Why good days are here for Aurobindo Pharma

Aurobindo Pharma is one of the few companies that was able to report better than expected numbers during the first quarter of 2020-21. It reported y-o-y revenue and net profit growths of 9% and 23% respectively for the quarter. Drug shortage in the US due to Covid-19 induced supply chain disturbances and the increase in demand owing to the large number of Covid cases, helped Aurobindo to report higher export growth. Its US formulation business grew 16% y-o-y in the first quarter. In addition to the small improvement in its operating margin, net profit growth was also pushed by higher other income and lower interest costs. Since a part of the other income is a grant received for the development of the Covid vaccine, the trend is expected to continue in the coming quarters as well.Analysts expect companies like Aurobindo, which export generic pharmaceutical and active pharmaceutical ingredients (APIs) to the US, will be able to report good numbers in the coming years due to several reasons. Shortage of drugs in the US is expected to continue for a few more quarters, which will give the sales a push in the short term. The second quarter numbers are expected to be better than the first because of the increased pickup witnessed in July and August. ‘China plus 1 strategy’ (decision to diversify import base outside China) of the global pharma majors, is another factor that will give a push to all API manufacturers in India including Aurobindo, in the long term.The company has a strong product pipeline. At present, Aurobindo is into a wide variety of drugs like antibiotics, antiretroviral, anti-allergic, gastroenterological and pain management. It is further expected to launch some new products which will push its growth in the coming years. For instance, Aurobindo plans to launch around 50 new products in the US market during this financial year. The company has an advanced R&D basket in several niche areas and as of now, it has more than 400 approved Abbreviated New Drug Applications (ANDAs) and another 200 waiting for approvals from the US FDA. Aurobindo recently receiving establishment inspection report (EIR) for its Hyderabad facility is another positive factor.With a trailing PE at 15.97, reasonable valuation is another factor that is attracting analysts to this counter. A re-rating is expected due to better growth prospects in the coming years. Increasing cash flows and decision of the management to use this additional cash flow to reduce debt (expected to become debt-free company in two years) is another possible trigger for the company. 78200818 78200821Selection MethodologyWe pick up the stock that has shown the maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.Graphics by Abdul Shafiq/ET Prime

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