1QFY2014 Result Update | Pharmaceutical

August 13, 2013

Aurobindo Pharma
Performance Highlights
Y/E march (` cr) Net sales Other income Operating profit Interest Adj. Net profit Profit/(loss) 1QFY14 1700 20 292 25 170 4QFY13 1553 32 222 33 110 % chg (qoq) 9.4 (37.9) 31.4 (23.3) 54.8 1QFY13 1197 19 123 33 79 % chg (yoy) 41.9 3.6 137.6 (23.3) 115.6

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 5,397 3,185 1.2 205/102 321,484 1 18,947 5,612 ARBN.BO ARBP@IN

`181 `271
12 months

Source: Company, Angel Research

For 1QFY2014, Aurobindo Pharmaceuticals (APL) posted better-than-expected results on the sales and OPM fronts, while the adj. net profit came in below expectation. For the quarter, the company posted net sales of `1,700cr vs our expectation of `1,660cr, registering a growth of 41.9% yoy. On the operating front, the margin improved by 691bp, to end the period at 17.2%, higher than our expectation of 16.2%. The adj. net profit come in at `170cr vs our expectation of `182cr and `79cr in 1QFY2013. On back of improvement on the financial front and clearance of facilities by the USFDA, the company marinated a sales guidance of 20.0%, with more upsides possible, and hinted at OPM in 2HFY2014 to be better than 1HFY2014. We have a Buy recommendation on the stock. Sales higher than expected: Net sales grew strongly by 41.9% yoy to `1,700cr, led by a robust growth in formulations (68.0% yoy growth). The growth in formulations was driven by the US market, which posted a yoy growth of 90.3%. Other key markets like EU and ROW along with antiretroviral (ARV) in the formulation segment posted a sales growth of 52.6% and 36.8% yoy respectively. Gross margin came in at 47.6% (vs 45.9% in 1QFY2013) on back of favourable product mix, which along with operating leverage led the OPM to come in at 17.2% vs10.3% in the corresponding quarter of the previous year. This led the company to post an Adj. net profit of `170cr vs `79cr in 1QFY2013. Outlook and valuation: The commencement of operations at the Hyderabad SEZ and incremental contribution from the Pfizer deal would boost APLs earnings and provide better growth visibility going forward. We estimate net sales to log a 14.9% CAGR to `7,637cr over FY201315E on the back of supply agreements in the US and ARV formulation contracts. Even after factoring in lower profitability and growth going forward, the stock trades at an attractive valuation. Hence, we maintain our Buy recommendation on the stock with a price target of `271. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg Recurring profit % chg EPS (`) Recurring EPS EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) FY2012 4,551 10.3 198 (62.4) 141 (57.4) 6.8 4.9 11.7 37.2 8.3 8.4 2.2 1.8 15.2 FY2013 5,783 27.1 432 118.2 376 165.7 14.8 12.9 14.1 14.0 17.5 9.9 2.0 1.4 9.9 FY2014E 6,641 14.8 560 29.7 504 34.2 19.3 17.3 15.9 10.4 19.5 12.3 1.6 1.2 7.5 FY2015E 7,637 15.0 657 17.2 601 19.1 22.6 20.6 15.9 8.8 18.9 13.1 1.4 1.0 6.3

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 54.8 17.4 18.3 9.5

Abs. (%) Sensex Aurobindo

3m (5.8) (7.3)

1yr 7.9 75.2

3yr 4.8 (5.6)

Sarabjit Kour Nangra

+91 22 3935 7800 Ext: 6806 sarabjit@angelbroking.com

Source: Company, Angel Researc; Note: CMP as of August 13, 2013

Please refer to important disclosures at the end of this report

Aurobindo Pharma | 1QFY2014 Result Update

Exhibit 1: 1QFY2014 performance (Consolidated)

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margins Operating profit OPM (%) Interest Dep & amortisation PBT Provision for taxation Net profit Less : Exceptional items ( gains)/loss MI & share in associates PAT after Exceptional items Adjusted PAT EPS (`)
Source: Company, Angel Research

1QFY2014 1,700 20 1,719 808 47.6 292 17.2 25 72 214 24 190 171 19 170 5.9

4QFY2013 1,553 32 1,576 748 48.2 222 14.3 33 69 152 45 107 1 (1) 107 110 3.8

% chg (qoq) 9.4 (37.9) 9.1 8.1 31.4 4.2 41.1 (45.7) 77.6 (82.6) 54.8

1QFY2013 1,197 19 1,217 550 45.9 123 10.3 33 59 50 (27) 77 206 (0) (129) 79 2.7

% chg (yoy) 41.9 3.6 41.3 47.0 137.6 22.2 145.2

FY2013 5,783 101 5,884 2,792 48.3 817 14.1 131 249 538 83 455 163 (2)

FY2012 4,551 102 4,652 2,031 44.6 533 11.7 103 201 332 (89) 420 545 (1) (124) 198 6.8

% chg (yoy) 27.1 (0.8) 26.5 37.5 53.2 27.8 24.0 62.1 8.2 118.3 118.3

115.6

294 432 14.8

Exhibit 2: Actual vs Estimate

(` cr) Net sales Other operating income Operating profit Tax Adj. Net profit
Source: Company, Angel Research

Actuals 1,700 20 292 24 170

Estimate 1,660 19 269 46 182

Variation % 2.4 3.6 8.3 (46.3) (6.4)

Revenue up at 41.9% yoy; higher than expectation: For the quarter, the company posted net sales of `1,700cr vs our expectation of `1,660cr, registering a growth of 41.9% yoy. The growth was driven by the formulation segment, which grew 68.0% yoy, driven by the US market, which posted a yoy growth of 90.3%. Other key markets like EU& ROW along with ARV in the formulation segment posted sales growth of 52.6% and 36.8% yoy respectively. The API segment on the other hand posted a growth of 10.2% yoy during the period, led by the SSP segment which grew 24.1% yoy. As of end of June 2013, the company has 281 approved abbreviated new drug applications (ANDAs) and 191 approvals.

August 13, 2013

Aurobindo Pharma | 1QFY2014 Result Update

Exhibit 3: Sales break-up (Consolidated)

(` cr) Formulations US Europe & ROW ARV API SSP Cephs NPNC 1QFY2014 1101 625 284 192 647 222 216 208 4QFY2013 918 486 249 183 667 189 244 235 % chg (qoq) 19.9 28.6 13.9 4.9 (3.0) 17.9 (11.2) (11.2) 1QFY2013 655 328 186 140 587 179 223 185 % chg (yoy) 68.1 90.3 52.6 36.8 10.2 24.1 (3.0) 12.6 FY2013 3387 1753 884 750 2536 765 937 834 FY2012 2603 1184 633 787 2062 629 746 687 % chg 30.1 48.1 39.8 (4.6) 23.0 21.7 25.6 21.4

Source: Company, Angel Research

OPM expands to 17.2% for the quarter: On the operating front, the margin improved by 691bp, to end the period at 17.2%, higher than our expectation of 16.2%. Improvement in OPM is on the back of improvement in gross margins, which expanded by 162bp yoy and higher sales growth. The Management expects 2HFY2014 to be better than 1HFY2014 in terms of OPM.

Exhibit 4: OPM Trend

19.0 17.2 17.0 15.0 13.0 11.0 9.0 7.0 5.0 1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014 10.3 15.5 15.5 14.3

Source: Company, Angel Research

Net profit lower than estimate: For the quarter, the company posted an Adj. net profit of `170cr, lower than our expectation of `182cr. This was mainly on back of higher interest expenses during the quarter.

August 13, 2013

(%)

Aurobindo Pharma | 1QFY2014 Result Update

Exhibit 5: Adj. net profit

180 160 140 120 137 110 79 87 170

(` cr)

100 80 60 40 20 0

1QFY2013

2QFY2013

3QFY2013

4QFY2013

1QFY2014

Source: Company, Angel Research

Management takeaways

The company has maintained its sales guidance of 20% for FY2014, which could be surpassed. The company plans to consolidate all injectiable assets (Unit IV, Auromedics + acquired 60% stake in Celon) in a wholly owned subsidiary and expects to have ~100 ANDA filings from it over the next 3-4 years, and could have ~15 such filings by FY2014 end. The Management has guided at US$33mn of revenue from injectibles business for FY2014 and US$45-50mn for FY2015. The Management has guided for 16-20 new launches in the US in FY2014. The company expects to repay US$50-70mn of debt by year-end, following which D/E to be around 1 or less than 1. R&D expenses to be 4% of sales in FY2014. The tax rate is expected to be around 20% in FY2014. Capex for FY2014 is expected to be `280-290cr.

Recommendation rationale

Supply agreements to drive growth: APL has increased its filing (ANDAs and dossiers) dramatically from 313 in FY2008 to 1,647 in FY2013, as it proposes to scale up from SSP and Cephs to NPNC products. Further, the companys transformation from being a pure API supplier to becoming a formidable formulations player has increased its cost efficiencies, as 90% of its formulation is now backward integrated. Thus, to leverage on its cost efficiency and strong product filings, APL has entered into long-term supply agreements with Pfizer (March 2009) and AstraZeneca (September 2010), which provides significant revenue visibility going ahead. APL is also in discussion with other MNCs for more supply agreements.

August 13, 2013

Aurobindo Pharma | 1QFY2014 Result Update

US and ARV formulation segments the key drivers for base business: APLs business, excluding the supply agreements, would primarily be driven by the US and ARV segments on the formulation front. The company has been an aggressive filer in the US market, with 281 ANDAs filed until 1QFY2014. Amongst peers, APL has emerged as one of the top ANDA filers. The company has aggressively filed ANDAs in the last few years and is now geared to reap benefits, even though most of the filings are for highly competitive products. APL expects to file 1520 ANDAs every year going forward. Going ahead, with US$70bn going off-patent in the US over the next three years, we believe APL is well placed to tap this opportunity. APL is one of the largest generic suppliers under ARV contracts, with a 35% market share. The company enjoys high market share as it is fully integrated in all its products apart from having a larger product basket.

Outlook and valuation

The commencement of operations at the Hyderabad SEZ and incremental contribution from the Pfizer deal would boost APLs earnings and provide better growth visibility going forward. We estimate net sales to log a 14.9% CAGR to `7,637cr over FY201315E on the back of supply agreements in the US and ARV formulation contracts. Even after factoring in lower profitability going forward, the stock trades at an attractive valuation. Hence, we maintain our Buy recommendation with a price target of `271.

Exhibit 6: Key assumptions

Sales Growth (%) Operating Margins (%) Capex (` cr)
Source: Company, Angel Research

FY2014E 14.8 15.9 250

FY2015E 15.0 15.9 250

Exhibit 7: One-year forward PE

400.0

300.0

(`)

200.0

100.0

0.0

Source: Company, Angel Research

August 13, 2013

Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13
5x 10x 15x 20x

Aurobindo Pharma | 1QFY2014 Result Update

Exhibit 8: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco Neutral Buy Buy Accumulate Buy Buy Neutral Buy Neutral Neutral Buy Neutral Neutral CMP (`) 160 181 691 415 2,179 43 2,286 67 645 819 368 2,501 541 Tgt. price (`) 271 894 477 2,535 73 78 904 426 Upside % PE (x) 49.7 29.4 14.9 16.4 69.8 16.4 10.4 15.8 11.5 8.8 15.4 17.4 17.2 2.6 34.3 8.8 14.4 19.1 24.2 24.6 27.2 FY2015E EV/Sales (x) 1.5 1.1 2.0 2.8 2.5 0.8 5.7 0.9 2.2 2.7 1.4 2.4 6.4 EV/EBITDA (x) 8.1 6.6 12.4 12.0 12.2 3.6 24.5 5.7 10.2 12.2 16.8 15.2 15.6 FY12-15E CAGR in EPS (%) 25.5 26.4 18.1 12.1 10.8 16.3 (7.3) 28.0 29.1 21.0 (49.4) 15.0 9.2 FY2015E RoCE (%) 34.2 13.1 15.2 16.8 18.3 11.4 30.6 15.0 25.1 29.0 5.2 14.7 29.6 RoE (%) 34.7 18.9 22.9 16..8 21.8 11.0 27.5 14.4 25.7 25.8 13.1 17.1 22.0

Source: Company, Angel Research; Note: *December year ending

Company background
Aurobindo Pharma manufactures generic pharmaceuticals and active pharmaceutical ingredients. The companys manufacturing facilities are approved by several leading regulatory agencies like the USFDA, UK MHRA, WHO, Health Canada, MCC South Africa and ANVISA Brazil among others. The companys robust product portfolio is spread over six major therapeutic/product areas encompassing antibiotics, anti-retrovirals, cvs, cns, gastroenterologicals, and anti-allergics.

August 13, 2013

Aurobindo Pharma | 1QFY2014 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Less: Minority interest (MI) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Diluted EPS (`) % chg FY2010 FY2011 FY2012 FY2013 3,446 76 3,370 206 3,575 16.2 2,752 1,777 338 327 310 617 65.1 18.3 149 468 90.0 13.9 73 44 6.9 645 100.0 (109.5) 754 191.4 25.4 563 (0) 563 454 50.7 16.7 20.2 16.3 45.4 4,225 100 4,126 256 4,381 22.5 3,422 2,189 411 429 804 704 14.0 17.1 172 532 13.8 12.9 62 25 3.4 751 16.4 (37.2) 788 225.1 28.6 563 (0) 563 526 15.9 13.7 19.3 18.1 10.9 4,619 69 4,551 77 4,627 5.6 4,017 2,520 475 536 487 533 (24.3) 11.7 201 409 (23.2) 9.0 103 25 7.5 331 (55.9) 544.5 (213) (88.8) 41.6 (125) (1) (124) 198 (62.4) (2.7) 6.8 6.8 (62.4) 5,863 80 5,783 72 5,855 26.5 4,966 2,792 578 663 932 817 53.2 14.1 249 568 38.8 9.8 131 29 5.3 538 62.3 163.4 374 82.7 22.1 291 (2) 294 432 118.5 5.1 10.1 14.9 119.4 FY2014E 6,742 101 6,641 72 6,713 14.7 5,585 3,088 664 762 1,071 1,057 29.3 15.9 279 778 36.9 11.7 131 29 3.8 747 39.0 747 186.8 25.0 560 560 560 29.7 8.4 19.2 19.2 29.2 FY2015E 7,754 116 7,637 72 7,710 14.8 6,422 3,551 764 876 1,231 1,215 15.0 15.9 309 906 16.5 11.9 131 29 3.3 876 17.2 876 218.9 25.0 657 657 657 17.2 8.6 22.6 22.6 17.2

August 13, 2013

Aurobindo Pharma | 1QFY2014 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Share Application Money Reserves & Surplus Shareholders Funds Minority Interest Long-term provisions Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long-term loans and adv. Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 2,506 73 375 2,058 708 1,798 4,079 2,312 697 1,615 570 96 0.3 2,387 699 1,688 657 51 39 111 3,322 188 505 2,629 1,534 1,788 4,334 3,032 892 2,141 645 54 39 108 3,248 71 315 2,863 784 2,465 5,452 3,316 1,140 2,175 645 55 22 243 4,128 208 332 3,587 1,200 2,928 6,069 3,566 1,419 2,146 645 55 22 243 4,878 377 381 4,119 1,378 3,500 6,613 3,816 1,728 2,088 645 55 22 243 5,783 607 439 4,737 1,584 4,199 7,252 2,155 91 4,079 28 1,801 1,829 4 29 2,416 2,445 9 3 1,758 119 4,334 29 2,311 2,340 10 4 3,096 2 5,452 29 2,577 2,606 11 9 3,384 68 6,069 29 3,120 3,149 11 9 3,384 68 6,613 29 3,760 3,789 11 9 3,384 68 7,252 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

August 13, 2013

Aurobindo Pharma | 1QFY2014 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2010 FY2011 FY2012 FY2013 752 149 (261) 44 (153) 443 (400) (9) 44 (365) 5 (1) (29) (109) (132) (54) 128 73 751 172 236 25 (180) 952 (470) (38) 25 (483) 1 (389) (34) 67 (354) 115 73 188 (213) 201 (796) 25 89 (745) (633) 25 (608) 1,340 (34) (70) 1,236 (117) 188 71 374 249 (191) 29 (83) 321 (283) (16) 29 (271) 288 (17) (183) 88 138 71 208 FY2014E 747 279 (404) 29 (187) 407 (250) 29 (221) (17) (17) 169 208 377 FY2015E 876 309 (468) 29 (219) 469 (250) 29 (221) (17) (17) 230 377 607

August 13, 2013

Aurobindo Pharma | 1QFY2014 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 1.1 3.4 6.4 0.6 2.2 8.5 1.3 5.7 4.0 1.2 3.9 4.3 1.0 2.8 5.9 0.7 2.3 6.9 1.7 101 94 74 169 1.9 107 92 118 139 1.7 98 115 237 158 1.8 98 129 78 159 2.0 101 133 80 159 2.1 104 137 80 159 12.1 15 29.6 12.7 16 24.6 8.4 10 8.3 9.9 12 17.5 12.3 15 19.5 13.1 16 18.9 13.9 74.6 0.9 9.8 2.4 1.5 20.6 12.9 71.4 1.1 9.9 2.3 0.9 16.7 9.0 58.4 1.0 5.1 2.5 1.0 7.6 9.8 77.9 1.0 8.0 3.2 1.3 14.0 11.7 75.0 1.1 9.8 2.9 1.1 17.2 11.9 75.0 1.2 10.7 2.9 0.8 17.2 20.2 16.3 25.6 1.0 65.7 19.3 18.1 25.2 2.0 84.0 6.8 6.8 2.6 1.0 80.4 10.1 14.9 18.6 0.5 89.5 19.2 19.2 28.8 0.5 108.1 22.6 22.6 33.2 0.5 130.1 11.1 7.1 2.8 0.6 2.1 11.5 1.7 10.0 7.2 2.2 1.1 1.7 9.7 1.6 26.6 68.6 2.2 0.5 1.8 15.5 1.5 12.1 9.7 2.0 0.3 1.5 10.3 1.4 9.4 6.3 1.7 0.3 1.2 7.8 1.3 8.0 5.4 1.4 0.3 1.1 6.6 1.1 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

August 13, 2013

10

Aurobindo Pharma | 1QFY2014 Result Update

Research Team Tel: 022 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Aurobindo Pharma No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 13, 2013

11