4QFY2013 Result Update | Pharmaceutical

June 4, 2013

Aurobindo Pharma
Performance Highlights
Y/E march (` cr) Net sales Other income Operating profit Interest Adj. Net profit Profit/(loss) 4QFY13 1553 32 222 33 110 3QFY13 1552 24 241 33 137 % chg (qoq) 0.0 33.6 (7.7) (0.7) (20.1) 4QFY12 1171 26 119 35 30 % chg (yoy) 32.6 22.8 86.7 (6.6) 262.4

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 1.1 205/100 292,522 1 19,546 5,919 ARBN.BO ARBP@IN

`178 `271
12 months

Source: Company, Angel Research

For 4QFY2013, Aurobindo Pharmaceuticals Ltd (APL) outperformed expectation on the top-line front, while the bottom-line came in below expectations. The OPM came lower than expectations (of 18.3%) at 14.3%. However, on back of lower taxations, the adj. net profit came in at `110cr, still lower than our estimate of `194cr. On back of improvement on the financial front and clearance of facilities by the USFDA, the company expects sales to grow by 20.0% and OPM to expand by 200-300bps for FY2014. We have a Buy recommendation on the stock. Sales higher than expected: Net sales grew strongly by 32.6% yoy to `1,553cr, led by a robust growth in formulations (41.4% yoy growth). The active pharmaceutical ingredients (API) segment grew by 17.0% yoy. Formulations in key geographies like the US, and Europe and rest of world (RoW) grew by 61.5% and 44.9% respectively. Gross margin came in at 48.2% (vs 45.2% in 4QFY2012) on back of favourable product mix, thus impacting the OPM which came in at 14.3% vs10.2% in the corresponding quarter of the previous year. This led the company to post an Adj. net profit of `110cr. 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 antiretroviral (ARV) formulation contracts. Even after factoring in lower profitability 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 36.6 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 13.8 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 10.3 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 8.6 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 18.9 17.3 9.0

Abs. (%) Sensex Aurobindo

3m 3.5 19.5

1yr 22.2 75.5

3yr 14.2 11.2

Sarabjit Kour Nangra

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

Source: Company, Angel Researc; Note: CMP as of June 3, 2013

Please refer to important disclosures at the end of this report

Aurobindo Pharma | 4QFY2013 Result Update

Exhibit 1: 4QFY2013 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

4QFY2013 1,553 32 1,584 748 48.2 222 14.3 33 69 152 45 107 1 (1) 109 110 3.8

3QFY2013 1,552 24 1,576 770 49.6 241 15.5 33 61 171 6 164 73 (1) 92 137 4.7

% chg (qoq) 0.0 33.6 0.6 (2.8) (7.7) 14.0 (11.0) 589.2 18.3 (20.1) (20.1)

4QFY2012 1,171 26 1,197 529 45.2 119 10.2 35 54 56 52 4 (103) (0) 108 30 1.0

% chg (yoy) 32.6 22.8 32.4 41.4 86.7 28.5 2,607.1

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

262.4 262.4

294 432 14.8

Exhibit 2: Actual v/s Estimate

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

Actuals 1,553 31.8 222 45 110

Estimate 1,233 36 225 6 194

Variation % 26.0 (11.5) (1.3) 642.0 (43.6)

Revenue up at 32.6% yoy; higher than expectations: Net sales grew by 32.6% yoy to `1,553cr, led by a robust growth in the formulations business (41.4% yoy growth). Formulations in the key geographies like the US, and Europe and rest of world (RoW) grew by 61.5% and 44.9% respectively. The API segment grew by 21.7% yoy. Growth was led by the Ceph segment which grew by 26.2% yoy, while the SSP segment grew by 14.2% yoy. As of March 2013, the company has 239 approved abbreviated new drug applications (ANDAs) and 181 tentative approvals.

January 4, 2013

Aurobindo Pharma | 4QFY2013 Result Update

Exhibit 3: Sales break-up (Consolidated)

(` cr) Formulations US Europe & ROW ARV API SSP Cephs NPNC 4QFY2013 918 486 249 183 667 189 244 235 3QFY2013 912 513 223 175 660 213 245 202 % chg (qoq) 0.7 (5.3) 11.6 4.4 1.0 (11.5) (0.7) 16.2 4QFY2012 649 301 172 176 570 165 193 212 % chg (yoy) 41.4 61.5 44.9 3.9 17.0 14.2 26.2 10.7 FY2013 3,387 1753 884 750 2,536 765 937 834 FY2012 2,603 1184 633 787 2,062 629 746 687 % chg 30.1 48.1 39.8 (4.6) 23.0 21.7 25.6 21.4

Source: Company, Angel Research

OPM expands to 14.3% for the quarter: Gross margin came in at 48.2% (45.2% in 4QFY2012), on back of favorable product mix. The OPM stood at 14.3% vs 10.2% in the corresponding quarter of the previous year. For FY2014, the company expects margins to be at 16-17%.

Exhibit 4: OPM Trend

16.0 15.0

15.6 15.5

15.5 14.3

14.0

(%)

13.0 12.0 11.0 10.0

9.0

10.2

4QFY2012

1QFY2013

2QFY2013

3QFY2013

4QFY2013

Source: Company, Angel Research

Net profit lower than estimates: For the quarter, the company posted an Adj. net profit of `110cr, much lower than our expectation of `194cr. This was mainly on back of lower-than-expected OPM and a higher-than-expected tax outgo.

Exhibit 5: Adj. net profit

160 140 120

137 110
79 87

100

(` cr)

80 60 40 20 30

0 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013

Source: Company, Angel Research

January 4, 2013

Aurobindo Pharma | 4QFY2013 Result Update

Management takeaways

The company has guided for a sales growth of 20% for FY2014 and 22% in FY2015. US sales are expected to be around 30-35% in FY2014. The Management has guided for 16-20 new launches in the US in FY2014. A margin expansion of 200-300bps has been guided by the Management in the coming quarters. The tax rate is expected to be around 20% in FY2014. Capex for FY2014 is expected to be `250cr

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. 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 239 ANDAs filed until FY2013. 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 antiretroviral (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.
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Aurobindo Pharma | 4QFY2013 Result Update

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
Feb-06

Oct-06

Sep-08

Sep-10

May-09

May-11

Sep-12

5x
Source: Company, Angel Research

10x

15x

20x

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 Buy Buy Buy Neutral Buy Accumulate Buy Neutral Neutral Neutral CMP (`) 137 178 772 369 2,113 69 2,661 65 606 753 362 2,608 1018 Tgt. price (`) 271 909 444 2,535 168 78 665 877 Upside % PE (x) 52.8 17.7 20.3 19.9 144.3 20.0 9.8 16.5 9.8 8.6 16.1 16.6 16.7 4.1 31.9 8.3 13.7 18.0 16.1 26.3 25.6 FY2015E EV/Sales (x) 1.3 1.0 2.0 2.5 2.4 0.8 6.3 0.8 2.1 2.4 1.2 2.6 6.0 EV/EBITDA (x) 6.9 6.3 11.1 11.3 11.9 3.7 22.0 5.5 9.7 11.2 9.3 15.7 14.5 FY12-15E CAGR in EPS (%) 26.1 61.9 12.7 15.9 12.8 33.7 6.1 15.8 24.9 29.1 (6.8) 13.4 18.8 FY2015E RoCE (%) 34.0 13.0 15.4 15.7 18.3 11.0 36.1 15.3 24.8 28.5 13.1 15.9 29.4 RoE (%) 34.7 18.9 23.1 15.9 21.8 11.2 31.0 14.7 25.4 24.8 19.1 16.7 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.
January 4, 2013

May-13

Jun-07

Jan-10

Jan-12

Jan-08

Aurobindo Pharma | 4QFY2013 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

January 4, 2013

Aurobindo Pharma | 4QFY2013 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

January 4, 2013

Aurobindo Pharma | 4QFY2013 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

January 4, 2013

Aurobindo Pharma | 4QFY2013 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 10.9 6.9 2.7 0.6 2.1 11.4 1.7 9.8 7.0 2.1 1.1 1.6 9.4 1.5 26.2 67.4 2.2 0.5 1.8 15.2 1.5 11.9 9.5 2.0 0.3 1.4 9.9 1.3 9.2 6.2 1.6 0.3 1.2 7.5 1.2 7.9 5.4 1.4 0.3 1.0 6.3 1.1 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

January 4, 2013

Aurobindo Pharma | 4QFY2013 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%)

January 4, 2013

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