Markets have hit a new peak and each day we are seeing the Sensex hitting new peaks. The risk of new highs means there is a risk of your portfolio value eroding in case there is a sharp downslide in stock prices. The one sector that has saw heavy selling is the pharma sector. This is because of margin pressures in the US, where companies like Sun Pharma, Glenmark and Lupin saw little success when compared to other companies.
Why Aurobindo Pharma is a good story?
Aurobindo pharma, the 5th largest pharma company in India has had no such problems. The company did not see great margin pressures nor a solid decline in profitability. Its US business continues to do well. There are reasons why Aurobindo Pharma bucked the trend and did well. It is because the company does not rely on a few products for its success in the US market. Going ahead the company does not see significant erosion in margins.
"As far as base price erosion is concerned, it is around 7-8% in FY17. We do not guide in terms of specific number but overall, we are confident about growth for the next year on a year-on-year basis. Even though there can be pricing pressure in terms of the oral business, you have to remember the fact that there are other four engines which will continue to fire like Auromedics, Aurolife, Natrol and Aurohealth. So we would still grow. Overall as an institution, we still believe that we would be able to grow when compared on a year to-year basis," N Govindarajan, Managing Director told an analyst meet recently.
Huge ANDA pipeline
Abbreviated New Drug Application or (ANDA) as it is popularly known is an application for a U.S. approval from the US FDA. Once an approval comes through you can market and sell the product in the US. Aurobindo as on March 31, 2017 has filed 429 ANDAs on a cumulative basis, out of which 276 have final approval and 38 having tentative approvals, including 10 ANDAs which are tentatively approved under PEPFAR and the balance 115 ANDAs are under review. If the company continues to get approvals at a brisk pace, there is no telling, how far they could go in terms of revenues.
For the year, the company registered a revenue growth of 8% YoY to Rs.15,090 crores. The EBITDA before FOREX and other income increased by 8% to Rs.3,434 crores and profit after tax increased by 13% to Rs.2,296 crores. In Q4 FY'16-17, overall revenues declined by 3% YoY to Rs.3,642 crores, mainly due to competitive environment. The EBITDA before FOREX and other income declined by 16.7% to Rs.721 crores,impacted by one -time inventory write -off and other exceptional items. PAT declined by 4% to Rs.533 crores.
Reasons for buying shares of Aurobindo
In terms of valuations, Aurobindo shares are not very expensive. The company reported an EPS of near Rs 40 for FY 2017-18. The company is confident of maintaining margins going forward and we believe that it can report an EPS of Rs 50 in 2018-19. Based on a very conservative valuation of 18 times, the stock should not trade less than Rs 900 in the next two years. That would be a remarkable jump of 50 per cent from the current levels. A good stock to own on declines. Check stock quote of Aurobindo here
There could be some risk to the projections, including currency fluctuations and if the company gets USFDA import alert. This could dramatically alter the performance of the company. The rupee has also been gaining ground against the US dollar and this could impact sentiments going ahead. This is because bulk of the company revenues comes from exports and the currency fluctuations are a threat.
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