3QFY2012 Result Update | Pharmaceutical

March 9, 2012

Aurobindo Pharma
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Interest Adj. Net profit 3QFY2012 1262 28 168 172 (29) 2QFY2012 1075 6 115 21 (80) % chg (qoq) 17.3 364.7 46.9 730.2 3QFY2011 1072 126 186 7 194 % chg (yoy) 17.7 (78.0) (9.7) 2228.6 -

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 3,351 1.0 209/80 239,059 1 17,503 5,334 ARBN.BO ARBP@IN

`112 `166
12 months

Source: Company, Angel Research

For 3QFY2012, Aurobindo Pharmaceuticals (APL) posted above expectations, in the area of operating profits. The companys top line was just in line with our estimates. The highlight of the quarter was, better than expected OPMs. The OPM came in at 13.3% V/s expectations of 12.1%. However, including the forex losses and redemptions the company reported losses. We maintain our Buy view on the stock. Above expectations results: Net sales grew modestly by 17.7% yoy to `1,262cr, mainly on the robust growth in the exports and domestic. ARV, both formulations and API was the main growth driver of the company which grew by 47.8% and 106.1% respectively. Other key geographies, like US and Europe & ROW formulations grew by (-0.9)% and 17.4% growth respectively. Gross margin came in at 45.1% (46.7%), impacted by higher raw-material costs, thus impacting the OPMs which came in at 13.3% V/s expectations of 12.1%. However, including the forex losses and redemptions the company reported losses. Outlook and valuation: Commencement of operations at the Hyderabad SEZ and incremental contribution from the Pfizer deal would boost APLs earnings with better growth visibility going forward. We estimate net sales to log a 12.7% CAGR to `5,243cr over FY201113E on the back of supply agreements and the US and ARV formulation contracts. Even after factoring in lower profitability going forward, the stock trades at attractive valuations. Hence, we maintain a Buy with a revised price target of `166. 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)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 54.7 16.3 14.5 14.5

Abs. (%) Sensex Aurobindo

3m 6.2 26.3

1yr

3yr

(4.5) 114.5 (41.5) 263.8

FY2009 2,935 20.8 100 (58.0) 169 26.3 3.7 6.3 12.7 17.8 25.5 7.3 2.4 1.8 13.9

FY2010 3,370 14.8 563 463 304 79.4 20.2 10.9 18.3 10.3 29.6 12.1 1.7 1.5 8.3

FY2011 4,126 22.4 563 (0.0) 332 9.2 19.3 11.4 17.1 9.8 24.6 11.7 1.3 1.3 7.7

FY2012E 4,519 9.5 462 (18.0) 343 3.5 15.9 11.8 14.8 9.5 17.1 9.4 1.1 1.1 7.3

FY2013E 5,243 16.0 480 3.9 401 16.8 16.5 13.8 14.6 8.1 15.1 10.2 0.9 0.9 6.5

Sarabjit Kour Nangra

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

Please refer to important disclosures at the end of this report

Aurobindo Pharma | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 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 MI & share in associates PAT after Exceptional items Adjusted PAT EPS (`)
Source: Company, Angel Research

3QFY2012 1,262 28 1,289 556 44.1 168 13.3 172 55 (31) (2) (29) (29) 116 4.0

2QFY2012 1,075 6 1,081 476 44.3 115 10.7 21 46 54 (52) 105 186 (80) (80) -

% chg (qoq) 19.5 (17.3) 19.3 21.7 66.8 730.2 19.5 (157.7) (127.2) -

3QFY2011 1,072 126 1,198 501 46.7 191 17.9 7 43 267 78 189 (5) 194 189 6.5

% chg (yoy) 17.7 (78.0) 7.6 11.0 (12.0) 2228.6 27.4

9MFY2012 3,380 71 3,451 1559 45.3 470 13.9 389 147 5 (141) 145 (327) (232)

9MFY2011 2,769 477 3,247 3247 47.2 516 18.7 44 124 826 190 636 31 438 444 15.2

% chg (yoy) 22.0 (85.2) 6.3 (52.0) (9.1) 792.0 18.1

(7.7) (80.1)

(38.6)

88 3.0

Exhibit 2: Actual v/s Estimate

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

Actuals

Estimate

Variation %

1262 28 168 (2) (29)

1295 28 156 15 99

(2.6) (0.9) 7.9 -

Revenue up at 17.7% yoy, in line with expectations: Net sales grew modestly by 17.7% yoy to `1,262cr. ARV, both formulations and API was the main growth driver of the company which grew by 47.8% and 106.1% respectively. Other key geographies, like US and Europe & ROW formulations grew by (-0.9)% and 17.4% growth respectively. Overall formulations and the API segment, on the other hand, grew by 14.7% yoy. The US formulation segment remained flat at `325cr (`328cr). The ARV formulation segment reported modest growth of 47.8% yoy growth to `209cr (`141cr). As a result, contribution from the formulations segment to net sales decreased to 57% in 3QFY2012 from 59% in 3QFY2011. The API segment posted growth of 20.3% yoy to `548cr (`456cr), driven by SSP, which grew by 15.1% yoy. As of December 2011, the company now has 144 approved ANDAs and 29 tentative approvals, with the cumulative filings to 233.

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Aurobindo Pharma | 3QFY2012 Result Update

Exhibit 3: Sales break-up (Consolidated)

(` cr) Formulations US Europe & ROW ARV API SSP Cephs ARV & others
Source: Company, Angel Research

3QFY2012 739 325 205 209 548 157 194 197

2QFY2012 592 283 174 134 490 150 170 170

% chg (qoq) 24.8 14.9 17.4 55.4 11.9 4.7 13.7 16.5

3QFY2011 644 328 175 141 456 137 223 96

% chg (yoy) 14.7 (0.9) 17.4 47.8 20.3 15.1 (13.2) 106.1

9MFY2012 1952 883 536 533 1497 464 558 475

9MFY2011 1753 840 493 420 1319 429 615 276

% chg 11.4 5.1 8.8 26.8 13.5 8.2 (9.2) 72.3

OPM dips by 410bp for the quarter: Gross margin came in at 45.1% (46.7%), impacted by higher raw-material costs, thus impacting the OPMs which came in at 13.3% V/s 17.4% in 3QFY2011. However, on the positive side the OPMs were higher than the expectations of 12.1%. The margins expanded, on back of lower than expected growth in other expenditure. Net profit higher than estimates: For the quarter, APL reported losses on account of Adjusted net loss came in at `29cr (`194cr) for the quarter.

Management takeaways
Management has guided for 25 new launches in US out of which 12 will be done through Unit VII and 11 from Unit III post USFDA resolution. Expect launch of 1 OC product in FY2013. No clarity on timelines with the resolution of the USFDA issue w.r.t. the Unit III and VI. Inspection is scheduled in March2012 for Unit III and in July2012 for Unit VI. As of December, 2011, gross debt on books around `3,300cr, with cash of `125cr. Tax Rate is guided at 18-20% of PBT.

Recommendation rationale
Supply agreements to drive growth: On the global filings front (ANDAs and dossiers), APL has increased its filing dramatically from 313 in FY2008 to 1,171 in FY2010, 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 APLs cost efficiencies, as 90% of its formulation is now backward integrated. Thus, to leverage on its cost efficiency and strong product filings, APL entered into long-term supply agreements with Pfizer (March 2009) and AstraZeneca (September 2010), which provide significant revenue visibility going ahead. APL is also in discussion with other MNCs for more supply agreements.

March 9, 2012

Aurobindo Pharma | 3QFY2012 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. APL has been an aggressive filer in the US market, with 209 ANDAs filed and 134 approvals received until FY2011. Amongst peers, APL is the third-largest ANDA filer. The company has aggressively filed ANDAs in the last three 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, during the next three years in the US with US$70bn going off-patent, one of the highest in history, we believe APL is well placed to tap this opportunity. We expect the base business (ex-Pfizer) to post a 36.0% CAGR over FY201012 and contribute US$268mn by FY2012, with revenue per product increasing to US$2.6mn from US$2.3mn in FY2010, as the company moves towards the high revenue-generating NPNC and injectable (SSP and Cephs) products. 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. Overall, we expect the ARV segment to post a 21.4% CAGR over FY2010-12E to `730cr, with PEPFAR allocation for generic ARVs expected to increase.

Outlook and valuation

Commencement of operations at the Hyderabad SEZ and incremental contribution from the Pfizer deal would boost APLs earnings with better growth visibility going forward. We estimate the companys net sales to log a 12.7% CAGR to `5,243cr over FY2011-13E on the back of supply agreements and the US and ARV formulation contracts. Even after factoring in a lower profitability going forward, the stock trades at attractive valuations. Hence, even after the downtrend, we maintain our Buy recommendation on the stock with a revised price target of `166.

Exhibit 4: Key assumptions

FY2012E API Sales Growth (%) Formulations Sales Growth (%) Operating Margins (%) Capex (`cr)
Source: Company, Angel Research

(0.4) 21.1 14.8 280

(2.3) 18.6 14.6 429

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Aurobindo Pharma | 3QFY2012 Result Update

Exhibit 5: One-year forward PE

1,600 1,400 1,200 1,000 800 600 400 200 -

Source: Company, Angel Research

Exhibit 6: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy*# Sun Pharma Reco Buy Buy Neutral Buy Accumulate Buy Neutral Buy Accumulate Buy Buy Neutral Neutral CMP Tgt. price Upside (`) 44 112 2,152 696 308 50 2,074 399 346 501 173 426 558 (`) 82 166 866 341 1,920 81 555 393 593 255 #

86.3 48.2 24.4 10.7 13.7 62.0 39.0 13.5 18.4 47.4 -

Accumulate 1,688

Source: Company, Angel Research; Note: *December year ending; Based on CY2012 estimates

March 9, 2012

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
5x 10x 15x 20x

FY2013E EV/EBITDA (x) 4.6 6.0 16.9 13.3 15.2 12.1 5.4 13.2 6.5 7.3 12.7 6.3 5.7 16.5 5.6 8.1 22.6 15.6 18.1 17.6 5.0 21.7 8.0 10.6 16.9 6.6 8.1 20.9 0.7 0.9 2.5 2.5 3.2 3.1 1.0 5.4 0.9 1.6 2.5 1.3 1.4 6.0

FY11-13E 34.8 9.9 5.6 11.7 16.9 22.7 0.6 37.7 15.6 25.4 23.9 13.7 21.8 23.5

FY2013E RoE (%) 38.0 15.0 15.4 29.5 17.0 24.9 8.5 30.7 16.9 27.8 28.6 15.8 30.0 22.5 26.6 10.2 15.1 17.2 15.5 21.8 7.3 41.0 14.2 25.9 24.8 8.9 27.7 22.6

% PE (x) EV/Sales (x)

CAGR in EPS (%) RoCE (%)

Aurobindo Pharma | 3QFY2012 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 (`) Adj EPS (`) % chg FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 2,547 117 2,430 11 2,441 14.3 2,089 1,412 267 193 217 341 13.2 14.0 100 241 19.3 9.9 69 110 37.6 0.0 292 41.8 292 53.6 18.4 238 (0) 239 239 19.1 9.8 8.9 8.9 17.8 3,025 90 2,935 142 3,077 26.1 2,561 1,680 301 244 336 374 9.6 12.7 128 246 2.3 8.4 93 27 8.4 0.0 323 10.5 201.0 122 21.4 17.6 100 100 301 26.3 3.4 3.7 11.2 26.3 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 4,588 69 4,519 150 4,669 6.6 3,849 2,368 475 602 404 670 (4.8) 14.8 206 465 (12.7) 10.3 54 43 7.1 603 (19.6) 603 141.5 23.5 462 462 462 (12.2) 10.2 15.9 15.9 (12.2) 5,322 80 5,243 100 5,343 14.4 4,477 2,770 550 696 460 766 14.3 14.6 232 534 14.8 10.2 57 52 8.3 629 4.3 629 149.4 23.7 480 480 480 3.9 9.2 16.5 16.5 3.9

March 9, 2012

Aurobindo Pharma | 3QFY2012 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Share Application Money Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,601 418 1,184 278 53 60 2,059 283 316 1,460 526 1,534 3,109 1,869 575 1,294 536 105 0.3 2,289 128 394 1,767 570 1,719 3,654 2,312 697 1,615 570 96 0.3 2,506 73 375 2,058 708 1,798 4,079 2,774 882 1,892 502 48 39 3,392 188 505 2,699 886 2,506 4,987 3,280 1,087 2,192 352 48 0.3 3,537 211 642 2,684 1,104 2,433 5,026 3,709 1,320 2,389 352 48 0.3 4,017 219 721 3,077 1,271 2,746 5,536 27 1,097 1,124 3 1,908 73 3,109 27 1,214 1,241 3 2,333 77 3,654 28 1,801 1,829 4 2,155 91 4,079 29 2,416 2,445 9 2,414 118 4,987 29 3,021 3,050 9 1,834 133 5,026 29 3,612 3,641 9 1,735 150 5,536 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

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Aurobindo Pharma | 3QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in WC 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 FY2008 292 100 (91) (49) (46) 305 (244) 113 (49) (181) 2 (141) (16) (268) (423) (300) 582 283 FY2009 73 128 (334) (180) (30) 16 (479) 48 (180) (611) 287 (39) 193 440 (155) 283 128 FY2010 FY2011E FY2012E FY2013E 752 149 (261) 44 (153) 443 (400) (9) 44 (365) 5 (1) (29) (109) (132) (54) 128 73 751 172 (593) 25 (180) 124 (470) (38) 25 (483) 1 297 (37) 261 (97) 73 188 739 206 96 43 (155) 842 (280) 38 43 (199) (580) (40) (620) 23 188 211 826 232 (305) 52 (174) 528 (429) 52 (377) (99) (45) (143) 8 211 219

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Aurobindo Pharma | 3QFY2012 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.) 1.4 4.8 3.5 1.8 5.9 2.6 1.1 3.4 6.4 0.9 3.2 8.5 0.5 2.0 11.1 0.4 1.6 13.6 1.6 108 97 78 174 1.8 99 92 70 169 1.7 101 94 74 169 1.7 107 92 67 168 1.5 112 99 70 177 1.5 103 94 70 162 7.8 10.3 23.7 7.3 9 25.5 12.1 15 29.6 11.7 14 24.6 12.0 14 20.7 13.8 16 19.0 9.9 81.6 0.9 7.5 2.8 1.6 14.7 8.4 82.4 1.0 6.7 3.6 1.6 11.7 13.9 74.6 0.9 9.8 2.4 1.5 20.6 12.9 71.4 1.0 9.2 2.0 1.0 16.6 13.3 77.0 1.0 9.9 2.0 0.7 15.7 13.9 76.9 1.1 11.3 2.3 0.5 15.5 8.9 8.9 12.6 0.7 41.8 3.7 11.2 8.5 0.9 46.2 20.2 16.3 25.6 1.0 65.7 19.3 18.1 25.2 1.1 84.0 19.5 19.5 26.6 1.2 104.8 21.8 21.8 29.8 1.3 125.1 12.6 8.9 2.7 0.6 1.9 13.6 1.5 17.8 13.2 2.4 0.8 1.8 13.9 1.4 10.3 4.4 1.7 0.9 1.5 8.4 1.3 9.8 4.4 1.3 1.0 1.3 7.8 1.1 9.5 4.9 1.1 0.9 1.1 7.3 1.0 8.1 4.6 1.0 0.9 1.0 6.5 0.9 FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

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Aurobindo Pharma | 3QFY2012 Result Update

Research Team Tel: 022 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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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%)

March 9, 2012

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