend (%) Canada, MCC South Africa, ANVISA Brazil. The company owns 16
manufacturing facilities in India and the US. Of these 16 facilities, seven
70 are for formulations, six are for APIs while three are for intermediates. It
58.7 56.9 56.2
60 54.4 54.4 also owns a distribution hub in Malta and a packaging facility in Brazil.
50 The company owns three R&D centres. The current employee strength
35.4 35.8
40 32.4 34.1 34.2 is more than 8000, which includes more than 750 scientists. APL
30 markets its products in 125 countries through a global marketing
20 network of 41 subsidiaries.
10
0 Till date, it has filled 200 ANDA with the USFDA and received approvals
Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 for 132 ANDAs (including 33 tentative approvals). It has also filed 906
Promoter FIIs & MFs dossiers in the EU market and received approvals for 351 dossiers.
Exports account for ~70% of total sales.

Aurobindo Pharma is vertically integrated and its product basket
includes about 300+ products spread over seven major therapeutic
areas encompassing cardiovascular (CVS), central nervous system
(CNS), anti-infectives, anti-retrovirals (ARVs), gastroenterologicals (GIs),
pain management and osteoporosis. The market potential of APL’s
product pipeline of 300+ products is more than US$200 billion.

The company is a leading player in APIs and has a strong presence in
anti-bacterials such as semi-synthetic penicillins (SSPs) and
cephalosporins (Cephs).

Explanation on Unit VI import alert
USFDA has imposed an import alert on drugs manufactured at the
Unit VI accounts for ~3-4% of total sales company’s Unit VI facility. Unit VI manufactures cephalosporin in both
oral and sterile forms. The facility was inspected by the USFDA in
December 2010 and it found some deviations in cGMP of sterile products
in the facility. Currently, Aurobindo has stopped shipments to US market
from this facility.

Currently, Aurobindo is supplying four injections cefazolin, cefotaxime,
ceftazidime and ceftriaxone from this facility to Pfizer. It is also supplying
five oral products cefadroxil, cefidinir, cefprozil, cefprozil oral suspension
and cefuroxime axetil to Pfizer’s generics unit Greenstone LLC. Annual
Pfizer will work closely with Aurobindo to sort out the issue sales to the US market from Unit VI are around US$30 million. It has filed
30 ANDAs from this facility and received approvals for 20 ANDAs so far.
The company has maintained that the ANDAs filed from other
manufacturing facilities will not have any impact. Pfizer has indicated that
it will help Aurobindo to resolve the issue as soon as it gets clarity on the
same. In all our calculations, we have considered the impact of future
revenue loss from this facility.

Page 2

Exhibit 2: Sales have grown at 19% CAGR in FY07-FY10 Exhibit 3: Shift towards formulations

4000 3575 120
3301
3500 3077 100
3000 80 43
2441 54 46
2500 2123 69 61
60
2000
40
1500 54 57
20 39 46
1000 31
500 0
0 FY07 FY08 FY09 FY10 9M FY11
FY07 FY08 FY09 FY10 9M FY11
Formulations APIs

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Exhibit 4: US accounts for 48% of formulation sales in 9MFY11 Exhibit 5: 9MFY11 sales break-up

120
Dossier Income
100 11 11 USA
16 14 7%
80 14 13 13 25%
20
60 27 28
33
40 40
APIs
20 49 48 EU
38 40%
24 7%
0
FY08 FY09 FY10 9M FY11 ARV
ROW 15%
6%
USA ARV EU ROW


Exhibit 6: Manufacturing facilities
Manufacturing facilities Product Type Approvals Cap. Utilisation
Indian Formulation Units
Unit III Non-Betalactum USFDA, UKMHRA, TGA, Health Canada, MCC(SA), ANVISA (Brazil), WHO High
Unit VI Cephs(Oral & Sterlie) USFDA, Health Canada, MCC(SA), ANVISA (Brazil) Moderate
Unit XII SSPs (Sterile & Non-Sterile) USFDA, UKMHRA, TGA, Health Canada, MCC(SA), ANVISA (Brazil) Moderate
Unit VII (SEZ) Non-Betalactum USFDA Moderate
Bhiwadi Penems Sterile Waiting for approvals Low
Trident Liquid injectibles Waiting for approvals Yet to Start
US Formulation Units
US NJ Non-Betalactum (Oral) USFDA Low
Indian API Units
Unit I CNS, CVS, Anti-allergic USFDA, UKMHRA, TGA, WHO High
Unit IA Cephs(Non-Sterlie) USFDA, UKMHRA, TGA High
Unit V SSPs (Sterile & Non-Sterile) cGMP High
Unit VIA SSPs USFDA, TGA High
Unit VIII GI, GRV USFDA, UKMHRA,TGA,WHO High
Unit XIA ARV USFDA, UKMHRA,WHO High
Intermediates
Unit IX Intermediates cGMP High
Unit X Intermediates cGMP High
Unit XIA Intermediates cGMP High

Page 3


Investment Rationale
APL sales growth will be driven by the formulation business as the
company is transforming itself from an API supplier to a generic
formulation player. In the last three or four years, it has invested around
| 1000 crore to set up and acquire formulation facilities both in India and
abroad. The current capacity utilisation of formulation facilities is still
low. We expect the formulation business to grow at 26.9% CAGR in
FY10-13E on the back of new product launches across geographies and
incremental supplies to MNCs. Sales from dossiers will trigger supply
deals in future to prospective customers. API supplies to regulated
markets will also support topline growth. Despite the embargo on Unit
VI, we maintain our positive outlook on the company. Overall, we
estimate total gross sales will grow at 17% CAGR of in FY10-13E.

Exhibit 8: Sales break-up

4000 3787

3500 3037
3000
2412
2500
1852 1831 1911
2000 1647 1602 1744
1410
1500
1000
500 142 198 260 200 80
0
FY09 FY10 FY11E FY12E FY13E

Formulations APIs Dossier


Change in revenue mix in favour of formulations to improve margins
The company was predominantly an API supplier with close to 90% of
the sales coming from APIs in FY05. Since then, it has consciously
moved up the value chain by expanding into formulations. For 9MFY11,
Formulations to constitute ~65% of base business by the formulations to API ratio for the base business stood at 57:43. Going
FY13E forward, we believe formulations will constitute more than ~65% of the
base sales and maximum APIs will be used for conversion into high
margin formulations. The company, in recent years, has ramped up
global filing activities and positioned itself as one of the largest generics
suppliers from India. The deals with Pfizer and lately with AstraZeneca
will demand incremental supply of various formulations to be launched
globally. Hence, the gradual shift to formulations will take care of their
requirements as well.

The shift towards formulations will also improve EBITDA margins. The
results are already visible. Margins have improved ~ 860 bps to 23%
Margins to remain in the range of 23-24.1% in FY10-FY13E during FY08-10. Although it is true that margins got a boost from higher
dossier sales, we believe the main growth will only come from this
paradigm shift as the dossier income is expected to come down in the
coming years. We expect margins to improve from 23.0% in FY10 to
24.1% in FY 13E.

Page 5

Exhibit 9: Shift towards formulations Exhibit 10: EBITDA margins to improve, going forward

120 30.0
100 25.0
23.0 23.0 24.1
80 42 38 34 22.6
54 46 20.0
61
60 16.8
15.0 14.4
40
58 62 66
46 54 10.0
20 39
0 5.0
FY08 FY09 FY10 FY11E FY12E FY13E 0.0
FY08 FY09 FY10 FY11E FY12E FY13E
Formulations APIs


APL’s formulation facilities have been backed by its own API facilities.
The business model is vertically integrated with ~95% of the key
intermediates and APIs required for formulations made in-house. This
has facilitated the company to enter into other niche segments such as
cardiovascular (CVS), central nervous system (CNS) and
gastroenterologicals (GI), other than its traditional segments of anti-
bacterials and ARVs. Despite that, we have also observed that the
To expand into niche formulations
company will remain committed to anti-bacterials, especially high-end
ones such as Cephalosporins (third and fourth generation) and Penems.
Also, in ARVs, the company will be selective in tender selection
(discussed later). Almost all formulations are meant for exports.

Aurobindo has recently added two more formulations facilities (one
acquired facility and one SEZ) and upgraded the New Jersey based
facility. The SEZ unit VII (capex of | 270 crore), which has already gone
on stream from June 2010 has the potential to clock | 1500-2000 crore
of sales at the optimum level. It is expected to reach ~30% utilisation
Unit VII has the potential to clock | 1500-2000 crore per by the end of FY11. This facility will cater to the non-betalactum product
annum class, which is also being catered to by unit III. This unit (i.e. unit III) is
already working at over 85% capacity. Hence, there is a need for new
capacity.

The Trident facility (acquired in 2009) is expected to start commercial
production in FY12. The plant is expected to manufacture the general
injectable range of formulation products.

The company is also building new capacities for oral contraceptives
(near Unit VII) and new multipurpose non-betalactum liquid injectable
facility near Hyderabad. All these acquisitions/additions will further
increase formulations share. Overall, the company has invested nearly |
1000 crore in the last five years to build up the formulation capacities.

Since APIs will increasingly be used for formulations, we see the share
of APIs to sales coming down to ~33-34% by FY13E. The residual APIs
Incremental APIs to be used for captive purpose will more or less cater to regulated markets. We project sales from APIs
will grow at 6% CAGR in FY10-13E to | 1911 crore. At the same time,
we expect formulations to grow at 26.9% CAGR in FY10-13E to | 3787
crore.

Page 6

Exhibit 11: API sales to grow at 6% CAGR in FY10-13E Exhibit 12: Formulation sales to grow at ~27% CAGR in FY10-13E

2000 4000 3787
1911
3500 3037
1900 1831
3000
1800 1744 2412
2500
1852
1700 1647 2000
1602 1410
1500
1600
1000
1500
500
1400 0
FY09 FY10 FY11E FY12E FY13E FY09 FY10 FY11E FY12E FY13E


To augment large unused formulation capacity utilisation
Aurobindo currently owns 16 manufacturing facilities - 15 in India and
one in the US. The recently acquired Trident facility is yet to start
commercial production. Overall capacity utilisation in case of most of
the formulation plants is still below 50%. Over the years, the company
has kept on building huge capacities. On account of the longer
gestation period for formulation plants, the company did face certain
Better capacity utilisation to improve margins balance sheet issues and cash flow constraints initially. Hence, it had to
rely on borrowings, which kept on ballooning. At one point of time the
debt/EBITDA stood at nearly 4.5x. However, the deal it entered into with
Pfizer in 2009 was in a way a shot in the arm as the deal not only gave
new strength but also provided assurances on incremental capacity
utilisation. The augmented capacity utilisation will strengthen the
EBIDTA margins as shown in the common-size statement.

Exhibit 13: Common-size statement
Net sales 100 100 100 100 100 100
Total Exp 85.6 83.2 77 77.4 77 75.9
EBITDA 14.4 16.8 23.0 22.6 23.0 24.1
Depreciation 4.1 4.1 4.2 3.8 3.9 3.7
Interest 1.8 2.7 1.9 1.4 2.2 1.8
Tax 2.2 0.7 5.3 5.5 4.3 4.8
Net Profit 9.8 3.3 15.8 13.0 12.9 14.5

Incremental capacity utilisation will also cater to the demand from
regulated markets culminating from an impending patent cliff other than
commitments to large customers like Pfizer and AstraZeneca. We
believe the utilisation process will go beyond FY13 as by then the newly
added facilities such as Trident for injectables, oral contraceptives and
liquid injectible facilities will go on stream.

Page 7

Exhibit 14: Debt/EBITDA to go down further Exhibit 15: Fixed asset turnover ratio to improve gradually

6.0 2.40
5.4 2.35 2.37
5.0
4.5 2.30
2.28
4.0 2.25 2.24 2.24
2.20
3.0 2.16
2.6 2.7 2.15
2.0 2.10 2.12
1.8
1.4 2.05
1.0
2.00
0.0 1.95
FY08 FY09 FY10 FY11E FY12E FY13E FY08 FY09 FY10 FY11E FY12E FY13E


It recently offloaded majority stake (from 100% to 19.5%) in its Chinese
manufacturing facility that was a fermentation unit manufacturing 6
APA, a derivative of Penicillin-G. The entire production is consumed by
APL India. Since the company intends to focus on high margin anti-
bacterials, this step indicates a step by step plan to defocus on semi
synthetic penicillins (SSPs) where the competition is intense and,
hence, realisation is low. We observe a gradual defocus on SSPs from
Offloaded majority stake in Chinese facility to prune losses
23% of sales in FY09 to ~11% of sales by FY13E. Since it was a loss
of ~| 20-25 crore per year on a consolidated basis
making unit, the company is expected to prune ~ | 20-25 crore of
losses in the consolidated financials. Thanks to this offloading, the
company expects to strengthen the overall cash flow and operating
margins. It has also received | 104 crore as repayment of loan from the
Chinese entity.
Monetisation of ANDAs in the US
Aurobindo was a relatively late entrant in the US market. The strategy in
the US market is - 1) to get a hold of huge generic opportunities that
would be available in this post patent /drying pipeline era by aggressive
USFDA approvals - Therapeutic break-up ANDA filing 2) to exploit and optimise the commercial value of products
on hand and 3) to fast track the launch of products and increase the
Therapy Final Tentative
ARVs 24 25
product pipeline. The company has already established strong
Anti Bacterials 16 0 relationships with marketing and distribution channels in the US such as
CNS 21 5 McKesson, Riteaid, Amerisource, Kaiser, Cardinal Health, Walgreen,
CVS 18 1 Wal-Mart, etc. The deal with Pfizer also augurs well as it covers the US
Others 20 2 market for both exclusive and non-exclusive launches.
Total 99 33
So far, it has filed 200 ANDAs with the USFDA and received approvals
for 132 ANDAs (99 final and 33 tentative). Till date, it has
commercialised 80 products in the US. In the next three years, the
company is planning to file another 100-125 ANDAs. Besides, it has filed
154 DMFs cumulatively for APIs to USFDA.

In July 2006, Aurobindo acquired a US-based FDA compliant cGMP
facility for oral dosages in the state of New Jersey from Sandoz for |
Filed 10 ANDAs from New Jersey facility 250 crore. This facility has been upgraded to undertake R&D and
warehousing requirements. This facility caters to the US institutional
demand. The company has already filed 10 ANDAs from this facility.

Page 8

Exhibit 16: ANDA pipeline trend

250
200
200 172
147
150 128 132
113
94
100 82
63
51
50 35
21

0
FY06 FY07 FY08 FY09 FY10 9M FY11

Filed Approved


We expect the US business to grow at ~27% CAGR to | 1849 crore in
FY10-13E on the back of monetisation of the huge ANDA pipeline. The
contribution from US to the overall sales is expected to grow from 17%
Strong ANDA pipeline to drive growth in the US market in FY09 to ~32% in FY13E.
Exhibit 17: Sales from US market to grow at 27% CAGR in FY10-13E

2000 1849
1800
1600 1445
1400
1135
1200
1000 912

800
558
600
400 236
200
0


Pfizer deal
In May 2009, APL entered into a licensing and supply agreement with
Pfizer Inc. to sell over 100 products in the US, 30 countries in the EU,
Canada, Australia-New Zealand and almost 110 rest of world (ROW)
countries. The deal is mostly non-exclusive in nature. Supplies to Pfizer
have already started in FY10. Pfizer will remain the biggest customer for
the company.

AstraZeneca deal
APL recently signed a licensing and supply agreement with AstraZeneca
Sales from AstraZeneca deal would start from FY13 to supply solid dosage and sterile products for emerging markets. These
onwards products will cater to therapeutic segments of anti-infectives, CVS and
CNS. We expect the sales from this deal to start from FY13 onwards.

Page 9


EU and ROW businesses shaping up
Currently, the European formulation business constitutes 7% of sales.
To centralise the European operations, the company has created a hub
at Malta to cater to different European customers. This hub operates as
a centralised quality control and packaging warehouse. As of on
So far, it has filed 906 dossiers with EU regulatory December 31, 2010, the company has filled 906 dossiers (including
authorities multiple registrations), received approvals for 351 dossiers and received
certificate of suitability for 85 products. Similarly, the company has filled
as many as 1224 DMFs cumulatively for APIs in the EU.
In February 2006, the company acquired UK based Milpharm Ltd, which
is engaged in selling formulations in the UK market. Milpharm owns
over 100 approved marketing authorisations (MAs) by Medicines and
Healthcare Products Regulatory Agency, UK (UK MHRA). The MAs are
well diversified into various segments – CNS, CVS, GI, anti-fungal, anti-
bacterial, oncology, cephs and SSPs, anti-diabetic, NSAIDS, etc.
In December 2006, it made another acquisition in Europe, of a Dutch
company Pharmacin International BV. Pharmacin owns several product
dossiers/market authorisations and intellectual property rights (IPRs).
Pharmacin has a broad product portfolio in three key segments – CNS,
CVS and GI and the dossiers support over 100 product registrations for
63 customers in the Netherlands and Europe.

In March 2008, it acquired the third company in Europe, by taking over
the Italian operations of German pharmaceutical major TAD
Pharmaceuticals. The acquisition has given Aurobindo access to more
than 70 ready-to-market products, which will speed up its entry into the
Italian generic market.
We expect Europe to grow to | 537 crore, at ~31% CAGR in FY10-13E,
boosted by 1) acquired businesses, 2) focus on new markets such as
Italy, Portugal, Spain and some Eastern European countries and 3)
Acquisition and dossier filings to drive EU growth supply agreements with MNCs. The traction will also come from scaling
up of the company’s own product portfolio as it intends to leverage on
the marketing network from its three acquisitions.

Exhibit 18: Sales from EU to grow at ~31% CAGR in FY10-13E Exhibit 19: Sales in ROW markets to grow at ~32% CAGR in FY10-13E

600 537 600
479
500 430 500

400 400 368
331
283
300 237 300
201 192 195 207
200 200 158

100 100

0 0
FY08 FY09 FY10 FY11E FY12E FY13E FY08 FY09 FY10 FY11E FY12E FY13E


Page 10


Dossier filings & approvals with various counties Similarly the ROW business, which currently forms 6% of sales, will get
a boost from MNC deals, aggressive regulatory filings and growing
Country Filed Approved
demand for branded generics. Till date, APL has filed 233 dossiers in
South Africa 124 47
Canada 27 11
South Africa, Canada, Australia and Brazil. Of this, it has received
Australia 23 5 approvals for 91 dossiers. Also, it has filed 415 DMFs in various
Brazil 59 28 countries. We expect the ROW business to grow at 32% CAGR in FY10-
13E to | 479 crore.
ARV segment is tender based
The company follows extensive participation in major global tenders.
The tenders are for specific programmes such as President's
Emergency Plan For AIDS Relief (PEPFAR/Emergency Plan) Clinton
Foundation, etc. and country specific tenders. Going forward, we see
the company following a measured path for growth by demonstrating
greater bidding discipline in global government tenders. We see good
Global tenders are major ARV drivers potential in these tenders, given that the US government has spent
nearly US$19 billion between 2006 and 2010 for PEPFAR and
committed another US$6 billion in 2010 for AIDS programmes. With
nearly 33 million people living with HIV/AIDS, this business will remain
a steady cash generator for the company in the coming years. This
vertical is slated to grow at a CAGR of ~23% to | 921 crore in FY10-13E.

Exhibit 20: ARVs to grow at 23% CAGR in FY10-13E

1000 921
900 794
800
662
700
600 495
464
500 404
400
300
200
100
0


Dossier sales to trigger supply agreements
APL sales dossiers are detailed monographs of non-infringing
processes of bio-equivalents, approved sights of manufacturing and
procurement of raw materials, which are required to be submitted to
Dossier filing will trigger future supplies different regulatory authorities. In Europe, the time taken for filing these
dossiers and getting marketing approval (MAs) can be at least 24
months. Once the customer gets marketing approvals, it may approach
APL to supply raw materials or finished products. For 9MFY11, dossier
income stood at | 229 crore in 9MFY11 compared to | 174 crore in
9MFY10. This income will go down going forward but is expected to tap
many potential clients for supply arrangements.

Page 11

Exhibit 21: Dossier income expected to come down

300
260
250
198 200
200
142
150

100 80

50
11
0


Changing industry dynamics
In 2010-2016, drugs worth ~US$110 billion will lose marketing
exclusivity worldwide, of which ~US$90 billion will be in the US alone.
Although price erosion and increase in competition will be a matter of
concern, we believe Indian players, on account of a vertically integrated
Impending patent cliff (US$ billion) model and proven capabilities and capacities, are well placed among
others. The generic pharmaceutical companies are expected to grow on
the back of strong filing momentum and increased volume growth and
also drying pipelines from innovators. The stricter norms adopted by
28 28 27
30 the USFDA for generic companies along with rising pricing pressure in
20 20
20
the regulated markets will enable only the stronger and established
players to retain their market dominance. Companies with a strong
10
presence in branded formulations, chronic segments, novel delivery
0 systems and backing of own raw material sourcing would be able to
2008 2009 2010 2011 2012 gain sizeable market share and protect their margins at the same time.
With close to 120 USFDA approved facilities (second only to the US)
Source: ICICIdirect.com Research Indian generic payers will be the major beneficiaries of the so-called
impending patent cliff. CY11 will be a year of major turmoil when drugs
worth ~US$20-25 billion will lose patents in that year itself. We believe
Indian generic players have already smelled the opportunity and we
could see the expediting of ANDA filings even in spite of delays in
getting approvals from the USFDA. From big players like Ranbaxy and
Sun to smaller players like Natco, all are preparing themselves for this
opportunity.

New facility addition and additional capex
APL to add two more formulations facilities-
• The new multipurpose liquid injectable facility (Unit IV) near
Hyderabad specialises in manufacture of general injectable
range including glass vials for lyophilised sterile powder and
liquids and ampoules. The facility is expected to get
commercialised in FY12
• Oral contraceptive facility near Hyderabad

The additional two facilities are expected to go on-stream by FY12-13.
This will further boost the formulations basket. It intends to spend an
additional | 700-750 crore on capex in FY12 & FY13.

Page 12


Debt
Redemption of FCCBs due in May 2011

Exhibit 22: FCCBs
FCCBs Conversion FCCB Fx Rate Underlying Coupon Rate
Price O/S 1$=| Shares O/S on Redemption
US$ 50 million | 175.8 US$ 33 million 45.15 8.5 million 46.99%
US$ 150 million | 202.8 US$ 106 million 45.15 23.5 million 46.29%

The company will redeem both FCCBs in May 2011. It will require US$
139 million for FCCB repayment and another US$65 million for YTM and
Debt as on December 31, 2010 withholding tax. Aurobindo will repay around US$100 million through
Debt Amount internal accruals and roll over the remaining short fall by the FCNR (B)
Secured Loans 350 route. As far as unprovided premium on redemption i.e. ~| 291 crore is
Working Capital Finance & Unsecured Loans 1210 concerned, the company has maintained that the same will be adjusted
Sales Tax Deferment 70 against share premium account.
Foreign Currency Covertible Bonds 620
Total Debt 2250
We believe the company’s debt position would improve significantly as
incremental capacity utilisation takes place. The FCCBs form ~ 28% of
the total debt. We expect the D/E ratio to come down from 1.2x in FY10
to 0.6x by FY13E.

Exhibit 23: Debt/equity to ease further

2.0
1.9
1.8
1.7
1.6
1.4
1.2 1.2
1.1
1.0
0.8 0.8
0.6 0.6
0.4
0.2
0.0


Page 13


Risk & concerns

cGMP related issues to be major threat for future earnings
The recently issued embargo on Unit VI will not have much of an impact
financially. However, the company will now have to tread cautiously in
future as any further deviation from compliance of good manufacturing
practices (cGMP) will bring the company in serious trouble.
Little presence in domestic formulations market
Unlike leading generic peers, the company does not have a strong
domestic cushion. All the peers derive ~20-40% sales from domestic
branded formulations whereas most of Aurobindo’s domestic revenues
come from APIs.
Political agitation may hit manufacturing activities at AP facilities
Since most of the plants (10 plants) are located in Andhra Pradesh, any
escalated turmoil in the state on account of the Telangana agitation will
impact the smooth functioning.
Pricing pressure on account of competition
As more and more players are concentrating on advanced countries like
the US and EU, the competition for generics will intensify, thus putting
pressure on prices.

Page 14


Financials
Sales to grow at 17% CAGR in FY10-13E
With robust growth expected from the formulation business, we project
APL’s total sales will grow at ~17% CAGR to | 5720 crore in FY10-13E.
Consequently, we project the share of formulation sales in gross sales will
increase to 65% in FY13E (vs. 51% in FY10). Topline growth will be
supported by steady growth in API sales (CAGR of ~6% in FY10-13E) and
dossier income.

Exhibit 24: Formulation business to drive overall sales growth

7000
5720
6000
4992
5000 4318
4000 3575
3077
3000 2441

2000

1000

0


EBITDA margins to increase in FY10 -13E
We expect the company’s EBITDA margins to increase from 23% in FY10
to 24.1% in FY13E mainly driven by strong growth in the formulation
business in general, and the US in particular. We project the EBITDA will
grow at 18.8% CAGR to | 1379 crore in FY10-13E.

Exhibit 25: EBITDA margins to improve, going forward

1600 30.0
1379
1400
114923.0 24.1 25.0
1200 23.0 22.6
975 20.0
1000 823
16.8
800 14.4 15.0
600 516
352 10.0
400
5.0
200
0 0.0

EBITDA EBITDA Margins


Page 15


Return ratios to improve, going ahead
With improved profitability and incremental fixed asset-turnover ratio, we
estimate APL will continue to generate high return ratios in FY10-13E.
RoCE is projected to increase by ~460 bps in FY10-13E to 21.5%.

Exhibit 26: Return ratios trend

25.0 35.0
30.8 21.5 30.0
20.0 19.8
16.0 24.0 25.0
16.9 23.6
15.0 21.2 20.0
23.0

10.0 10.9 15.0
8.3
10.0
5.0 8.1
5.0
0.0 0.0

ROCE RONW


Page 16


Valuation
The revenue mix transformation augurs well for the company that in the
past was stamped as predominantly commoditised API business model.
Incremental capacity utilisation will also act as an operating leverage to
improve the overall profitability. Its foray into niche segments like CNS,
CVS and proposed entry into oral contraceptives and high end Penems
will optimise the product offerings in the formulation space. The Pfizer
deal has come as a shot in the arm at a time when the company is
scaling up its capacities. It will infuse steady and incremental cash
flows, going forward, besides improving margins.

APL is currently trading at steep discount to industry peers on account
of the recent meltdown and legacy issues like API model and weak
balance sheet. Despite import alert for one facility, we believe other
issues such as transformation from an API driven model to niche
formulations, incremental capacity utilisation, monetisation of the
growing ANDA pipeline and recent deals with leading MNCs will remain
intact. We expect the gap in valuation to narrow down, going forward.
We have valued the stock at | 257, based on 9x FY13E EPS of | 28.5.
Exhibit 27: P/E band chart

450
400
350
300
250
(|)

200
150
100
50
0
Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10

Price 11.5x 18.3x 8.9x 6.2x


Exhibit 28: EV/EBITDA band chart

16000
14000
12000
10000
(| crore)

8000
6000
4000
2000
0
Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10

EV 14.2x 12.2x 8.3x 4.4x


Exhibit 29: Peer valuation (FY12E)
M Cap (| cr) EV/Sales EV/E P/BV Base PE RoCE RoNW
Aurobindo 5575 1.5 6.5 2.0 12 19.8 23.6
Dr Reddy's Labs 27173 2.9 12.7 4.3 19 17.9 25.7
Ranbaxy Labs 19203 2.1 10.7 2.9 18 10.2 18.8
Sun Pharma 43893 5.7 19.4 4.0 23 18.1 17.3

Page 17


Exhibit 30: Profit & loss account

(|crore) FY09 FY10 FY11E FY12E FY13E
Net Sales 3077 3575 4318 4992 5720
Growth (%) 26 16 21 16 15
Total Operating Expenditure 2561 2752 3344 3843 4341
EBITDA 516 823 975 1149 1379
Growth (%) 47 59 18 18 20
Depreciation 128 150 165 195 211
Interest 84 68 62 110 101
Other Income 18 39 25 32 40
PBT before Exceptional Items 323 645 773 876 1108
Less: Forex & Exceptional Items 201 -109 -26 20 0
PBT 122 754 799 856 1108
Total Tax 21 190 239 214 277
PAT 100 563 560 642 831
Adjusted PAT 266 482 542 657 831
Growth (%) 26 81 12 21 26
EPS (|) 3.4 19.4 19.2 22.0 28.5
EPS (Adjusted) (|) 9.1 16.5 18.6 22.6 28.5

Exhibit 31: Balance sheet

(| crore) FY09 FY10 FY11E FY12E FY13E
Equity Capital 27 28 29 29 29
Reserve and Surplus 1,214 1,801 2,409 2,691 3,436
Total Shareholders funds 1,241 1,829 2,438 2,720 3,465
Secured Loan 988 864 714 814 714
Unsecured Loan 1,345 1,291 1,891 1,291 1,241
Deferred Tax Liability 79 95 95 95 95
Minority Interest 3 4 4 4 4
Source of Funds 3,656 4,083 5,142 4,924 5,520
Gross Block 1,855 2,263 2,808 3,208 3,683
Less: Acc. Depreciation 554 664 810 984 1,170
Net Block 1,301 1,599 1,998 2,224 2,514
Capital WIP 536 570 425 350 150
Net Fixed Assets 1,837 2,169 2,423 2,574 2,664
Net Intangible Assets 98 112 118 121 220
Liquid Investments 0 0 0 0 0
Inventory 878 1,102 1,264 1,198 1,466
Cash 128 73 441 177 157
Debtors 890 956 1,124 1,231 1,410
Loans and Advances 387 371 579 619 753
Total Current Assets 2,289 2,506 3,404 3,229 3,784
Creditors 543 673 769 957 1,097
Provisions 27 35 38 48 55
Total Current Liabilities 570 708 807 1,005 1,152
Net Current Assets 1,719 1,798 2,597 2,224 2,632
Deferred Tax Assets 2 4 4 4 4
Application of Funds 3,656 4,083 5,142 4,924 5,520


Page 18

ICICI Direct aurobindo_pharma_initiating coverage March 2011

ICICI Direct aurobindo_pharma_initiating coverage March 2011

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