ICICIdirect AurobindoPharma InitiatingCoverage

ICICI Securities Limited
Initiating Coverage
March 9, 2011
Rating Matrix
Rating Target Target Period Potential Upside : : : : Strong Buy | 257 12-15 months 34%
Aurobindo Pharma (AURPHA)

| 191
YoY Growth (%)

(YoY Growth) Net Sales EBITDA Net Profit EPS (|) FY10 16.2 59.4 462.5 462.5 FY11E 20.8 18.4 -0.6 -0.6 FY12E 15.6 17.9 14.7 14.7 FY13E 14.6 20.0 29.4 29.4
USFDA issue overblown, time to cash in

Aurobindo Pharma (APL) is a leading formulations and API player. Over the last five years it has transformed itself from a pure API supplier to a generic formulations player. This transformation is still on and has improved the financials of the company. Henceforth, the next big growth drivers will be capacity optimisation and monetisation of the US ANDA pipeline. Recent deals with MNCs have given the company new strength. Aurobindo, on account of its proven capabilities and huge capacities, is well equipped to cater to their incremental requirements. The stock has corrected sharply with the import alert imposed by the USFDA for the Unit VI facility. We believe this was an overreaction. We expect sales and adjusted PAT to grow at a CAGR of 17.0% and 19.9% to | 5720 crore and | 831 crore, respectively, in FY10-13E. We are initiating coverage on the stock with a STRONG BUY rating. Transformation, capacity optimisation to improve margins, cash flows We expect the formulations-API ratio to improve from 46:54 in FY09 to 66:34 by FY13E. Similarly, we also expect capacity utilisation to improve on account of successful regulatory approvals for both facilities and products. We expect EBITDA margins to improve from 16.8% in FY09 to 24.1% in FY13E on account of these developments. US business to continue to be major growth driver The passage of the US Healthcare bill and impending patent cliff will throw open good opportunities for generic players like Aurobindo. So far, the company has filed 200 ANDAs with the USFDA and received approvals for 132 products. We expect APLs US business to grow at a CAGR of 27% to | 1849 crore in FY1013E on the back of monetisation of the huge ANDA pipeline.
Current & target multiple

P/E EV / EBITDA Price to Book Value Target P/E Target EV / EBITDA Target P/BV FY10 9.9 9.3 3.0 13.3 11.6 4.1 FY11E 10.0 7.9 2.3 13.4 9.9 3.1 FY12E 8.7 6.5 2.0 11.6 8.2 2.7 FY13E 6.7 5.3 1.6 9.0 6.7 2.2
Stock Data
Bloomberg/Reuters Code Sensex Average volumes Market Cap (| crore) 52 week H/L Equity Capital (| crore) Promoter's Stake (%) FII Holding (%) DII Holding (%) ARBP.IN / ARBN.BO 18,439.7 149,189 5,225.6 272 / 161 29.1 54.4 26.4 9.4
Comparative return matrix (%)

Return % Aurobindo Pharma Ltd Ranbaxy Laboratories Sun Pharmaceuticals Dr Reddy's Labs 1M -21.1 -8.5 6.5 4.3 3M -27.0 -19.6 -7.5 -12.8 6M -10.7 -11.0 20.7 14.3 12M -4.7 -1.0 29.7 37.4
Valuations
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 balance sheet. Despite the import alert for one facility, we believe other issues like transformation from API driven model to generic formulations, incremental capacity utilisation, monetisation of the growing ANDA pipeline and recent deals with leading MNCs will remain intact. We expect the valuation gap to narrow down, going forward. We value APL at | 257, based on 9x FY13E EPS of | 28.5.
Exhibit 1: Valuation Metrics
(Year-end March) Net Sales (| crore) EBITDA (| crore) Net Profit (| crore) EPS (|) P/E (x) Price / Book (x) EV/EBITDA (x) RoCE (%) RoE (%)
Source: Company, ICICIdirect.com Research
Price movement
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Mar-10 Jun-10 Sep-10 Dec-10
Nifty (L.H.S)
300 250 200 150 100 50 0 Mar-11

Price (R.H.S)
Analysts name
Siddhant Khandekar siddhant.khandekar@icicisecurities.com Krishna Kiran Konduri krishna.konduri@icicisecurities.com
FY09 3,077.3 516.4 100.2 3.4 55.7 4.5 15.1 10.9 8.1
FY10 3,575.4 823.2 563.4 19.4 9.9 3.0 9.3 16.9 30.8
FY11E 4,318.1 974.5 559.8 19.2 10.0 2.3 7.9 16.0 23.0
FY12E 4,991.9 1,149.4 641.8 22.0 8.7 2.0 6.5 19.8 23.6
FY13E 5,720.1 1,379.0 830.8 28.5 6.7 1.6 5.3 21.5 24.0
ICICIdirect.com | Equity Research

Share holding pattern (Q3FY11)
Shareholder Promoters Institutional Investors Other Investors General Public Holding (%) 54.4 35.8 3.1 6.8
Company background
Aurobindo Pharma (APL) was set up by first generation entrepreneurs PV Ramprasad Reddy and K Nithyananda Reddy in 1986. Based in Hyderabad, APL is an integrated pharmaceutical company, which 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 Canada, MCC South Africa, ANVISA Brazil. The company owns 16 manufacturing facilities in India and the US. Of these 16 facilities, seven are for formulations, six are for APIs while three are for intermediates. It also owns a distribution hub in Malta and a packaging facility in Brazil. The company owns three R&D centres. The current employee strength is more than 8000, which includes more than 750 scientists. APL markets its products in 125 countries through a global marketing network of 41 subsidiaries. Till date, it has filled 200 ANDA with the USFDA and received approvals for 132 ANDAs (including 33 tentative approvals). It has also filed 906 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 APLs 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 companys 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 Pfizers generics unit Greenstone LLC. Annual 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.
FII & DII holding trend (%)

70 60 50 40 30 20 10 0 Q3 FY10 Q4 FY10 Promoter Q1 FY11 Q2 FY11 Q3 FY11 32.4 34.1 34.2 35.4 35.8 58.7 56.9 56.2
54.4
54.4
FIIs & MFs
Unit VI accounts for ~3-4% of total sales
Pfizer will work closely with Aurobindo to sort out the issue
Page 2

Exhibit 2: Sales have grown at 19% CAGR in FY07-FY10
4000 3500 3000 2500 2000 1500 1000 500 0 FY07 FY08 FY09 FY10 9M FY11 2123 2441 3077 3575
Exhibit 3: Shift towards formulations

120 100 80 60 40 20 0 FY07 FY08 FY09 Formulations
3301
69
61
54
46
43
31
39
46
54
57
FY10 APIs
9M FY11
Exhibit 4: US accounts for 48% of formulation sales in 9MFY11

120 100 80 60 40 20 0 40 24 FY08 16 20 14 14 33 38 FY09 USA ARV EU 11 13 27 49 FY10 ROW 11 13 28 48 9M FY11
Exhibit 5: 9MFY11 sales break-up
Dossier Income 7%
USA 25%
APIs 40%
EU 7% ROW 6% ARV 15%
Exhibit 6: Manufacturing facilities

Manufacturing facilities Unit III Unit VI Unit XII Unit VII (SEZ) Bhiwadi Trident US NJ Unit I Unit IA Unit V Unit VIA Unit VIII Unit XIA Unit IX Unit X Unit XIA Product Type Non-Betalactum Cephs(Oral & Sterlie) SSPs (Sterile & Non-Sterile) Non-Betalactum Penems Sterile Liquid injectibles Non-Betalactum (Oral) CNS, CVS, Anti-allergic Cephs(Non-Sterlie) SSPs (Sterile & Non-Sterile) SSPs GI, GRV ARV Intermediates Intermediates Intermediates Approvals Indian Formulation Units USFDA, UKMHRA, TGA, Health Canada, MCC(SA), ANVISA (Brazil), WHO USFDA, Health Canada, MCC(SA), ANVISA (Brazil) USFDA, UKMHRA, TGA, Health Canada, MCC(SA), ANVISA (Brazil) USFDA Waiting for approvals Waiting for approvals US Formulation Units USFDA Indian API Units USFDA, UKMHRA, TGA, WHO USFDA, UKMHRA, TGA cGMP USFDA, TGA USFDA, UKMHRA,TGA,WHO USFDA, UKMHRA,WHO Intermediates cGMP cGMP cGMP Cap. Utilisation High Moderate Moderate Moderate Low Yet to Start Low High High High High High High High High High
Page 3

Exhibit 7: Business Overview
Aurobindo Pharma (| 3301 cr, 100%)
Formulation (| 1753 cr, 53%)
APIs (| 1319 cr, 40%)
Dossiers (| 229 cr, 7%)
USA (| 840 cr, 25%)
SSPs (| 429 cr, 13%)
Europe (| 228 cr, 7%)
Cephs (| 615 cr, 18%)
ARVs (| 493 cr, 15%)
Others (| 275 cr, 8%)
RoW (|192 cr, 6%)
Page 4

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 3500 3000 2500 2000 1500 1000 500 0 FY09 FY10 FY11E Formulations
3787 3037 2412 1647 1410 1852 1602 1744 1831 1911
142
198
260
200 FY12E Dossier FY13E
80
APIs
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, the formulations to API ratio for the base business stood at 57:43. Going 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% 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.
Formulations to constitute ~65% of base business by FY13E
Margins to remain in the range of 23-24.1% in FY10-FY13E
Page 5

Exhibit 9: Shift towards formulations
120 100 80 60 40 20 0 FY08 FY09 FY10 FY11E APIs FY12E FY13E 39 46 61 54 46 42 38 34
Exhibit 10: EBITDA margins to improve, going forward

30.0 25.0 20.0 15.0 14.4 16.8 23.0 22.6 23.0 24.1
54
58
62
66
10.0 5.0 0.0 FY08 FY09 FY10 FY11E FY12E FY13E
Formulations
To expand into niche formulations
APLs 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 antibacterials and ARVs. Despite that, we have also observed that the 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 by the end of FY11. This facility will cater to the non-betalactum product 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 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.
Unit VII has the potential to clock | 1500-2000 crore per annum
Incremental APIs to be used for captive purpose
Page 6

Exhibit 11: API sales to grow at 6% CAGR in FY10-13E
2000 1900 1800 1700 1600 1500 1400 FY09 FY10 FY11E FY12E FY13E 1647 1602 1744 1831
Exhibit 12: Formulation sales to grow at ~27% CAGR in FY10-13E

4000 3500 3000 2500 2000 1500 1000 500 0 FY09 FY10 FY11E FY12E FY13E 1410 1852 2412 3037 3787
1911
Better capacity utilisation to improve margins
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 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 Total Exp EBITDA Depreciation Interest Tax Net Profit FY08 100 85.6 14.4 4.1 1.8 2.2 9.8 FY09 100 83.2 16.8 4.1 2.7 0.7 3.3 FY10 100 77 23.0 4.2 1.9 5.3 15.8 FY11E 100 77.4 22.6 3.8 1.4 5.5 13.0 FY12E 100 77 23.0 3.9 2.2 4.3 12.9 FY13E 100 75.9 24.1 3.7 1.8 4.8 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
6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY08 FY09 FY10 FY11E FY12E FY13E
Exhibit 15: Fixed asset turnover ratio to improve gradually

2.40 2.35 2.30 2.25 2.20 2.15 2.10 2.05 2.00 1.95
5.4 4.5
2.37 2.24 2.16 2.12 2.24 2.28
2.6
2.7 1.8 1.4
FY08
FY09
FY10
FY11E
FY12E
FY13E
Offloaded majority stake in Chinese facility to prune losses of ~| 20-25 crore per year on a consolidated basis
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 antibacterials, 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 23% of sales in FY09 to ~11% of sales by FY13E. Since it was a loss 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 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 product pipeline. The company has already established strong relationships with marketing and distribution channels in the US such as McKesson, Riteaid, Amerisource, Kaiser, Cardinal Health, Walgreen, Wal-Mart, etc. The deal with Pfizer also augurs well as it covers the US market for both exclusive and non-exclusive launches. 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 | 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.
USFDA approvals - Therapeutic break-up

Therapy ARVs Anti Bacterials CNS CVS Others Total Final 24 16 21 18 20 99 Tentative 25 0 5 1 2 33
Filed 10 ANDAs from New Jersey facility
Page 8

Exhibit 16: ANDA pipeline trend
250 200 150 100 51 50 0 FY06 FY07 FY08 Filed
200 172 128 82 21 35 63 147 94 113 132
FY09 Approved
FY10
9M FY11
Strong ANDA pipeline to drive growth in the US market
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% in FY09 to ~32% in FY13E.
Exhibit 17: Sales from US market to grow at 27% CAGR in FY10-13E
2000 1800 1600 1400 1200 1000 800 600 400 200 0 FY08 FY09 FY10 FY11E FY12E FY13E 236 558 912 1135 1445 1849
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
Sales from AstraZeneca deal would start from FY13 onwards
APL recently signed a licensing and supply agreement with AstraZeneca to supply solid dosage and sterile products for emerging markets. These 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 December 31, 2010, the company has filled 906 dossiers (including 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, antibacterial, 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) supply agreements with MNCs. The traction will also come from scaling up of the companys own product portfolio as it intends to leverage on the marketing network from its three acquisitions.
Exhibit 19: Sales in ROW markets to grow at ~32% CAGR in FY10-13E
600 500 400 300 200 100 0 FY08 FY09 FY10 FY11E FY12E FY13E FY08 FY09 FY10 FY11E FY12E FY13E 158 283 195 207 368 479
So far, it has filed 906 dossiers with EU regulatory authorities
Acquisition and dossier filings to drive EU growth
Exhibit 18: Sales from EU to grow at ~31% CAGR in FY10-13E

600 500 400 300 200 100 0 201 192 237 331 430 537
Page 10

Dossier filings & approvals with various counties
Country South Africa Canada Australia Brazil Filed 124 27 23 59 Approved 47 11 5 28
Similarly the ROW business, which currently forms 6% of sales, will get a boost from MNC deals, aggressive regulatory filings and growing demand for branded generics. Till date, APL has filed 233 dossiers in South Africa, Canada, Australia and Brazil. Of this, it has received approvals for 91 dossiers. Also, it has filed 415 DMFs in various countries. We expect the ROW business to grow at 32% CAGR in FY1013E 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 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 900 800 700 600 500 400 300 200 100 0 FY08 FY09 FY10 FY11E FY12E FY13E 404 464 495 662 794 921
Global tenders are major ARV drivers
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 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.
Dossier filing will trigger future supplies
Page 11

Exhibit 21: Dossier income expected to come down
300 250 200 150 100 50 0 FY08 FY09 FY10 FY11E FY12E FY13E 11 142 80 198 200 260
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 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 the USFDA for generic companies along with rising pricing pressure in the regulated markets will enable only the stronger and established players to retain their market dominance. Companies with a strong presence in branded formulations, chronic segments, novel delivery systems and backing of own raw material sourcing would be able to gain sizeable market share and protect their margins at the same time. With close to 120 USFDA approved facilities (second only to the US) 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$20-25 billion will lose patents in that year itself. We believe Indian generic players have already smelled the opportunity and we could see the expediting of ANDA filings even in spite of delays in getting approvals from the USFDA. From big players like Ranbaxy and Sun to smaller players like Natco, all are preparing themselves for this opportunity.
Impending patent cliff
(US$ billion)
30 20 10 0
28 20 20
28
27
2008
2009
2010
2011
2012
Source: ICICIdirect.com Research
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 US$ 50 million US$ 150 million Conversion Price | 175.8 | 202.8 FCCB O/S US$ 33 million US$ 106 million Fx Rate 1$=| 45.15 45.15 Underlying Shares O/S 8.5 million 23.5 million Coupon Rate on Redemption 46.99% 46.29%
Debt as on December 31, 2010

Debt Secured Loans Working Capital Finance & Unsecured Loans Sales Tax Deferment Foreign Currency Covertible Bonds Total Debt Amount 350 1210 70 620 2250
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 withholding tax. Aurobindo will repay around US$100 million through internal accruals and roll over the remaining short fall by the FCNR (B) route. As far as unprovided premium on redemption i.e. ~| 291 crore is concerned, the company has maintained that the same will be adjusted against share premium account. We believe the companys 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 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 FY08 FY09 FY10 FY11E FY12E FY13E 1.2 1.1 0.8 0.6 1.7 1.9
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 Aurobindos 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 APLs 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 6000 5000 4000 3000 2000 1000 0 FY08 FY09 FY10 FY11E FY12E FY13E 2441 3077 3575 4318 5720 4992
EBITDA margins to increase in FY10 -13E

We expect the companys 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 1400 1200 1000 800 600 400 200 0 FY08 FY09 FY10 EBITDA
1379 23.0 16.8 516 823 975 22.6 114923.0 24.1
30.0 25.0 20.0 15.0 10.0 5.0 0.0
14.4 352
FY11E EBITDA Margins
FY12E
FY13E
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 20.0 15.0 10.0 5.0 0.0 FY08 FY09 FY10 ROCE
35.0 30.8 21.2 10.9 8.3 8.1 16.9 16.0 23.0 19.8 23.6 21.5 24.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 FY11E RONW FY12E FY13E
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 8000 6000 4000 2000 0 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10
(| crore)
EV
14.2x
12.2x
8.3x
4.4x
Exhibit 29: Peer valuation

Aurobindo Dr Reddy's Labs Ranbaxy Labs Sun Pharma M Cap (| cr) 5575 27173 19203 43893 EV/Sales 1.5 2.9 2.1 5.7 EV/E 6.5 12.7 10.7 19.4 P/BV 2.0 4.3 2.9 4.0 Base PE 12 19 18 23 RoCE 19.8 17.9 10.2 18.1
(FY12E)
RoNW 23.6 25.7 18.8 17.3
Page 17

Exhibit 30: Profit & loss account
(|crore) Net Sales Growth (%) Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT before Exceptional Items Less: Forex & Exceptional Items PBT Total Tax PAT Adjusted PAT Growth (%) EPS (|) EPS (Adjusted) (|)
FY09 3077 26 2561 516 47 128 84 18 323 201 122 21 100 266 26 3.4 9.1
FY10 3575 16 2752 823 59 150 68 39 645 -109 754 190 563 482 81 19.4 16.5
FY11E 4318 21 3344 975 18 165 62 25 773 -26 799 239 560 542 12 19.2 18.6
FY12E 4992 16 3843 1149 18 195 110 32 876 20 856 214 642 657 21 22.0 22.6
FY13E 5720 15 4341 1379 20 211 101 40 1108 0 1108 277 831 831 26 28.5 28.5
Exhibit 31: Balance sheet

(| crore) Equity Capital Reserve and Surplus Total Shareholders funds Secured Loan Unsecured Loan Deferred Tax Liability Minority Interest Source of Funds Gross Block Less: Acc. Depreciation Net Block Capital WIP Net Fixed Assets Net Intangible Assets Liquid Investments Inventory Cash Debtors Loans and Advances Total Current Assets Creditors Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets Application of Funds
FY09 27 1,214 1,241 988 1,345 79 3 3,656 1,855 554 1,301 536 1,837 98 0 878 128 890 387 2,289 543 27 570 1,719 2 3,656
FY10 28 1,801 1,829 864 1,291 95 4 4,083 2,263 664 1,599 570 2,169 112 0 1,102 73 956 371 2,506 673 35 708 1,798 4 4,083
FY11E 29 2,409 2,438 714 1,891 95 4 5,142 2,808 810 1,998 425 2,423 118 0 1,264 441 1,124 579 3,404 769 38 807 2,597 4 5,142
FY12E 29 2,691 2,720 814 1,291 95 4 4,924 3,208 984 2,224 350 2,574 121 0 1,198 177 1,231 619 3,229 957 48 1,005 2,224 4 4,924
FY13E 29 3,436 3,465 714 1,241 95 4 5,520 3,683 1,170 2,514 150 2,664 220 0 1,466 157 1,410 753 3,784 1,097 55 1,152 2,632 4 5,520
Page 18

Exhibit 32: Cash flow statement
(| crore) Profit after Tax Depreciation (inc)/Dec in Current Assets (inc)/Dec in Current Liabilities CF from operations (Purchase)/Sale of Fixed Assets (inc)/dec in Investments (inc)/dec in Def. Tax Assets inc/(dec) in Def. Tax Liability CF from Investing Activities Inc / (Dec) in Equity Capital Inc / (Dec) in sec. Loan Funds Inc / (Dec) in unsec. Loan Funds Dividend & Dividend Tax inc/(dec) in exchange rate Fluc. inc/(dec) in Sec. Premium Acc CF from Financial Activities Cash generating during the Year Opening cash balance Closing Cash
FY09 100 128 -385 45 -113 -548 60 -2 6 -484 0 291 134 -28 45 0 442 -155 283 128
FY10 563 150 -272 138 579 -496 0 -2 16 -480 1 -124 -55 -32 -43 99 -154 -55 128 73
FY11E 560 165 -530 99 294 -425 0 0 0 -425 1 -150 600 -51 -30 129 499 369 73 441
FY12E 642 195 -89 198 946 -350 0 0 0 -350 0 100 -600 -68 0 -292 -860 -264 441 177
FY13E 831 211 -575 147 613 -398 0 0 0 -398 0 -100 -50 -85 0 0 -235 -20 177 157
Exhibit 33: DuPont analysis

PAT/PBT PBT/EBIT EBIT/Sales Sales/Asset Asset/Equity ROE FY09 82.4 31.3 12.6 84.2 294.6 8.1 FY10 74.7 112.0 18.8 87.6 223.3 30.8 FY11E 70.1 98.7 18.7 84.0 210.9 23.0 FY12E 75.0 89.7 19.1 101.4 181.0 23.6
(%)
FY13E 75.0 94.8 20.4 103.6 159.3 24.0
Page 19

Exhibit 34: Key ratios
FY09 Per Share Data EPS EPS (Adjusted) Cash EPS BV Operating profit per share Operating Ratios EBITDA / Net Sales PBT / Net Sales PAT / Net Sales Return Ratios RoE RoCE RoIC Valuation Ratios P/E P/E (Adjusted) EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Sales / Equity Turnover Ratios Inventory Turnover Debtors Turnover Ratio Creditors Turnover Ratio Fixed Asset Turnover Ratio Solvency Ratios Debt / Equity Current Ratio Quick Ratio Debt / EBITDA
FY10 19.4 16.5 24.5 62.8 28.3 23.0 21.1 15.8 30.8 16.9 12.6 FY10 9.9 11.6 9.3 2.1 1.6 3.0 2.0 3.6 3.7 5.3 2.2 1.2 3.5 3.4 2.6
FY11E 19.2 18.6 24.9 83.8 33.5 22.6 18.5 13.0 23.0 16.0 12.1 FY11E 10.0 10.3 7.9 1.8 1.3 2.3 1.8 3.7 3.8 5.6 2.2 1.1 4.2 3.7 2.7
FY12E 22.0 22.6 28.8 93.4 39.5 23.0 17.1 12.9 23.6 19.8 15.1 FY12E 8.7 8.5 6.5 1.5 1.1 2.0 1.8 4.1 4.1 5.2 2.2 0.8 3.2 3.0 1.8
3.4 9.1 7.8 42.6 17.7 16.8 4.0 3.3 8.1 10.9 9.1 FY09 55.7 21.0 15.1 2.5 1.8 4.5 2.5 3.7 3.5 5.7 2.4 1.9 4.0 3.8 4.5
FY13E (|) 28.5 28.5 35.8 119.0 47.4 (%) 24.1 19.4 14.5 (%) 24.0 21.5 16.4 FY13E (x times) 6.7 6.7 5.3 1.3 1.0 1.6 1.7 (x times) 4.3 4.1 5.2 2.3 (x times) 0.6 3.3 3.1 1.4
Page 20

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
We /I, Siddhant Khandekar CA-INTER Krishna Kiran Konduri MBA FINANCE research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of 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. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.
pankaj.pandey@icicisecurities.com
Disclosures:
ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. 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ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Siddhant Khandekar CA-INTER Krishna Kiran Konduri MBA FINANCE research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. 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ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.
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ICICIdirect AurobindoPharma InitiatingCoverage

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ICICI Securities Limited

Aurobindo Pharma (AURPHA)

YoY Growth (%)

USFDA issue overblown, time to cash in

Current & target multiple

Comparative return matrix (%)

300 250 200 150 100 50 0 Mar-11

ICICIdirect.com | Equity Research

ICICI Securities Limited

FII & DII holding trend (%)

FIIs & MFs

Unit VI accounts for ~3-4% of total sales

ICICIdirect.com | Equity Research

ICICI Securities Limited

Exhibit 3: Shift towards formulations

Source: Company, ICICIdirect.com Research

Exhibit 4: US accounts for 48% of formulation sales in 9MFY11

Exhibit 5: 9MFY11 sales break-up

EU 7% ROW 6% ARV 15%

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Exhibit 6: Manufacturing facilities

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

ICICI Securities Limited

Aurobindo Pharma (| 3301 cr, 100%)

Formulation (| 1753 cr, 53%)

APIs (| 1319 cr, 40%)

Dossiers (| 229 cr, 7%)

USA (| 840 cr, 25%)

SSPs (| 429 cr, 13%)

Europe (| 228 cr, 7%)

Cephs (| 615 cr, 18%)

ARVs (| 493 cr, 15%)

Others (| 275 cr, 8%)

RoW (|192 cr, 6%)

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

ICICI Securities Limited

200 FY12E Dossier FY13E

Change in revenue mix in favour of formulations to improve margins

Formulations to constitute ~65% of base business by FY13E

Margins to remain in the range of 23-24.1% in FY10-FY13E

ICICIdirect.com | Equity Research

ICICI Securities Limited

Exhibit 10: EBITDA margins to improve, going forward

10.0 5.0 0.0 FY08 FY09 FY10 FY11E FY12E FY13E

Source: Company, ICICIdirect.com Research

To expand into niche formulations

Incremental APIs to be used for captive purpose

ICICIdirect.com | Equity Research

ICICI Securities Limited

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

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Better capacity utilisation to improve margins

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

ICICI Securities Limited

Exhibit 15: Fixed asset turnover ratio to improve gradually

2.37 2.24 2.16 2.12 2.24 2.28

2.7 1.8 1.4