Dear Friends,
We are recommending Buy on our Actionable Ideas "Aurobindo Pharma" as per following:-
CMP: Rs 760 Target: Rs 895 (17% Upside)
Key Points:
Aurobindo Pharma: Stock stays a Buy as it makes strategic acquisition
· Acquisition update: Aurobindo Pharma has signed an agreement to acquire the commercial operations and three US-based manufacturing facilities from Sandoz Inc., for $900 million, or Rs. 6,500 crore. The facilities are located at Hicksville and Melville, New York for dermatology and Wilson, North Carolina for oral solids. The acquisition includes the dermatology and oral solid businesses, and has been done on an all-cash basis, without Aurobindo taking any cash or debt from the acquired business. The deal will be financed through debt. The management indicated that the acquired business is likely to have sales potential of ~$900 million (post acquisition) and will be EPS accretive from the first year of ownership. The acquisition will lead to strong synergies and will be closed in CY2019, mostly in the first half.
· Rationale & Effect: The acquisition is a perfect fit in the company's growth strategy and diversification of its US business. The acquired portfolio is a sizeable generic business for key therapy areas and will allow Aurobindo to expand its product offerings and become one of the leading players in the US generic dermatology market. The deal also enhances the scale of operations, leading to cost synergies. We expect the deal to close by end of FY2019 or early FY2020. In our estimates, we have assumed the numbers to reflect from FY2020E. We expect the company's debt: equity ratio to increase from 0.4 in FY2018 to 0.7 in FY2020, as debt of Rs. 6,500 crore will be added. However, sales of ~Rs. 6,500 crore will be added in FY2020. We expect Aurobindo to report sales and earnings CAGR of 30% over FY2018-FY2021E.
· Maintain Buy, raise PT to Rs. 895: Considering the sharp depreciation in the Indian rupee and cues from management's commentary on acquisition of Sandoz's businesses, we have revised our sales and earnings estimates by 29% and 9%, respectively, for FY2020E and also introduce FY2021E earnings. We maintain our Buy rating on the stock and raise the PT to Rs 895, valuing stock at 12x FY2020E earnings.
· Risk: Delayed product approvals, forex volatility, deferred execution of strategy, stressed balance sheet and any adverse outcome of USFDA audits pose risks to our earnings estimates.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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