Detailed Report |18 February 2016
Sector: Healthcare
Aurobindo Pharma
Growth capsule
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 3982 5584
Amey Chalke
(Amey.Chalke@MotilalOswal.com); +91 22 39825423
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Aurobindo Pharma
Aurobindo Pharma: Growth capsule
Summary ............................................................................................................. 3
US business – strong growth to sustain in medium term ........................................ 5
Regulatory concerns unwarranted; Buy on weakness .......................................... 13
European operations – Actavis acquisition to provide scale ................................. 17
ARV business – Focus on high margin business .................................................... 19
APIs – Ramping up capacities to meet demand.................................................... 20
Financial outlook ................................................................................................ 21
Valuations: At significant discount to peers ......................................................... 23
Aurobindo Pharma – SWOT Analysis ................................................................... 28
Story in charts .................................................................................................... 29
Financials and Valuations ................................................................................... 31
18 February 2016
2

Aurobindo Pharma
BSE Sensex
23,382
S&P CNX
7,108
Detailed Report
|
Sector:
Healthcare
CMP: INR667
TP: INR1,100(+65%)
Buy
Growth capsule
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)/(USD b)
Avg Val,(INR m)/Vol ‘000
Free float (%)
Rare combination of fastest growth and cheapest valuations
ARBP IN
584.8
892/491
-14/-4/42
390.1/5.7
1,688/1,696
46.1
Financial Snapshot (INR b)
Y/E Mar
2015 2016E 2017E
Net Sales
121.2 138.2 163.1
EBITDA
25.6 31.9 39.2
PAT
16.2 20.1 25.4
EPS (INR)
27.7 34.5 43.5
Gr. (%)
9.1 24.4 26.3
BV/Sh (INR)
88.3 119.7 160.7
RoE (%)
36.4 33.1 31.0
RoCE (%)
28.2 29.2 30.6
P/E (x)
24.0 19.3 15.3
P/BV (x)
7.5
5.6
4.1
Shareholding pattern (%)
As On
Dec-15 Sep-15 Dec-14
Promoter
53.9
53.9
54.1
DII
6.5
6.1
6.5
FII
28.8
28.9
29.7
Others
10.9
11.1
9.7
FII Includes depository receipts
ARBP is poised to deliver the fastest growth among Indian large cap pharma peers
(27% EPS growth over FY15-18E v/s 22% for coverage universe) and is trading at
attractive valuations of 15x FY17E and 12x FY18E EPS – at ~20% discount to large
cap peers.
US business revenue is expected to more than double in three years to >INR100b
(USD1.5b) in FY18 v/s ~INR47b (USD792m) in FY15, driven by (a) ramp-up of
existing launches, (b) one of the largest pipeline of pending ANDAs among Indian
peers – in niche areas of Controlled Substances, Injectables, Penems and Peptides,
and (c) USD appreciation.
We believe concerns related to 483 observations at unit VII are unwarranted, as
there are no data integrity issues, and most importantly, ARBP has received two
approvals (on 2nd and 5th February 2016) from this facility post the inspection.
We expect the valuation gap vis-à-vis peers to narrow on increasing profitability
and strong free cash flow generation. ARBP remains one of our top picks in the
sector. Our target price of INR1,100 (20x FY18E EPS) implies 65% upside.
Our sensitivity analysis suggests significant upside in the bull case (assuming
higher US sales and margins) and <10% downside in the bear case.
US business to double in three years
ARBP has the highest number of pending ANDAs among Indian peers (~159
pending ANDAs). It has received >30 approvals YTD FY16 v/s 3 approvals in
FY15.
We expect this strong approval momentum to continue, as the company has
>50 pending ANDAs, which are >2.5 years old, including 168 pending ANDAs
with 28 TADs till the end of August 2016. This provides us visibility of strong
launch pipeline over the next 12-15 months.
US business revenue is expected to more than double in three years to
>INR100b (USD1.5b) in FY18 v/s ~INR47b (USD792m) in FY15, driven by (a)
ramp-up of existing launches, (b) strong pipeline in niche areas of Controlled
Substances, Injectables, Penems and Peptides, and (c) USD appreciation.
Over the next twelve months, strong growth in US sales will be driven by
ramp-up of existing launches (Integrilin, Isosulfan, etc), and upcoming
launches like Meropenem, Valgancyclovir, Angiomax, Nexium, etc.
Improving business mix to boost margins; expect 27% EPS CAGR over
FY15-18
Click here for Video Link
Large exposure to API business and low margin ARV products kept ARBP’s
base business margins at sub-20% levels till FY15. We expect EBITDA
margins to expand to >25% by FY18, driven by improved scale of operations
(driving operating leverage) and scale-up of high margin US launches
(Injectibles, Penems, etc).
18 February 2016
3

Aurobindo Pharma
Stock Performance (1-year)
We expect ARBP’s net profit to expand at 27% CAGR over FY15-18, mainly
led by strong operating performance (24% EBITDA CAGR) and increasing
financial leverage.
ARBP has not been able to generate significant cash flows till FY15 (because
of lower margins and geographic / technological expansions). This trend is
likely to change, going forward, as the investments start generating returns.
In 9MFY16, ARBP generated ~USD70m of FCF (~USD50m in 3Q). We expect
FCF generation of ~USD400m by FY18, which would help reduce leverage
from 0.7x currently to 0.1x by FY18.
Capex is expected to come down from FY18, as the 5 greenfield facilities and
3 brownfield facilities get commissioned by FY17. Consequently, RoCE is
likely to improve to >30% by FY18.
The stock has corrected ~18% in the last one month, primarily due to
concerns related to (1) observations raised by USFDA at unit VII plant, (2)
charge sheet by Enforcement Directorate (ED), and (3) weak macro
fundamentals.
We believe that concerns related to 483 observations at unit VII are
unwarranted, as there are no data integrity issues, and most importantly,
the company has received two approvals (on 2nd and 5th February 2016)
from this facility post the inspection.
Unlike most other large cap peers (Sun Pharma, Dr Reddy’s and Cadila),
ARBP has no facilities under regulatory enforcement at this point in time.
Given that ARBP’s key plants have been successfully inspected (we believe
issues at unit VII are non-concerning) by USFDA in the last one year, it
provides comfort around stable business outlook.
The ED charge sheet was filed in a four year old case. ARBP has categorically
mentioned that liability from this case at company level is insignificant
(~INR130m). However, promoters are directly involved in this matter.
ARBP trades at 15x FY17E and 12x FY18E EPS, at ~20% discount to large cap
peers. Strong US ramp-up, improvement in margins coupled with FCF
generation, and continuous decline in debt would help multiples expand in
the medium term.
We expect the valuation gap vis-à-vis peers to narrow on the back of
increasing profitability and strong free cash flow generation. ARBP remains
one of our top picks in the sector. Our target price of INR1,100 (20x FY18E
EPS) implies 65% upside.
Our sensitivity analysis suggests significant upside in the bull case (assuming
higher US sales and margins) and <10% downside in the bear case.
Risks: USFDA inspection is an ongoing (but critical) business risk, as every
quarter 1-2 facilities are being inspected.
High FCF generation + declining capex = lower debt
Regulatory concerns unwarranted; Buy on weakness
Trades at significant discount to peers; Buy
18 February 2016
4

Aurobindo Pharma
US business – strong growth to sustain in medium term
ARBP's US business is likely to double in three years to INR93b, driven by burst of
ANDA approvals and increasing contribution of complex generic products in US sales.
ARBP has 168 products pending at USFDA, of which more than 50 are Injectables. It
will also be launching products in the Control Substances, Penems, Depo Injections
and Peptides categories.
ARBP has been traditionally strong in Beta Lactum products, with significant
presence in Semi-synthetic Penicillins and Cephalosporins. However, in the last few
years, it has developed a robust ANDA pipeline of 168 products (largest among
Indian peers), with a fair mix of niche complex generics like Injectables, Controlled
Substances, Penems, Peptides and plain vanilla generics. These niche segments are
technically complex to commercialize/develop and also have entry barriers in terms
of dedicated facility required (and gestation period). Consequently, competition is
likely to be much lower and profitability per product higher. ARBP’s low cost
operating structure and vertical integration across most products (~90%) have also
added to its competitiveness. Moreover, it has forayed into US OTC business with
US-based subsidiary called Aurohealth and Natrol Franchise.
Exhibit 1: US generic business
US generic formulations (INR b)
133
94
29
37
-8
7
FY10
8
FY11
8
FY12
18
FY13
34
FY14
47
FY15
55
FY16E
73
FY17E
93
FY18E
32
28
YoY growth (%)
18
17
Source: Company, MOSL
US business to grow at a CAGR of 30%+ over FY15-18E
Over FY10-15, ARBP delivered robust 42% CAGR on the back of niche oral launches
(including Cymbalta), entry into Injectables, Controlled Substances and Government
Tender business. Despite a strong growth phase in the last five years, we believe
ARBP is well poised to maintain this growth momentum for the next few years. We
expect US business to grow at a CAGR of ~30% over FY15–18 (Injectables portfolio
to grow at 35-36%). Consequently, the contribution of US sales is expected to
increase from ~24% in FY15 to ~28% in FY18.
18 February 2016
5

Aurobindo Pharma
Exhibit 2: US sales break-up
130
425
1500
792
90
63
FY15 (USD m)
Rx business
Injectables
Natrol
OTC
FY18E (USD m)
Source: Company, MOSL
Exhibit 3: Aurobindo’s US business is divided into four key verticals
Aurobindo Orals
(~80% of sales)
•Oral products
•Accounts for >80% of
US sales
•135+ pending ANDAs
Controlled substances
(~6% of US sales)
•Primarily institutional
business
•7 product approvals
till date
•9 ANDAs pending
(USD 3b)
Injectable business
(~8% of US sales)
•ARBP has 3
Manfacturing
facilities
•First approval
recieved in FY12.
•18 products approval
till date
•60+ pending ANDAs
AuroHealth
•Deals with OTC and
Nutraceutical
business
•Revenue generation
to start from FY16
Natrol
•Acquired this brand
in FY15.
•FY15 sales include
only 4 month sales
(~USD30m)
•To grow at 20%+
CAGR
Source: Company, MOSL
Exhibit 4: US revenue split of USD790m (FY15)
AurohealthNatrol
0%
4%
Aurolife
(Controlled
Substances)
24%
Aurobindo
USA (Oral
products)
63%
Exhibit 5: US revenue split of USD1.5b (FY18E)
Aurohealth
4%
Aurolife
(Controlled
Substances)
28%
Auromedics
(Injectables
)
12%
Natrol
8%
Auromedics
(Injectables
)
9%
Aurobindo
USA (Oral
products)
48%
Source: Company, MOSL
Source: Company, MOSL
18 February 2016
6

Aurobindo Pharma
Largest product pipeline among peers
New product launches and the quality of the products approved remain the key
drivers for growth in the US generics space. ARBP received 37 product approvals in
FY14, including niche approvals like Cymbalta. The product pipeline in the US looks
robust, as ARBP has the largest pipeline of pending ANDAs, including a rich mix of
Oral, Injectables and Controlled Substances.
Exhibit 6: Robust ANDA pipeline
ANDA filed
ANDAs pending
336
209
59
FY10
75
239
92
269
145
88
168
387
Exhibit 7: Highest pending ANDAs among peers
ANDA Filed
ANDA Pending
591
387
168
71
FY14
YTD
172
266
165 167
27
CDH
63
GNP
42 23
IPCA
311
158
156
FY11
FY12
FY13
ARBP
ALPM
LPC
SUNP
Source: Company, MOSL
Source: Company, MOSL
Exhibit 8: Classification of filed products
Cephalospo
rin & SSP
Injectables 15%
Penem
0%
Exhibit 9: Classification of pending products
Cephalospo Penem
rin & SSP
1%
1%
Injectables
and
Ophthalmic
32%
and
Ophthalmic
4%
Non
Betalectam
81%
Source: Company, MOSL
Non
Betalectam
66%
Source: Company, MOSL
Burst of approvals provide strong visibility of future growth
In the first 9 months of FY16, ARBP has received 35 approvals from USFDA, which
could add USD130m-150m to annual sales. The number of approvals received in
FY16 is already more than double the number received in the whole of FY15 and
FY14 put together (~13 approvals). The approvals are a mix of plain vanilla generics,
limited competition Injectables and complex Oral generics. We believe product
approvals like Suprax, Evista, Dilantin and Baraclude could add USD20m-30m each
to US annual sales, going forward. Given that out of the pending Injectable portfolio
of >50 pending ANDAs, most were filed in FY12 and FY13, we expect multiple
Injectable approvals to come through in the next two years.
18 February 2016
7

Aurobindo Pharma
Exhibit 10: ANDA approvals picking up in FY16
ANDA approvals
26
18
7
10
19
16
18
17
10
3
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
YTD
36
35
FY05
Source: Company, MOSL
Exhibit 11: List of ARBPs approved products in US market in FY16 (YTD)
Brand Name
Integrilin
Plan B One-Step
Actonel
Imodium
Solu-Medrol
Patanol
Pepcid
Revatio
Ultram ER
Namenda
Abilify
Micardis
Lopid
Evista
Baraclude
Prilosec DR
Boniva
Xanax
Methadose
Brevibloc
Tambocor
Zithromax
Comtan
Dilantin
Flagy
Suprax
Atracurium
Revatio
Drug Name
Eptifibatide Inj
Levonorgestrel Tab
Dexamethasone Sodium Phosphate
Risedronate Sodium Tab
Loperamide Hydrochloride
Methylprednisolone Sodium Succinate
Olopatadine Hydrochloride
Famotidine Tab
Sildenafil Citrate Tab
Tramadol Hydrochloride tablets
Memantine Hydrochloride tablets
Aripiprazole Tablets
Telmisartan
Gemfibrozil
Raloxifene Hydrochloride
Entecavir
Omeprazole DR
Ibandronate Injection
Alprazolam
Methadone Hydrochloride
Cetrizine Hydrochloride (OTC product)
Esmolol HCL Injection
Flecainide Acetate
Azithromycin Injection
Entacapone
Phenytoin Sodium
Metronidazole
Cefixime
Atracurium Besylate Injection
Sildenafil Injection
Size
(USD m)
31
64
31
113
10
102
235
29
80
<100
1230
7300
92
35
404
291
442
15
58
NA
NA
6
61
135
59
125
58
80
10
10
Launch/
approval date
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Dec-15
Nov-15
Oct-15
Oct-15
Oct-15
Sep-15
Sep-15
Aug-15
Aug-15
Aug-15
Aug-15
Aug-15
Aug-15
Aug-15
Jul-15
Jul-15
Jun-15
Jun-15
Jun-15
May-15
Apr-15
Apr-15
Apr-15
18 February 2016
8

Aurobindo Pharma
Exhibit 12: Break-up of US sales
150
115
100
100
1243
786
FY15
Incremental
sales from already
launched products
Products
approved
but yet to launch
Injectables
More than
35 products
to be launched…
FY17E
Injectables – next leg of growth
US Injectables market – low on competition and high on profitability:
The US is the
largest market for Generic Sterile Injectables, with a market size of ~USD7b in 2013
and is expected to reach ~USD10b by 2020. Injectables are a specialized and niche
area within the pharmaceuticals industry due to the high complexity involved in
formulating a large and complex product portfolio across various therapies based on
multiple technology platforms and delivery mechanisms.
High entry barriers keep competition away:
Limited FDA-approved capacities,
capital intensive facilities with long timelines to set up, changes in regulations (auto-
handling is now mandatory in the EU), and manufacturing complexities make
Injectables a limited pricing pressure opportunity. The customer segment is almost
exclusively hospitals, with a distinct decision-making process and criteria. This has
resulted in very few generic players.
Exhibit 13: Generic injectable market to expand over next years (USD b)
10
7
2013
2020
Source: Company, MOSL
18 February 2016
9

Aurobindo Pharma
Injectables remain key growth driver for ARBP:
ARBP received its first Injectables
approval in late FY12 for a product called Ceftazidime. Since then, it has received 10
product approvals in the Injectables space. The current pending filings stand at 48.
ARBP has received target action date (TAD) for 27 products till August 2016. It has
already received 13 Injectable approvals in FY16. We expect another 10-12
Injectable approvals over the next 12 months. Besides, it will continue to benefit
from the shortages in already existing products like Lidocaine and Bupivacaine
(earlier benefited from shortage of Piperacillin Tazobactam also). We believe
Injectables will be one of the key contributors to ARBP’s US sales going forward and
expect this segment to grow at a CAGR of 36% over FY15-18.
Exhibit 14: Injectable portfolio to be key driver
Injectable revenues (INR m)
148.4
118.4
65.3
34.6
1,246
FY12
2,060
FY13
4,500
FY14
11,179
FY15
25.0
13,974
FY16
50.0
20,961
FY17
Anti-nausea
9%
Anti-biotics
45%
Source: Company, MOSL
% YoY growth
Exhibit 15: Approved injectable portfolio in the US
Others
23%
Anaesthetics
23%
35.0
28,297
FY18
Source: Company, MOSL
Building capabilities in niche areas within Injectables space:
ARBP has dedicated
facilities for Semi-synthetic Penicillins (SSPs), Penems and non-Betalactam liquid
Injectable products. Of 25 approved Injectable products, 10 are SSP-based approved
Injectables, while the rest are a mix of plain vanilla Injectables and products under
drug shortage list (including Lidocaine and Bupivacaine). ARBP’s pipeline of
Injectable ANDAs includes 2 Penems filings, 10 Ophthal, and few complex
Injectables (like Fondaparinux). ARBP is also working on building capabilities in the
niche areas of (1) Hormones / Steroids, (2) Oncology, (3) Liposomes /
Microspeheres, and (4) addition to Penems / Opthalmic portfolio.
Controlled Substances and Institutional Business in the US
ARBP supplies Controlled Substances in the US market through its Aurolife
subsidiary in the US. It has decided to establish a foothold in this market due to
limited competition and high barriers to entry. For this, ARBP has set up a
manufacturing facility in the US through a US-based subsidiary, Aurolife Inc. It
currently has 7 approved products and generated revenue of >USD50m in FY15 from
this vertical. The current ANDA pipeline of 9 Control Substances has market
potential of at least USD500m. Revenue from Controlled Substances is expected to
grow at a CAGR of 20% over FY16-18.
The Federal VA awards, which drove revenues in FY14 and FY15, will continue to do
so, as the tenure is five years. USD15m-20m of reasonably stable revenue stream
can be expected from these awards in FY15. Oxycodone with Acetaminophen,
Dextroamphetamine, and the Dextromphetamine combination salt are few of the
key products in this segment.
18 February 2016
10

Aurobindo Pharma
Penems
ARBP has also developed and made Penem filings for four products in the
Injectables portfolio. The company is selecting difficult-to-make products and
has set up a facility under brand AuroNext in Bhiwandi to manufacture high-end
Penems.
The company has also made a strategic acquisition of Silicon Life Sciences in
FY14 (for INR116m) for backward integration into manufacturing APIs for
Penems.
The company has already filed two Penems with USFDA and is expected to
receive approval for Meropenem in the near term. The total market size of
these Penem filings is expected to be around USD200m in the US. ARBP is also
expected to file for Ertapenem in FY17.
Peptides
Peptides is a fast growing industry and ARBP is likely to emerge as a strong
player, with plans to file more than 30 Peptides, going forward. Currently, only
1-2 players are manufacturing these products.
The company has set up a subsidiary called Auro Peptide and has already filed
two DMFs and is expected to file one more in 4QFY16. Prior to the US, it will
launch these products in emerging markets and Europe. The commercializing is
likely to start from CY16.
Currently, ARBP is developing four Microsphere and Liposomal Injectable
products for which filing can start from FY17. The addressable market for these
products is about USD3b.
Specialty Drugs (Oncology & Hormones)
As per IMS, Oncology is among the largest therapy segments in developed
markets (USD70b-80b by FY18). Hormones are also going to be one of the
fastest growing therapies over the next few years.
In FY14, ARBP acquired 60% stake in Eugia, which develops and markets niche
Hormonal and Oncology generic formulations for the regulated markets.
ARBP has completed first exhibit batches for three Hormone products, with
filing expected in FY16.
It is also working on 15 Oncology products and plans to prepare exhibit batches
for Oncology Injectables from FY16.
Nutraceuticals
As per GIA, the global Nutraceuticals market is expected to exceed USD263b by
2020, growing at a CAGR of 8%.
ARBP is exploring this market and R&D facilities have been initiated to identify
and develop synthetic Nutraceutical products.
During 2013-14, process development work to manufacture a few products has
been completed.
18 February 2016
11

Aurobindo Pharma
Exhibit 16: Pending approvals
Molecule
Esomeprazole
Palonosetron
Emtricitabine
Rosuvastatin
Paricalcitol
Dexmedetomidine
Abacavir + lamivudine
Ritonavir
Tenofovir Disporoxil
Emtricitabine + tenofovir
Atomoxetine
Atazanavir
Tygecycline
Bivalirudin
Moxifloxacin
Saxagliptin
Saxagliptin+metformin
Gatifloxacin
Pitavastatin
Prasugrel
Minocycline
Dalfampridine
Efavirenz
Dextromethorphan HBr+Guaifenesin
Doribax
Esomeprazole
Palonosetron
Brand
Nexium
Aloxi
Emtriva
Crestor
Zemplar
Precedex
Epzicom
Norvir
Viread
Truvada
Strattera
Reyataz
Tygacil
Angiomax
Vigamox
Onglyza
Kombiglyze XR
Zymaxid
Livalo
Effient
Solodyn
Ampyra
Sustiva
Mucinex DM
Doripenem
Nexium
Aloxi
Sales (USD m)
2,272
450
25
3,164
300
150
490
500
570
2,000
384
769
132
450
266
426
165
65
100
377
370
235
178
90
10
2,272
450
Potential
FY17
FY17
FY17
FY17
FY17
FY17
FY17
FY17
FY18
FY18
FY18
FY18
FY18
FY20
FY20
FY23
FY23
Unknown
Unknown
Unknown
Unknown
Unknown
Unknown
Unknown
Unknown
FY17
FY17
Source Company, MOSL
18 February 2016
12

Aurobindo Pharma
Regulatory concerns unwarranted; Buy on weakness
The stock has corrected ~18% in the last one month, primarily due to concerns
related to (1) observations raised by USFDA at unit VII plant, (2) charge sheet by
ED (Enforcement directorate), and (3) weak macro fundamentals.
We believe that concerns related to 483 observations at unit VII are
unwarranted, as there are no data integrity issues, and most importantly, the
company has received two approvals (on 2nd and 5th February 2016) from this
facility post the inspection.
Unlike most other large cap peers (Sun Pharma, Dr Reddy’s and Cadila), ARBP
has no critical regulatory issues at this point in time. Given that ARBP’s key
plants have been successfully inspected (we believe issues at unit VII are non-
concerning) by USFDA in the last one year, it provides comfort around stable
business outlook.
The ED charge sheet was filed in a four year old case. ARBP has categorically
mentioned that liability from this case at company level is insignificant
(~INR130m). However, promoters are directly involved in this matter.
Increase in regulatory scrutiny a concern- to benefit the sector in long term
Inspection rate by US FDA outside US has increased by >75% over last 5 years
What has led to this increase:
Inspection rate outside US was at ~2-3 years vs ~1 year in US. US FDA is
planning to bridge this gap.
Increase in regulatory fees has helped FDA to invest more on quality control
and increase inspection rate.
Surprise visits by USFDA (unlike before) has led to increase in adverse
results.
Though it seems that inspection rate has increased it is in line with the asset
share
India accounts for ~40% of US FDA compliant facilities (outside US) and
inspection rate share for India was at ~35% in recent past.
18 February 2016
13

Aurobindo Pharma
Exhibit 17: India's share of inspection rate in line with facility Exhibit 18: Equal % of warning letter issued to facilities in US
share (%)
and outside US (%)
40
35
India's share of US FDA
India's share of inspection
approved facilties outside
rate (%)
US (%)
Source: Company, MOSL
6%
5%
Rate of warning letter
issuance for US (%)
Non-US facilties (%)
Source: Company, MOSL
483 observations common but escalation of it is uncommon
Recent history suggests that 483s observations comes at more than 70% of
inspections which happen
However this does not mean that every 483 observation will escalate to warning
letters/ import alerts
Rate of 483 observations getting converted into warning letter/ import alerts
remains in low single digits
Nature of 483 observations is key to assess the probability of it getting
converted into warning letter- Data integrity issues etc.
Exhibit 19: FDA inspections in last 7 years
No of inspection
483 issued
% of 483 issued
Warning Letter
Import alert
SUNP
52
37
71
2
1
LPC
18
12
67
1
0
DRRD
31
19
61
3
1
ARBP
18
14
77
1
1
CDH
15
12
80
1
0
GNP
19
14
74
0
0
TRP
5
4
80
0
0
IPCA
10
7
70
0
3
Source: Company, MOSL
18 February 2016
14

Aurobindo Pharma
Exhibit 20: US FDA approved facilities status for key companies
FDF
11
5
6
2
6
5
6
1
2
API
3
3
9
2
6
2
2
0
2
Both
1
2
0
2
1
0
0
1
0
Total
15
10
15
6
13
7
8
2
4
Under
enforcement
4
0
3
0
0
0
1
0
0
Pending 483s
0
1
0
1
1
0
0
0
0
SUNP
LPC
DRRD
CIPLA
ARBP
GNP
CDH
TRP
IPCA
Source: Company, MOSL
Exhibit 21: Past warning letters to Indian companies
Company
Cadila Healthcare
Cadila Healthcare
Sun Pharma
Dr. Reddy's
Dr. Reddy's
Dr. Reddy's
Cadila Healthcare
Lupin
Ranbaxy
Ranbaxy
Strides
Sun Pharma
Sun Pharma
Wockhardt
Wockhardt
Aurobindo
Aurobindo
Facility
Moraiya
Ahmedabad
Halol
Duvvada
Miryalguda
Srikakulam
Moraiya
Mandideep
Dewas
Paonta Sahib
Agila
Karkhadi
Cranbury
Chikalthana
Waluj
Unit III
Unit VI
Issue
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Date of inspection
9/5/2014
12/6/2014
9/16/2014
3/6/2015
1/31/2015
11/27/2014
2/3/2011
11/12/2008
2/12/2008
3/7/2008
6/27/2013
11/16/2013
4/28/2010
7/31/2013
3/22/2013
9/24/2010
12/22/2010
Date of letter
12/23/2015
12/23/2015
12/17/2015
11/15/2015
11/15/2015
11/15/2015
6/21/2011
5/7/2009
9/16/2008
9/16/2008
9/9/2013
5/7/2014
8/25/2010
11/25/2013
7/18/2013
5/20/2011
5/20/2011
Time Gap
Resolution Date
(days)
474
382
457
254
288
353
138
176
217
193
74
172
119
117
118
238
149
Not closed
Not closed
Not closed
Not closed
Not closed
Not closed
7/11/2012
1/20/2010
Not closed
Not closed
Not closed
Not closed
9/19/2011
Not closed
Not closed
Not closed
6/4/2012
381
390
386
258
Time Gap
(days)
Source: Company, MOSL
18 February 2016
15

Aurobindo Pharma
One of the strongest manufacturing capabilities
ARBP currently has 7 USFDA approved formulations facilities (including 2 Injectables,
1 Controlled Substance, and 1 Nutraceutical formulation facility). Apart from this, it
has 8 formulations facilities under construction (including 1 Penems, 1 dedicated
Oncology & Hormones, and 1 Injectable). 4-5 of these yet-to-be-operational facilities
will supply formulations to the US market. It also has 6 USFDA approved API
facilities, which supply Cephalosporin, Peptides, Penems and ARVs.
Exhibit 22: Aurobindo- Unitwise product portfolio in US
Unit
Unit 3
Unit 4
Unit 6B
Unit 7
Unit 12
AuroLife
AuroNext
Total
Products
NPNC
NPNC
Cephs
NPNC
SSP
NPNC
Penem
Form
Oral
Injectable
Oral
Oral
Oral & injectable
Oral
Injectable
Filed
119
67
11
143
19
26
2
387
Approved
112
21
11
55
19
10
0
228
Under review
7
46
0
88
0
16
2
159
Source: Company, MOSL
Exhibit 23: US FDA approved formulations facilities
Site Name
Unit III
Unit IV
Unit VI B
Unit VII
Unit XII
Natrol
AuroLife
Other formulations facilities
AuroNext
Brazil Unit
Eugia^
AuroHealth^
Unit X^
Unit XV^
Unit XVI^
APL Healthcare^
Product Capabilities
Non antibiotics, ARVs / orals
Injectables (Non-antibiotics)
Cephalosporin / orals
Non antibiotics, ARVs / orals
Antibiotics, injectables, orals
Nutraceuticals
Non antibiotic & controlled substances
Penem formulations
Antibiotics
Oncology & hormones
Pharma OTC / Orals and Liquids
Non antibiotics, solid orals
Non antibiotics, solid & liquid orals
Antibiotics, injectables
Pharma OTC, solid orals
Location
India
India
India
India
India
US
US
India
Brazil
India
US
India
India
India
India
18 February 2016
16

Aurobindo Pharma
European operations – Actavis acquisition to provide
scale
ARBP has expanded its Europe business inorganically. Till date, it has acquired three
businesses in Europe – Milopharm in 2006, Pharmacin in 2007 and Actavis in 2014.
European business sales grew four fold in FY15 to INR31.9b on the back of the
acquisition of Actavis’ Europe business. As a result, Europe sales contribution has
also increased from 8% in FY14 to 26% in FY15.
Actavis business was making substantial losses when it was acquired by ARBP in
2014. However, the shift in manufacturing location from Europe to India is likely to
bring substantial cost savings. ARBP has site transferred 28 products to its Indian
facility and has achieved EBITDA breakeven in the EU region.
Exhibit 24: EU growth bolstered by Actavis buy
Base EU business (INR b)
Actavis assets (INR b)
378
24
19
36
44
25
-1
8
FY16E
24
25
2
8
FY17E
7
9
FY18E
YoY growth (%)
3
FY12
5
FY13
7
FY14
7
FY15E
Source: Company, MOSL
Benefits of Actavis business
Currently, Actavis business is spread over 7 countries in Europe – France, Germany,
Netherlands, United Kingdom, Spain, Italy, and Portugal. It is one of the leading
Indian companies, with strong generics footprint in Europe. With this acquisition,
ARBP has expanded its product lines and distribution network. It also includes 1,250
dossier license rights and another 200 drugs are in the pipeline.
ARBP is likely to provide low cost high quality APIs that will lower COGS significantly.
ARBP also has large presence in Injectables, which could be leverage to improve
profitability in Europe. This acquisition would also give an opportunity to enter into
institutional (Hospital) market in Europe. ARBP will strengthen its position in key
therapy areas like CNS, Anti-infectives and Digestives post this acquisition.
Cost optimization to help create value in European business
Actavis’ generic Europe business had reported 8% loss of sales in CY13. By cost
optimization efforts, ARBP is on track to achieve PAT breakeven by FY16 and higher
single-digit margins in next two years.
Currently, ARBP sources most of its products from Actavis’ manufacturing facilities.
However, it plans to expand 50% of its portfolio to India. Till 3QFY16, it has
18 February 2016
17

Aurobindo Pharma
transferred 28 products to Indian facilities. Once the greenfield facility to supply to
Europe is ready, the site transfer process would pick up.
Acquisition to provide access to institutional business
Till now, ARBP did not have presence in Hospital sales across Europe. With this
acquisition, 25% of the sales channels comprise of Hospital sales. ARBP can leverage
this sales channel 18-24 months down the line to market its growing Injectables
portfolio. Further down the line, its high value products like Penems from Auronext
and Hormones from Eugia can be launched in Europe through these established
channels.
Exhibit 25: Wide product portfolio acquired
Products
44
34
22
Sales contribution (%)
Hospitals
25%
Branded
Generics
9%
611
Others
Tender
16%
Source: Company, MOSL
Exhibit 26: … expanding access to newer channels
OTC
2%
Generics
48%
395
France
192
Germany
18 February 2016
18

Aurobindo Pharma
ARV business – Focus on high margin business
ARV business grew 15% in FY15 to INR9.7b, driven by improving traction in tenders.
The company provides cost effective generic version of >43 ARV products catering
to more than 100 countries and 2m HIV patients. ARBP plans to focus on high value
triple combination products. WHO recently included Tenofovir Triples as First Line
Treatment (FLT). Currently, out of USD1b Tenfovir Triples market, ARBP’s share is
only 4%.
Exhibit 27: ARV business
61.2
40.7
23.6
14.8
ARV business (INR b)
40.0
13.4
(4.6)
1,783
FY06
2,875
FY07
4,044
FY08
4,642
FY09
4,953
FY10
6,936
FY11
7,866
FY12
7,503
FY13
8,402
FY14
9,639
FY15
12.0
14.7
YoY growth (%)
6.7
Source: Company, MOSL
Dolutegravir (DTG) – The Next Growth Driver
ARBP is the first generic company to sign license with ViiV Healthcare for the
next generation Integrase Inhibitor – DTG
Filed an ANDA application for DTG 50mg with USFDA under the PEPFAR
program.
WHO announced this drug as a 1st line reserve drug in its 2015 HIV
treatment guidelines.
Play a collaborative role in upgrading millions of patients to the latest best in
class ARV drug.
Developing a Triple drug combination containing DTG.
Market size is expected to be USD2b in 2017; Triple combination drug
containing DTG expected to garner major share.
Key ARV products:
1.
2.
3.
4.
5.
6.
Efavirenz + Lamivudine + Tenofovir
Lamivudine + Zidovudine Tabs
Abacavir Sulfate Tabs
Lopinavir + Ritonavir Tabs
Efavirenz + Emtricitabine + Tenofovir Tabs
Zidovudine + Lamivudine + Nevirapine Tabs
18 February 2016
19

Aurobindo Pharma
APIs – Ramping up capacities to meet demand
API sales declined 6% in FY15 to INR27b, impacted by shift in focus to formulations
and growing captive consumption. Broadly, API business is divided into three
categories – SSPs, Cephalosporin and non-Betalactum. SSP sales declined 12% to
INR8.6b while Cephalosporin sales grew 6% to INR9.3b. Non-Betalactum sales
declined 10% to INR9.1b, affected by weaker traction in ARV tenders in FY15.
Slowdown in growth is due to increasing pricing pressures and strategy to stay out
of low margin products. This focus is clearly visible from the uptick in the share of
non-Betalactum products from 17% in FY09 to 34% in FY15. Going ahead, the ARV
segment would be the key driver of API business that will drive profitability and
revenue growth. However, we expect overall API business contribution to decline
from 22% in FY15 to 16% in FY18.
Exhibit 28: API mix shifting toward high-margin products
SSPs
FY15
FY14
FY13
FY12
FY11
FY10
FY09
0
10
32
34
30
30
31
38
44
20
30
40
50
60
Ceph
34
31
37
36
47
42
39
70
80
ARV & others
34
35
33
33
22
19
17
90
100
Source: Company, MOSL
Exhibit 29: API filings
US FDA
EU DMF
415
295
178
66
656
122
FY08
242
74
810
133
FY09
81
1036
145
FY10
154
FY11
85
97
1783
1395
160
FY12
502
CoS
565
109
1443
172
FY13
RoW
627
106
669
112
Exhibit 30: Declining contribution of API
Formulations (INR b)
API (INR b)
27
28
31
16
16
18
21
25
29
1504 1557.0
181
FY14
188
YTD
14
19
24
26
34
54
96
111
134
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Source: Company, MOSL
Source: Company, MOSL
18 February 2016
20

Aurobindo Pharma
Financial outlook
We forecast ARBP’s core earnings to grow at 27% CAGR over FY15-18, primarily led
by improved business mix (high margin formulations), financial leverage and
turnaround of acquired EU business. We expect revenue to grow at 17% CAGR and
expect EBITDA margins to expand cumulatively by 370bp over FY15-18 (to 25.3%).
We expect moderation in capex (INR6b-7b annually) to aid cash flow generation and
deleveraging, driving financial leverage.
US to lead revenue growth
We expect ARBP’s revenues to grow at 17% CAGR over FY15-18, on a high base
(gCymbalta). Key growth drivers are likely to be (a) scale-up of niche products in US
(30% CAGR, 38% of sales), (b) steady growth in EU business (3% CAGR, 27% of sales),
and (c) triple dose combination products driving growth in ARV segment (20% CAGR,
8% of sales).
Improving business mix to boost margins; expect 27% EPS CAGR over FY15-
18
Large exposure to API business and low margin ARV products has kept ARBP’s base
business margins at sub-20% levels over the last four years. We expect EBITDA
margins to improve cumulatively by 370bp over FY15-18, driven by improved scale
of operations (driving operating leverage) and scale-up of high margin US launches
(Injectibles, Penems, etc). We expect ARBP’s net profit to grow at 27% CAGR over
FY15-18, mainly led by strong operating performance (24% EBITDA CAGR) and
increasing financial leverage.
Exhibit 31: Forecast 27% EPS CAGR
EPS (INR)
56 %
Exhibit 32: Break-up of EPS growth (FY15E-18E)
27 %
17 %
55
28
8.6
FY10
9.2
FY11
3.3
FY12
6.9
FY13
25.4
FY14
27.7
34.5
43.5
55.0
EPS (FY15)
Sales
Growth
Margin expn Financial
Leverage
EPS (FY18E)
FY15 FY16E FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
Despite high capex, ARBP to generate substantial cash flows
High capex outlay over the years has resulted in suboptimal return ratios. We expect
capex outlay to stay at least at INR10b for the next few years. However, stable
working capital requirement (post integration of EU operations) and improving
margin profile would result in better free cash generation. Over FY15-18, we expect
ARBP to generate INR25b free cash flows, which would help reduce leverage from
0.7x to 0.2x by FY18. Consequently, RoCE is likely to improve from 28% (FY15E) to
31% by FY18.
18 February 2016
21

Aurobindo Pharma
Exhibit 33: Capex plans
Brownfield
Expansions
• Dedictaed block for Lypholized
vials at Unit IV
• Finished dosages blocks at Unit
VII
• New API blocks at Unit XI
• Substantial capacity expansion at
Aurolife
Greenfield
Expansions
• Oral solid facility at naidupet
• Special product facility at Eugia
• Finished dosage facility for
European markets
• New formulation development
center in USA
Source: Company, Mosl
Exhibit 34: Capex to remain elevated
Capex (INR b)
14
11
6
4
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Source: Company, MOSL
Exhibit 35: Asset turnover to improve
Gross Block (INR b)
Asset turnover (x)
2.2
2.1
2.1
2.3
11
8
1.4
1.7
2.0
1.5
1.6
6
5
24
FY10
24
FY11
31
FY12
37
FY13
42
FY14
56
FY15
67
78
86
FY16E FY17E FY18E
Source: Company, MOSL
Exhibit 36: Improving free cashflows
1.9
Free cashflow (INR m)
1.2
1564
-5727
-1304
-7157
-70
1.3
1.0
1.3
1.0
-794
0.7
2979
5356
0.5
D/E (x)
11478
8327
0.3
0.2
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Source: Company, MOSL
18 February 2016
22

Aurobindo Pharma
Valuations: At significant discount to peers
ARBP has outperformed most of its peers in Indian Pharma over the last 12 months.
This has been driven by (a) significant improvement in operating performance post
clearance of USFDA import alert, and (b) ramp-up in US launches, including high
margin gCymbalta. With its recent acquisitions in the EU (Actavis assets) and the US
(Natrol), the share of high margin formulations in total revenues has increased to
~80% (v/s 54% in FY10), positioning it among large cap formulations players. Our
target price of INR1,100 discounts ARBP’s FY18E EPS at 20x.
The stock is currently trading at a premium to its 3-year average P/E multiple,
which is justified, given stronger business profile and earnings outlook.
It quotes at 10% discount to the sector average target P/E multiple, factoring
higher leverage and potential execution-related risks.
Current valuations imply a PEG of 0.66x (FY15-18E EPS CAGR of 27%).
We believe re-rating of the stock from a single-digit P/E multiple to current levels
partly factors transition to a formulations player, improved execution in the US, and
moderation in leverage (from 1.2x D/E in FY10 to 0.7x in FY15). However, current
valuations at 15.9x FY17E and 12.6x FY18E EPS are still at 30-35% discount to the
sector average, which is unjustified in our view. Further re-rating is imminent, given:
Strong EPS outlook – expect 27% CAGR over FY15-18, backed by 17% revenue
CAGR
Strong free cash flow generation of INR28b over FY15-18
Deleveraging of balance sheet – expect D/E to improve to 0.2x by FY18 from
0.7x now
Key catalysts to drive stock performance over the medium term
Improvement in EU profitability (30% of business), led by deeper penetration in
existing markets and site transfer to India
Launch of high margin products in the US, including Injectables (25+ launches
over next 18 months), Controlled Substances, etc.
Focus on high margin triple combination ARV products in Africa (from FY16E)
Risks to our investment assumptions
Regulatory risks could lead to stoppage of supplies to the US and Europe. ARBP
has filed large number ANDAs from its unit VII facility in Hyderabad. During the
last USFDA inspection, it had received four 483 observations, EIR is still awaited.
There is ongoing litigation, involving ARBP’s senior management in the
Hyderabad court.
Delay in cost rationalization efforts in the EU business could lead to lower than
expected earnings growth.
Deferral of key approvals in the US.
18 February 2016
23

Aurobindo Pharma
Valuation gap to narrow
ARBP trades at 15x FY17E and 12x FY18E EPS, at 30-35% discount to large cap
peers. We expect the valuation gap to narrow on the back of increasing
profitability and strong free cash flows.
Though ARBP is largely into generics business, a substantial part of its business
still comes from mature products that generate sustainable cash flows. The risk
that ARBP will face heavy competition in these products over the foreseeable
future is low.
Besides that, business fundamentals are also improving. ARBP has started
generating FCF and leverage has declined by ~USD70m YTD (to USD610m). Net
debt/equity has come down to ~0.5x at as the end of 3QFY16 from ~1.3x in FY13
(despite increase in capex, acquisition of EU business and Natrol), primarily due
to strong profitability growth (PAT growth of 72% over FY13-16E).
Substantial improvement in monetizing ANDA pipeline has also increased the
confidence on the company’s execution skills. We believe strong earnings
delivery and sharp reduction in leverage would merit a re-look at the valuation
gap with peers; further re-rating is imminent. We value the stock at INR1,100
(20x FY18E EPS).
Rating
Buy
Buy
Neutral
Neutral
Buy
Buy
Neutral
Neutral
Buy
Neutral
Neutral
FY16E
19.9
49.7
152.4
23.0
34.5
15.2
29.8
64.2
61.7
26.2
10.9
FY17E
EPS (INR)
33.1
73.0
154.4
24.8
43.5
14.5
39.9
71.6
71.4
29.5
26.0
FY18E
39.0
90.0
183.4
33.3
55.0
21.0
48.9
90.0
87.5
35.6
40.1
FY16E
42.9
34.8
19.4
22.5
19.2
20.6
24.1
20.6
21.4
23.2
54.7
FY17E
P/E (x)
25.8
23.7
19.2
21.0
15.2
21.6
18.0
18.5
18.5
20.6
23.0
FY18E
21.9
19.2
16.1
15.6
12.0
15.0
14.7
14.7
15.1
17.1
14.9
FY16E FY17E FY18E
EV/EBITDA (x)
23.9
17.1
14.1
27.3
17.6
14.1
13.0
12.6
10.3
14.2
11.8
9.1
13.3
10.6
8.2
14.8
14.0
9.9
14.1
9.0
7.8
8.7
13.5
10.8
19.5
15.5
11.9
10.3
14.3
11.4
22.3
13.0
9.3
Source: Company, MOSL
Exhibit 37: Compendium
Company
SUNP
LPC
DRRD
CIPLA
ARBP
CDH
GNP
TRP
ALKEM
ALPM
IPCA
CMP
(INR)
854
1,730
2,961
519
667
314
720
1,322
1,320
608
598
TP
(INR)
950
2,250
3,300
600
1,100
380
880
1,800
1,750
680
680
Exhibit 38: P/E bands (trading at 1 Std to its LPA P/E)
1250
1000
750
500
250
0
12x
24x
18x
6x
Exhibit 39: P/E bands (trading at 18x)
1500
1250
1000
750
500
250
0
Mean
Std -1
Std +2
Std +1
Source: Company, MOSL
Source: Company, MOSL
18 February 2016
24

Aurobindo Pharma
Exhibit 40: Relative to healthcare (%)
250
Aurobindo Pharma PE Relative to Healthcare PE (%)
0
-39.6
-250
Source: Company, MOSL
18 February 2016
25

Aurobindo Pharma
Sensitivity analysis – Upside potential outweighs downside risk
Exhibit 41: Scenario analysis suggests >100% upside in bull case vs <10% downside in bear case
Assumptions
Base Case
Bull Case
Bear Case
FY18E EPS
(INR)
55.0
61.3
38.7
Target
Multiple (x)
20
22
15
TP
(INR)
1,100
1,350
580
Upside/
(Downside)
75%
>100%
-7.4%
USD1,550m of US sales in FY18E
EU EBITDA margins of ~5% in base case in FY18E
USD100m of additional sales in US
EU EBITDA margins of ~10% vs 5% in base case
USD250m of lower sales in US & ROW
EU EBITDA margins of ~0% vs 5% in base case
Bull case suggests >100% upside from current levels
Our sensitivity analysis suggests that in the bull case, ARBP could generate EPS of
~INR65 (v/s INR57.5 in base case). Valuing ARBP at 22x forward earnings (in line with
peers v/s 20x in base case – 10% discount to peers) yields a fair value of INR1,425
(v/s TP of INR1,150), implying upside of >75% from CMP.
Faster than expected ramp-up of US business:
We have assumed US business
sales for ARBP to almost double to ~USD1500m in FY18 (v/s USD792m in FY15)
in our base case. However, approvals in niche segments, including Penems,
Peptides, and Hormonal & Oncology Injectables could help add US sales of
~USD100m in FY18. We have also assumed EBITDA margin of 35-40% on
incremental US sales of USD100m in bull case scenario (v/s ~30% in base case).
Vertical integration benefits in EU could surprise positively:
Site transfer of
products to India should lead to margin expansion. Currently, we have assumed
EBITDA margins of ~5% in FY18 from EU region. Cost optimization coupled with
vertical integration benefits could lead to margin of 10% in EU market (ARBP
expects margins from this region to be in low double digits in medium term).
Valuation multiples in line with peers rather than at discount:
In our base case,
we have assumed target multiple of ~20x (10-15% discount to peers). EPS
growth of ~28% coupled strong FCF generation and improvement in return
ratios should allow ARBP to trade at par with large cap peers at 22x.
Exhibit 42: Triggers for bull case- US ramp up coupled with margin improvement in EU and multiple re-rating
120
80
50
1350
1100
TP- Base case
Better ramp-up in US
Faster vertical intergartion
benefits in EU
Valuations multiples
@22x (vs 20x)
TP- Bull case
Source: Company, MOSL
18 February 2016
26

Aurobindo Pharma
Bear case analysis indicates limited downside from current levels
Our bear case sensitivity analysis shows that ARBP could generate EPS of ~INR47
(v/s INR57.5 in base case). Valuing ARBP at 15x forward earnings (25-30% discount
to peers v/s 20x in base case – 10% discount to peers) yields a fair value of INR580
(v/s TP of INR1,100), implying downside of <10% from CMP.
Slower ramp-up in US and ROW markets:
We have assumed US business sales
for ARBP to almost double to ~USD1,500m in FY18 (v/s USD792m in FY15) in our
base case. However, slower than expected approval rate coupled with increase
in competition could lead to lower sales. Also, we have assumed revenues to
grow in high teens in the years ahead. In the bear case, we have lowered our
FY18E revenues by ~USD250m on the back of slower ramp-up in the US and
ROW markets.
Status quo remains in EU business:
Though there is a very high likelihood of
margin improvement in EU markets, in the bear case scenario, we have assumed
that cost will remain high and the company will continue to generate zero
operating profit in this market. This could happen only if the site transfer plan
does not result in cost benefit (which should be the ideal case).
Valuation multiples discount to broaden to 25-30% discount to peers:
In this
case, we have assumed target multiple at ~15x v/s ~20x in the base case. This
could happen if macro factors become progressively worse or there is a
question mark on the company’s growth outlook.
Exhibit 43: Triggers for bear case- Slow ramp-up in US & ROW coupled status quo in EU and multiple downgrade
200
50
270
1100
580
TP- Base case
Muted growth in US
(USD250m less in FY18E)
Staus quo in EU
Valuations multiples
@15x (vs 20x)
TP- Bull case
Source: Company, MOSL
18 February 2016
27

Aurobindo Pharma
AUROBINDO PHARMA – SWOT Analysis
Vertically integrated business
model
One of the largest ANDA
pipelines in US:
ARBP has one
of the largest pending ANDA
pipelines of >165 in the US
market
Lower dependence on large
products
provides stability to
base business (largest product
accounts for <5% of sales).
To generate ~USD950m of US
sales in FY16,
with lowest
R&D in the industry
No presence in domestic
branded business
Behind large cap peers in
complex generics segment
Higher debt - investing for
future:
ARBP currently has
debt of ~USD610m primarily
due to recent acquisitions and
aggressive expansion
Foraying into niche areas in
US:
Complex generic filings in
limited competition areas
including Penems, Peptides,
and Hormonal & Oncology
Injectables
Turnaround in Europe:
ARBP
expects EBITDA margins for
this business to be in double
digits over the next three
years.
Currency volatility bodes well
due to limited emerging
market exposures:
USFDA
scrutiny:
USFDA
scrutiny has become a key risk
for pharma companies.
High base effect:
US business
will almost reach the USD1b
mark in FY16.. Niche approvals
will be key to drive growth
INR appreciation:
Steep
appreciation in INR will have a
negative impact on revenue
and profitability.
STRENGTHS
WEAKNESS
OPPORTUNITY
THREATS
18 February 2016
28

Aurobindo Pharma
Story in charts
Exhibit 44: Segment mix (%)
FY14
USA
Natrol
EU
RoW
ARV
APIs
Total
30
0
8
7
13
43
100
FY15
41
0
8
6
10
35
100
FY16E
33
1
30
5
7
25
100
FY17E
33
5
28
5
6
22
100
FY18E
34
5
29
6
6
21
100
CAGR
(15-17)
26
78
3
17
20
8
17
Exhibit 45: Segment growth (%)
FY13
USA
Natrol
EU
RoW
ARV
APIs
Total
36
45
-5
23
27
44
11
12
13
39
375
23
15
-6
49
133
FY14
94
FY15
37
FY16E
24
355
0
12
20
7
FY17E
32
12
2
20
20
9
FY18E
22
10
7
20
20
9
Source: Company, MOSL
18
18
16
Source: Company, MOSL
Exhibit 46: EBITDA growth to exceed revenues
EBITDA (INR m)
165
EBITDA growth (%)
Exhibit 47: Break-up of sales growth (FY15-18E)
73 %
10 %
9%
194
123
4%
5%
59
17
8
FY10
10
FY11
-36
6
FY12
41
12
23
FY14
26
25
32
23
39
24
49
9
FY13
FY15 FY16E FY17E FY18E
Source: Company, MOSL
FY15
APIs
ARVs
US
EU
RoW
FY18E
Source: Company, MOSL
Exhibit 48: Forecast 27% EPS CAGR
EPS (INR)
Exhibit 49: Break-up of EPS growth (FY15E-18E)
27 %
56 %
17 %
55
28
8.6
FY10
9.2
FY11
3.3
FY12
6.9
FY13
25.4
FY14
27.7
34.5
43.5
55.0
EPS (FY15)
Sales
Growth
Margin expn Financial
Leverage
EPS (FY18E)
FY15 FY16E FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
18 February 2016
29

Aurobindo Pharma
Exhibit 50: Working capital has improved
Inventory Days
Creditor Days
300
225
150
75
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Source: Company, MOSL
22
FY10
24
FY11
31
FY12
34
FY13
36
FY14
39
36
229
240
243
238
245
Debtor Days
Cash conv. cycle days
250
205
205
215
2.5
2.3
Exhibit 51: Expect improved cash flows to aid deleveraging
Total Debt (INR b)
5.0
3.7
1.3
1.1
Net Debt/EBITDA
1.5
0.7
0.2
32
28
FY15 FY16E FY17E FY18E
Source: Company, MOSL
Exhibit 52: Rich ANDA pipeline v/s peers
ANDA Filed
ANDA Pending
591
387
168
71
ARBP
27
CDH
266
165 167
63 42 23
GNP
IPCA
LPC
SUNP
311
158
156
Exhibit 53: Return ratios
ROE (%)
47
31
36
25
16
19
18
8
8
11
30
28
29
33
31
31
29
32
ROCE (%)
ALPM
Source: Company, MOSL
Source: Company, MOSL
18 February 2016
30

Aurobindo Pharma
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
43,816
22.5
9,598
21.9
1,715
7,883
625
252
372
7,881
2,251
28.6
-4
5,634
5,369
11.5
2011
582
23,866
24,448
24,143
1,191
49,873
24,380
6,994
17,386
6,574
385
34,334
14,553
12,310
1,867
5,604
8,807
8,193
614
25,527
49,872
2012
46,274
5.6
6,101
13.2
2,005
4,096
1,028
247
-5,445
-2,129
-888
41.7
-6
-1,235
1,939
-63.9
2012
582
22,814
23,397
30,959
-16
54,442
30,863
8,916
21,947
6,454
385
33,536
15,456
12,400
709
4,972
7,880
7,174
706
25,656
54,442
2013
58,553
26.5
8,610
14.7
2,487
6,122
1,313
285
-1,353
3,741
827
22.1
-25
2,939
3,993
105.9
2013
582
25,475
26,058
34,355
680
61,202
37,080
11,246
25,834
2,185
223
43,982
19,236
15,970
2,085
6,692
11,576
10,685
891
32,406
61,202
2014
80,998
38.3
22,828
28.2
3,125
19,703
1,079
232
-2,031
16,825
3,635
21.6
-38
13,228
14,820
271.2
2014
583
36,919
37,502
36,339
2,054
76,151
41,817
14,371
27,445
2,105
198
64,386
23,675
26,366
1,786
12,559
18,747
17,389
1,358
45,640
76,151
2015
121,205
49.6
25,636
21.2
3,326
22,310
843
808
-596
21,679
5,966
27.5
-45
15,758
16,190
9.2
2015
584
50,975
51,559
38,636
2,058
92,511
55,810
17,697
38,112
2,500
198
87,647
36,113
35,392
4,692
11,451
36,587
34,161
2,426
51,061
92,511
2016E
138,228
14.0
31,931
23.1
3,862
28,068
966
600
-835
26,868
7,389
27.5
-48
19,527
20,132
24.4
2016E
584
69,334
69,918
36,023
2,099
108,303
66,810
21,560
45,250
2,500
200
92,133
37,075
39,764
5,394
9,900
32,420
31,495
925
59,714
108,303
2017E
163,139
18.0
39,153
24.0
4,483
34,670
720
800
0
34,750
9,382
27.0
-50
25,417
25,417
26.3
2017E
584
93,291
93,875
31,771
2,141
128,056
77,810
26,043
51,766
2,500
200
109,481
43,265
46,931
7,385
11,900
36,531
35,606
925
72,950
128,056
(INR Million)
2018E
192,362
17.9
48,668
25.3
5,072
43,595
635
1,000
0
43,960
11,869
27.0
-55
32,146
32,146
26.5
2018E
584
123,977
124,561
28,345
2,184
155,364
85,810
31,115
54,694
2,500
200
133,117
50,436
55,337
13,445
13,900
35,788
34,863
925
97,329
155,364
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
(INR Million)
18 February 2016
31

Aurobindo Pharma
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2011
9.2
12.2
42.0
1.2
12.1
2012
3.3
6.8
40.2
0.5
-23.6
2013
6.9
11.1
44.7
0.8
14.9
2014
25.4
30.8
64.3
1.5
6.6
26.2
21.6
10.4
5.2
18.6
0.2
25.1
18.4
0.9
100
121
129
0.9
2011
9,598
252
-6,409
-2,251
372
1,562
-2,866
-1,304
383
0
-2,483
1,207
2,645
-625
-1,167
2,060
1,139
728
1,867
8.1
8.4
0.8
96
122
96
1.3
2012
6,101
247
-1,288
-327
-5,445
-712
-6,446
-7,157
0
0
-6,446
474
6,828
-1,028
-276
5,998
-1,159
1,867
708
16.1
11.2
1.0
97
120
118
1.2
2013
8,610
285
-5,374
-132
-1,353
2,036
-2,106
-70
-163
0
-2,269
159
3,403
-1,313
-641
1,608
1,376
709
2,084
46.6
29.7
1.1
116
107
137
0.9
2014
22,828
232
-13,533
-3,635
-2,031
3,863
-4,656
-794
-25
0
-4,681
-910
2,131
-1,079
379
520
-298
2,085
1,786
2015
27.7
33.4
88.3
2.3
8.3
24.0
19.9
7.5
3.5
16.5
0.3
36.4
28.2
1.3
105
109
136
0.7
2015
25,636
808
-2,515
-5,966
-596
17,367
-14,388
2,979
0
0
-14,388
-386
2,298
-843
-1,142
-73
2,906
1,786
4,691
2016E
34.5
41.1
119.7
2.0
6.0
19.3
16.2
5.6
3.0
13.1
0.3
33.1
29.2
1.3
103
98
151
0.4
2016E
31,931
600
-7,951
-7,389
-835
16,356
-11,000
5,356
2
0
-10,998
0
-2,607
-966
-1,083
-4,656
702
4,692
5,394
2017E
43.5
51.2
160.7
2.5
5.7
15.3
13.0
4.1
2.5
10.6
0.4
31.0
30.6
1.3
103
97
151
0.3
2017E
39,153
800
-11,244
-9,382
0
19,327
-11,000
8,327
0
0
-11,000
0
-4,247
-720
-1,368
-6,335
1,992
5,394
7,385
2018E
55.0
63.7
213.3
2.5
4.5
12.1
10.5
3.1
2.1
8.3
0.4
29.4
32.0
1.2
103
96
137
0.1
2018E
48,668
1,000
-18,320
-11,869
0
19,478
-8,000
11,478
0
0
-8,000
0
-3,421
-635
-1,362
-5,419
6,059
7,385
13,445
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
18 February 2016
32

AUROBINDO PHARMA GALLERY
AUROBINDO PHARMA
OTHER COMPANIES
SECTOR UPDATES

This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company(ies) and/sector(s), if any, covered in the report
Aurobindo Pharma
its
and may be distributed by it and/or
affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or
inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to
you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment
objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek
professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for
future performance, future returns are not guaranteed and a loss of original capital may occur.
MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business relationships with a some
companies covered by our Research Department. Our research professionals may provide input into our investment banking and other business selection processes. Investors should assume that MOSt and/or its affiliates are
seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may educate investors
on investments in such business. The research professionals responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and
interpreting information. Our research professionals are paid on the profitability of MOSt which may include earnings from investment banking and other business.
MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt
generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates
may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment
decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing among other things, may give rise to real or potential conflicts of interest.
MOSt and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies
mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an
advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing
whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the affiliates of MOSt even though there might exist an inherent
conflict of interest in some of the stocks mentioned in the research report
Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match
with a report on a company's fundamental analysis. In addition MOST has different business segments / Divisions with independent research separated by Chinese walls catering to different set of customers having various
objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any
and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and
harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources
believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt’s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription
service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. While we
would endeavor to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt
and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in
this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of
merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for
any necessary explanation of its contents.
Most and it’s associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received any compensation for
products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months.
Most and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report.
Subject Company may have been a client of Most or its associates during twelve months preceding the date of distribution of the research report
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this
report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412
There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities
Disclosures
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or
indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive
compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues
Disclosure of Interest Statement
Analyst ownership of the stock
Served as an officer, director or employee
AUROBINDO PHARMA
No
No
A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes
Regional Disclosures (outside India)
For U.S.
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which
would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a
registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the
absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This
document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be
engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by
the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal
Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore,
may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC)
pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has an agreement with
Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any
investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.”
Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in
Hong Kong & are not conducting Research Analysis in Hong Kong.
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the
Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Kadambari Balachandran
Email : kadambari.balachandran@motilaloswal.com
Contact : (+65) 68189233 / 65249115
Office Address : 21 (Suite 31),16 Collyer Quay,Singapore 04931
For Hong Kong:
For Singapore
18 February 2016
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd
34