KRChoksey Research has issued a BUY recommendation for Aurobindo Pharma Ltd with a target price (TP) of Rs 1,591, suggesting a 25.6% potential upside from the current market price of Rs 1,267. This optimistic forecast is grounded in Aurobindo’s strong market performance, expansion in Europe and emerging markets, and strategic steps to overcome supply chain disruptions affecting its injectables and specialty segments. With a renewed focus on R&D and a backward integration plan, the company aims to secure sustained long-term growth.

Executive Summary

Recommendation: BUY
Current Price: Rs 1,267
Target Price: Rs 1,591 (upside of 25.6%)
52-Week Range: Rs 1,592 / Rs 903
Market Cap: Rs 734.7 billion

Aurobindo Pharma has demonstrated robust revenue growth, especially in European and growth markets, despite challenges in the U.S. market. While EBITDA and Adj. PAT fell short due to higher operating expenses and finance costs, the company’s strategic focus on new product launches and backward integration shows promise for future profitability.

Performance Highlights for Q2FY25

Revenue Growth: Increased by 8.0% YoY to Rs 77,961 million, with sequential growth of 3.0%. Key drivers were European markets (+19.0% YoY) and growth markets (+44.0% YoY).
EBITDA Margin: Expanded by 65 basis points YoY to 20.1%, driven by stable raw material costs and a favorable product mix, despite being down 131 basis points QoQ.
Profit After Tax (PAT):** Rs 8,174 million, down 11.1% QoQ but up 8.0% YoY, impacted by increased R&D and freight costs.

Revenue Analysis by Geography

Europe: Representing 27.0% of total revenue, Europe saw 19.0% YoY growth, reaching Rs 21,050 million. The rise is attributed to new product launches and a boost in sales volume.
Growth Markets: Contributing 10.4% of revenue, these markets experienced a 44.0% YoY increase to Rs 8,120 million. This growth stemmed from expansion into new regions and an enriched product portfolio.
United States: Although accounting for 45.3% of revenue, U.S. growth was subdued at 1.7% YoY, largely due to supply chain issues affecting the injectable and specialty segments.
API Segment: This segment saw a 0.9% YoY decline to Rs 11,560 million due to competitive pricing pressures, although quarterly growth stood at 5.9%.

Operational and Financial Efficiency

Aurobindo Pharma’s gross margin expanded by 366 basis points YoY to 58.8%, driven by a stable cost of raw materials and an optimized product mix. The EBITDA grew by 11.6% YoY to Rs 15,661 million, with an EBITDA margin of 20.1%. Increased expenses in R&D, freight, and employee costs due to currency fluctuations in Europe slightly dampened overall profitability.

Research and Development (R&D) Focus

Aurobindo continues to invest heavily in R&D to fuel its long-term growth. Key developments include:

Biosimilars: Four biosimilar products are currently in Phase 3 clinical trials, including denosumab (similar to Prolia) and omalizumab (similar to Xolair).
New Product Approvals: The company filed 10 ANDAs in Q2FY25 and received final approval for 8.
Pipeline Strength: With recent approvals, including the linaclotide peptide for irritable bowel syndrome, Aurobindo strengthens its specialty pharmaceuticals portfolio, setting the stage for sustainable growth.

Supply Chain Stabilization and Expansion Plans

Aurobindo Pharma expects supply chain stability to improve by CY26E, especially for injectable products from its Eugia-III facility. Key upcoming launches in the U.S. and European markets should also contribute to the top-line performance in FY25 and beyond. The company’s commitment to backward integration, particularly in essential APIs, is expected to enhance operational efficiency and improve margins over time.

Backward Integration and Cost Efficiency

To combat external supplier dependencies, Aurobindo has prioritized backward integration, focusing on products like Penicillin-G. This initiative is expected to yield substantial cost savings and bolster margin performance over time. The Penicillin-G facility is projected to break even by Q4FY25 and contribute positively from FY26 onwards.

Key Financial Ratios and Projections

Revenue CAGR (FY24-FY26E): Projected at 8.7%, underscoring Aurobindo’s steady growth trajectory.
Adj. PAT CAGR (FY24-FY26E): Expected at 17.7%, demonstrating strong earnings growth potential.
Earnings Per Share (EPS): Forecasted to grow from Rs 58.0 in FY25 to Rs 79.6 by FY26.
P/E Multiple: Trading at a forward P/E of 21.8x (FY25E) and 15.9x (FY26E), highlighting the stock’s attractive valuation.

Valuation and Target Price

KRChoksey Research maintains a BUY rating with a target price of Rs 1,591, reflecting a 25.6% upside. The valuation basis includes a P/E multiple of 20.0x applied to FY26E EPS, indicating confidence in Aurobindo’s capability to address its supply chain challenges and capitalize on new market opportunities.

Technical Analysis and Fibonacci Retracement Levels

Applying Fibonacci retracement on Aurobindo Pharma’s 52-week range of Rs 903 to Rs 1,592 identifies key technical levels:

23.6% Retracement: Rs 1,160
38.2% Retracement: Rs 1,287
50% Retracement: Rs 1,387
61.8% Retracement: Rs 1,487
76.4% Retracement: Rs 1,587
These levels provide important support and resistance markers, beneficial for technical traders assessing optimal entry and exit points.

Investment Risks

Despite promising growth prospects, investors should consider certain risks:

Regulatory Uncertainties: Stringent regulations in core markets could affect the approval timelines for Aurobindo’s new products.
Pricing Pressure in API Segment: The company’s API division faces pricing pressure, which may impact its profit margins if demand growth does not offset the price erosion.
Supply Chain Disruptions: Unforeseen delays in resolving supply chain issues, especially in injectables, could slow revenue growth and margin expansion.

Conclusion: Investment Thesis and Long-Term Outlook

Aurobindo Pharma presents a compelling investment opportunity. Despite short-term headwinds, the company’s robust R&D investments, effective expansion strategy, and commitment to backward integration position it well for long-term growth. The BUY recommendation, combined with a target price of Rs 1,591, reflects KRChoksey Research’s confidence in Aurobindo’s capacity to meet its growth targets, improve its supply chain, and navigate the competitive pharmaceutical landscape.