Monday, July 7, 2008

VALUE BUY – AUROBINDO PHARMA

Aurobindo Pharma is a manufacturer of Active Pharmaceutical Ingredients (API'), formulations and intermediates, having a wide portfolio of products in various segments such as anti infectives, anti retrovirals, cardiovascular systems , CNS etc.

Strengths:

It has 5 units for manufacture of API' and 4 for manufacture of formulations, catering to regulated markets where norms relating to manufacture are extremely stringent. It has invested heavily in modernizing its plants to make them compliant with USFDA/European standards. This is a significant step in improving quality standards and would be beneficial to the company in the long run. A significant presence in US markets is accounted by a large number of approvals from the USFDA. In addition the company is in the process of filing for 30 more drug approvals in the coming years. Acquisition of Milmet Pharma (UK) and Prarmcin (Netherlands) has given it the required presence in major European markets. It has maintained its efforts to increase its presence in Europe by filing drug master files in various European countries. About 40 products are awaiting approval in various European countries, which could be a significant driver of revenues and profits going forward. In May 08 it has received 9 product approvals from MCC to market products in South Africa. It has now a total of 31 marketing authorisations approved by MCC.

Since the company manufactures a majority of the intermediates required for the manufacture of API', it has been relatively insulated from the cost pressures due to rising intermediate costs affecting a majority of its competitors. The company has focussed on diversifying its product portfolio by going into the formulations business, which is likely to impact bottom lines positively since formulations is typically a higher margin business as compared to API'.

Risks:

Prices of chemicals and intermediate inputs are on the rise due to the global commodities boom. This could have an adverse impact on the bottom line of the company.

The company operates in regulated markets of the US and Europe. Delays in the approval of drugs can have an effect on new launches thereby putting a constraint on the growth of the business. Also the quality parameters not only with respect to the final product, but also in the practices followed in their manufacture are very stringent, any slip ups can cause serious problems.

Financials:
For the year ended March 08, the company achieved sales of Rs.2234 crores, a growth of 19 % over the previous year.
Profits increased from Rs.229 cr. to Rs.290 cr. A growth of 27 %. However this was aided by an increase in other income from Rs.39 cr. To Rs.118 cr.
The EPS for the year stands at 53 giving a PE ratio of 5.5 at current prices. If other income is excluded, it gives an EPS from operations of 32.
The real undervaluation of this company is observed in its balance sheet. The company has Net Current Assets of Rs.1800 cr. as on 31.3.07. Against this the Market Capitalisation is just Rs.1500 cr. on date. This makes Aurobindo Pharma a real value buy.

4 comments:

Venkat Muthukrishnan said...

Hi,
Would it not be right to infer that a very proportion of current assets (primarily made up of Sundry Debtors, I guess) shows that the debtors collection cycle takes a longer time? Theoretically high s debtors doesnot look good for a company.
regards
Venkatesh

Mahendra Naik said...

Hi Venkat,

Extremely valid point. However a close examination of the Current assets reveals the following:
Investments : 202 cr
Sundry Debtors: 624 cr
Inventories : 547 cr.
Cash & Bank : 500 cr
Loans : 549 cr.

Total CA : 2423 cr.

In this context 624 cr of debtors looks OK particularly since debtors more than 6 months are only 122 cr.
Also the Co has a positive cash flow from operations of 49.48 cr. Also the co has outstanding creditors of 284 cr on 31.3.07.

Uma said...

mahendra, I think pharma cos are struggling in terms of ROI. All that research and testing is not really paying off well

VALUE STOCKS UNDER TWO DOLLARS said...

Healthcare is an excellent area to be in great review on Aurobindo pharma.