Buy Aurobindo Pharma, target price Rs 450: Motilal Oswal

Motilal Oswal has given a buy rating to Aurobindo Pharmaceuticals with a target price of Rs 450 ( an upside of over 15 per cent over the CMP of Rs 392). Aurobindo Pharma and Sandoz have mutually terminated a definitive agreement related to the acquisition of the US-based generic oral solids and dermatology businesses. Sandoz’s portfolio was expected to be among the key inorganic growth drivers for Aurobindo over the next 12–15 months. While termination of the agreement would dent earnings growth, reduced financial leverage (as this deal was expected to be funded with a debt of $900 million) would alleviate the balance sheet to some extent.

The share price of the company moved up by 0.60 per cent from its previous close of Rs 392.30. The last traded price is Rs 394.65. Incorporated in 1986, Aurobindo Pharma has a market cap of Rs 22977.58 crore.

Investment Rationale


The brokerage has reduced its earnings estimate for FY21/FY22 by 19 per cent/18 per cent to Rs 51/Rs 53 to factor in termination of Sandoz acquisition plan. The pharma company continues to be valued at 8 times 12 months forward earnings, arriving at a price target of Rs 450. The brokerage remains positive on the robust abbreviated new drug application (ANDA) pipeline for US generics (154 pending approval) and the improving profitability of the Europe business.

However, the brokerage has reduced its earnings estimate by 19 per cent/18 per cent for FY21/FY22 to reflect the Sandoz deal’s termination. Accordingly, the target price has been revised to Rs 450 (Rs 530 earlier).

Financials

For the quarter ended December 31, 2019, the company has reported consolidated sales of Rs 5799.44 crore, up 5.10 per cent from last quarter sales of Rs 5518.27 crore and up 12.06 per cent from last year's same quarter sales of Rs 5175.26 crore. The company reported net profit after tax of Rs 705.95 crore in the latest quarter.