Near-term growth and cost challenges to weigh on Aurobindo Pharma stock

While valuations are now attractive, product approvals and progress on the injectable guidance are among key long term term triggers

Pegged back by a weak showing in the US and EU markets and cost pressures, Aurobindo Pharma delivered a weaker-than-expected performance in the March quarter. The muted performance and near-term margin outlook led to a downward revision of earnings estimates of up to 15 per cent. While the stock gained about 2 per cent in a weak market on Wednesday, further gains will depend on the pace of approvals and uptick in the base business.

The company reported a 3.3 per cent year-on-year (YoY) fall in overall sales largely on account of a 4.5 per cent decline in the US market which accounted for 47 per cent of consolidated sales. The US sales were lower than expected on account of sharper than expected price erosion and lack of meaningful launches. Sales in the European market (27 per cent of revenues), too, were weak falling a per cent while its growth markets and active pharmaceutical ingredients (API) reported a 15-28 per cent uptick.

The company has retained its guidance of achieving sales of $650 million to $700 million from the injectables segment over the next three years aided by a strong product pipeline. However, in the near term (next two quarters) there could be pricing pressures for its base business which coupled with higher costs could impact the margins.

“We expect cost pressures to remain in the near term and margin trajectory should improve from the second half of FY23. However, pick up in US sales hinges on timely niche approvals along with stabilisation of pricing pressure in base business," say Param Desai and Akshaya Shinde of Prabhudas Lilladher Research. The brokerage believes that the company has multiple growth drivers in place with investments in vaccines, injectables, biosimilars and production-linked incentive scheme, which are expected to be reflected from FY24.

At the current price, the stock is trading at an attractive valuation of just under 11 times its FY23 earnings estimates. Most brokerages have a buy or accumulate rating for the stock. In addition to valuations, Motilal Oswal Research is positive on the company’s robust complex product pipeline comprising injectables/biosimilars, comprehensive product offering in the generics space and a healthy free cash flow generation.