Lupin and Aurobindo Pharma have been recommended for hold by research house Prabhudas Lilladher. Target price for Aurobindo Pharma has been suggested Rs 511. The stock is currently trading at Rs 428. The research report has suggested Rs 760 as target price for Lupin.

The research note from Prabhudas Lilladher informs….

Aurobindo Pharma

ARBP sales, adj. EBITDA and PAT miss estimates by 1%, 7% and 14% respectively. With US injectable sales in line with guidance, AuroMedics grew by 12% QoQ to US$75m on launches of injectables in oncology and hormones (e.g. Makena) as well as bagline products of pantoprazole and Vancomycin. Besides, the execution of NBO supplies, launch of OTC drugs (out of 10-12 as guided) and non-oral launces (e.g. gSensipar) helped in core business growth in Q2 while we expect the impact of lower supply of Losartan to reflect with a lag of 1-2 quarters.

NBO orders continue to benefit the company with more number of generic majors actively rationalizing US generic portfolio. Core EU grew only 1% QoQ, excluding the accounting integration benefits. ARV sales were flat QoQ with no improvement in order book execution of DTG based ARVs. Adj. gross margin and EBITDA margin are largely identical QoQ at 57% and 19.7%, respectively.

In spite of 12% sequential growth in US generics, its net profit was flat QoQ and grew only 5% YoY. Its annualized earnings of H1FY20E was 12% lower than our estimates. ARBP needs to improve US growth in tandem with margin expansion, which were absent in H1FY20.

LUPIN

LPC divested Japanese generic business to a PE investor, Unison at a valuation of US$526m. This will result in net cash inflow of US$300m (post tax (@9.5%) outflow of US$50m) and reduction in net debt by US$176m. While LPC guided accretive EPS due to capital gain, there will be decrease in EPS by Re0.5 (FY20E) Rs1.2 (FY21E).

Our earnings estimates are likely to decrease by 1% (FY20E) and 3% (FY21E), assuming closure of the acquisition in January FY20E, lower sales of US$85m and US$200m, lower Dep/amort. of US$6m and US$25m and interest savings of US$1.1m and US$4.4m in FY20E and FY21E respectively. The sell-off of Kyowa at 1.8x EV/EBITDA is at justifiably lower valuation (vs. peer deals) due to inertia in Japan generic business.

While the sell-off to increase concentration risk with higher contribution from US and India, there could be better option to deploy new capital (sourced from the divestment) in focused market. The efficient use of the capital may likely to increase profitability, return ratios and decrease leverage (to 0.08 fro, 0.32). With an opportunity of efficient capital allocation, there could be likely improvement in quality of earnings.