Aurobindo Pharma Q1FY23 results profitability affected due to higher input costs

Aurobindo Pharma, a fully integrated pharmaceutical company, is ranked among India’s top businesses in terms of consolidated revenues. The company also entered the high profit speciality generic formulations area with cost-effective production capabilities and a few devoted customers. It is R&D-focused, offers a variety of products, and has 27 State-of-the-art manufacturing and packaging facilities globally,

Additionally, it has been active in more than 155 markets worldwide. Moreover, the company not only dominates the market for semi-synthetic penicillins but also has a foothold in important therapeutic areas like gastroenterology, neuroscience, cardiovascular, anti-retrovirals, and anti-diabetics, among others.

Aurobindo Pharma announced their Q1FY23 results on 12^th August 2022, where they reported lower than expected profits due to cost headwinds creating margins pressure. Geographically speaking, US business grew well YoY, while EU business remained sluggish. The Aurobindo Stock has experienced a big correction on the technical standpoint since the beginning of 2022. It didn’t make any significant moves on either side after the release of the Q1FY23 data. However, given that the stock is now trading at steep discounts despite the firm being the second-largest pharmaceutical company, let’s examine their Q1FY23 numbers to see whether there is any potential for investment.

Key Highlights of Aurobindo Pharma Q1FY23 results

• Aurobindo Pharma’s revenues from operations went up by 4% YoY to Rs 6,236 crore and up 7.4% QoQ
• US revenue in the Q1FY23 rose 10.8% YoY to Rs 2,971.1 crore, making up 47.7% of total revenues
• Sales in Europe fell by 2.2% YoY to Rs. 1,548.9 crore with formulations in accounting for 8% of total sales
• EBITDA was at Rs 936 crore, down 23% YoY with margins at 15%.
• Aurobindo Pharma said its consolidated net profit for the Q1FY23 was down by 4% YoY to Rs 520.5 crores & fell 9.5% QoQ
• Other expenses included one off Rs 60 crores related to reschedule of production process to meet certain regulatory compliance
• Company launched 7 new products including 4 injectable in the US market; Filed 13 ANDAs (abbreviated new drug application) including 4 injectable in Q1FY23
• Expects to file and launch 20-30 products annually from FY24 onwards

Aurobindo Pharma results Q1FY23: Revenue grew 9.4% YoY while EBITDA fell 22.3% YoY

Aurobindo Pharma’s revenues from operations were up by 9.4% YoY to Rs 6,236 crore during Q1FY23 compared to Rs 5,702 crore in Q1FY22. While on a sequential basis it went up by 7.4% from Rs 5,809 crores in Q4FY22 to Rs 6,236 crores in Q1FY23.

US revenue in the Q1FY23 rose 10.8% YoY to Rs 2,971.1 crore, making up 47.7% of total revenues. While sales in Europe fell by 2.2% YoY to Rs. 1,548.9 crore. Formulations in Europe accounted for 24.8% of total sales. While Rest of the world business grew 30% YoY aided by domestic formulation consolidation.

Further ARV (antiretroviral) sales improved by 28% YoY to Rs 3.8bn (up 10% QoQ). API (Active Pharmaceutical Ingredient) sales grew strongly by 12% YoY on increased demand in key products. Aurobindo continues to be one of the top manufacturers of API globally.

The company’s EBITDA margins, too, decreased by 620bps on a YoY basis, majorly impacted by cost pressure due to rising RM costs. EBITDA was at Rs 936 crore, down 23% YoY with margins at 15%. The company’s Gross Margins declined by 480bps YoY due to price erosion in the industry, high input (raw material, power, etc) and high logistic costs.

Aurobindo Pharma results Q1FY23: PAT fell 32.4% YoY while PAT margin fell to 8.8% in Q1FY23

Aurobindo Pharma said its consolidated net profit for the Q1FY23 was down by 32.4% YoY to Rs 520.5 crores compared to Rs 770 crore in the Q1FY22. While on a sequential basis profits fell 9.5% to Rs 521 crores in Q1FY23 from Rs 576 crores in Q4FY22.

Moreover, the profits have been continuously declining with PAT margin coming down to 8.4% from 13.5% in Q1FY22 & 9.9% in Q4FY22. The main reason for this was building margin pressures that have heavily impacted their profitability.

Additionally, other expenses were up 3% QoQ and up 20% YoY mainly led by higher freight cost and one-off expenses to the tune of Rs 60 crores. R&D cost came at 5% of sales,down 13% YoY. Further, there was forex loss to the tune of Rs 28 crores.

The company witnessed 2-3% price erosion in base business in the US in Q1FY23 which was negated by volume growth. Further, they expect to minimize impact by new launches.

K Nithyananda Reddy, Vice-Chairman and Managing Director of the company said, “We delivered a good performance amidst a challenging environment, while reinforcing our growth pillars. Investments in product portfolio continued at a healthy pace as reflected in the filings and launches in the quarter.”

Technical Analysis of Aurobindo share price

The Aurobindo Share price has corrected severely, almost 33.7% in a year. The same can be attributed to several factors including RM costs, price erosion & statutory delays. The stock has a huge potential given its future prospects and current market share. Technically the stock is in a bearish phase with 50 EMA below 100 & 200 EMA for more than a year.

Therefore, investors can wait till EMA makes a bullish crossover, to take advantage of a probable investment opportunity.

ICICI Securities said, “We remain positive on Aurobindo’s long-term outlook considering its strong US pipeline with the possibility to launch more than 20 products every year, potential unlocking of injectable business, significant balance sheet improvement and investments in new segments for future growth. However, recent run up in the stock price (11% in last 1 month) captures the growth potential partially. Hence, we downgrade the stock to ADD from Buy with a revised target price of Rs 632/share”

While Axis Securities said, “The overall increase in the competition, persistent price erosion in the US market (68% revenue from the US market), and higher frequency of USFDA inspection may lead to more surprises in upcoming quarters’ results. Keeping this in view, we recommend a HOLD rating on the stock with a Target Price of Rs 630/share. The management has indicated to demerge the injectable business to unlock the shareholders’ value.”

Our View

Aurobindo’s goal to deliver sustained improvement in profitability will go hand in hand with the company’s focus on the development of specialty product pipeline to create new opportunities for commercial growth in the future.

Further investors can expect the cost pressures to remain in the near term while it is expected that margin trajectory will improve from H2FY23. Therefore, investors need to have a ‘wait and watch’ approach for a while to see how things play out in future before investing in Aurobindo Pharma.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

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