Good Timing

Aurobindo Pharma promoters sell over 10 million shares in a market transaction valued at ₹900 crore

A day after Aurobindo Pharma hit its 52 week high of Rs.895, promoters K Nithyananda Reddy and P Suneela Rani sold over 10 million shares at an average price of Rs.822 a share in a market transaction valued at Rs.900 crore. Currently the stock trades at Rs.823. Post this transaction K Nithyananda Reddy's stake is down from 4.70% to 4.33% and P Suneela Rani's stake reduced from 35.04% to 33.56%.

While the buyers are yet to be known, the chunk must have crossed over to institutional investors. In FY16, the company reported a sales turnover of Rs.13,896 crore and a net profit of Rs.1,982 crore. Aurobindo Pharma, which derives close to 90% of its revenue from the international market, has seen its stock prices rise 30% since July this year.

In terms of valuation, the stock is trading at 16x its FY18 consensus estimated earnings of Rs.51 a share, which is actually a discount to some of its large cap peers, which are trading at 20-25x their estimated FY18 earnings. Analysts expect the good time to continue.  

"Over the past three years, Aurobindo has shown superior execution on all key business. This has driven strong earnings growth, allayed concerns on R&D, leverage, profitability and inorganic strategy and reaffirmed its competitive advantage. We expect this trend to continue and the company to report 21% EPS CAGR over FY16-19, led by the US business (23% growth). We expect RoCEs and leverage ratios to improve. Earnings visibility is high with 25 plus launches expected over the next six months (all approved by FDA)" writes Jefferies analyst Piyush Nahar in a note.

Moreover, investors are counting on a 250-300 basis point jump in the operating margin led by improving product mix and growing share of high margin formulation business. The company has got a strong product pipeline (175 ANDA due for final approval) and one of the best approval ratio at 9%. Few days ago, it also got US FDA approval for Dolutegravir (DTG) 50 mg (for treatment of HIV infection). The drug is expected to pull in additional sales of about Rs.500 crore – Rs. 600 crore over the next three years.