Aurobindo Pharma commenced its operations in 1988 with a single manufacturing facility for Semi-Synthetic Penicillin (SSP) in Pondicherry. Today the company is one of the largest generic pharmaceutical player in the industry with 29+ manufacturing facilities, 155+ markets and 26+ billion dosage forms. Aurobindo Pharma has a presence in key therapeutic segments such as neurosciences (CNS), cardiovascular (CVS), anti-retroviral, anti-diabetics, gastroenterology and Anti-biotics.
The company’s shares have 52 weeks price band of INR 791-288 and a total market capitalization of INR 436 billion which makes it a Large-Cap company. The shares have a P/E ratio of 17 and a dividend yield of 0.40%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ★ ☆)
The company operates in the pharmaceutical business where market dominance is achieved through R&D, regulatory approvals, scale and distribution. Aurobindo Pharma is the 7th largest generic company by sales in the world and the 2nd largest Indian Pharmaceutical company in terms of revenue. It is also the 2nd largest generic Company by Rx dispensed in the US. This shows the sheer scale of operations which the company has along with a wide distribution across the globe.
On the R&D and Approvals front, the company has 7 R&D centres out of which 2 are based in the US. The R&D centres already have a 100+ new formulations in their pipeline. Aurobindo pharma also has a large US portfolio with 572 ANDAs filed, 391 with final approval, 27 Tentative approval, and 154 under review. The company is also looking to expand into Canada, Brazil and China and their future product launches are mostly targeted towards Oncology and Specialty injectables. Overall the company has a wide economic moat due to its sheer scale, product offering and geographical presence. Therefore this category gets 4 stars in the Aurobindo Pharma fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ☆)
The business model of the company is focused on aggressive expansion through both organic growth and acquisitions. The company acquired Generis Limited in Portugal in 2016. They also acquired Apotex Inc’s businesses in other 5 European countries along with a portfolio of 7 marketed oncology injectable products from Spectrum Pharmaceuticals in 2018. In 2019, they entered a JV with Shandong Luoxin in China. This indicates the M&A and integration capabilities of the management.
The revenue breakup is such that the company was heavily dependent on generic oral dosages with 93% contribution in 2014. Since then the company has diversified its offerings and dosage forms. Presently, Oral forms 63% of revenue, Injectables is 25%, Dietary supplements forms around 10% and OTC along with oncology drugs contribute 9% of the revenue.
Mr N. Govindarajan is the managing director and has 20+ years of experience across a variety of domains such as Bulk Drugs, CRAMS, Finished Dosages and Biotechnology. The Board also has a good mix of pharmaceutical experience and professional management. Decision-making is decentralized, with accountability and freedom to operate. The management also has shown dedication to shareholder’s wealth and have issued bonus shares from time to time. Therefore this category gets 4 stars in the Aurobindo Pharma fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ★)
The revenue has seen a 20% CAGR growth over the last 10 years. The Operating Income and Net income has also increased by 16.8% and 17.4% CAGR respectively. The working capital has been positive and the Cap-Ex has been stable over the years. The growth, however, is not comparable with previous years as the company has done many acquisitions during the period, but still, it gives an idea about the expansion over the years. Therefore this category gets 5 stars in the Aurobindo Pharma fundamental analysis.
4. Profitability Ratios (★ ★ ★ ★ ☆)
The gross margin has almost flattened over the years. But this is due to the nature of the generics business. The other margins along with return on assets have shown stability over the years as the company expanded into new dosage forms and geographies. However, the margins are likely to remain flattened in the future without any significant improvement due to increasing costs and competition. Therefore this category gets 4 stars in the Aurobindo Pharma fundamental analysis.sis.
5. Cash Flow Ratios (★ ★ ★ ☆ ☆)
The net income margin and Cap-Ex as a percentage of sales have been stable over the years. The free cash flow as a percentage of net income has been fluctuating due to M&A activities and business integrations. The operating cash flow growth has also gone negative which indicates increasing working capital. Therefore this category gets 3 stars in the Aurobindo Pharma fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ☆)
Aurobindo Pharma does not have any long term debt in its capital structure therefore the financial leverage and debt to equity ratio are very low. The company also has stable profitability and hence there is no significant concern regarding its solvency. The current and quick ratios are also stable and signify good asset liquidity for the company. Therefore this category gets 4 stars in the Aurobindo Pharma fundamental analysis.
7. Efficiency Ratios (★ ★ ☆ ☆ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has declined over the years as the company expanded into new formulations and across new geographies. The inventory days are very high and the payable period has declined. The receivable days have reduced from 111 to 73 days but the cash conversion cycle has been positive and increasing. This indicates deteriorating efficiency for the company. Therefore this category gets only 2 stars in the Aurobindo Pharma fundamental analysis.
8. Valuation Ratios (★ ★ ☆ ☆ ☆)
The company has been expanding rapidly due to acquisitions and JVs and the market, therefore, has valued its shares at declining multiples. The financial health and efficiency of the company are also deteriorating with increased scale and competition. Hence there may be a further correction in valuation multiples in the near future. Therefore this category gets only 2 stars in the Aurobindo Pharma fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ☆ ☆)
The leverage ratio has flattened and has seen some increase in recent years. The tax efficiency and interest burden ratios have remained stable along with the asset turnover ratio. The operating margin, however, has seen some decline in recent years. Overall the Return on Equity has declined due to a reduction in profitability. Therefore this category gets 3 stars in the Aurobindo Pharma fundamental analysis
10. Future Prospects (★ ★ ★ ☆ ☆)
Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.
- Novartis AG recently scrapped the $1 billion sale of its US generic pill and skin drug assets to Aurobindo pharma. The deal was in the pipeline but then collapsed due to the U.S. Federal Trade Commission’s not giving approval within expected timelines. The cancellation leaves hydroxychloroquine, an older malaria drug in Novartis’s Sandoz generic unit’s portfolio.
- The R&D spend guidance was at 5-6% of sales mainly towards complex product development. However, this might get delayed as the company will try to preserve cash in the uncertain times due to Covid-19 outbreak.
- Gross Margins were impacted last year due to the integration of the Apotex business, which has relatively lower margins. The company is looking forward to converting the loss-making Apotex operation to EBITDA neutral by year-end FY 2021.
- EU formulation grew 19% YoY in constant currency terms during the third quarter of FY 2020. There is further expansion on the way into the European Union but margins are expected to remain flat.
The company has expanded rapidly but this has led to the deterioration of its financial health. Further, the company is looking into expansion in oncology and other generic dosage forms but the growth will remain flat until the global supply chains are restored. Therefore this category gets 3 stars in the Aurobindo Pharma fundamental analysis
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above or equal to 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
AUROBINDO PHARMA SHARES (3.4/5)
Therefore it is a 3-star stock
★ ★ ★ ☆ ☆
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|Aurobindo Pharma Shares|
|Economic Moat||★ ★ ★ ★ ☆|
|Business & Management||★ ★ ★ ★ ☆|
|Growth Ratios||★ ★ ★ ★ ★|
|Profitability Ratios||★ ★ ★ ★ ☆|
|Cash Flow Ratios||★ ★ ★ ☆ ☆|
|Liquidity & Solvency||★ ★ ★ ★ ☆|
|Efficiency Ratios||★ ★ ☆ ☆ ☆|
|Valuation Ratios||★ ★ ☆ ☆ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ☆ ☆|
|Future Prospects||★ ★ ★ ☆ ☆|
|Overall Fundamental Rating||★ ★ ★ ☆ ☆|
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