Up 125% in a month and analysts say this stock has more steam left

NEW DELHI: Despite having climbed 125 per cent since March 23, this pharma stock has not yet run out of gas, and seems to have more steam left.

Major hangovers are easing, other things too are falling in place, and the drug maker is going to become a net-cash company by FY22. Analysts largely are projecting more upside for the stock.

The stock is Hyderabad-based Aurobindo Pharma.


The brisk rally in the stock has come against a mere 4 per cent rise in the Sensex in last one month. What fuelled sentiment on the counter was the recent establishment inspection report from the USFDA, which classified the company’s injectable formulation facility, Unit IV, as VAI or voluntary action indicated.

The margin profile of the injectable segment is said to be superior than the company's average. There are hopes of early resolution on the three other plants that are under the USFDA radar.

Calling it an end to regulatory cycle, Kotak Institutional Equities said the fresh USFDA move seems to have been helped partly by the ongoing demand surge and product shortages in the US for critical care injectable products as indicated by peers.

“With Unit-X and Eugia also clear, nearly 90 per cent of Aurobindo’s pipeline is now de-risked. We raise the fair value of the stock to Rs 690 from Rs 520 earlier, valuing the stock at 13 times FY2022 EPS,” it said.

The stock traded at Rs 655 on Thursday, clocking a rise of nearly 125 per cent for last one month.

Motilal Oswal has a price target of Rs 745 on the stock. “We remain positive on Aurobindo and expect a 7 per cent earnings growth CAGR over FY19–22, led by a robust ANDA pipeline for US generics, improving profitability in the EU owing to its foray into newer markets and a shift in product manufacturing to India," it said.

The news on Unit-IV came days after the company called off the Sandoz deal due to delays in approval from the US Federal Trade Commission.

Analysts said while the deal would have been earnings-accretive, it would also have added a debt of $800 million to the company's book, which was unwanted in the ongoing weak environment.

The pharma major is repaying $297 million debt in the first nine months of this financial year compared with an yearly target of $200 million, which too is going down well with analysts.

Credit Suisse has doubled its price target for the stock to Rs 665 from Rs 345, surprised by the clearance for Unit-IV. In its base case, it had expected a re-inspection, given that the first three observations pertained to aseptic process controls.


“Approvals should come now (nearly 15 in FY21). We increase FY21E/FY22E EPS by 13/14 per cent," it said.

Credit Suisse' price target suggested limited upside, as there are other plants as well which have been impacted by USFDA orders.

The US drug regulator has issued OAIs (official action indicated) to Unit VII (oral formulations), Unit I (API) and Unit IX (API intermediates).

Centrum Broking said early closure of Unit XI, I and IX and the debt repayment in the coming quarters could be key triggers to watch out for.

“Besides showing growth in the formulations business, the company will be able to sustain margins with increased focus on the US and EU over coming two years. The EU business is expected to be profitable in FY21. We have undone the Sandoz acquisition from our earnings estimates yielding nearly 13 per cent cut in our earnings estimates. With this, we increase our earnings estimates by 3 per cent and accord a ‘buy’ rating to the stock with a price target of Rs 830,” Centrum Broking said.

Aurobindo's Unit VII has 18 pending ANDAs ( abbreviated new drug applications). Unit XI is Aurobindo's largest API facility. It is under a warning letter since June 2019. In the latest earnings call, Aurobindo mentioned that it had submitted corrective and preventive actions (CAPA) report for Unit VII in January 2020. For Unit XI, it is currently awaiting a re-inspection.