Professional Documents
Culture Documents
September 2014
Product
selection
Sales
execution
Event specific
risk
Base
business
growth
Drivers of
growth
Newer
avenues
for growth
Associated
risk to
growth
Regulatory
risk
Therapeutic
coverage
Geographical
coverage
Thematic:
Analysts:
Aditya Khemka
adityakhemka@ambitcapital.com
Tel: +91 22 3043 3272
Paresh Dave
pareshdave@ambitcapital.com
Tel: +91 22 3043 3212
Sales force
productivity
Healthcare
CONTENTS
SECTOR
Healthcare: Mid-sized pharma: DNA for growth.. 3
Mid-sized pharma: Apples or Oranges4
Introduction to Indian pharmaceuticals...8
Deep dive into IPMs evolution; regulation says innovate! .10
Challenges ahead for mid-sized pharma. 14
Analysing sustainability: Business DNA.15
Valuations not in sync with DNA.28
Suggest switching from Aurobindo (SELL) to Cadila (BUY)31
Case studies 33
COMPANIES
Cadila Healthcare (BUY): Multiple levers for growth37
- Snapshot of company financials 38
- Cadila Diversified revenue streams.. 39
- Gaining lost ground. 40
- Mapping competitive advantage The 5 Rs 43
- Cadila has multiple levers for growth.. 48
- Valuation discount to large-caps to narrow 56
- Accounting analysis No concerns.. 61
Aurobindo Pharma (SELL): Structural issues galore. 67
- Snapshot of company financials 68
- Aurobindo Opportunistic and fragile.69
- Snowballing of a most humble beginning.. 70
- Low rank in our competitive framework the 5 Rs. 71
- US formulations the only growth driver but a no moated business 77
- Base business EBITDA margins and RoCE to improve till.85
FY17E but decline thereafter
- Valuation Deserves a deep discount to large-caps 88
- Accounting analysis some RED flags. 94
Page 2
Healthcare
POSITIVE
THEMATIC
Key Recommendations
Lupin
BUY
Upside 2%
IPCA
BUY
Upside: 16%
Cadila
BUY
Upside: 19%
Aurobindo
SELL
Downside: 8%
Sun
Pharma
17
EV/EBITDA (FY16E)
Cadila
15
13
Cipla
Dr.
Reddy's Glenmark
11
9
Lupin
IPCA
Aurobind
o
7
5
10
20
30
40
RoCE (FY14)
Analyst Details
Aditya Khemka
+91-22-3043 3272
aditya.khemka@ambitcapital.com
Paresh Dave
+91-22-3043 3212
pareshdave@ambitcapital.com
Rating
BUY
BUY
BUY
BUY
BUY
SELL
CMP
Mcap
P/E
P/E
(`) (US$mn) (FY15E) (FY16E)
806
27,495
32
25
1,359
10,042
25
22
2,959
8,296
22
20
1,273
4,292
26
19
820
1,703
20
16
896
4,302
17
13
TP (`)
730
1,387
3,149
1,510
949
828
EPS CAGR
(FY08-14)
9%
33%
22%
11%
23%
29%
EPS CAGR
(FY15E-17E)
21%
17%
19%
31%
21%
31%
RoCE (FY14)
38%
26%
16%
17%
31%
24%
Healthcare
Exhibit 1: Sales CAGR over FY08-14 reflects strong growth by mid-sized pharma
companies
30%
24%
25%
19%
20%
5%
6%
6%
FDC
Strides
Wockhardt
Claris
7%
8%
Indoco
4%
5%
Ranbaxy
10%
Unichem
15%
5%
24%
10% 11%
15%
13% 14%
Biocon
Ajanta
IPCA
Glenmark
Natco
Alembic
Torrent
Cadila
0%
Current
market
wisdom
seems
to
suggest
buying
headed/expected to ramp up towards US/regulated markets
companies
16 September 2014
Page 4
Healthcare
Exhibit 2: Indoco plans to foray into the US market, whilst Aurobindo is likely to ramp
up its US operations (stock price indexed to 100 and adjusted for dividends)
500
400
300
200
100
Strides
Indoco
Aurobindo
Glenmark
Aug-14
Aug-14
Jul-14
Jun-14
Jun-14
May-14
Apr-14
Apr-14
Mar-14
Feb-14
Jan-14
Jan-14
Dec-13
Nov-13
Nov-13
Oct-13
Sep-13
Sep-13
Aug-13
Cadila
Source: Bloomberg, Ambit Capital research; Note: We have adjusted Strides performance for the special
dividend of Rs500/share paid in December 2013
Pantocid-India
Protonix-US
1,200
613
600
150
135
130
120
720
In US$ mn
In ` mn
140
892
800
400
160
1,040 1,071
1,000
478
361
100
80
80
60
40
200
20
Larger companies like Sun Pharma, Dr. Reddys and Lupin have exhibited the
capability of sustaining and growing profits in regulated markets consistently. The
sustained growth momentum has been a result of investments in R&D (scaling up the
value chain), excellence in execution (gaining market share and logistics excellence)
and scale (large basket of product offering) amongst other things.
Mid-sized companies are yet to
fully establish themselves in
However, mid-sized pharma companies are unlikely to repeat the performance of the
regulated markets
larger pharma companies. Barring IPCA, Cadila and Aurobindo, we believe other
mid-sized firms are yet to fully establish themselves in the US and other regulated
markets and the jury is still out on the sustainability of their growth prospects.
16 September 2014
Page 5
Healthcare
Exhibit 5: Mid-sized pharma companies like Ajanta, FDC and Biocon have no US
revenues
% of Total Revenue
` mn
Domestic
US
FDC
82.0%
0.0%
18.0%
Biocon
37.0%
0.0%
63.0%
Ajanta
32.5%
0.0%
67.5%
IPCA
36.7%
7.0%
56.3%
Natco
75.6%
13.3%
11.1%
Torrent
28.0%
18.6%
53.4%
Unichem
60.0%
18.9%
21.1%
Cipla
38.8%
19.0%
42.2%
Alembic
52.0%
25.0%
23.0%
Indoco
65.0%
28.8%
6.2%
Cadila
34.2%
30.1%
35.7%
Ranbaxy
17.7%
32.2%
50.1%
Glenmark
26.6%
32.2%
41.2%
7.3%
36.8%
55.9%
Dr. Reddy
11.9%
41.8%
46.3%
Lupin
25.1%
42.4%
32.5%
Wockhardt
21.0%
44.0%
35.0%
Claris
50.0%
50.0%
0.0%
Sun Pharma
22.1%
60.4%
17.5%
Strides
For example, IPCA and Aurobindo offer a low-cost value proposition whilst Cadila
offers a technology advantage which keeps its prospects in these markets strong;
however, not all mid-sized companies have similar propositions.
Branded generic exports offer sustainable growth for mid-sized companies
We believe mid-sized pharma companies are better off exploring the branded generic
export markets, given their relevant experience in the Indian pharma market. Even as
these markets offer lower margins and RoCEs as compared to the US initially and
have higher gestation periods, we believe that lower upfront investments and the
sustainability of revenues and profits from these geographies makes them the most
viable avenue for growth.
16 September 2014
Page 6
Healthcare
Exhibit 6: Teva and Actavis have shown that the RoW market has provided better
growth than overall revenue growth
35.0%
27.9%
30.0%
25.0%
20.0%
17.9%
12.9%
15.0%
10.0%
5.0%
0.0%
Teva
Actavis
RoW
Overall
The branded generic markets, excluding some minor details, largely mirror the Indian
market, and hence, we believe that a successful track record in India can be taken as
a valid proxy for probable success in these markets.
Lets not forget that the India business itself is of prime importance for midsized pharma
Whilst the broadening growth horizon is a positive, we do not want to lose sight of
the fact that the quality of growth in India also determines the sustainability of profits
from the domestic business as well. Hence, we take a deep dive into the evolution of
the Indian market and the quality of growth exhibited by mid-sized Indian companies
using our business DNA framework. The exercise helps us in: (a) projecting the
sustainability of revenues in India and (b) extrapolating the success of the Indian
business to other branded generic exports.
16 September 2014
Page 7
Healthcare
Secular growth
The IPM is experiencing secular growth characterised by: (a) rising income levels,
ensuring affordability; (b) higher health awareness, leading to higher diagnosis; (c)
better penetration of diagnostic clinics, leading to better patient access; (d) increasing
insurance penetration, ensuring affordability, and (e) worsening lifestyle in urban
centres, causing high incidence of chronic diseases like diabetes, psychiatric diseases
and neurological disorders.
Historically, the IPM has grown at 12-15% per annum, comprising: (a) Volume growth
(7-8%); (b) New introductions (3-5%) and (c) price increases (1-2%).
Exhibit 7: The IPM has registered higher CAGR of 13.1% over FY05-14 as compared to
real GDP (7.4%) and disposable income (4.2%)
in ` billion
730
FY13
FY14
630
600
544
477
500
418
400
300
705
240
276
315
363
200
100
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Organic consolidation
The IPM is amongst the most competitive markets globally. The Herfindahl-Hirschman
Index (HHI) for the market is at 229 (for FY14) as compared to the US markets 593
(monopoly would have an index value of 10,000 and perfect competition would tend
to 0). However, despite intense competition, the market is experiencing organic
consolidation.
16 September 2014
Page 8
Healthcare
Exhibit 8: Herfindahl-Hirschman Index (HHI) indicates organic consolidation
235
HHI
230
228
227
229
225
220
223
217
215
210
205
213
212
210
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
200
1970
2014
22%
32%
68%
78%
MNC
Indigenous
MNC
Indigenous
16 September 2014
Page 9
Healthcare
16 September 2014
Page 10
Healthcare
Phase V (2005
regulation/impetus
sustenance
16 September 2014
Page 11
Healthcare
Foray into NCEs and NDDS: Large domestic companies have ramped up R&D
Many of the large domestic pharma companies have evolved from being generic drug
manufacturers to consciously investing in R&D activities to produce novel molecules
(small and large) and drug delivery systems (targeted and passive). We believe this to
be the next leg of growth for the large domestic manufactures. Companies like Dr.
Reddys, Zydus, Lupin and Glenmark have many products in the pipeline in various
stages of development. In 2013, Zydus received an approval for its first NCE, antidiabetic drug, Lipaglyn. Dr. Reddys markets biosimilars in India and EMs and
Glenmark has out-licensed many novel candidates under-development. However,
the relatively smaller Indian generic companies are yet to invest in such
initiatives.
16 September 2014
Page 12
Healthcare
Exhibit 10: The ramp up in the number of pharma manufacturing units in India was driven by the introduction of process patents in 1970
25,000
Production Units
20,000
15,000
10,000
(a) Ammendment of Patent Act, 1970 Moved from 5-year process patent to
20-year product patent
(b) NPPP 2012 - 348 drugs included
under price control
(c) Compulsory licensing, 2012 - GOI
to award compulsory licence to ensure
availability of drugs
5,000
Key events
Its Impact
Opportunity to price
drugs at higher rates
which are not under
NLEM
2013-14
2012-13
2000-01
1989-90
1985-86
1984-85
1983-84
1982-83
1980-81
1979-80
1977-78
1969-70
1960-61
1952-53
Pre 1947
Page 13
Healthcare
30%
25%
21.0%
20%
16.1%
14.5%
22.2%
23.4%
24.1%
Mar-13
Mar-14
17.7%
15%
10%
5%
0%
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
6
5
4.01
4.02
4.46
4.46
4.58
FY05
FY06
FY07
FY08
FY09
4.21
4.09
4.18
FY10
FY11
FY12
4.59
5.01
4
3
2
1
FY13
FY14
Source: Company, Ambit Capital research; * Note: Companies that we have aggregated for arriving at industry
numbers are Glenmark, Sun Pharma, Torrent Pharma, IPCA, Cadila, Lupin, Dr. Reddys, Ranbaxy, Cipla and GSK
Page 14
Healthcare
Exhibit 13: Sales force productivity of the top companies, as
per our framework
8.2%
3%
6.5%
4.6%
3.7%
CAGR FY05-14
8.9%
CAGR FY05-14
2.7%
2%
1%
0%
-1%
-1.0%
-2%
-1.5%
-3%
Cipla
Ranbaxy
Dr. Reddy
Lupin
Cadila
Ipca
Sun Pharma
Glenmark
GSK
-3.1%
-4%
Torrent
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Also, the approval process has been lengthened, with pharma companies required to
take approval from the Drug Controller General of India (DGC (I)) committee. The
documentation requirements are also more elaborate.
These measures by the regulator have increased the time taken for new introductions
and also increased the cost for companies to launch products. Whilst the larger firms
can continue to feed on the cash generated by the large base business, such
regulatory changes may affect smaller companies more significantly.
September 16, 2014
Page 15
Healthcare
25%
19%
20%
6%
8%
Indoco
6%
7%
Unichem
FDC
5%
Claris
5%
Wockhardt
4%
Ranbaxy
10%
Strides
15%
5%
24%
10% 11%
15%
13% 14%
Biocon
Ajanta
IPCA
Glenmark
Natco
Alembic
Torrent
Cadila
0%
However, we suspect that the growth for some of these companies is more
sustainable than others. Various factors need to be assessed when judging the
quality, sustainability and risks to reported sales growth for the Indian business.
Exhibit 16: Key levers to assess
Business DNA
Components
Product selection
Drivers of Growth
(50% weightage)
Sales execution
Therapeutic coverage
Geographical coverage
Measures
Ability to select product segments which can
grow higher than IPM (Molecule sales growth
> IPM sales growth)
Ability to outperform peer sales growth
(Company sales growth in molecule >
Molecule sales growth)
Gauging higher brand equity (Higher base
business growth). Lower weightage as brand
equity is a derivative of the many factors
including product selection and execution.
Smaller therapeutic presence indicates higher
scope for product portfolio expansion (Lower
current coverage of product portfolio)
Smaller geographical presence indicates
higher scope for expansion (Lower current
geographical reach of product portfolio)
Indicates push vs pull dynamics underlying the
business (Higher sales per marketing
representative). Lower weightage as sales
productivity could be lower due to a
fragmented target audience.
Broader brand base reduces event specific risk
(Top-50 products contribution to total sales).
Higher weightage as event specific risks in the
past have been more detrimental for
companies than regulatory risk (example
Losar franchise for Unichem)
Higher contribution from base business
growth to overall growth mitigates impact of
regulatory risk (Contribution of base business
growth to total growth)
Weights
20%
20%
10%
10%
10%
5%
15%
10%
Page 16
Healthcare
Exhibit 17: Business DNA decides which path the company takes
Sales growth
Newer avenues
Drivers
Associated risk
Drivers
Time
Scope
Risk
We also need to appreciate that the GoI has always been providing an impetus to the
domestic players through various regulations. Be it Industrial Licensing in 1956 or key
regulations in 1970-1990, the Government continues to push the domestic
companies towards uncharted territories.
The recent examples of regulations providing direction are price regulations (20132014) and product patents (2005). Whilst the Government is curbing the prices of
plain-vanilla products, it is also providing opportunities for domestic companies to
increase R&D spend and innovate.
Given these market dynamics we advise investors to be selective and invest in
companies which have the ability to sustain growth momentum.
Exclude MNCs i.e. companies having origin outside India and have set up
subsidiaries in India to run Indian operations MNC subsidiaries are prone
to lack of management access and multiple sister concerns in India which are
unlisted but engaged in the same business.
Based on the above filters, we analyse 19 companies ranging from large
capitalisation names like Sun Pharma, Lupin and Dr. Reddys to medium market
capitalisation names like Claris Life Sciences, Unichem Labs and Indoco Remedies.
Note that 14 out of the selected 19 companies fall under the top-40 in the Indian
pharma market (by sales in FY14).
Page 17
Healthcare
I. Drivers of growth
We believe that the key for domestic companies to maintain their growth trajectory is
to have strong product portfolios and have the ability to execute sales in a manner
where they are able to create a strong brand which is sustainable over time and
resilient in the face of incremental competition.
Product selection: Ability to select therapeutic segments which can grow
higher than the IPM
We believe a key driver of growth for companies is the ability to select therapeutic
segments which can provide impetus to growth which would be higher than the
growth of the Indian Pharmaceutical Market (IPM).
We evaluate this parameter by assessing the presence of companies in different
therapeutic segments and comparing the YoY growth of therapeutic segments, in
which the companies are present, with the growth of IPM over FY09-14.
Exhibit 18: Growth of therapeutic segments (in which companies are present) as
compared to IPM growth on a YoY basis
Growth YoY (%)
FY09
FY10
FY11
FY12
FY13
FY14
Rank
Ajanta
16.9%
14.9%
21.8%
15.4%
14.6%
7.8%
Biocon
19.8%
16.8%
31.7%
21.2%
13.8%
6.9%
Glenmark
16.3%
15.2%
20.0%
16.2%
11.8%
6.2%
Unichem
16.3%
14.5%
17.9%
15.4%
12.5%
4.7%
Torrent
18.9%
17.5%
17.7%
16.6%
11.6%
5.2%
Sun Pharma
17.9%
15.3%
18.9%
15.2%
11.7%
5.7%
Lupin
16.5%
14.0%
18.9%
15.1%
11.4%
5.2%
IPCA
18.2%
16.5%
16.1%
14.7%
10.9%
5.1%
Indoco
18.4%
15.8%
18.9%
14.9%
11.1%
3.4%
Strides
18.1%
15.1%
19.6%
14.9%
11.7%
4.7%
FDC
19.5%
16.1%
14.1%
15.3%
10.6%
4.0%
Ranbaxy
16.3%
14.3%
18.4%
14.9%
10.9%
4.8%
Cadila
15.4%
13.5%
16.9%
15.0%
11.4%
4.9%
13
Dr. Reddy
19.3%
16.2%
15.0%
15.2%
11.6%
4.6%
13
Wockhardt
15.7%
13.6%
16.4%
13.8%
10.0%
3.5%
13
Cipla
14.8%
13.5%
15.3%
13.5%
10.5%
4.2%
16
Alembic
16.6%
12.9%
15.0%
13.9%
10.0%
3.7%
16
Natco
8.8%
9.2%
10.8%
9.7%
6.8%
0.1%
18
Claris
12.7%
8.4%
10.4%
12.8%
6.4%
1.5%
18
IPM
14.8%
13.6%
15.3%
15.3%
11.7%
6.2%
Based on the above data, Ajanta and Biocon have displayed superior capability to Ajanta and Biocon have displayed
select the therapeutic segments which can deliver above-market sales growth over
superior capability to select
FY09-14. At the same time, Natco and Claris have consistently had poor therapeutic therapeutic segments
selection and are ranked the lowest amongst their peers. However, note that
secondary sales data does not capture hospital sales, which are the bread and butter
for both Natco and Claris. To that extent our analysis is distorted for these two
companies.
Sales execution: Ability to outperform peer sales growth
Whilst product selection is a key determinant for future growth, however accurate
product selection may be, it is a futile exercise unless the company is able to
capitalise on it and report superior sales performance. Therefore, we analyse
companies with the yardstick of sales execution.
The ability to execute sales efficiently and report growth better than the therapeutic
segment growth is the parameter that we have used to assess the companies.
Page 18
Healthcare
Exhibit 19: Domestic sales growth as compared to the respective therapeutic segment
growth
Growth YoY (%)
Sun Pharma
Therapeutic segment growth
Lupin
Therapeutic segment growth
Glenmark
Therapeutic segment growth
IPCA
Therapeutic segment growth
Ajanta
Therapeutic segment growth
Indoco
Therapeutic segment growth
Cadila
Therapeutic segment growth
Biocon
Therapeutic segment growth
Cipla
Therapeutic segment growth
Alembic
Therapeutic segment growth
Natco
Therapeutic segment growth
Unichem
Therapeutic segment growth
Torrent
Therapeutic segment growth
Strides
Therapeutic segment growth
Claris
Therapeutic segment growth
Wockhardt
Therapeutic segment growth
FDC
Therapeutic segment growth
Ranbaxy
Therapeutic segment growth
Dr. Reddy
Therapeutic segment growth
FY09
26.5%
17.9%
24.3%
16.5%
20.3%
16.3%
31.2%
18.2%
7.4%
16.9%
26.5%
18.4%
8.7%
15.4%
17.2%
19.8%
15.3%
14.8%
6.1%
16.6%
-9.8%
8.8%
21.0%
16.3%
16.0%
18.9%
118.6%
18.1%
-18.0%
12.7%
3.5%
15.7%
10.1%
19.5%
0.6%
16.3%
5.7%
19.3%
FY10
22.2%
15.3%
18.3%
14.0%
16.7%
15.2%
26.6%
16.5%
18.6%
14.9%
16.1%
15.8%
14.1%
13.5%
42.0%
16.8%
14.9%
13.5%
21.5%
12.9%
80.5%
9.2%
9.1%
14.5%
13.4%
17.5%
-15.8%
15.1%
68.2%
8.4%
3.9%
13.6%
10.2%
16.1%
4.7%
14.3%
13.1%
16.2%
FY11
23.2%
18.9%
28.1%
18.9%
16.3%
20.0%
13.9%
16.1%
21.4%
21.8%
22.1%
18.9%
2.2%
16.9%
-11.5%
31.7%
5.3%
15.3%
4.1%
15.0%
5.7%
10.8%
9.2%
17.9%
9.5%
17.7%
19.6%
19.6%
-19.9%
10.4%
19.2%
16.4%
-10.7%
14.1%
-6.3%
18.4%
3.0%
15.0%
FY12
24.2%
15.2%
17.3%
15.1%
23.0%
16.2%
18.6%
14.7%
27.8%
15.4%
11.6%
14.9%
15.2%
15.0%
66.3%
21.2%
13.3%
13.5%
16.9%
13.9%
51.2%
9.7%
2.7%
15.4%
9.9%
16.6%
-11.8%
14.9%
117.9%
12.8%
12.3%
13.8%
4.0%
15.3%
12.5%
14.9%
8.6%
15.2%
FY13
20.4%
11.7%
14.0%
11.4%
19.6%
11.8%
15.0%
10.9%
21.7%
14.6%
9.3%
11.1%
20.0%
11.4%
9.9%
13.8%
8.3%
10.5%
7.6%
10.0%
16.6%
6.8%
7.9%
12.5%
16.1%
11.6%
-7.8%
11.7%
3.0%
6.4%
5.1%
10.0%
5.0%
10.6%
6.1%
10.9%
10.4%
11.6%
FY14
16.2%
5.7%
12.3%
5.2%
16.1%
6.2%
18.7%
5.1%
28.8%
7.8%
4.3%
3.4%
8.4%
4.9%
39.8%
6.9%
9.1%
4.2%
10.5%
3.7%
-34.8%
0.1%
6.9%
4.7%
14.6%
5.2%
-14.6%
4.7%
-24.4%
1.5%
0.5%
3.5%
2.9%
4.0%
-1.0%
4.8%
4.6%
4.6%
Rank
1
1
3
3
5
5
5
8
8
8
8
12
12
12
12
16
17
17
17
The above table clearly reflects the importance of having efficient execution
capabilities over and above the product selection expertise. Sun Pharma and Lupin,
which ranked lower on the product selection scale, have displayed superior execution
capabilities by growing higher than their respective therapeutic segment growth on a
consistent basis. Dr. Reddys and Ranbaxy despite having fairly reasonable product
portfolios have not been able to capitalise and implement superior execution skills
and thus they rank the lowest in the sales execution criteria.
Amongst the midcaps, IPCA, Ajanta, Indoco and Cadila have executed better than
their peers.
Page 19
Healthcare
To determine brand equity, we analyse the base business revenue CAGR over FY0914. Companies delivering consistent base business growth at higher levels are
considered to have stronger brand equity.
We define the base business as all the products launched two years prior to the year
in question. For example, in FY11, the base business would include all the products
launched in the FY minus 2 year i.e. FY09.
Strides
FDC
Ranbaxy
Wockhardt
Unichem
Dr. Reddy
Cipla
Cadila
Alembic
Indoco
Torrent
Lupin
Glenmark
Natco
IPCA
Claris
Sun Pharma
Ajanta
Biocon
Exhibit 20: High base business CAGR over FY09-14 portrays brand equity
30
25
26.6
20
22.7
20.5
15
18.1
16.8
10
11.2
18.2
12.4
10.0
17.3
17.4
5
7.5 6.8 6.4 3.2 1.7
11.9
10.9
0
-5
-6.5
-10
Amongst midcaps, Biocon, Ajanta and Claris have developed strong brand equity for
their portfolio products by growing the domestic base business by a CAGR of 26.6%
over FY09-14. Strides has reported negative CAGR over the same period, displaying
a lower ability to position itself as a strong brand and capitalise on the products
launched.
Overall, Ajanta, Glenmark, Biocon, IPCA and Indoco have better quality of
growth than their peers
Aside from the usual suspects like Sun Pharma and Lupin, amongst the mid-caps,
Ajanta, Glenmark, Biocon, IPCA and Indoco have exhibited a better quality of growth
and are more likely to sustain growth in the face of the aforementioned challenges.
Exhibit 21: Ajanta has the best drivers of growth placed in its business
Company / Score
Weights
Ajanta
Glenmark
Biocon
Sun Pharma
Lupin
IPCA
Indoco
Torrent
Unichem
Cadila
Natco
Alembic
Cipla
Claris
Strides
Wockhardt
Ranbaxy
FDC
Dr. Reddy
Product
selection
40%
1
3
1
6
6
6
6
5
3
13
18
16
16
18
6
13
6
6
13
Sales
execution
40%
5
3
8
1
1
3
5
12
12
5
8
8
8
12
12
16
17
17
17
Base business
growth
20%
2
7
1
3
8
5
10
9
15
12
6
11
13
4
19
16
17
18
14
Overall
Rank
100%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Source: Ambit Capital research; Note: We derive the weighted average overall rank by scoring each company
(with a maximum score of 20) on the basis of the individual rank. For example, rank 1 in the individual rank
would score 20 and rank 19 would score 1.
Page 20
Healthcare
64.9
67.5
67.8
Lupin
Cadila
Cipla
49.4
Alembic
63.4
48.5
Unichem
Ranbaxy
48.1
Glenmark
53.6
46.1
Torrent
Wockhardt
42.9
Sun Pharma
36.1
Indoco
39.6
35.0
IPCA
Dr. Reddy
34.8
FDC
29.0
21.3
Biocon
Strides
18.9
Ajanta
14.1
Natco
Claris
80
70
60
50
40
30
20
10
0
8.5
Claris Life Sciences, Natco, Ajanta and Biocon have the lowest coverage in the
universe, and thus they have an opportunity to grow sales by foraying into uncharted
therapeutic segments. This provides inorganic growth for the company, keeping the
current business constant.
On the other hand, Cipla and Cadila have the highest therapeutic coverage. They
have a presence in most therapies, thus implying less scope for inorganic expansion
of sales.
Geographic coverage: Smaller geographical presence indicates higher scope
for expansion
Page 21
Healthcare
now expand its geographical coverage to the northern states, where Bafna has strong
infrastructure and sales execution capabilities through its distributor channels.
As per AIOCD data, sales are divided into 24 regions. We assess geographical
coverage by analysing the concentration of sales in different regions. Higher sales
from the top-10 regions signify geographic concentration.
43
35
22
Cadila
37
Lupin 22
41
40
22
Alembic
39
40
Unichem 22
Claris
Top 4 regions
38
36
27
Wockhardt
37
36
27
Dr. Reddy
36
35
33
32
IPCA
33
31
Sun Pharma
35
33
27
Ajanta
40
33
28
Torrent
41
27
Glenmark
41
27
Cipla
41
28
Ranbaxy
42
31
Biocon
39
32
32
30
26
25
43
32
Indoco
47
29
20
FDC
40
24
19
55
27
26
71
24
Natco
60
76
80
Strides
100
Exhibit 23: Geographic concentration of sales (as a percentage of total sales) is the
least for Strides
Strides ranks the highest, as it has a high concentration in southern India. However,
with the acquisition of Bafnas branded generic business, it now will be able to
increase its presence in other regions and provide impetus to its sales.
Other mid-caps which could tap similar opportunities are Natco, Claris, FDC, Indoco
and Biocon.
Cadila and Alembic, on the other hand, have a diversified presence across India and
the scope for increasing the footprint to new regions is limited, and thus they have a
lower ability to increase sales through geographic expansion.
Sales force productivity: Indicates push vs pull dynamics underlying the
business
The capabilities of the sales force are crucial to broaden scope for higher sales
growth. As we had mentioned earlier, the industry faces a challenge in retaining its
sales force due to the high attrition rate of Marketing Representatives (MRs).
MR productivity helps understand whether the company follows a push model of sales
or a pull model. Efficient MR productivity signifies constructive efforts by the sales
force to establish the brand in front of the doctor and get a higher prescription share
(pull mechanism). Low productivity indicates a push mechanism where the
prescription may be largely driven by the frequency of doctor calls without really
capturing a significant mind share.
We evaluate companies based on sales per marketing representative. Higher sales
per MR represent better MR quality and focus on a pull model as compared to lower
sales per MR which represents more focus on a push sales model. We accept that this
matrix has an inherent lacuna under which it does not reward companies which
follow a pull model but experience lower productivity purely due to the higher
number of doctors that the MR has to address. Such issues are largely noticed with
companies which rely on general physicians for prescriptions as compared to say a
Sun Pharma which relies on a lower number of doctors due to its presence in
specialty segments.
Page 22
Healthcare
Exhibit 24: Sun Pharma has excellent sales reps productivity
9.3
7.6
6.6 6.4
5.6 5.3
5.0 5.0 4.7
3.1 2.9
2.7 2.4 2.4
IPCA
Alembic
Torrent
Strides
Unichem
Natco
Claris
Dr. Reddy
Lupin
Cipla
Glenmark
Ranbaxy
Wockhardt
Cadila
Biocon
FDC
Sun
1.8 1.5
Ajanta
Indoco
10
Whilst Sun Pharma gets an expected pole position, FDC and Biocon also rank
amongst the top-5, performing much better than other mid-cap peers. IPCA, Indoco
and Ajanta rank the lowest presumably due to their general physician exposure, as
discussed above.
Overall, Claris, Natco, FDC, Biocon and Indoco have higher scope of growth
than mid-cap peers
Smaller companies have the maximum opportunity to grow. Claris, Natco and FDC
have the maximum scope to increase their product and geographical coverage.
Whilst FDC has an efficient sales force, Claris and Natco can leverage their sales
force through newer product introductions.
Exhibit 25: Claris has the maximum scope to grow
Therapeutic
coverage
Geographical
coverage
40%
40%
20%
100%
Claris
11
Natco
12
FDC
Biocon
Strides
14
Company / Score
Weights
Indoco
Sun Pharma
Ajanta
Sales force
Overall Rank
productivity
18
10
12
11
19
Glenmark
12
Ranbaxy
16
10
Dr. Reddy
14
10
11
11
10
15
12
IPCA
13
17
12
Cipla
19
14
Wockhardt
15
15
15
Unichem
13
16
13
16
Cadila
18
19
17
Alembic
14
17
16
17
Lupin
17
18
19
Torrent
Source: Ambit Capital research; Note: We derive the weighted average overall rank by scoring each company
(with a maximum score of 20) on the basis of the individual rank. For example, rank 1 in the individual rank
would score 20 and rank 19 would score 1.
Page 23
Healthcare
The resultant price cuts, decline in market size and decline in volumes pose a serious
risk to the companies, as their margins are likely to shrink. We believe companies
which have a broader product portfolio are less susceptible to event-specific risk.
To assess the event-specific risk, we evaluate companies based on their brand
concentration. Companies with higher brand concentration are at risk in terms of
their revenue. Therefore, on a relative basis, companies deriving a higher percentage
of sales from the top-50 products rank lower in the population.
Exhibit 26: Sun Pharma ranks first, with a diversified product portfolio; Natco is at
risk
100
80
60
40
20
Top 26-50
Natco
Claris
Strides
Biocon
Indoco
Unichem
FDC
Ajanta
IPCA
Alembic
Glenmark
Dr. Reddy
Wockhardt
Top 10 brands
Torrent
Ranbaxy
Cadila
Cipla
Lupin
Sun Pharma
50 and above
From the exhibit above, we infer that Sun Pharma has excellent product
diversification and faces the least event-specific risk. It derives 51% of its sales from
the top-50 products. On the contrary, Strides, Claris and Natco derive almost 100%
of their sales from the top-50 products, thus posing event-specific risk to their
revenue. The analysis represents an obvious bias towards larger companies. But, we
assert that larger companies indeed are less prone to needle-swinging events as
compared to the smaller ones and hence are relatively safe from event-specific
events.
Page 24
Healthcare
Therefore, we evaluate companies on the basis of their ability to derive and
sustain/grow revenue from the base business. We assess the contribution of base
business growth to the total revenue growth for the company. Higher contribution
from the base business implies that despite challenges arising out of regulatory risk
(such as lower new product introductions), companies are able to sustain the current
growth in revenue through the base business.
Exhibit 27: Strides has the highest contribution, whereas Cadila earns most of its
revenues from new product introductions
120
77.5
76.2
75.8
74.6
73.8
73.3
68.7
66.8
66.5
64.4
62.9
61.5
59.4
56.3
55.8
Torrent
Cipla
IPCA
FDC
Biocon
Sun Pharma
Glenmark
Natco
Wockhardt
Lupin
Ranbaxy
Unichem
Alembic
Dr. Reddy
Ajanta
40
20
47.4
78.3
Indoco
60
92.1
80
97.7
100
Cadila
Claris
Strides
Amongst the mid-caps, Torrent, IPCA, Glenmark, Indoco and FDC have the
lowest risk to growth than mid-cap peers
Whilst larger companies score higher on risk mitigation, amongst mid-caps, Torrent,
IPCA, Glenmark, Indoco and FDC have the lowest risk to growth.
Exhibit 28: Cipla is the most efficient in risk mitigation
Company / Score
Regulatory risk
Event-specific risk
Overall Rank
60%
40%
100%
Cipla
Sun Pharma
Torrent
Lupin
13
IPCA
10
14
Weights
Ranbaxy
Glenmark
10
Indoco
14
FDC
12
Cadila
19
Strides
17
11
17
12
18
13
16
14
Dr. Reddy
Claris
Alembic
Biocon
16
15
Wockhardt
15
12
16
Unichem
13
15
16
Ajanta
11
18
18
Natco
19
11
19
Source: Ambit Capital research; Note: We derive the weighted average overall rank by scoring each company
(with a maximum score of 20) on the basis of the individual rank. For example, rank 1 in the individual rank
would score 20 and rank 19 would score 1
Page 25
Healthcare
Drivers of growth
Product
selection
Sales
execution
Base
business
growth
20%
20%
10%
10%
10%
5%
15%
10%
100%
10
12
Glenmark
12
10
Biocon
16
Ajanta
11
19
11
18
IPCA
13
17
10
Torrent
12
11
10
15
Lupin
17
18
13
Indoco
10
18
14
Rank
Weights
Sun Pharma
Therapeutic
coverage
Geographical
coverage
Sales force
productivity
Regulatory
risk
Cipla
16
13
19
Claris
18
12
11
18
10
Strides
12
19
14
17
11
Natco
18
12
19
11
12
17
18
12
13
FDC
Cadila
13
12
18
19
19
14
Unichem
12
15
13
16
13
13
15
15
Ranbaxy
17
17
16
14
16
Alembic
16
11
14
17
16
16
17
Dr. Reddy
13
17
14
14
10
17
18
Wockhardt
13
16
16
15
15
15
12
19
Source: Ambit Capital research; Note: We derive the weighted average overall rank by scoring each company (with a maximum score of 20) on the basis of the
individual rank. For example, rank 1 in the individual rank would score 20 and rank 19 would score 1.
Whilst Sun Pharma and Lupin unsurprisingly feature amongst the top-10 companies
on our framework, amongst mid-caps, we highlight Glenmark, Biocon, Ajanta, IPCA,
Torrent and Indoco as companies that are better placed than their peers in terms of
business DNA and hence sustainability of growth.
Glenmark: Whilst the company ranks low on therapeutic coverage (high number of
segments already covered by product portfolio) and event specific risk (moderate
diversification beyond top 25 brands), it scores high on product selection (high
presence in fast growing therapy areas) and sales execution (companys revenue
growth higher than therapeutic areas present in). Overall Glenmark secures the 2nd
rank on our DNA framework.
Biocon: Biocon has exhibited best-in-class product selection and brand equity (base
business growth). The company also boasts of low therapeutic and geographic
coverage (implying high scope for growth) and high sales force productivity
(concentrated audience and large basket of products offered to target audience).
However, Biocons business entails higher than average regulatory risk. Overall,
Biocon scores the 3rd position on our DNA framework.
Ajanta: Ajanta has exhibited best-in-class product selection and brand equity (base
business growth). The company also boasts of low therapeutic and geographic
coverage (implying high scope for growth). However, low sales force productivity
(fragmented audience and small basket of products offered to target audience) and
higher regulatory and event specific risk drag the companys overall rank. Overall,
Ajanta scores the 4th position on our DNA framework.
Page 26
Healthcare
IPCA: IPCA ranks high on product selection, sales execution, base business growth,
therapeutic coverage and event specific risk. The companys presence in few niche
segments like malaria, pain and dermatology has driven past performance. However,
low sale force productivity (target audience of consulting and general physicians is
highly fragmented and low number of products offered) and high regulatory risk
exposure are challenges. Overall, the company secures the 6th position on our DNA
framework.
Torrent: Torrents business has exhibited best-in-class risk management (low event
specific and regulatory risks) and product selection (high chronic therapy exposure).
However, the company has been plagued by patchy sales execution (changes in
business heads) and limited scope for growth (high therapy and geography coverage
and low sales force productivity). Overall, Torrent scores the 7th position on our
framework.
Indoco: Indoco ranks high on product selection, sales execution, low event specific
risk and low geographical coverage. However, low base business growth, sales force
productivity and high regulatory risk exposure drag the overall competitive
positioning to 9th amongst the 19 companies analysed.
Page 27
Healthcare
Aug-14
Aug-14
Aug-13
Aug-12
Aug-11
Aug-10
Aug-09
Aug-08
Aug-07
Aug-06
Aug-05
-20%
Aug-13
0%
Average
Aug-12
20%
Aug-11
40%
Aug-10
60%
Aug-09
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
Aug-08
Average
Aug-07
Aug-06
100%
Exhibit 31: BSETHCs P/E premium has reverted to 30% visa-vis the BIGNRCGP Index
Aug-05
Exhibit 30: BSETHCs P/E premium has reverted to its 10year average vis-a-vis the BWPHRM Index
We illustrate below that the valuations for Indian pharma companies which are
expected to derive a larger proportion of growth from the US have re-rated more
than the valuations for those which derive a higher proportion of growth from EMs.
We believe that the prevailing market wisdom favours companies headed West
(towards the US), as: (a) the US market offers a low gestation period and (b) the US
market also offers higher RoCEs and margins on similar products sold in other
markets.
The consolidation on the buy and supply side in the US is also likely to make life
difficult for the marginal players in the absence of a compelling proposition.
However, the street has given the benefit of doubt to these players, as is reflected in
the stock performance of the US-bound mid-sized companies.
Page 28
Healthcare
Exhibit 32: US-bound mid-cap pharma's valuation gap with large-cap pharma has
narrowed substantially (one-year forward EV/EBITDA)
18.0
16.0
14.0
12.0
10.0
8.0
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
6.0
Source: Company, Bloomberg, Ambit Capital research; Note: Large caps include Sun Pharma, Lupin, Dr. Reddys
and Cipla; US-bound mid-size include Wockhardt, IPCA, Strides, Ranbaxy, Cadila, Alembic, Natco, and Indoco;
and EM-bound midsize include Torrent, Glenmark, Biocon, Claris, FDC, Unichem and Ajanta
We suggest using the domestic business DNA as a proxy for success in export
markets for mid-caps
For the mid-sized pharma companies, the fate of the export market remains unclear.
Most mid-caps are too small in the export markets and hence they could largely be
growing on a small base vs a sustainable and profitable business model. The Indian
business growth is likely to fuel cash flows and RoCEs in the near term for these
companies and could be used as a proxy for judging the fate of branded export
markets.
Exhibit 33: Amongst the mid-caps, Ajanta, IPCA, Torrent and Glenmark appear better placed than peers
30
FY16 EV/EBITDA
25
Ranbaxy
20
Natco
Sun Pharma
Cipla
Cadila
15
Torrent
Glenmark
Indoco
Strides
10
Alembic
Dr. Reddy
Wockhardt
FDC
Unichem
Biocon
Lupin
Ajanta
IPCA
Claris
0
10
15
20
25
30
35
40
45
50
ROCE (%)
Source: Company, Ambit Capital research. Note: (a) Bubble size indicates rank on DNA framework (larger the better). (b)
across markets),
EM-bound companies,
US-bound companies
Page 29
Healthcare
IPCA and Glenmark are already making investments in innovative avenues for growth
whilst Torrent and Ajanta have not made any significant moves on this front.
However, given that all these companies appear in the bottom right quadrant of the
exhibit above and are all available at valuations of 10.0x-13.0x FY16E EV/EBITDA (as
compared to an average of 12.5x), we believe there are upsides to these stocks.
Exhibit 34: Ajanta, IPCA, Torrent and Glenmark are the best bets among mid-caps
RoCE (%)
(FY14)
Score on
Business
DNA
EV/EBITDA
(FY16)
Sun Pharma
37.5
19
18.2
Glenmark
20.8
18
12.9
Biocon
12.7
17
10
MCap
Market focus
(US$ Mn)
29,381 Presence across markets
3,483 EM-bound
1,655 EM-bound
Ajanta
46.7
16
11.5
948 EM-bound
IPCA
30.6
15
10.1
1,668 US-bound
Torrent
30.4
14
10.8
2,417 EM-bound
Lupin
26.3
13
12.4
17
12
12.3
Indoco
473 US-bound
Cipla
18.9
11
15
Claris
17.8
10
3.5
Strides
12.1
10.7
699 US-bound
Natco
17.5
20.9
811 US-bound
FDC
24.8
8.4
470 EM-bound
Cadila
17.5
13.8
4,398 US-bound
Unichem
20.8
7.7
349 EM-bound
Ranbaxy
7.1
21.2
4,562 US-bound
Alembic
37.7
13.7
1,254 US-bound
Dr. Reddy
15.5
12.3
Wockhardt
26.6
11.9
1,532 US-bound
Based on our analysis above, we highlight that Ajanta, IPCA, Torrent and
Glenmark appear to be the best bets amongst the Indian mid-caps. Biocon and
Indoco miss the cut due to depressed RoCEs.
Exhibit 35: Our key recommendations
Rating
CMP
(`)
Sun
Pharmaceuticals
BUY
806
29,381
32
25
21%
38%
Lupin Ltd
BUY
1,359
9,973
25
22
17%
26%
BUY
2,959
8,445
22
20
19%
16%
Cadila Healthcare
BUY
1,273
4,398
26
19
27%
17%
IPCA
BUY
820
1,668
20
16
21%
31%
Aurobindo
SELL
896
4,302
17
13
31%
24%
Company
Mcap
P/E
P/E
EPS CAGR RoCE
(US$mn) (FY15E) (FY16E) (FY15E-17E) (FY14)
Comments
We highlight that Sun Pharmas acquisition of Ranbaxy is a
key positive; synergies are likely to be US$400mn-500m by
Year 3 as opposed to the management guidance of
US$250m.
Lupins expertise in evolving profitably would keep the
company on the growth track as it moves up the pharma
value chain.
Higher visibility on longer-term growth drivers keep us
bullish on Dr. Reddys prospects in India/RoW and
regulated markets.
High investments in longer-term growth drivers, high
presence in India and a large US ANDA pipeline are likely
to fuel growth over the next 3-5 years.
Whilst IPCA is facing near-term headwinds from regulatory
issues with the FDA, we keep sight of the fact that the
company has a credible Indian and branded exports
business with an inclination towards innovation.
Lack of investments in longer-term growth drivers, past
legal issues with the promoter, and absence of moated
revenue streams keep us cautious on Aurobindo.
Page 30
Healthcare
Page 31
Healthcare
Exhibit 36: Aurobindos discount to Cadilas 1 year forward
EV/EBITDA has narrowed
EV/EBITDA premium/discount %
Cadila Mcap, RHS
Aurobindo Mcap, RHS
40%
20%
300
120%
250
150
-40%
100
-60%
50
`. Bn
-20%
100%
API, 2.4%
80%
Branded,
48.2%
API, 24.1%
200
0%
60%
Unbranded
, 75.9%
40%
Unbranded
, 49.4%
20%
0
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
-80%
0%
Cadila
Aurobindo
5000
30%
4000
20%
15%
10%
`. Mn
25%
40%
2,551
2,502
2,085
4,563
3,628
4,669
Aurobindo
3000
0%
5%
Cadila
952
973
FY09
FY10
1,394
FY11
1,593
FY12
FY13
FY14
Page 32
Healthcare
Case studies
We highlight a case study exhibiting how a mid-sized pharma company has been
able to re-rate, as it extended its capabilities and strength of the Indian business in
other geographies and another case study of a company that does not have a strong
franchise in India and has hence failed to create a strong business in the export
markets.
FY10
FY11
RoCE (%)
FY12
FY13
FY14
900
800
700
600
500
400
Malaria dominated
sales in India; Exports
to semi regulated
300
Exports starting to
ramp up in semi
regulated markets
200
Mar
Jan
Aug
Jun
No
Apr
Sep
Feb
Dec
Jul-09
Ma
Oct
Mar
Aug
Jan
Jun
No
Apr
Sep
Feb
Dec
Jul-02
Ma
Oct
Mar
Aug
Jan
No
Jun
Apr
Sep
Feb
Jul-95
Ma
Dec
100
Page 33
Healthcare
Exhibit 42: IPCAs re-rating as a sustainable business has been reflected in its P/E
multiples
25
IPCA - one-year forward P/E chart
20
15
10
5
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Sep-09
FY10
FY11
FY12
RoCE (%)
FY13
FY14
Under-performance of US
sales vs market expectations
and therapeutic substitution of
leading brand Losar in India
250
200
150
100
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
May-13
Gradual ramp-up in
exports
Mar-13
50
Page 34
Healthcare
Exhibit 44: Unichems P/E multiples have not re-rated due to lack of confidence in the
future of the business
35
30
25
20
15
10
5
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Sep-09
Mcap
EV/EBITDA (x)
P/E (x)
EV/Sales (x)
US$ mn
FY15
FY16
FY15
FY16
FY15
FY16
CAGR (FY14-16)
EBITDA EPS
ROE (%)
FY14
FY15
FY16
29
Large caps
Sun Pharma*
806
27,495
23.6
18.2
31.7
24.6
9.3
5.6
25
22
15
28
Lupin*
1,359
10,042
14.4
12.4
25.1
22.3
4.1
3.4
21
22
Dr. Reddy's*
2,959
8,296
14.3
12.3
22.4
19.5
3.5
3.0
12
11
26
23
21
15
14
16
29
32
Cipla
GSK Pharma
Aurobindo Pharma*
Cadila*
Ranbaxy
Divi's Laboratories
Glenmark
613
8,103
20.6
16.6
32.9
25.4
4.3
3.7
18
18
2,505
3,494
27.2
22.2
35.2
31.5
6.3
5.7
NA
NA
896
4,302
11.8
9.3
16.6
13.2
2.5
2.1
16
24
37
35
32
1,273
4,292
17.9
13.5
26.3
18.7
3.4
2.7
30
30
25
26
29
610
4,259
14.3
20.1
20.6
33.3
2.3
2.4
NA
NA
32
14
1,756
3,839
18.6
15.5
25.7
21.3
7.5
6.3
20
19
28
28
28
770
3,441
15.2
12.9
24.2
19.6
3.4
2.9
29
40
19
25
24
17.8
15.3
26.1
22.9
4.7
3.8
Average
Mid-caps
Torrent Pharma
870
2,425
12.2
10.6
20.0
17.6
3.0
2.6
15
12
40
33
30
IPCA Laboratories*
820
1,703
12.5
10.1
19.8
15.7
2.9
2.4
11
17
27
24
25
Biocon
498
1,642
12.3
10.3
21.6
17.9
2.9
2.5
14
15
14
14
15
17
20
16
18
17
(16) (23)
28
11
13
Bayer Cropscience
2,592
1,563
19.0
16.3
28.7
24.0
2.6
2.2
Wockhardt
852
1,543
18.7
14.3
27.8
18.9
2.3
2.1
Alembic Pharma
431
1,337
18.2
14.3
26.9
21.0
3.7
3.1
26
28
40
37
35
1,746
1,011
14.5
12.4
22.5
19.3
4.4
3.7
16
17
47
36
31
28
Ajanta Pharma
Pfizer Ltd
1,548
761
12.1
10.5
21.3
18.6
3.0
2.7
28
19
30
Abbott India
3,339
1,169
22.8
19.7
36.2
31.1
3.1
2.8
NA
7.3
25
23
23
174
456
7.0
5.5
9.0
5.7
1.1
1.0
6 111
11
16
Strides Arcolab
730
716
15.7
11.6
22.5
16.0
3.1
2.5
NA
NA
19
21
Natco Pharma
1,495
814
25.1
21.8
41.4
34.7
6.3
5.5
15
16
16
16
17
15.8
13.1
24.8
20.0
3.2
2.7
Average
Small caps
FDC Ltd
159
466
NA
NA
NA
NA
NA
NA
NA
NA
17
Unichem Labs
242
361
10.0
8.2
15.6
12.6
1.7
1.4
22
22
16
18
Indoco Remedies
302
458
17.5
13.1
28.7
20.1
3.2
2.6
34
55
13
19
22
Claris LifeSciences
183
165
NA
NA
Average
11.2
8.9
18.1
13.5
2.1
1.8
Source: Company, Bloomberg, Ambit Capital research; Note: * indicates Ambit Capital estimates
Page 35
Healthcare
Page 36
Cadila Healthcare
BUY
INITIATING COVERAGE
CDH IN EQUITY
Pharmaceuticals
Recommendation
Catalysts
Plenty of levers for growth; we do not give the benefit of doubt yet
Whilst we do not pencil in any material ramp up in growth in Wellness/RoW/JV
businesses given its poor ranking on our DNA framework, the US business is
likely to ramp up (37% CAGR in FY14-17E) with 158 ANDAs pending approval vs
68 marketed products. The India formulations business is likely to grow in line
with the broader market (12% CAGR in FY14-17E). We credit Cadila for the
launch of the first NCE in India and are upbeat about the prospects of other
innovations, such as vaccines, NCEs and biosimilars.
Performance
`222/US$3.7
`127/US$2.1
`1273
`1510
19
Flags
Accounting:
Predictability:
Earnings Momentum:
GREEN
AMBER
GREEN
Sensex
Jun-14
Aug-14
Apr-14
Feb-14
Dec-13
1200
1100
1000
900
800
700
600
Oct-13
28,000
26,000
24,000
22,000
20,000
18,000
16,000
Aug-13
US/ EMs and differentiated products to drive near / medium term RoCE
Better margins from niche launches (transdermals and nasal sprays) in the US
are likely to increase EBITDA margin to 20.4% in FY17E from 17% in FY14 and
expand RoCE to 24.4% in FY17E (from 17.5% in FY14). Cadila has invested in its
ground presence in several geographies through bolt-on acquisitions and in
biosimilars, vaccines and NCEs (35% of R&D as of FY14). Whilst bolt-on
acquisitions seem to be in the gestation period as of now, innovative products
have started contributing to revenues in India recently.
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
FY13
61,552
11,251
6,536
31.9
23.7
40.4
4.5
FY14
70,600
12,001
8,036
40.1
25.2
32.2
3.8
FY15E
82,389
15,522
9,928
48.5
26.0
26.6
3.1
FY16E
101,257
20,280
13,916
68.0
29.1
19.0
2.5
FY17E
122,902
25,048
16,968
82.9
27.8
15.6
1.9
Analyst Details
Aditya Khemka
+91-22-30433272
adityakhemka@ambitcapital.com
Paresh Dave
+91-22-30433212
pareshdave@ambitcapital.com
Cadila Healthcare
Revenue Mix
FY15E
FY16E
Net revenues
82,389
101,257
122,902
EBITDA
15,522
20,280
25,048
Depreciation
2,841
3,119
Interest expense
1,115
1,115
1,115
12,064
16,756
20,345
Adjusted PBT
Tax
1,810
2,513
9,928
13,916
16,968
18.8
20.0
20.4
12.1
13.7
13.8
18.2
13.7
10.7
26.6
19.0
3.4
2.7
82,389
101,257
EV/Sales (x)
Domestic Formulations
FY17E
30,821
34,884
3,824
4,160
4,506
4,511
4,872
5,261
3,198
3,569
3,983
40,469
54,359
70,658
29,096
41,350
55,910
Ex North America
11,373
13,009
14,748
4,882
5,308
5,669
84,014
103,088
124,962
Consumer
Export Formulations
15.6 JV Revenues
2.2
122,902 Total Gross Sales
Balance Sheet
FY16E
27,131
FY15E
Cash flow
FY15E
FY16EE
Total Assets
71,460
83,110
97,811 PBT
Fixed Assets
41,812
44,193
Current Assets
46,517
58,400
866
866
Investments
FY15E
FY16E
FY17E
12,064
16,756
20,345
46,157 Depreciation
2,841
3,119
4,536
74,134 Tax
1,810
2,513
3,052
(2,505)
(4,005)
(4,593)
10,264
13,030
16,910
(4,500)
(5,500)
(6,500)
Total Liabilities
71,460
83,110
Total networth
84,103
107,404
Total debt
27,004
27,004
27,004 Investment
Current liabilities
17,736
20,349
23,346 CFI
961
961
(4,500)
(5,500)
(6,500)
RoCE
20.2
23.9
RoE
(2,232)
(2,266)
(2,266)
(2,232)
(2,266)
(2,266)
3,532
5,264
8,144
97,811 CFO
136,807 Capital Expenditure
Inc/Dec in Borrowings
26.0
29.1
0.3
0.3
0.2 CFF
0.2
0.1
P/B (x)
3.1
2.5
Revenue EBITDA
EBITDA Contribution to
margin % reported EBITDA
Zydus Wellness
4,027
1,084
26.9%
9.0%
Joint Ventures
4,499
2,017
44.8%
16.8%
6,161
25.0%
51.3%
-13.3%
Reported
70,600
12,001
Filings
17.0%
FY15E
-10.2%
10
15
40
20
20
3
FY14
15,726 (1,602)
13
11
FY13
Others
25
18
FY12
36.2%
24
FY11
20.0%
FY10
4,341
FY09
21,704
18
11 148 1412
FY08
US Business
40
FY17E
24,644
60
54
FY16E
India Business
70
60
50
40
30
20
10
-
Approvals
Page 38
Cadila Healthcare
in
multiple
segments
(`
80
` Bn
20
3
5
4
7
3
4
2
6
16
14
0
US
3
6
5
10
60
40
Bn)
10
FY10
FY11
India formulations
3
5
4
8
3
7
4
11
30.5%
30%
26.5%
25%
21.6%
25
23
19
15
12
FY12
RoW JV
22.6%
20%
22
24.1%
15%
FY10
FY13
FY14
Consumers API
23.0%
FY11
18.3%
17.5%
18.2%
17.0%
FY13
FY14
FY12
CDH, RoCE
Within India, Cadila has had an acute heavy presence which drags down the
companys score on our DNA framework. However, off late, the company has
increased its presence in chronic therapies and has also commercialised biosimilars
and NCE (Lipaglyn) in India. We are upbeat about the prospects of other innovative
projects that Cadila has undertaken like biosimilars, NCEs, vaccines and NBEs.
Respiratory,
10%
53.7
48.2
42.9
0.0
Aurobindo
Gynaecolog
ical, 10%
AntiInfectives,
13%
Glenmark
Pain
, 7%
68.8
IPCA
Gastro
Intes,
14%
Derma, 7%
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Cadila
Others,
23%
Cardiac,
17%
Biocon
Page 39
Cadila Healthcare
Post listing on the BSE in 2000, Cadila acquired German Remedies (2001) and Recon
(2000) to expand its product basket and distribution reach in the Indian formulations
business. The company received the rights to the blockbuster brand, Aten, through
the German Remedies acquisition.
In FY03, Cadila reported revenues of `10.4bn, implying a CAGR of 25% since the
takeover by Ramanbhai in 1995. The growth was led by in-licensed
products/acquisitions and organic expansion.
Phase 3 (2003 onwards): Exploring the export opportunity; focus on
innovation
Cadila entered the US market through the acquisition of Banyan Chemicals in 2002.
Banyan had a USFDA-approved API facility which enabled Cadila to produce
pharmaceuticals for clients who were marketing in the US. Cadilas Moraiya
formulations facility received UK MHRA approval in 2002. The company established
two subsidiaries in FY03 (in Brazil and the US). The establishment of a US front-end
was aimed at starting its own ANDA filings in the US. In 2003, Cadila filed its first
ANDA in the US and it received a USFDA approval for its formulation facility at
Moraiya in 2004. Cadila launched its first product in the US in 2005 in collaboration
with Mallinckrodt.
Page 40
Cadila Healthcare
Exhibit 5: RoCE has reduced over FY05-14 due to lack of new launches in US and pricing regulation in India
Incremental competition in
Taxotere and import alert at
Moraiya facility hurt
profitability and RoCE
Launch of generic
Taxotere with limited
competition led to
spike in RoCEs
Lack of new
meaningful launches in
US, pricing regulation
in India and losses in
foreign subsidiaries
35.0%
30.0%
70
60
50
23.0%
22.7%
26.5%
20.1%
20.0%
80
30.5%
24.1%
25.0%
Launch of Depakote ER
marginally offsets
adverse impact of
pricing in India and low
margins in JVs and
Wellness
40
24.1%
17.8%
18.2%
30
20
15.0%
10
17.5%
RoCE
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
0
FY05
10.0%
Generic Taxotere
approved by USFDA
Listed on
the NSE
and BSE
Launched first
product in the US
Tentative approval
for generic
Taxotere
800
Acquired
companies
Recon and GRL
and brand Aten
600
400
Hospira JV files
for Taxotere
FDA approved
Moraiya facility
USFDA
issues
warning
letter to
Moraiya
facility
US Court
invalidates
Taxotere
patents
200
Launch of
Depakote ER
in US drives
revenues and
profitability
Jun-14
Jan-14
Aug-13
Mar-13
Oct-12
May-12
Jul-11
Dec-11
Feb-11
Sep-10
Apr-10
Nov-09
Jun-09
Jan-09
Mar-08
Aug-08
Oct-07
May-07
Jul-06
Dec-06
Feb-06
Sep-05
Apr-05
Nov-04
Jun-04
Jan-04
Mar-03
Aug-03
Oct-02
May-02
Jul-01
Dec-01
Feb-01
Sep-00
Apr-00
Page 41
Cadila Healthcare
Active strategic partnerships/acquisitions approach
In FY05, Cadila entered into JVs with Mayne Pharma (now Hospira) for cytotoxic
injectables for the regulated markets and with BSV to develop, manufacture and
market a non-infringing and proprietary Novel Drug Delivery System (NDDS). These
JVs catapulted Cadilas profits in FY10-14.
Exhibit 7: Active strategic partnerships by Cadila from 2003 onwards
Name of Joint venture
Nature
/ Acquisition
Year
Geography
Particulars
Acquisition
2003
France
Acquired US-based Alpharma Inc's French subsidiary, Alpharma SAS France for a consideration of
Euro5.5 million. This acquisition will provide access to the French generics markets.
Alliance
2003
India
Signed a pact with Schering AG, Germany, which allows Zydus to market Schering's eight patented
products in India. The agreement also covers transfer of technology and manufacturing of Schering
AG's products in India. The products are in the womens healthcare segment.
Alliance
2003
Fermenta Biotech Ltd (FBL), a subsidiary of Duphar Interfran, signed an agreement with Cadila Ltd
for the sale of FBL's global patents and process technology for the manufacture of Lisinopril and
Benazepril. The objective of this alliance is to strengthen the presence in CVS and anti-hypertensive
segments.
Alliance
2004
India
Long-term strategic pact with Boehringer Ingelheim India, a wholly-owned subsidiary of Boehringer
Ingelheim of Germany, for manufacturing and marketing the latter's products in India for a period
of 10 years and to set up a joint venture to fortify their co-marketing efforts in India.
Alliance
2005
US
Agreement with Tyco's Mallinckrodt Pharmaceuticals under which Mallinckrodt would market
generics produced by Cadila. This alliance provided Cadila with access to the US markets
Mayne JV
Joint
Venture
2005
Cadila Healthcare and Mayne signed an agreement to set up an API manufacturing facility in India
to manufacture specialty oncology products.
Nippon Universal
Pharmaceutical Ltd.
Acquisition
2006
Japan
Acquisition of Nippon Universal Pharmaceutical Ltd., Japan. The acquisition provided access to
ready manufacturing facilities, marketing base and the distribution network of Nippon in Japan. In
2014, Cadila announced its decision to exit the Japanese market.
Quimica e Farmaceutica
Acquisition
Nikkho do Brasil Ltda
2006
Brazil
Acquisition of Quimica e Farmaceutica Nikkho do Brasil Ltda for US$25mn. The objective of this
acquisition is to foray into Brazil's branded generics business.
Alliance
2008
Entered into a three-year collaboration with Swedens Karo Bio for developing new drugs for the
treatment of inflammatory diseases.
Combix Laboratorious
Acquisition
2008
Spain
Acquired stake in Combix Laboratorious, Spain. Combix has a pure generic focus and strong
product pipeline in Spain.
Etna Biotech
Acquisition
2008
Zydus Cadila acquired Etna Biotech, a subsidiary of Crucell N.V. The deal helped Cadila foray into
innovative vaccine research and development.
Simayla Pharma
Acquisition
2010
South Africa
Acquired Simayla Pharma, South Africa, to strengthen its presence in South Africa.
Joint
Venture
2011
India
Agreement with Bayer HealthCare to set up 50:50 joint venture company in the name of Bayer
Zydus Pharma for sales and marketing of pharmaceutical products in India.
Nesher Pharma
Acquisition
2011
US
Acquired Nesher Pharma which has expertise in niche therapies such as controlled release
medications.
Acquisition
2011
RoW
Acquired Bremer Pharma GmbH from ICICI Ventures to expand its animal health business to gain
strategic access in markets across Europe, South America, Asia and Africa.
Biochem
Acquisition
2011
India
Alliance
2012
US
Agreement with Microbix Biosystems, Canada, for re-commercialising and marketing of certain
drugs in the US markets.
Page 42
Cadila Healthcare
Components
Measures
Remarks
Strategy
Recent hires,
management transition,
depth and width
Ambit's Forensic
accounting
Market share in US
Quality
Reputed management,
strategy and execution
Execution
6 (Worse than
average)
R&D productivity
Productivity
index
4 (Average)
Greatness
framework
Ambit's proprietary
framework
2 (Excellent)
Bargaining
power with
buyers
Bargaining
Robustness of the business power with
model
suppliers
Operational risk
Risk entailed in operations
Investment risk
Overall rank
Diversity of manufacturing
base
Incidence of Form 483s
from USFDA
3 (Better than
average)
4 (Average)
Page 43
Cadila Healthcare
The vision and intent of the management are in sync with our thoughts on the
longer-term prospects of the industry. We believe innovation is the only
sustainable competitive advantage over the longer horizon.
The companys execution in India and the US has been high quality. Despite an
inferior product mix in India and lack of support from the base business in terms
of growth contribution, the company has been able to consistently beat the
broader market growth led by new product introductions and consistent
execution.
Despite being an active acquirer, Cadila has thus far been unable to replicate its
It was unable to replicate its
success with German Remedies in other acquisitions. This is a cause for concern,
success with German Remedies in
as the company remains acquisitive and may not be taking impairment charges
other acquisitions
despite incurring losses on past investments.
The company underwent a restructuring in 1995 when the Modi family split from
the Patel family. Until then, after 43 years of existence, the company had clocked
revenues of only `2bn (1995).
The multiple business interests of the promoters and kin are also a cause for
concern. The promoter and immediate kin had 25 other directorships other than
Cadila and its subsidiaries.
60
50
47
48
Sun
Pharma
Dr. Reddy's
40
30
20
10
25
Average
15
16
18
Lupin
Cipla
Ipca
0
Glenmark
Cadila
Healthcare
The continued losses at several foreign subsidiaries may be indicative of the lack
of scalability of the companys strategy in these markets.
Page 44
Cadila Healthcare
Exhibit 10: Cadila registered decent R&D productivity despite delay in USFDA
approvals and high innovative avenues spend
R&D spend as % of sales
(FY14)
10.0%
Dr. Reddy's
9.0%
Glenmark
8.0%
Lupin
7.0%
Cadila
6.0%
Sun Pharma
5.0%
Ipca
4.0%
3.0%
2.0%
0
R&D spend on innovative pursuits like biosimilars, vaccines and NCEs bodes well
for longer-term prospects.
High R&D spend in innovative pursuits (35% of R&D in FY14) may lead to
depression in RoCE until such endeavours yield results.
The company has capitalised its R&D spend on transdermals in the Zydus
Noveltech JV with Sharad Govil. Whilst the principle of capitalising the R&D spend
in a JV is appropriate per accounting standards, the profits stand exaggerated
due to such a practice. We credit the management for disclosures on this front.
Cadila ranks high on our rational capital allocation measures (Ambits proprietary
greatness framework). Amongst pharma companies, Cadila ranks second only
to Sun Pharma and IPCA.
Whilst the company still remains acquisitive, there is a credible threat of a great
mistake as indicated by the less-than-ideal track record in acquisitions.
Page 45
Cadila Healthcare
Less than average debtor days are a positive for bargaining power against
Diversified revenue portfolio
buyers.
augurs well for sustainability
High proportion of revenues sourced from differentiated segments like consumer
business, animal business and niche products in the US augurs well for
sustainability. Cadila sources ~45% of its revenues from the domestic market as
compared to ~30% for most large-cap peers. High proportion of domestic
revenues (branded market) is a key positive.
We see a material improvement in R&D productivity ahead and also anticipate that
the management would improve on earnings delivery and visibility. With new
capacities coming online for the US market, the operational risk is also likely to
decline. These improvements are likely to cause a material jump in Cadilas ranking
in our universe.
Exhibit 11: Cadila scores average on our five Rs framework; improvement in management and risk could lead to a
material jump in rankings
Reputation, strategy and
execution of management
R&D productivity
Rational capital
allocation
Robustness of the
business model
Risk entailed in
operations
Overall
rank
Lupin
Sun Pharma
IPCA
Cadila
Healthcare
Dr. Reddy's
Glenmark
Cipla
Company
Page 46
Cadila Healthcare
Exhibit 12: SWOT analysis
Strengths
Weaknesses
the lacklustre growth in the India wellness and emerging markets despite
enormous scope for growth).
Inorganic strategy has not proven successful. As opposed to the valueaccretive German Remedies acquisition (2001), the latest acquisitions of
Biochem and Nesher Pharma (2011-2012) are yielding negative RoCEs.
Threats
Page 47
Cadila Healthcare
FY13
FY14
FY15E
FY16E
FY17E
23,232
24,644
27,131
30,821
34,884
3,098
3,497
3,824
4,160
4,506
Consumer
4,100
4,296
4,511
4,872
5,261
Animal Health
2,462
2,865
3,198
3,569
3,983
24,886
32,282
40,469
54,359
70,658
10.2%
15,068
21,704
29,096
41,350
55,910
9,818
10,578
11,373
13,009
14,748
5,070
4,499
4,882
5,308
5,669
44.8%
62,848
72,083
84,014
103,088
124,962
17.0%
Domestic Formulations
Export Formulations
North America (US)
Ex North America
JV Revenues
Total Gross Sales
presence
in
acute
segment
like
anti-infective,
pain and
Cardiac,
17%
Others, 23%
Derma, 7%
Gastro
Intes,
14%
Pain, 7%
Gynaecological,
10%
Anti-Infectives,
13%
Respiratory, 10%
Page 48
Cadila Healthcare
Amongst chronic therapies, the company has a credible presence in the cardiac and
chronic respiratory segment. The company has limited presence in the faster-growing
areas of anti-diabetes and neurology. However, in the past, the company has beaten
the broader market growth by better execution (better selling and marketing) and
plethora of new introductions.
Exhibit 15: Contribution of new product sales to total
growth has improved over FY10-14 with CAGR of 130% as
compared to 15% total sales CAGR
22%
100%
33%
25%
36%
25.0%
147%
80%
20.0%
60%
40%
15.0%
78%
67%
75%
64%
10.0%
20%
0%
5.0%
-47%
-20%
0.0%
-40%
FY10
FY11
FY12
Base business
FY13
FY09
FY14
Cadila
FY10
FY11
FY12
FY13
FY14
IPM sales
We expect the business to sustain its growth in line with the broader market, as the
product mix improves. We maintain that with higher data requirements on clinical
trials and longer timeframe for new product approvals, the Indian Pharma Market
(IPM) is likely to experience a slow down by a couple of percentage points.
35,000
30,000
CAGR 14%
` mn
25,000
20,000
15,000
10,000
5,000
FY10
FY11
FY12
FY13
FY14
FY15e
FY16e
FY17e
Page 49
Cadila Healthcare
Exhibit 18: Withdrawal of warning letter at Moraiya facility to help obtain niche
approvals
1,000
US$ mn
900
800
700
CAGR 39%
600
500
400
CAGR 26%
300
200
100
FY10
FY11
FY12
FY13
FY14
FY15e
FY16e
FY17e
The company has ~158 ANDAs pending approval, including filings for niche
controlled release products like Toprol XL (US$250mn) and Transdermals (6-7 ANDAs
filed), which may include interesting opportunities like Clonidine (USD200m),
Estradiol Weekly (US$150mn), Fentanyl (US$1bn) and Lidocaine (US$1.2bn).
60
60
54
50
40
40
40
30
20
25
24
18
11
10
14
8
18
1412
13
11
10
15
20
20
FY08
FY09
FY10
FY11
FY12
Filings
FY13
FY14
Approvals
Page 50
Cadila Healthcare
` mn
CAGR 8%
5,000
CAGR 13%
4,000
3,000
2,000
1,000
FY10
FY11
FY12
FY13
FY14
FY15e
FY16e
FY17e
We expect the business to grow in single digits in the foreseeable future. We see
Expect business to grow in single
upside risk to these estimates if the recent launch of ActiLife and re-launch of
digits in the foreseeable future
EverYuth brands (with extensions) were to perform better than our expectations and
the company were to materially expand its geographical reach. Zydus Wellness
brands currently penetrate only 30% of the total target market in terms of
distribution, as per the management.
` mn
CAGR 8%
RoCE - JV business
120.0%
CAGR 30%
4,000
100.0%
3,000
80.0%
95.7%
87.0%
60.0%
2,000
48.4%
49.3%
FY13
FY14
40.0%
1,000
20.0%
FY17e
FY16e
FY15e
FY14
FY13
FY12
FY11
FY10
0.0%
FY11
FY12
Page 51
Cadila Healthcare
We expect the business to grow in single-digits and see upside risk to our estimates in
case any significant and niche opportunities (such as docetaxel and pantoprazole in
the past) were to materialise. We expect the JVs to ramp up post FY16E led by the
Hospira JV. Hospira in its 2013 10K mentioned that 2014 and 2015 are likely to be
peak years in terms of manufacturing start-up, validation (facility and productrelated), registration costs, and unabsorbed production costs w.r.t. the Zydus-Hospira
JV.
Nature
Year
Geography
Particulars
2003
France
Alliance
2003
Global
Nippon Universal
Pharmaceutical Ltd.
Acquisition
2006
Japan
Quimica e
Farmaceutica Nikkho Acquisition
do Brasil Ltda
2006
Brazil
Acquisition of Quimica e Farmaceutica Nikkho do Brasil Ltda for US$25mn. The objective
of this acquisition is to foray into Brazil's branded generics business.
2008
Spain
Acquired stake in Combix Laboratorious, Spain. Combix has a pure generic focus and
strong product pipeline in Spain.
Simayla Pharma
Acquisition
2010
South Africa
Acquired Simayla Pharma, South Africa, to strengthen its presence in South Africa.
Bremer Pharma
GmbH
Acquisition
2011
RoW
Acquired Bremer Pharma GmbH from ICICI Ventures to expand its animal health
business to gain strategic access in markets across Europe, South America, Asia and
Africa.
Acquired US-based Alpharma Inc's French subsidiary, Alpharma SAS France for a
consideration of Euro5.5 million. This acquisition provides access to the French generics
markets.
Fermenta Biotech Ltd (FBL), a subsidiary of Duphar Interfran, signed an agreement with
Cadila Ltd for the sale of FBL's global patents and process technology for the
manufacture of Lisinopril and Benazepril. The objective of this alliance is to strengthen
the presence in the CVS and anti-hypertensive segments.
Acquisition of Nippon Universal Pharmaceutical Ltd, Japan. The acquisition provides
access to ready manufacturing facilities, marketing base and the distribution network of
Nippon in Japan. In 2014, Cadila announced its decision to exit the Japanese market.
Although we agree with the strategy in terms of the need to diversify from an
Improvement in profitability may
India/US concentration, profitable integration of these operations may take a long
potentially result in margin
time. We concede that visibility in the pricing of products/services to these markets
expansion
remains low, but any improvement in profitability of the larger subsidiaries (through
turnaround of operations or rationalisation), especially in Latin America, Spain, the
US (Nesher) and Mexico may potentially result in margin expansion.
Exhibit 24: EBITDA contribution from other business (FY14)
Revenue
EBITDA
EBITDA
margin %
Contribution to
reported EBITDA
Zydus Wellness
4,027
1,084
26.9%
9.0%
Joint Ventures
4,499
2,017
44.8%
16.8%
India Business
24,644
6,161
25.0%
51.3%
US Business
21,704
4,341
20.0%
36.2%
Others
15,726
(1,602)
-10.2%
-13.3%
Reported
70,600
12,001
17.0%
In ` Mn
However, we are not building in any margin expansion from these markets in our
estimates for the explicit forecast period owing to the poor ranking for Cadila in our
DNA framework.
Page 52
Cadila Healthcare
Exhibit 25: Sales in EU and emerging markets to increase
16,000
` mn
14,000
CAGR 14%
12,000
10,000
CAGR 11%
8,000
6,000
4,000
2,000
FY17e
FY16e
FY15e
FY14
FY13
FY12
FY11
FY10
Further, Cadila's partnership with Abbott for ~18 emerging markets provides a
longer-term growth prospect.
FY12
FY13
FY14
FY15E
FY16E
FY17E
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Material Cost
31.9%
31.9%
36.5%
37.6%
37.2%
37.9%
39.0%
General Expenses
40.6%
40.3%
38.5%
39.5%
39.0%
37.4%
36.1%
Revenue
R&D Expenses
5.4%
6.9%
7.3%
6.3%
5.4%
5.1%
4.8%
Total Expenditure
77.8%
79.1%
82.3%
83.4%
81.6%
80.4%
80.0%
EBITDA
22.2%
20.9%
17.7%
16.6%
18.4%
19.6%
20.0%
Page 53
Cadila Healthcare
We expect RoCEs to decline overtime due to a) as the company moves up the value
chain, the cost arbitrage with Western generic companies would narrow resulting in
lower asset turnover; b) High proportion (44%) of revenues coming from India in
FY14 (high RoCE business due to high asset turnover and margins). As the EMs
presence in built out and revenues are geographically diversified, the RoCE would be
adversely impacted (other geographies are relatively lower RoCE markets).
Exhibit 27: We expect RoCEs to be above WACC and stabilise at 17% in the terminal
year
35.0%
WACC
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY26E
FY27E
FY28E
FY29E
0.0%
ROCE
Source: Company, Ambit Capital research
Financial assumptions
Exhibit 28: Detailed financial assumptions (` mn unless otherwise mentioned)
Particulars
Assumptions
Comments
FY15E
FY16E
FY17E
FY15E
FY16E
FY17E
India formulations
27,131
30,821
34,884
10%
14%
13%
NA generics
29,096
41,350
55,910
34%
42%
35%
7,708
8,440
9,245
8%
9%
10%
11,373
13,009
14,748
8%
14%
13%
Total
17%
23%
21%
Gross profit
52,877
64,133
76,296
17%
21%
19%
Overhead costs
37,355
43,853
51,247
13%
17%
17%
EBITDA
15,522
20,280
25,048
29%
31%
24%
18.84%
20.03%
20.38%
10,254
14,242
17,294
23%
39%
21%
Sales assumptions
Page 54
Cadila Healthcare
Ambit vs consensus
Our revenue projections are 3-8% higher than consensus estimates for FY16/17E,
largely due to our expectations of higher number of launches in US led by
improvement in USFDA timelines. Our EBITDA and net profit estimates are 7-9% and
7-8% ahead of consensus for FY16E andFY17E presumably due to higher operating
leverage assumptions.
Exhibit 29: Our net profit estimates are broadly in line with consensus
Particulars (` mn)
Ambit
Consensus
Divergence (%)
FY15E
82,389
83,911
-1.8%
FY16E
101,257
98,119
3.2%
FY17E
122,902
113,530
8.3%
FY15E
15,522
15,344
1.2%
FY16E
20,280
18,913
7.2%
FY17E
25,048
23,004
8.9%
FY15E
9,928
10,293
-3.5%
FY16E
13,916
12,996
7.1%
FY17E
16,968
15,765
7.6%
Sales
EBITDA
Net Profit
Page 55
Cadila Healthcare
Domestic Formulations
8.6%
5.0%
Domestic API
5.5%
0.0%
8.2%
5.0%
Export Formulations
10.8%
3.1%
11.0%
3.0%
8.9%
3.0%
14.2%
5.0%
8.7%
3.0%
10.0%
5.0%
Exports API
5.2%
0.0%
All JVs
5.6%
3.6%
9.8%
3.6%
Our DCF model suggests a fair value of `1,510/share (our 12-month forward target
price), which implies ~20.0x FY16/17E EPS as compared to the current trading
multiple of 23.0x FY15/16E EPS.
Page 56
Cadila Healthcare
Exhibit 31: Valuation multiples do not reflect competitive positioning
28
26
Sun Pharma
P/E (FY15E)
24
Lupin
22
Cadila
20
Cipla
18
Glenmark
16
14
IPCA
Dr. Reddy's
12
10
10
15
20
25
30
35
40
RoCE (FY14E)
Source: Bloomberg, Ambit Capital research; Note: Bubble size indicates competitive positioning (larger bubble =
higher position)
As seen in the exhibit above, Cadila is trading at a deep discount to Sun Pharma and
Lupin largely due to depressed RoCEs despite comparable competitive positioning.
We believe that the discount is justified given the suppressed profitability and RoCE
and no visible catalysts to turn around the foreign loss-making subsidiaries.
At our target P/E multiple of 20x one-year forward EPS, Cadila would still be trading
at a discount of 10-15% to these companies. In our DCF model, we do not assume
any significant success in innovative pursuits and would expect the discount to narrow
further in case Cadilas innovative pursuits show signs of paying off.
Exhibit 32: Terminal value contributes 47% to total fair enterprise value
Key assumptions
Value
Remarks
Discount rate
13.1%
Cost of equity
3.7%
327,149
9.0%
Terminal Value
152,476
` mn
18.8%
27.6%
47%
We expect Cadilas EBITDA margin to improve over the next 15 years and RoCE to
expand from the current ~17% to 27% in the terminal year (FY29E).
Exhibit 33: Our 12-month forward target price is `1,510/share
Particulars
In ` mn
Total EV
327,149
(17,985)
Equity Value
309,165
205
1,510
CMP (`)
1,273
19.0%
FY15E
FY16E
FY17E
31.1
22.2
18.2
26.3
18.7
15.4
Page 57
Cadila Healthcare
Cross-cycle valuation
Cadila is currently trading at 26.0x FY15/16E EPS i.e. a ~15-20% discount to its
larger peers like Lupin and Sun Pharma. Whilst the company has re-rated
significantly over the recent past largely led by the managements guidance towards
margin expansion and revenue growth in the US, we believe that sustained earnings
growth may drive valuations higher. The US generics business is about to ramp up
led by approvals of niche products. Historically, the companys re-rating has been
driven by scaling up the value chain. At the current valuations, we see little room for
further re-rating of the business and believe that niche opportunities like
transdermals and nasal sprays in the US are largely accounted for. Hence, we expect
the stock performance to be largely in line with earnings growth. We expect earnings
CAGR of 27% over FY14-17E.
Mar-14
Mar-13
Mar-12
Mar-11
Jul-14
Mar-13
Nov-13
Jul-12
Nov-11
Mar-11
Jul-10
Nov-09
Mar-09
Jul-08
Mar-07
Nov-07
Jul-06
Nov-05
Mar-05
10x
Mar-10
Price
Mar-09
20x
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Mar-08
30x
Mar-07
Mar-06
1800
1600
1400
1200
1000
800
600
400
200
0
Mar-05
RoE (RHS)
FY14
FY13
FY12
10%
RoCE (RHS)
We believe that the next round of re-rating would require the longer-term growth
opportunities to come to the fore and the US business to ramp up. The investments
made in innovative projects like NCEs, biosimilars, NBEs, vaccines and emerging
markets have suppressed RoCEs despite the growing profitability of the US business
and operating leverage in India. Given that the long-term growth drivers come to the
fore, especially in emerging markets, over the next 3-5 years, we would expect the
P/E multiple to re-rate. Turnaround in profitability of EMs could be another trigger for
a re-rating.
FY11
10%
15%
FY10
15%
20%
FY09
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
20%
25%
FY08
25%
30%
FY07
30%
35%
FY06
35%
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
FY05
40%
FY05
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
Page 58
Cadila Healthcare
Delay in EMs profits: We deduce RoW business EBITDA margins of -10% for
FY14. If the company is unable to rationalise/turnaround EM operations, RoCE
may remain depressed. Due to below average ranking in our DNA framework,
we do not build a turnaround in emerging market profitability into our forecasts.
INR appreciation against USD: Cadila has not been a beneficiary of the INR
depreciation against the USD largely due to hedges taken at lower rates.
However, the company now has negligible hedges and in the event of a reversal
in trend, we assess that the companys profits could decline by 1.5% for every 1%
appreciation in the INR beyond `60/USD levels.
Catalysts
Unknown large filings in the US: We have taken a top-down approach for the
unknown filings in the US at an average revenue rate of US$5mn per ANDA.
However, as seen in the past, there is always an upside risk to such assumptions,
as more complex and already off-patent products do not come under our radar.
Discount rate
2.7%
3.7%
4.7%
5.7%
11.1%
1,858
1,981
2,138
2,344
2,627
12.1%
1,586
1,674
1,783
1,922
2,104
13.1%
1,367
1,432
1,510
1,607
1,730
14.1%
1,189
1,237
1,295
1,364
1,450
15.1%
1,042
1,079
1,121
1,172
1,234
Page 59
Cadila Healthcare
Exhibit 39: Sensitivity of TP to US business medium-term growth rate and EBITDA
margins
US formulations
medium-term
growth rate
23.1%
23.6%
24.1%
24.6%
8.0%
1,373
1,391
1,409
1,426
1,444
9.0%
1,422
1,440
1,458
1,476
1,494
10.0%
1,474
1,492
1,510
1,528
1,546
11.0%
1,528
1,547
1,565
1,584
1,602
12.0%
1,587
1,605
1,624
1,643
1,662
Score
Comments
Accounting
GREEN
In our forensic analysis of 360 companies, Cadila scores in line with the pharma industry average (comprising
26 companies). Cadila scores high on ratios of: (a) gross block conversion; (b) change in depreciation rates;
(c) audit fees and (d) non-operating expenses. However, Cadila has weaker scores on: (a) cash yield; and (b)
volatility in sales and distribution costs.
Predictability
AMBER
Overall, the management has made timely announcements in its earnings calls, meetings and interviews
regarding product filings, acquisitions and business outlook. However, the unpredictability of emerging
markets and innovative projects makes us assign an AMBER flag on predictability.
Earnings momentum
GREEN
Consensus FY15 EBITDA and EPS estimates have been upgraded by 4-5% and FY16 EBITDA and EPS
estimates have been upgraded by 2-5% over the past three months.
Page 60
Cadila Healthcare
Revenue recognition: Cadilas pre-tax CFO as a percentage of EBITDA has Stable CFO as a percentage of
been stable over the years, with a blip in FY12. The reason for the decrease in EBITDA
revenue recognition from 81% in FY11 to 64% in FY12 was due to higher working
capital investment. Working capital days increased from 95 days in FY11 to 142
days in FY12. Excluding FY12, Cadilas revenue recognition has been similar or
better than its peers. Also, Cadilas revenue recognition has been less volatile
than its peers. We assign a GREEN FLAG.
Volatility
(measured
by SD)
FY09
FY10
FY11
FY12
FY13
FY14
FY13
FY14
Cadila
98%
96%
81%
64%
82%
98%
1,806
1,590
13%
Aurobindo
62%
70%
55%
65%
46%
46%
1,072
(1,963)
10%
Glenmark
NA
NA
60%
131%
80%
102%
7,165
(5,114)
31%
93%
71%
66%
94%
86%
90%
2,806
(841)
12%
Biocon
35%
101%
152%
123%
104%
103%
(2,840)
(1,924)
39%
Average(ex-Cadila)
63%
81%
83% 104%
79%
86%
2,051
(2,461)
23%
Divergence
35%
15%
-2% -40%
3%
12%
(244)
4,050
-9%
IPCA
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity
Working capital days: Cadilas debtor days and inventory days have been
consistently lower than the peer average due to its Zydus Wellness business in
which it sells relatively fast-moving goods such as sugar substitutes and EverYuth
scrubs and peel-offs in the skin-care range. Zydus Wellness contributes 12% to
consolidated PBT. Cadila has a large presence in the non-US and non-EU market.
Cadila earns 66% of its revenues from the emerging market and animal health Lower working capital days due
business. Businesses in these geographies usually require higher working capital to the Wellness business
investment, as the debtor cycle is usually longer. Despite having a substantial
presence in emerging markets, Cadila has been able to manage its debtor days
at significantly lower levels than its peers. GREEN FLAG.
Cadilas inventory days have been stable over FY09-14 and better than its peers.
As stated above, despite having a considerable presence in emerging markets,
the company has managed its inventory well. We take comfort from the fact that
Cadila has stable and below average inventory days and hence we assign a
GREEN FLAG.
Cadilas creditor day has been higher than the peer set in FY09-FY11but have
lowered in FY12-14. We believe this may be due to acquisition of Nesher pharma
and Biochem pharma in FY12. However, this needs further investigation and
hence we assign AMBER FLAG.
Page 61
Cadila Healthcare
Exhibit 42: Working capital days
Company/Metric
Cadila
FY11
FY12
FY13
FY14
FY11
FY12
FY13
FY14
FY11
FY12
FY13
FY14
FY11
FY12
FY13
FY14
49
58
54
53
62
66
66
65
57
48
35
40
53
77
85
78
Aurobindo
91
97
88
95
107
118
108
97
57
56
51
52
141
160
146
140
Glenmark
140
108
105
115
100
72
59
54
81
66
66
73
158
115
98
96
83
63
49
48
82
104
96
94
24
32
33
34
141
134
113
109
IPCA
Biocon
63
88
74
70
52
69
57
49
35
57
51
44
80
100
80
76
Average(ex-Cadila)
94
89
79
82
85
91
80
74
49
53
50
51
130
127
109
105
(46)
(30)
(25)
(30)
(23)
(25)
(14)
(8)
(5)
(16)
(11)
(77)
(50)
(24)
(27)
Divergence
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity.
Expense manipulation: The average depreciation rate for Cadila was almost
constant across FY11-14. However, as compared to its peers, the average
deprecation rate has been significantly lower by 1.5-2.3%. This is primarily due to
higher proportion of intangibles in the books of Cadila as compared to its peers.
As shown in Exhibit 42, Cadila has 36% of its total gross assets as intangibles, as Lower depreciation rate due to
compared to 4-9% for its peers. Majority of these intangibles consist of goodwill higher intangibles on the books
arising out of acquisitions. Whilst goodwill is reviewed frequently and decision on
impairment is taken on a periodic basis, amortisation is not done every year on
intangibles. We see similar trends in Glenmark which has a higher percentage of
intangibles in its total gross assets. Cadilas numbers are mostly in line with
Glenmarks, with a marginally higher depreciation rate. We have no significant
concerns over the depreciation rate and hence we assign a GREEN FLAG.
YoY change in
depreciation rate (bps)
FY12
FY13
FY14
FY13
Cadila
4.8%
4.8%
4.6%
4.6%
(21)
Aurobindo
7.1%
7.3%
7.3%
7.9%
60
Glenmark
3.8%
3.7%
4.1%
6.1%
45
199
IPCA
6.0%
6.3%
6.0%
6.0%
(28)
(7)
Biocon
8.1%
8.4%
7.6%
7.6%
(81)
(3)
Average(ex-Cadila)
Divergence
FY14
6
6.2%
6.4%
6.3%
6.9%
(16)
62
-1.5%
-1.7%
-1.7%
-2.3%
(5)
(56)
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity.
Exhibit 44: Cadila and Glenmark have a high proportion of intangible assets
Cadila
Aurobindo
Glenmark
IPCA
Biocon
64%
91%
59%
91%
96%
36%
9%
41%
9%
4%
Cash manipulation: Cadilas loans and advances have remained higher than its
peers average consistently. Also, loans and advances have grown over the years
from 20.9% in FY11 to 24.3% in FY14. However, majority of these loans and
advances consist of advances paid to government authorities and hence we do
not see this as a major concern. Hence, we assign a GREEN FLAG.
Page 62
Cadila Healthcare
Exhibit 45: Cash manipulation checks
Company/Metric
FY11
FY12
FY13
FY14
Cadila
19.2%
20.9%
22.4%
25.3%
24.3%
Aurobindo
20.3%
21.8%
18.1%
21.9%
31.1%
Glenmark
NA
9.8%
13.4%
12.8%
17.6%
14.6%
11.2%
18.2%
15.9%
15.8%
IPCA
Biocon
Average(ex-Cadila)
Divergence
7.6%
9.6%
14.4%
15.8%
15.7%
14.2%
13.1%
16.0%
16.6%
20.0%
5.0%
7.8%
6.4%
8.7%
4.2%
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity; we have
excluded capital advances from loans and advances to calculate the above ratio.
Investment income analysis: Cadilas investment income as a percentage of Higher investment income as a
cash has been high as compared to its peers. It has also been volatile, with FY12
percentage of cash
reporting higher investment income due to profit from sale of investments. Whilst
we take comfort from the fact that interest income accounted for negligible
percentage of PBT over FY11-14, leaving little incentive for manipulation of this
line item, but the higher investment income as percentage of cash is a cause of
concern. We assign an AMBER FLAG.
Change in investment
income as a % of cash and
marketable investments
(bps)
FY11
FY12
FY13
FY14
FY13
FY14
Cadila
4.8%
4.1%
8.7%
4.8%
5.5%
(394)
74
Aurobindo
0.9%
0.3%
2.9%
0.3%
0.4%
(260)
10
Glenmark
NA
5.1%
3.6%
1.4%
0.7%
(220)
(71)
IPCA
2.1%
3.5%
10.5%
8.7%
4.6%
(179)
(410)
Biocon
3.1%
4.6%
4.7%
3.7%
4.0%
(99)
30
Average(ex-Cadila)
2.0%
3.4%
5.4%
3.5%
2.4%
(166)
(150)
Divergence
2.8%
0.7%
3.3%
1.3%
3.1%
(95)
161
Source: Company, Ambit Capital research. Note: (a) All financials pertain to the consolidated entity; (b)
Investment income comprises interest income, dividend income and profit on sale of current investments
Cadilas contingent liabilities as a percentage of net worth declined by 300bps in Higher contingent liabilities as a
FY14. Cadilas disputed liabilities as a proportion of net worth is significant as at percentage to net worth is a
end-FY14 and mainly consisting of liabilities of Income tax matters. As compared cause of concern
to its peers, contingent liabilities not provided for by Cadila is at the peer
average. Contingent liabilities of more than 5% as percentage of net worth is a
large number for our comfort and hence we assign an AMBER FLAG.
Exhibit 47: Contingent liabilities not provided for by Cadila is at peer average
Contingent liabilities
as % of net worth
Contingent liabilities
(` Mn)
Net Worth
(` Mn)
Cadila
6.9%
2,383
34,390
Aurobindo
3.3%
1,253
37,502
Glenmark
4.3%
1,294
29,966
12.9%
2,529
19,597
7.7%
2,322
30,267
FY14
IPCA
Biocon
Average(ex-Cadila)
Divergence
7.06%
-0.13%
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity.
Page 63
Cadila Healthcare
Provisions for debtors: Cadilas debtors outstanding for more than six months
Adequate provisioning of debtors
(which have a high probability of turning bad) as a percentage of gross debtors have
as compared to its peers
been constant across FY11-14. At the same time, the provision for the same has
dropped to 40% in FY14 from 51% in FY13. However, the company has consistently
been providing for more than its peers. Cadila has lower debtors aging six months or
more, which is due to its lower debtor days as compared to its peers. We assign a
GREEN FLAG.
Exhibit 48: Provision for debtors
Company\Metric
FY12
FY13
FY14
FY12
FY13
FY14
FY12
FY13
FY14
Cadila
50.9%
51.0%
40.4%
1.2%
1.3%
0.8%
2.3%
2.5%
2.1%
Aurobindo
40.2%
42.7%
41.1%
2.3%
1.7%
1.2%
5.7%
4.0%
2.9%
Glenmark
18.8%
10.0%
9.4%
2.2%
1.7%
1.2%
11.5%
16.6%
13.0%
IPCA
3.7%
0.0%
4.8%
0.1%
0.0%
0.1%
2.4%
2.7%
3.0%
Biocon
53.1%
27.1%
53.7%
1.4%
0.6%
0.8%
2.6%
2.1%
1.6%
Average(ex-Cadila)
28.9%
19.9%
27.3%
1.5%
1.0%
0.9%
5.6%
6.3%
5.1%
Divergence
22.0%
31.1%
13.2%
-0.3%
0.3%
0.0%
-3.3%
-3.9%
-3.1%
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity
Auditors
The companys accounts are audited by M/s Mukesh M. Shah & Co., and the auditors
have not been changed since FY08. We assign an AMBER FLAG.
The Audit Committee, as on 31 March 2014, comprises three members (all of whom
Auditors have not been changed
are non-executive independent directors of the company). Mr. Mukesh M Patel is the
since FY08
Chairman of the committee. The attendance of members has been healthy and
composition revolving, and hence we assign a GREEN FLAG.
Cadilas audit fees as a percentage of sales are in line with the peer group average
and we do not have any significant concerns on its audit fees. As compared to net
sales, there was no significant growth in audit fees. GREEN FLAG
Corporate governance
Rotation of independent directors: The Best Practices Code suggests that the
3 out of 5 independent directors
maximum tenure for an independent director should be five years. Three of the
have been associated with Cadila
five independent directors have been associated with the company for more than
for more than 10 years
10 years. This is a cause of concern and hence we assign an AMBER FLAG.
Attendance of the board: The attendance of the board members has remained
reasonable for the Board meetings held in FY11-14.
Page 64
Cadila Healthcare
Revenue Mix
Year ended 31 Mar (` mn)
FY13
FY14
FY15E
FY16E
FY17E
23,232
24,644
27,131
30,821
34,884
3,098
3,497
3,824
4,160
4,506
Consumer
4,100
4,296
4,511
4,872
5,261
Animal Health
2,462
2,865
3,198
3,569
3,983
24,886
32,282
40,469
54,359
70,658
15,068
21,704
29,096
41,350
55,910
9,818
10,578
11,373
13,009
14,748
Domestic Formulations
Export Formulations
North America (US)
Ex North America
JV Revenues
5,070
4,499
4,882
5,308
5,669
62,848
72,083
84,014
103,088
124,962
FY13
FY14
FY15E
FY16E
FY17E
Net revenues
61,552
70,600
82,389
101,257
122,902
Material Cost
23,202
27,136
31,310
39,120
48,826
General Expenses
24,455
28,540
32,792
38,605
45,213
Income statement
Year to March (` mn)
R&D Expenses
4,669
4,563
4,563
5,247
6,035
Core EBITDA
11,251
12,001
15,522
20,280
25,048
Depreciation
1,847
2,012
2,841
3,119
4,536
Interest expense
1,687
902
1,115
1,115
1,115
Adjusted PBT
8,088
9,422
12,064
16,756
20,345
Tax
1,188
1,060
1,810
2,513
3,052
6,536
8,036
9,928
13,916
16,968
FY13
FY14
FY15E
FY16E
FY17E
Total Assets
60,859
63,798
71,460
83,110
97,811
Fixed Assets
37,612
40,153
41,812
44,193
46,157
Current Assets
34,965
38,846
46,517
58,400
74,134
1,145
866
866
866
866
60,859
63,798
71,460
83,110
97,811
Balance sheet
Year to Mar (` mn)
Investments
Total Liabilities
Shareholders' equity
1,024
1,024
1,024
1,024
1,024
28,459
33,366
41,028
52,678
67,379
29,483
34,390
42,052
53,702
68,403
Total debt
29,178
27,004
27,004
27,004
27,004
Current liabilities
12,901
16,067
17,736
20,349
23,346
1,005
961
961
961
961
Page 65
Cadila Healthcare
Cash flow statement
Year to March (` mn)
FY13
FY14
FY15E
FY16E
FY17E
PBT
8,088
9,422
12,064
16,756
20,345
Depreciation
1,847
2,012
2,841
3,119
4,536
1,188
1,060
1,810
2,513
3,052
(1,996)
(359)
(2,505)
(4,005)
(4,593)
Tax
Net Working Capital
CFO
Capital Expenditure
Investment
Other investments
CFI
Issuance of Equity
Inc/Dec in Borrowings
Net Dividends
Other Financing activities
4,272
8,870
10,264
13,030
16,910
(7,031)
(4,576)
(4,500)
(5,500)
(6,500)
(564)
354
(7,595)
(4,222)
(4,500)
(5,500)
(6,500)
6,285
(3,095)
(1,790)
(2,192)
(2,232)
(2,266)
(2,266)
CFF
4,495
(5,287)
(2,232)
(2,266)
(2,266)
1,172
(639)
3,532
5,264
8,144
5,838
5,488
9,019
14,283
22,428
Valuation Parameters
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS
31.9
40.1
48.5
68.0
82.9
288.0
335.9
410.8
524.6
668.2
40.8
32.5
26.9
19.2
15.7
4.5
3.9
3.2
2.5
1.9
25.8
24.0
18.3
13.8
10.8
EV/Sales (x)
4.7
4.1
3.5
2.8
2.2
EV/EBIT (x)
30.8
28.9
22.5
16.3
13.2
Year to March
FY13
FY14
FY15E
FY16E
FY17E
Revenue growth
20.9
14.7
16.7
22.9
21.4
EV/EBITDA(x)
Ratios
2.4
6.7
29.3
30.7
23.5
APAT growth
0.1
23.0
23.5
40.2
21.9
EPS growth
0.1
25.6
21.0
40.2
21.9
18.3
17.0
18.8
20.0
20.4
EBIT margin
15.3
14.1
15.4
16.9
16.7
10.6
11.4
12.1
13.7
13.8
ROCE (%)
18.2
17.5
20.2
23.9
24.4
23.7
25.2
26.0
29.1
27.8
1.0
0.8
0.6
0.5
0.4
CFO/EBITDA (x)
0.4
0.7
0.7
0.6
0.7
1.7
1.8
2.0
2.4
2.7
3.1
3.1
3.2
3.0
2.8
Current Ratio
2.7
2.4
2.6
2.9
3.2
Page 66
Aurobindo Pharma
SELL
INITIATING COVERAGE
ARBP IN EQUITY
Pharmaceuticals
Recommendation
`252/US$4.2
`1621/US$26.6
`896
`828
8
Flags
Accounting:
Predictability:
Earnings Momentum:
RED
AMBER
GREEN
Catalysts
Performance
26,000
24,000
22,000
20,000
18,000
16,000
1150
950
750
550
350
150
Aug-13
Oct-13
Nov-13
Jan-14
Feb-14
Apr-14
May-14
Jul-14
Aug-14
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Sensex
Aurobindo, RHS
FY13
58,553
8,891
3,501
12.0
14.2
72.4
9.7
FY14
80,998
21,328
11,737
40.3
36.9
21.6
6.8
FY15E
119,928
25,052
15,770
54.1
34.9
16.1
4.8
FY16E
136,808
30,499
19,733
67.7
31.9
12.9
3.6
FY17E
161,507
40,098
27,268
93.5
32.7
9.3
2.6
Analyst Details
Aditya Khemka
+91-22-3043 3272
adityakhemka@ambitcapital.com
Paresh Dave
+91-22-3043 3212
pareshdave@ambitcapital.com
Aurobindo Pharma
Revenue mix
FY15E
FY16E
Net revenues
119,928
136,808
Core EBITDA
25,052
30,499
40,098 USA
Depreciation
3,701
4,226
4,264 ARV
Interest expense
1,071
846
20,480
25,627
4,710
5,894
15,770
19,733
21.1
22.4
25.0 Cephs
13.1
14.4
11.5
9.1
16.1
12.9
2.4
2.0
Adjusted PBT
Tax
Reported net profit
621 Europe
35,413 ROW
8,145 Total formulations
SSP
Balance Sheet
Year to March (in ` mn)
FY16E
FY17E
42,416
55,495
74,175
9,591
11,029
12,132
33,745
34,060
37,204
5,060
5,566
6,122
90,812
106,149
129,633
10,676
11,210
11,770
10,200
10,500
10,500
10,537
11,591
12,750
31,413
33,301
35,020
150
150
150
122,375
139,600
164,803
27,268 API
EV/Sales (x)
FY15E
161,507 Formulations
Cash flow
FY15E
FY16E
Total Assets
90,949
101,450
Fixed Assets
32,613
35,887
Current Assets
82,027
92,070
198
198
Total Liabilities
90,949
101,450
Total networth
52,946
70,948
Total debt
35,691
28,191
20,691 Investment
Current liabilities
22,531
25,347
2,054
2,054
RoCE
26.3
28.2
(3,071)
(8,346)
(8,121)
RoE
34.9
31.9
(1,384)
(1,732)
(2,393)
0.7
0.4
0.6
0.3
0.1 CFF
P/B (x)
4.8
3.6
Investments
2,054 CFI
Issuance of Equity
FY16E
FY17E
25,627
35,413
3,701
4,226
4,264
(4,710)
(5,894)
(8,145)
(10,662)
(4,207)
(10,002)
10,731
20,398
21,952
(6,000)
(7,500)
(10,000)
200
200
200
(5,800)
(7,300)
(9,800)
(4,455)
(10,077)
(10,514)
476
3,021
1,638
2,270
5,291
6,929
FY11
FY12
FY13
FY14
Aurobindo
70%
55%
65%
46%
46%
Cadila
96%
81%
64%
82%
98%
Glenmark
NA
60%
131%
80%
102%
90%
IPCA
71%
66%
94%
86%
Biocon
101%
152%
123%
104% 103%
Average(ex-Aurobindo)
89%
90%
103%
88%
Divergence
-19% -35%
-38%
-42% -52%
98%
EV/EBITDA (FY16E)
Company/Metric
FY15E
20,480
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
Sun
Pharma
Cadila
Cipla
Lupin
Dr. Reddy's
Glenmark
IPCA
Aurobindo
10
20
30
40
RoCE (FY14)
Page 68
Aurobindo Pharma
US $ Mn
1,400
30%
1,200
25%
474
1,000
20%
800
600
338
400
44
50
104
192
200
-
395
431
58
65
148
53
79
164
261
247
466
77
86
138
77
111
139
15%
563
5%
322
26.3%
23.0%
21.7%
22.0%
19.5%
24.2%
13.2% 15.2%
10%
9.8%
6.0%
0%
FY10
FY10
FY11
FY12
FY13
FY14
USA
ARV
Europe
ROW
API
Source: Company, Ambit Capital research
FY11
FY12
FY13
FY14
ARBP, RoCE
Within US, Aurobindo has high concentration of revenues in oral solids (~59% of
FY14 US sales excluding Cymbalta). During FY14, the company launched Cymbalta
under 180 day shared exclusivity in the US which yielded US$94mn in revenues and
high margins, in our assessment. Aurobindo has not invested in innovative projects
like biosimilars, NCEs, vaccines and NBEs.
48.2
42.9
0.0
Aurobindo
Injectables
(Auromedi
cs), 37
53.7
Glenmark
Orals,
330
68.8
IPCA
Cephalosp
orins, 28
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Biocon
One offs,
94
Controlled
Substance
(Aurolife),
74
Cadila
Page 69
Aurobindo Pharma
Exhibit 5: RoCE has been lower than peer average and volatile due to one-off events
Rampup in US sales and
associated operating
leverage results in higher
RoCE
30.0%
Challenges in profitability
in overseas branches in
particular ventures in
China resulting in lower
profitability
25.0%
20.0%
17.4%
10.0%
5.0%
0.0%
24.2%
11.4%
Increase in capital employed
through preferential
allotment and increase in
debt led to lower RoCE
FY03
FY04
Normalisation of
RoCE as capacity
utlisation increases
14.1%
15.0%
12.2%
12.7%
21.7%
6.9%
19.5%
6.0%
4.1%
FY05
9.8%
FY06
FY07
FY08
RoCE (%)
FY09
FY10
FY11
FY12
FY13
90
80
70
60
50
40
30
20
10
0
FY14
Exhibit 6: Recent stock price performance led by withdrawal of import alert on Unit VI and launch of Duloxetine
900
800
700
600
500
400
300
200
Capacity
expansion
through set up
of new facilities
and listing at
stock exchange
Setting up two
wholly owned
subsidiaries in
US and Hong
Kong to increase
presence in the
international
markets
100
Lower capacity
utilisation to get
manufacturing
facilities ready
for inspection by
international
authorities
US FDA import
Purchased fully integrated alert for
R&D, formulation
products from its
manufacturing and
Unit VI which
distribution facility from
manufacture
Sandoz in US; acquired
cephs
Pharmacin International
BV to help reduce
Aurobindo's time to market
and build portfolio in the
Commenced
generic value chain
operations of SEZ
UNIT VII and
Aurolife USA
facilities
Apr-95
Oct-95
Apr-96
Oct-96
Apr-97
Oct-97
Apr-98
Oct-98
Apr-99
Oct-99
Apr-00
Oct-00
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Acquired operations in 7
European countries from
Actavis and launch of
Duloxetine (generic
Cymbalta) which
provided super-normal
profits due to shared
exclusivity
Commenced
marketing speciality
injectables products
in US through Auro
Medics
Page 70
Aurobindo Pharma
Exhibit 7: Aurobindos competitive position lags due to inferior capital allocation, strategy, execution and balance sheet
Competitive
advantage
Position as
compared to
larger listed peers
Components
Measures
Remarks
Strategy
Vision and mission focus on: (a) being among the top15 generic companies in the world by 2015; (b)
developing wide range of products; (c) becoming the
most-valued pharma partner.
Recent hires,
management transition,
depth and width
Ambit's Forensic
accounting
Market share in US
Inorganic strategy
success
Quality
Reputed
management,
strategy and
execution
Execution
Below average
R&D productivity
Productivity index
Above average
Rational capital
allocation
Greatness
framework
Ambit's proprietary
framework
Below average
Bargaining
power with
buyers
Bargaining
power with
suppliers
Barriers to entry
Operational risk
Diversity of
manufacturing base
Incidence of Form 483s
from USFDA
High
number
of
USFDA-approved
facilities
(formulations + API) encountered by a 39% 483 issue
rate make Aurobindo rank above average with low
operational risk.
Average
investment
risk
with
a
mix
alliances/partnerships and own investments
subsidiaries and business verticals.
Robustness of the
business model
Risk entailed in
operations
Investment risk
Overall rank
Below average
Above average
of
in
Below Average
Page 71
Aurobindo Pharma
Over the past 5 years, the management has transitioned from being promoterdriven to a team of professionals. The induction of Mr Govindrajan (ex Shasun),
as MD, Robert Cunard (ex Teva) as Head of US business and Arvind Vasudeva (ex
Glenmark) as Head of International business also increases the management
bandwidth.
The companys execution in the US has been high quality. Despite an inferior
product mix in the US (largely me-too products), the company has been able to
consistently garner a higher than fair share of market share in most marketed
products led by a cost advantage derived from vertical integration.
Other business interests of the promoter family and immediate kin are lower than
average. We believe this indicates lower risk of diversion in focus.
Exhibit 8: Aurobindo has lower other business interest as compared to its peers
Other directorships of immediate family of promoter
47
12
15
16
Cipla
48
25
18
Lupin
Average
Aurobindo
60
50
40
30
20
10
0
Dr. Reddy's
Sun Pharma
Cadila
Healthcare
Ipca
Glenmark
Aurobindo also scores below average on our forensic accounting framework. The
companys scores lag due to concerns on consistently lower-than-peer
CFO/EBITDA for the last 5 years and higher loans and advances.
The company also has the highest volatility amongst peers for reported vs
expected EBITDA over the past 5 years. We believe that the trend suggests that
the companys earnings have largely been influenced by variables that were
either unanticipated or undisclosed by the management.
Nature
Year Geography
Milpharm
Acquisition
2006 UK
2007 US
2007 Netherlands
Acquisition
2009 India
Hyacinths Pharma
Acquisition
2013 India
2014 Europe
Particulars
Acquired Milpharm (UK), engaged in generic formulation manufacturing, mainly in the UK
market. Milpharm had over 100 products approved from the UK regulator and it helped
Aurobindo to tap the UK generic market.
Purchased fully integrated R&D, formulation manufacturing and distribution facility from
Sandoz in the US.
Acquired Pharmacin International BV to help reduce Aurobindo's time to market and build
portfolio in the generic value chain.
Acquired majority stake in group company, Trident Life Sciences, which provides
Aurobindo with additional capacity in non-oncological and non-infective injectables.
Acquired Hyacinths Pharma, an API manufacturer; strategic location of land ideal and
convenient for expansion plans for the company.
Acquired Actavis's operations in 7 European nations, which includes personnel,
commercial infrastructure, products, marketing authorisations and dossier license rights.
Page 72
Aurobindo Pharma
Promoter has been involved in legal issues: Aurobindo Pharma has also
been haunted by legal issues in the past due to alleged political connectivity. The
Central Bureau of Investigation in n India (equivalent of the FBI in the US) had
charge-sheeted the former MD and current Board member, Nithyanand Reddy, in
a case involving disproportionate asset claims. However, the company did
disclose that investments were made by promoters (if any) and the listed entity
had nothing to do with the case. The charges were also later dropped by the CBI.
Click here for media reports regarding this issue.
Accounting practices of the company have failed in the past: Media reports
also suggest that the company had declared `300mn of undisclosed income for
FY12 post an Income Tax raid on its premises in February 2012.
Despite Aurobindos R&D spend being considerably lower than its peers, the
companys productivity has been higher than most peers. We believe this is
a function of: (a) no spend on longer-term growth drivers like biosimilars, NCEs,
NDDS-based products and other complex products; (b) investments largely in less
complex products like oral solids, general injectables, controlled substances, and
cephalosporins which have yielded significant revenues owing to excellent
execution in the US driven by vertical integration.
Low R&D spend is healthy for near-term (FY15E-18E) RoCE, as there is little
revenue-cost mismatch on the income statement; however, over longer-term low
R&D spend will keep avenues of growth poor.
As per the management, there is no capitalisation of R&D spend. Even the R&D
spend on hormones and oncology products in Eugia JV have been expended
through the income statement. Cadila has capitalised its R&D spend in the JV for
transdermals.
Exhibit 10: Aurobindo has high R&D productivity due to low R&D spend and excellent
execution in the US to gain market share driven by vertical integration on oral solids
R&D spend as % of sales
(FY14)
10.0%
9.0%
Dr. Reddy's
8.0%
Glenmark
Lupin
7.0%
Cadila
Sun Pharma
6.0%
Aurobindo
5.0%
Ipca
4.0%
3.0%
2.0%
-
1.0
2.0
3.0
4.0
5.0
R&D productivity index
6.0
7.0
Source: Ambit Capital research; Note: Bubble size represents the ratio for pipeline of ANDAs to currently
approved ANDAs
Page 73
Aurobindo Pharma
Negatives Lack of innovative investments may dampen long-term prospects
Low R&D spend on innovative pursuits like biosimilars, vaccines and NCEs does
Low R&D spend on innovative
not bode well for longer-term prospects.
products and lack of differentiation
The companys revenues from oral solids, cephalosporins, controlled substances in currently marketed products
and general injectables could be low-margin revenues. Lack of differentiation in
the currently marketed portfolio makes Aurobindo more vulnerable to
incremental competition from incumbents like Hospira (general injectables),
Ranbaxy (cephalosporins) and Nesher (controlled substances) which have been
out of the market due to FDA-related issues.
Aurobindo scores high on sales improvement and pricing discipline under our
greatness framework. Whilst improvement in product mix (move from API to
formulations) has helped the score in pricing discipline, gaining traction in oral
solids due to vertical integration has helped the score on sales improvement. We Improvement in product mix has
highlight that both these advantages seem temporary, as the decline in helped score in pricing discipline
contribution from API sales would be more gradual and Aurobindo is not
vertically integrated in injectables which form a large chunk of its pipeline. The
management may have to rethink its portfolio strategy once scale becomes an
obstacle to growth.
We have to credit the company for achieving sales growth in a short span of time Excellent sales execution
post the resolution of issues with the FDA at Unit VI. Whilst Cymbalta has been a capabilities
major contributor to sales and EBITDA in FY14, the resumption of cephalosporin
sales and controlled substances along with general injectables have been within
a very short span of time, exhibiting excellent execution.
Exhibit 11: Aurobindo scores high on pricing discipline and sales improvement, but lags in cash flow increase, balance
sheet discipline and investments
Scores out of 0.17 for each measure
Investment
Sales
Improve
Pricing
discipline
EPS and
CFO increase
BS
Discipline
Ratios
improve
Total Score-using
Adj PAT
Rank
IPCA
0.17
0.17
0.17
0.17
0.17
0.17
1.00
Sun Pharma
0.17
0.17
0.17
0.17
0.08
0.17
0.92
Cadila
0.17
0.17
0.17
0.17
0.17
0.08
0.92
Lupin
0.17
0.08
0.17
0.17
0.17
0.08
0.83
Strides
0.17
0.08
0.17
0.17
0.08
0.17
0.83
Torrent
0.08
0.17
0.17
0.13
0.13
0.17
0.83
Cipla
0.17
0.04
0.17
0.17
0.17
0.71
Dr Reddy's
0.08
0.08
0.17
0.17
0.17
0.67
Aurobindo
0.08
0.13
0.17
0.08
0.08
0.54
Glenmark
0.08
0.08
0.08
0.25
10
Company
Source: Ambit Capital research; Note: Bubble size represents the ratio for pipeline of ANDAs to currently approved ANDAs
The ever-expanding working capital cycle for Aurobindo has had an adverse
impact on balance sheet improvement and cash flows amongst our framework.
(Please refer Page 28 and Exhibit 43)
Page 74
Aurobindo Pharma
Negatives
Higher than average debtor days indicates low bargaining power with customers.
Vulnerable to incremental
The companys revenues from oral solids, cephalosporins, controlled substances competition due undifferentiated
and general injectables could be low-margin revenues. Lack of differentiation in product portfolio
currently marketed portfolio makes Aurobindo more vulnerable to incremental
competition from incumbents like Hospira (general injectables), Ranbaxy
(cephalosporins) and Nesher (controlled substances) which have been out of the
market due to FDA-related issues.
Excellent
risk
Aurobindo has five API units and six formulation units that are commercialised in
the US. With a diverse manufacturing base, we see low operational risk exposure
Diversified risk through wide
for the company. Aurobindo also has a low 483 issue rate.
manufacturing base and low 483
Exhibit 12: Aurobindo has the second lowest Form 483 issue rate
issue rate
57%
60%
50%
40%
39%
43%
46%
67%
67%
Cipla
70%
Cadila
80%
61%
50%
32%
30%
20%
10%
Glenmark
Torrent
Lupin
Sun
Pharma
Ipca
Aurobindo
Dr. Reddy's
0%
Aurobindo has engaged in a JV with Celon Labs for hormones and oncology
injectables for the US. The JV diversifies manufacturing operations requirement
and hence limits investment risk.
Page 75
Aurobindo Pharma
Weaknesses
weakness. The company has registered API sales CAGR of 6% (in USD).
Aurobindos RoCE is lower than peers due to: (a) inferior product mix, (b)
Opportunities
Threats
growth (US$77mn sales in FY14). Given the lack of a track record for
scaling up emerging market business, we do not give much credit to it.
We believe that the RoCE and margins of Aurobindo may come under
pressure if the companys US business faces competition from incumbents
that have withdrawn from the market due to FDA issues.
Page 76
Aurobindo Pharma
FY14
FY15E
FY16E
FY17E
CAGR FY14-17E
Comments
563
707
925
1,236
30%
330
330
363
453
11%
-One offs
94
80
40
38
-26%
74
131
204
322
63%
-Cephalosporins
28
31
34
37
10%
-Injectables (Auromedics)
37
102
194
262
92%
ARV
139
160
184
202
13%
Europe
111
562
568
620
77%
-Legacy
111
133
160
192
20%
-Actavis
429
408
428
NA
77
84
93
102
10%
890
1,514
1,769
2,161
34%
SSP
162
178
187
196
7%
Cephs
145
170
175
175
7%
167
176
193
212
8%
Total API
474
524
555
584
7%
1,364
2,037
2,324
2,744
26%
Formulations
USA
-Orals
ROW
Total formulations
API
Page 77
Aurobindo Pharma
We expect a significant
improvement in the product mix in
the US led by incremental launches
in niche areas like injectables,
controlled substances, OTC and
penems
1QFY15 Comments
Aurobindo has a legacy business of oral non Betalactam products.
With only 5 ANDAs pending from Unit 3, we dont expect significant
growth from the Unit.
119
- Approved
114
- Pending
5
Unit 7 has 97 ANDAs pending approval in the oral non Betalactam
segment and likely to be the growth engine for the segment. We
expect revenues of US$4m/ANDA per annum from this segment.
133
- Approved
36
- Pending
97
General injectables and ophthalmic products are likely to be the key
growth driver for Aurobindos US business. We expect revenues of
US$4m/ANDA from this segment going forward.
66
- Approved
- Pending
58
Unit 12 is not a significant growth driver given only 1 ANDA from
the facility is pending approval.
20
- Approved
19
- Pending
1
Unit 6 is not a significant growth driver given only 1 ANDA from the
facility is pending approval
11
- Approved
10
- Pending
1
Controlled substances are a key growth driver given high margins
and revenue potential per ANDA in the segment. We pencil in
US$20m / ANDA from the segment going ahead.
25
7
18
- Products filed
- Approved
- Pending
Total
- Products filed
376
- Approved
194
- Pending
182
Page 78
Aurobindo Pharma
Legacy oral solid products Vertical integration driving market share
We assess that sales from legacy oral products in the US were at US$330mn in FY14
vs US$121mn in FY09 (CAGR of 22% in USD terms). The growth in sales was largely
driven by market share gains in these products owing to vertical integration benefits
and incremental launches of me too products and day 1 launches over the same
period. We exclude generic Cymbalta from this segment due to its one-off
contributions in FY14 and higher than normal pricing post exclusivity.
Exhibit 16: We expect Aurobindos Oral Solids CAGR at 11% over FY14-17E
500
Oral Solids
Revenue in US$ mn
CAGR 11%
400
300
CAGR 38%
453
200
312
100
192
35
59
233
330
363
330
213
121
FY07 FY08
Going forward, we expect the segment to register a revenue CAGR of 20% (in USD
terms) over FY14-17E, led by incremental launches. Out of the 208 ANDAs currently
pending approval from the USFDA, at least 102 products fall under this segment.
These filings would likely unravel over the next 3-4 years and result in revenue
growth. Aurobindo has also guided to filing ~40 ANDAs per year going forward. A
majority of these would be general injectables in FY16E, but FY15E and FY17E are
likely to see some more oral solid filings.
Exhibit 17: We expect the recent filings to unravel in the next 3-4 years
Unit-wise filings
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
- Products filed
123
120
120
120
116
117
118
119
- Approved
114
115
116
117
114
114
114
114
- Products filed
59
63
66
71
83
89
111
133
- Approved
18
19
23
28
29
30
33
36
- Pending
41
44
43
43
54
59
78
97
- Pending
Unit 7 - Oral Non-Betalactam products
Page 79
Aurobindo Pharma
Exhibit 18: We estimate that Aurobindo paid 30-40% distribution margins to Citron
In US$ mn
Lupin
Torrent
110
65
15%
8%
(C)
733
813
25%
25%
183
203
29%
36%
130
130
Post exclusivity, even as incremental competition has stepped in and pricing has
eroded further (~90% erosion now as per industry sources), the product still remains
relatively more profitable as compared to other similar products. Aurobindo continues
to sustain ~25% market share in the product, as per Wolter Kluwers audit data. We
expect the product to have a fatter tail than normal in the near term.
30
25
CAGR 63%
250
20
18
19
Q2FY14
Q3FY14
Q4FY14
Q1FY15
204
131
74
FY14
FY15E
FY16E
18
22
100
13
Q1FY14
150
13
Q4FY13
10
322
15
17
Q3FY13
15
200
50
Q2FY13
Revenue in US$ mn
300
- Approved
FY17E
- Pending
We estimate Aurolife would record a revenue CAGR of 63% over FY14-17E led by
new launches in FY15 of already approved products and incremental launches in
FY16/17E from new approvals from USFDA.
Page 80
Aurobindo Pharma
Cephalosporins Not a needle mover despite vertically integration benefits
Aurobindo received an import alert on its cephalosporin manufacturing unit (Unit VI)
from the USFDA in February 2011. The company was clocking revenues of
~US$33mn from cephalosporin sales in the US prior to the import alert. However,
the sales dropped to zero in FY13 due to stoppage of exports. The import alert was
lifted by the FDA in March 2013 and the company resumed supplies in April 2014.
20
10
15
10
16
5
FY11
FY12
FY13
16
16
17
- Approved
10
10
10
10
Q1FY15
15
Q4FY14
25
Q3FY14
20
Q2FY14
25
30
Q2FY13
Revenue in US$ mn
30
CAGR 10%
Q1FY14
Cephalosporins
35
Q4FY13
40
Q3FY13
- Pending
Post resumption of supplies, the company earned revenues of US$28mn from the
segment in FY14. We highlight that the regain in market share was driven by vertical
integration benefits and supply chain improvement, as most of the market share in
the interim was lost to players like Lupin. Going ahead, we expect the company to
clock a CAGR of 10% over FY14-17E from the segment given no incremental
launches.
Page 81
Aurobindo Pharma
Exhibit 24: Revenue unlocking
approvals
70
250
50
CAGR 92%
200
60
40
30
150
37
FY12
FY13
FY14
8
Q1FY15
10
19
Q4FY14
1
-
19
Q3FY14
102
- Approved
58
Q2FY14
50
18
0
36
47
Q1FY14
10
194
Q3FY13
100
24
42
Q4FY13
20
262
Q2FY13
Revenue in US$ mn
- Pending
We pencil in revenue CAGR of 92% for injectable sales in the US from Auromedics
over FY14-17E. We assume 15-20 product launches each year from the segment with
average revenue per ANDA of US$4mn.
FY14
FY15E
FY16E
563
707
925
1,236
30%
330
330
363
453
11%
Formulations
USA
-Orals
-One offs
94
80
40
38
-26%
74
131
204
322
63%
-Cephalosporins
28
31
34
37
10%
-Injectables (Auromedics)
37
102
194
262
92%
Aurobindo expects to narrow down the losses of the operations to EUR10mn in FY15E
and break even in FY16E by integrating the operations with its own business in
Western Europe, site transferring several products to lower cost manufacturing base
in India and discontinuing loss-making products/segments where there are no
synergies.
Page 82
Aurobindo Pharma
Exhibit 26: Contribution from Actavis portfolio to increase
700
600
500
400
CAGR 77%
428
408
300
429
200
100
-
111
133
160
192
FY14
FY15E
FY16E
FY17E
-Legacy
-Actavis
Whilst we believe that the acquisition will be RoCE-accretive when the profitability is
turned around, it will also be margin-dilutive as Western European markets offer high
single to low double-digit EBITDA margins for generic operations. We estimate
revenue CAGR of 5% over FY15-17E.
100
CAGR 13%
80
150
60
100
50
139
160
184
202
40
77
84
93
102
20
-
FY14
FY15E
ARV
FY16E
FY14
FY17E
FY15E
FY16E
ROW
FY17E
We pencil in 13% CAGR from ARV formulation sales largely driven by new
introductions. We also believe that the margins in the African business have shown
signs of improvement based on our primary data checks which suggest increased
rationality in pricing for contracts.
Aurobindo also has a small presence in certain emerging markets like South Africa,
Canada, Australia and Brazil. It further plans to enter geographies like Mexico and
South East Asian countries. Due to lack of evidence on the scalability of Aurobindos
business in these markets, we remain cautious.
Page 83
Aurobindo Pharma
193
212
145
170
175
175
162
178
187
196
FY14
FY15E
FY16E
FY17E
167
SSP
Cephs
Lack of investments in long-term growth drivers (NCEs, NDDS, biosimilars) has also
resulted in high R&D productivity in the near term and also aids reported RoCE and
EBITDA margins.
Exhibit 30: Aurobindo has the lowest R&D spend as a percentage of sales
10%
8%
4.3%
5.4%
8.0%
8.9%
9.1%
Glenmark
4.1%
7.0%
Dr. Reddy's
3.1%
Ranbaxy
2%
Cipla
4%
Lupin
6%
Cadila
Sun Pharma
Aurobindo
0%
Page 84
Aurobindo Pharma
28.5%
29.0%
27.0%
26.3%
25.8%
24.1%
25.0%
23.0%
21.2%
21.0%
24.8%
22.3%
20.9%
19.0%
17.0%
15.0%
FY14
FY15E
Conslidated margins
FY16E
Base Business margins
FY17E
(a) incumbents like Hospira, Ranbaxy, and Nesher return and establish themselves in
the respective segments resulting in market share and pricing erosion.
(b) lack of longer-term growth drivers (NCEs, NDDS and biosimilars) start to reflect in
terms of lower asset turnover. We pencil in decline in gross block turnover from
4.2X in FY17E to 3.0X (peer average) in FY27E.
(c) Lack of scalability in RoW and ARV formulation sales begin to drag growth and
operating leverage.
Page 85
Aurobindo Pharma
Exhibit 32: We expect RoCEs to stabilise at 12.8% in the terminal year
40.0%
35.0%
30.0%
25.0%
20.0%
WACC
15.0%
10.0%
5.0%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY26E
FY27E
FY28E
FY29E
0.0%
Financial assumptions
Exhibit 33: Detailed financial assumptions (` mn unless otherwise mentioned)
Assumptions
Particulars
FY14
FY15E
FY16E
FY17E
FY15E
FY16E
FY17E Comments
USA
34,028
42,416
55,495
74,175
24.7%
30.8%
33.7%
ARV
8,402
9,591
11,029
12,132
14.1%
15.0%
10.0%
Europe
6,721
33,745
34,060
37,204 402.1%
0.9%
9.2%
ROW
4,634
5,060
5,566
6,122
9.2%
10.0%
10.0%
API
28,643
31,413
33,301
35,020
9.7%
6.0%
5.2%
Total
82,593
48.2%
14.1%
18.1%
Gross profit
44,938
61,535
74,570
92,650
36.9%
21.2%
24.2%
Overheads cost
23,610
36,483
44,070
52,552
54.5%
20.8%
19.2%
EBITDA
21,328
25,052
30,499
40,098
17.5%
21.7%
31.5%
22.4%
25.0%
19,733
27,268
34.4%
25.1%
38.2%
Sales assumptions
Growth in the US to be led by unfolding of the 208 ANDA
strong pipeline
ARV sales growth muted, as opportunity is limited
Post Actavis acquisition, we expect some rationalisation in
product portfolio; we expect high single-digit growth on a
consolidated basis for Europe
Lack of evidence on scalability drives our low double-digit
growth assumption
Contribution to internal consumption to increase,
pressurising growth for external sales
Mid- to high-teen growth in revenues for FY16/17E
Expect expansion in gross margins, as product mix
improves in US and API
Limited operating leverage expected, as costs are based
out of India
Expansion in EBITDA margins largely led by gross margin
expansion
Financial leverage fuels PAT growth higher than EBITDA
growth
Ambit vs consensus
Exhibit 34: Our estimates are higher than consensus on FY16/17E EBITDA margins
Particulars (` mn)
Ambit
Consensus
Divergence (%)
FY15E
119,928
118,624
1.1%
FY16E
136,808
135,198
1.2%
FY17E
161,507
156,745
3.0%
FY15E
25,052
23,665
5.9%
FY16E
30,499
27,530
10.8%
FY17E
40,098
32,342
24.0%
FY15E
15,770
14,533
8.5%
FY16E
19,733
17,224
14.6%
FY17E
27,268
20,820
31.0%
Sales
EBITDA
Net Profit
Page 86
Aurobindo Pharma
Our estimates are 1.1-1.2% ahead of consensus FY15/16 revenue and 6-11% ahead
of consensus FY15/16 EBITDA estimates, as we expect a faster ramp up in US sales
led by improvement in USFDA timelines. Our FY15E net profit estimate of `15.8bn is
lower than management guidance of more than `16bn. Further, we believe that the
street is yet to upgrade its estimates post the fantastic results in 1QFY15. We are
penciling in higher margins for FY16/17E vs consensus led by our expectations of
launch of all interesting products like penems, controlled substances etc over the
period which are likely to result in higher EBITDA margins.
Page 87
Aurobindo Pharma
a) Given the absence of incumbents in the US, the market share and pricing for
Aurobindos cephalosporins, general injectables and controlled substances may
be inflated. Injectables and controlled substances account for more than 70%
revenue and profit growth for Aurobindo over FY14-17E. We expect pressure on
the base business to translate to decline in RoCE over the medium term (fy1827E).
b) Aurobindo is vertically integrated in most of its oral products but not so in
injectables. Hence, the company is unlikely to make similar margins and RoCEs
from the anticipated growth in the US and market share gains cannot be taken
for granted.
c)
Aurobindo sources 35% of its revenues (FY14) from API sales which are unlikely
to grow significantly from hereon as the company rationalizes low margin
revenues and increases captive consumption. Low consolidated growth beyond
FY18E would result in lower multiples.
We use a DCF methodology to value Aurobindo with a terminal RoCE of 13% and
discount rate of 13%. This leads to a target price of `828/share.
Valuation methodology
We value Aurobindo using a DCF methodology wherein EBITDA margin, mediumterm revenue growth rate and terminal revenue growth rate are the key variables
controlling the valuation. Furthermore, we use a free cash flow to equity
methodology.
EBITDA margin: We build in a gradual expansion in EBITDA margins from 21% in
FY14 (base business) to 29% in FY18E and then a gradual decline to 21% in FY29E
(terminal year). Aurobindo would have incremental margin tailwinds in the US over
the near term, as it ramps up its product basket. However, we believe it will face
pricing and market share erosion, as incumbents in various segments return to
market and establish themselves.
Medium-term and terminal revenue CAGR: We pencil in medium-term (FY18FY27E) revenue CAGR of 7% largely led by continued growth momentum in the US
market but no material growth in the API and Europe Actavis business. We expect the
US revenues to slow down post FY18E, as the tailwinds on faster approvals subside.
Page 88
Aurobindo Pharma
Exhibit 35: We pencil in medium-term revenue growth of 6.5% and terminal rate of
2.5%
Medium-term
revenue CAGR
(FY18-27E)
Terminal revenue
growth rate
(FY28E onwards)
USA
9.0%
3.0%
9.0%
3.0%
-One offs
0.0%
0.0%
9.0%
3.0%
-Cephalosporins
9.0%
3.0%
9.0%
3.0%
ARV
5.0%
3.0%
Europe
5.0%
2.0%
-Legacy
5.0%
2.0%
-Actavis
5.0%
2.0%
10.0%
5.0%
Total formulations
7.1%
2.9%
SSP
5.0%
0.0%
Cephs
0.0%
0.0%
5.0%
0.0%
Total API
3.8%
0.0%
7.1%
3.0%
ROW
Our DCF model suggests a fair value of `828/share (our 12-month forward target
price), which implies ~10.5x FY16/17E EPS as compared to the current trading
multiple of 14.5x FY15/16E EPS.
Exhibit 36: Aurobindos valuation discount does not fully reflect the competitive
disadvantage and lower RoCE
21
EV/EBITDA (FY16E)
19
Sun Pharma
17
Cipla
15
Cadila Glenmark
13
Lupin
Dr. Reddy's
11
IPCA
9
Aurobindo
7
5
10
15
20
25
RoCE (FY14)
30
35
40
Source: Bloomberg, Ambit Capital research; Note: Bubble size indicates competitive positioning (larger bubble =
higher position); Aurobindos FY14 RoCE estimated at 16% excludes Cymbalta exclusivity profits
As seen in the exhibit above, Aurobindo is trading at a discount to Sun Pharma and
Lupin largely due to inferior competitive positioning and lower RoCE. We believe that
the discount should expand given the lack of investments in longer-term growth
drivers and the vulnerability of revenues and profits to incremental competition.
At our target P/E multiple of 10.5x one-year forward EPS, Aurobindo would be
trading at a 50% discount to these companies, which we feel is justified.
Page 89
Aurobindo Pharma
Exhibit 37: Terminal value contributes 40% to total fair enterprise value
Key assumptions
Discount rate
Terminal growth rate
Medium term growth rate
EBITDA margins (FY14)
EBITDA margins (FY29E)
Value
255,173
Terminal value
101,127
Comments
40%
in ` mn
255,173
13,762
241,411
291.50
828
CMP (`.)
896
-8%
FY15E
FY16E
FY17E
15.3
12.2
8.9
16.6
13.2
9.6
Page 90
Aurobindo Pharma
Cross-cycle valuation
Aurobindo is currently trading at 14.5x FY15/16E EPS i.e. a ~35% discount to its
larger peers like Cadila, Lupin and Sun Pharma. Whilst the company has re-rated
significantly over the recent past largely led by the managements guidance towards
margin expansion and revenue growth in the US, we believe that the valuations fail
to reflect the fragility of the current profits and growth prospects.
At the current valuations, we see room for a de-rating of the business and believe
that segments like controlled substances, oral solids and general injectables in the US
are likely to see incremental competition from former incumbents in the medium
term. Hence, we expect the price performance to be negative despite strong earnings
growth.
Exhibit 39: The stock has traded in a P/E band of 6.0x-15.0x
over the last 12 months
1200
higher
EV/EBITDA
18x
1000
800
12x
20
15
600
10
Price
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-05
Oct-13
May-14
Mar-13
Aug-12
Jan-12
Jun-11
Nov-10
Apr-10
Sep-09
Jul-08
Feb-09
Dec-07
May-07
0
Oct-06
Mar-06
200
Mar-07
6x
Mar-06
400
The spike in FY11 in EV/EBITDA and P/E ratios reflects the impact of FDA ban on Unit
VI on earnings.
-150%
PAT growth (LHS)
Source: Bloomberg, Ambit Capital research
15%
FY14
-50%
FY13
0%
FY12
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
-50%
-100%
FY05
0%
20%
50%
FY11
50%
25%
FY10
100%
100%
FY09
150%
30%
FY08
200%
150%
FY07
250%
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
FY06
300%
FY05
-100%
RoE (RHS)
10%
5%
0%
RoCE (RHS)
Page 91
Aurobindo Pharma
Catalysts
We believe that the trigger/catalyst for de-rating could be:
(a) Return of an incumbent like Hospira in general injectables which are likely to
contribute 13.4% to the overall revenue growth over FY18E-27E.
(b) Large expensive acquisitions to establish longer-term growth drivers but at an
exorbitant cost; Aurobindo has no track record of large acquisitions, but we suspect
that the company will have to look for one when the growth dries up over the
medium term.
(c) Slowdown in US formulations sales due to inability in gaining market share in
injectables, as they are not vertically integrated.
Discount rate
828
1%
2%
3%
4%
5%
11%
984
1,036
1,102
1,186
1,297
12%
863
902
949
1,007
1,082
13%
765
794
828
870
922
14%
683
705
731
762
799
15%
615
632
651
674
702
21%
22%
23%
24%
25%
7%
646
674
701
728
755
8%
707
734
762
790
818
9%
771
800
828
856
885
10%
841
870
899
927
956
11%
915
945
974
1,004
1,033
Page 92
Aurobindo Pharma
Our INR assumption and sensitivity of earnings
We have penciled in `60/USD for FY15E and beyond. Our sensitivity analysis
suggests that for every percentage point appreciation/depreciation in the INR/USD,
Aurobindos net profit decreases/increases by 2.5%.
Score
Comments
RED
Aurobindo accounting analysis raises RED flags on: (a) admission of undisclosed income in the past; (b)
continuation of the same auditor despite undisclosed income issue; (c) lower than peer EBITDA/CFO ratios;
and (d) higher than peer working capital cycle.
Predictability
AMBER
Overall, the management has made timely announcements in its earnings calls, meetings and interviews
regarding product filings, acquisitions and business outlook. However, the unpredictability of segments like
ARV sales, RoW formulation sales and API sales make us assign an AMBER flag on predictability.
Earnings momentum
GREEN
Consensus FY15 EBITDA and EPS estimates have been upgraded by 5-8% and FY16 EBITDA and EPS
estimates have been upgraded by 4-5% over the past three months.
Accounting
Page 93
Aurobindo Pharma
FY10
FY11
FY12
FY13
YoY change in
Volatility
CFO as a % of
EBITDA (bps) (measured
by SD)
FY14
FY13
FY14
Aurobindo
70%
55%
65%
46%
46%
1,072 (1,963)
Cadila
96%
81%
64%
82%
98%
1,806
Company/Metric
Glenmark
IPCA
Biocon
Average(ex-Aurobindo)
Divergence
NA
60%
131%
80%
102%
71%
66%
94%
86%
90%
101%
152%
123%
104%
89%
90%
103%
88%
-19%
-35%
-38%
-42%
9%
1,590
16%
7,165 (5,114)
37%
2,806
15%
(841)
39%
2,377 (2,626)
-52% (1,305)
30%
663
-21%
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity
Working capital days: Aurobindos high debtor and inventory levels is only
partly explained by its business model, which is predominantly that of a generic
drug supplier with a relatively lower negotiating power (hence longer payment
cycles). This is in comparison with its peers that have a mix of generic as well as
branded drug businesses. Both API and generic finished dosages in the Western
markets are highly competitive.
Whilst the higher debtor days can also be justified for new entrants trying to
break into the business, Aurobindo has had a presence in the generic business
for nearly a decade. Hence, we raise a RED FLAG on Aurobindos overall cash
conversion cycle.
Exhibit 47: Working capital days
Company/Metric
Aurobindo
Cadila
FY11
FY12
FY13
FY14
FY11
FY12
FY13
FY14
FY11
FY12
FY13
FY14
FY11
FY12
FY13
FY14
91
97
88
95
107
118
108
97
57
56
51
52
141
160
146
140
78
49
58
54
53
62
66
66
65
57
48
35
40
53
77
85
140
108
105
115
100
72
59
54
81
66
66
73
158
115
98
96
IPCA
83
63
49
48
82
104
96
94
24
32
33
34
141
134
113
109
Biocon
Average(exAurobindo)
Divergence
63
88
74
70
52
69
57
49
35
57
51
44
80
100
80
76
85
83
74
76
80
86
77
72
51
52
47
49
108
106
94
90
(37)
(24)
(20)
(24)
(19)
(20)
(11)
(7)
(4)
(13)
(9)
33
53
52
50
Glenmark
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity.
Page 94
Aurobindo Pharma
FY11
FY12
FY13
FY14
Aurobindo
20.3%
21.8%
18.1%
21.9%
31.1%
Cadila
19.2%
20.9%
22.4%
25.3%
24.3%
NA
9.8%
13.4%
12.8%
17.6%
14.6%
11.2%
18.2%
15.9%
15.8%
7.6%
9.6%
14.4%
15.8%
15.7%
15.4%
14.7%
17.3%
18.3%
18.3%
4.9%
7.1%
0.8%
3.5%
12.8%
Glenmark
IPCA
Biocon
Average(ex-Aurobindo)
Divergence
Source: Company, Ambit Capital research. Note: All financials pertain to the consolidated entity; we have
excluded capital advances from loans and advances to calculate the above ratio.
Auditors
The fact that the company acknowledged undisclosed income during tax raids in
February 2012 calls into question the independence/ capabilities of both the statutory
auditors (S R Batliboi and Associates) as well as the internal auditors (KPMG). This
issue itself makes us raise a RED FLAG.
The statutory auditors of Aurobindo Pharma are S R Batliboi & Associates who were
appointed in 2008-2009 replacing Batliboi & Company who had been auditors of
Aurobindo at least since FY01. Both the statutory auditors are essentially a part of
Ernst & Young auditors and effectively the auditors have remained unchanged for
more than 11 years now.
Page 95
Aurobindo Pharma
Board composition: The Board currently comprises ten directors, out of which
four are independent directors and four are executive directors. Although the
percentage of independent directors is higher than Indian company laws
prescribed 30%, it is lower than global best practice of 50%. AMBER FLAG
In the past, ex-employees have been classified as independent directors and have
occupied positions on critical board committees such as the Audit Committee. Mr
Srinivas Lanka who was on the companys board between 2002 and 2007 was
classified as an independent director; he had overseen the companys operations
in manufacturing and marketing up to early 2002 till he resigned from his
executive duties and was inducted as a non-executive independent director on
the board. Moreover, Mr Lanka was also a member of the all-important Audit
committee until his resignation in 2007.
Insider trading: There are several stock transactions by insiders that raise
questions over corporate governance practices. For instance, towards the end of
CY10 and early CY11 there was selling by insiders. This was shortly followed by
issues relating to US FDA strictures against an injectable facility becoming public
which led to significant correction in valuations. Similarly towards the end of
CY11, there was heavy insider buying which was followed by news flow on
regulatory issues gradually getting resolved. We assign an AMBER FLAG.
Page 96
Aurobindo Pharma
Revenue Mix
Year ended 31 Mar (` mn)
FY13
FY14
FY15E
FY16E
FY17E
USA
17,526
34,028
42,416
55,495
74,175
ARV
7,503
8,402
9,591
11,029
12,132
Europe
4,679
6,721
33,745
34,060
37,204
Formulations
ROW
4,164
4,634
5,060
5,566
6,122
33,872
53,785
90,812
106,149
129,633
SSP
7,652
9,778
10,676
11,210
11,770
Cephs
9,373
8,755
10,200
10,500
10,500
8,337
10,110
10,537
11,591
12,750
25,362
28,643
31,413
33,301
35,020
Total formulations
API
760
165
150
150
150
59,994
82,593
122,375
139,600
164,803
FY13
FY14
FY15E
FY16E
FY17E
Net revenues
58,553
80,998
119,928
136,808
161,507
Material Cost
29,908
36,060
58,393
62,238
68,857
General Expenses
17,670
21,059
31,086
37,914
45,284
Total
Income statement
Year to March (in ` mn)
R&D Expenses
2,085
2,551
5,397
6,156
7,268
Core EBITDA
8,891
21,328
25,052
30,499
40,098
Depreciation
2,487
3,125
3,701
4,226
4,264
Interest expense
1,316
1,087
1,071
846
621
Adjusted PBT
4,303
15,334
20,480
25,627
35,413
Tax
827
3,635
4,710
5,894
8,145
3,501
11,737
15,770
19,733
27,268
FY13
FY14
FY15E
FY16E
FY17E
Total Assets
61,202
77,503
90,949
101,450
118,826
Fixed Assets
28,574
30,314
32,613
35,887
41,623
Current Assets
43,982
64,386
82,027
92,070
107,830
223
198
198
198
198
61,202
77,504
90,949
101,450
118,826
Balance sheet
Year to Mar (in ` mn)
Investments
Total Liabilities
Shareholders' equity
291
292
292
292
292
25,766
37,210
52,655
70,656
95,532
Total networth
26,058
37,502
52,946
70,948
95,823
Total debt
34,355
37,691
35,691
28,191
20,691
Current liabilities
10,685
16,037
22,531
25,347
29,467
680
2,054
2,054
2,054
2,054
Page 97
Aurobindo Pharma
Cash flow statement
Year to March (In ` mn)
FY13
FY14
FY15E
FY16E
FY17E
PBT
4,303
15,334
20,480
25,627
35,413
Depreciation
2,487
3,125
3,701
4,226
4,264
Tax
(1,192)
(3,440)
(4,710)
(5,894)
(8,145)
(4,216)
(10,591)
(10,662)
(4,207)
(10,002)
3,311
6,471
10,731
20,398
21,952
(2,676)
(3,741)
(6,000)
(7,500)
(10,000)
CFO
Capital Expenditure
Investment
233
(236)
Other investments
(21)
(4,211)
200
200
200
(2,463)
(8,187)
(5,800)
(7,300)
(9,800)
CFI
Issuance of Equity
35
Inc/Dec in Borrowings
1,747
1,737
(3,071)
(8,346)
(8,121)
Net Dividends
(674)
(596)
(1,384)
(1,732)
(2,393)
CFF
1,081
1,176
(4,455)
(10,077)
(10,514)
1,928
(540)
476
3,021
1,638
2,085
1,786
2,270
5,291
6,929
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS
12.0
40.3
54.1
67.7
93.5
89.5
128.7
181.6
243.4
328.7
P/E (x)
72.4
21.6
16.1
12.9
9.3
Valuation Parameters
P/BV (x)
EV/EBITDA(x)
9.7
6.8
4.8
3.6
2.6
32.1
13.6
11.5
9.1
6.7
EV/Sales (x)
4.9
3.6
2.4
2.0
1.7
EV/EBIT (x)
50.8
17.6
13.3
10.4
7.4
CFO/EBITDA (x)
0.4
0.3
0.4
0.7
0.5
2.1
2.8
3.8
4.0
4.2
1.3
1.3
1.5
1.4
1.5
Year to March
FY13
FY14
FY15E
FY16E
FY17E
Revenue growth
26.5
38.3
48.1
14.1
18.1
45.7
139.9
17.5
21.7
31.5
NA
236.5
34.8
25.1
38.2
Ratios
APAT growth
EPS growth
NA
234.9
34.4
25.1
38.2
22.0
13.2
15.2
26.3
20.9
EBIT margin
9.6
20.3
18.0
19.4
22.3
5.9
14.4
13.1
14.4
16.9
ROCE (%)
9.8
24.2
26.3
28.2
33.4
14.2
36.9
34.9
31.9
32.7
1.3
1.0
0.7
0.4
0.2
Current Ratio
4.1
4.0
3.6
3.6
3.7
Page 98
Aurobindo Pharma
(022) 30433174
saurabhmukherjea@ambitcapital.com
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Utsav Mehta
Technology
(022) 30433209
utsavmehta@ambitcapital.com
Sales
Name
Regions
Desk-Phone E-mail
UK
Deepak Sawhney
India / Asia
(022) 30433295
deepaksawhney@ambitcapital.com
Dharmen Shah
India / Asia
(022) 30433289
dharmenshah@ambitcapital.com
Dipti Mehta
India / USA
(022) 30433053
diptimehta@ambitcapital.com
Hitakshi Mehra
India
(022) 30433204
hitakshimehra@ambitcapital.com
USA / Europe
(022) 30433259
nityamshah@ambitcapital.com
UK / USA
(022) 30433169
pareespurohit@ambitcapital.com
Praveena Pattabiraman
India / Asia
(022) 30433268
praveenapattabiraman@ambitcapital.com
Sajid Merchant
Production
(022) 30433247
sajidmerchant@ambitcapital.com
Sharoz G Hussain
Production
(022) 30433183
sharozghussain@ambitcapital.com
Joel Pereira
Editor
(022) 30433284
joelpereira@ambitcapital.com
Nikhil Pillai
Database
(022) 30433265
nikhilpillai@ambitcapital.com
sarojini@panmure.com
Production
Page 99
Aurobindo Pharma
Expected return
(over 12-month period from date of initial rating)
Buy
>5%
Sell
<5%
Disclaimer
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