Prabhudas Lilladher has issued an Accumulate rating on Aurobindo Pharma Ltd. (ARBP), setting a target price of Rs 1,475. Despite lower-than-expected Q2 FY25 results, driven by elevated Pen-G related operational costs and shipping disruptions, Aurobindo Pharma is positioned for growth. The company’s investments in biosimilars, injectables, and vaccines, along with new initiatives in the Pen-G facility and Vizag plant, are expected to boost margins and growth starting in FY26. With these developments, Prabhudas Lilladher sees Aurobindo Pharma trading at a favorable valuation, with strong growth drivers expected to enhance its performance in the near future.

Q2 FY25 Performance: Key Highlights and Challenges

EBITDA Impacted by Higher Costs
Aurobindo Pharma’s EBITDA for Q2 FY25 reached Rs 15.6 billion, representing a 3% quarter-over-quarter decline, with EBITDA margins at 20.1%, below Prabhudas Lilladher’s estimates. This shortfall was largely due to additional operating costs associated with the Pen-G facility and increased shipping expenses. However, management expects these margins to recover with the ramp-up of the Pen-G facility and other operational efficiencies.

Revenue Growth Led by RoW and EU Markets
The company’s overall revenue for the quarter grew by 8% year-over-year, reaching Rs 78 billion, driven by strong performances in the Rest of World (RoW) and European Union markets. U.S. revenue (excluding Puerto Rico) increased by 4% YoY. However, U.S. sales in constant currency terms declined slightly by 1.2% QoQ to $421 million due to lower-than-anticipated generic Revlimid sales.

Operational Cost Control and Margin Outlook

Reduction in Pen-G Facility Operational Costs
The operational cost for the Pen-G facility was Rs 800 million in Q2. Management anticipates cost reductions in this segment by Q4 FY25, which should enhance EBITDA margins. Additional costs for remediation have mostly been resolved, supporting Aurobindo’s goal of achieving consistent 21-22% EBITDA margins in FY25.

Higher R&D Expenditure to Fuel Innovation
Aurobindo’s R&D spending increased by 37% YoY to Rs 4.1 billion in Q2, primarily directed toward ongoing clinical trials for four biosimilar assets. This rise in R&D underscores the company’s strategic focus on strengthening its biosimilar pipeline, which is expected to drive revenue growth in the coming years.

Pipeline Development and Key Takeaways from Earnings Call

U.S. Market: New Products and Regulatory Approvals
During the quarter, Aurobindo launched 14 new products in the U.S. market, filed 10 ANDAs, and received 8 final ANDA approvals. The company’s injectable and specialty segments in the U.S. faced challenges from supply chain issues and lower generic Revlimid sales, but volume gains in oral generics provided a growth offset.

European Market: Strong Revenue Growth Expected
Aurobindo’s European segment saw strong growth across key markets, with the company projecting high single-digit revenue increases in the coming quarters. European margins are anticipated to remain stable, further bolstered by favorable currency impacts and demand resilience.

Expansion in Vizag Plant and Pen-G Facility Ramping Up

Vizag Plant Expansion Phased Rollout
Aurobindo’s Vizag plant is progressing with a three-phase capacity rollout, with revenues from this facility expected to commence in FY26 and ramp up significantly by FY27. This plant expansion is expected to support the company’s production needs across multiple therapeutic areas.

Pen-G Facility Targeting Break-even
The Pen-G facility, a key driver in Aurobindo’s growth strategy, is projected to achieve breakeven by Q4 FY25 as operational costs reduce. The facility’s commercialization is expected to drive significant operational efficiencies and strengthen Aurobindo’s cost competitiveness in the active pharmaceutical ingredient (API) market.

Financial Outlook and Target Valuation

Consistent Revenue and Profit Growth Projections
Prabhudas Lilladher projects Aurobindo’s revenue to grow by 10.7% CAGR from FY24 to FY27, with EBITDA and PAT CAGRs of 15.2% and 11.9%, respectively. Earnings per share (EPS) for FY26 and FY27 are forecasted at Rs 74.7 and Rs 83.6. The company’s strong revenue and profitability outlook reflect a strategic focus on high-growth markets and therapeutic categories.

Valuation Metrics and Target Price
Aurobindo Pharma’s stock is valued at 17x FY26E P/E, with Prabhudas Lilladher setting a target price of Rs 1,475. This valuation takes into account the company’s growth potential in emerging biosimilars, injectables, and specialized therapies, along with anticipated margin recovery.

Investment Risks and Considerations

Challenges in U.S. Market Dynamics
Aurobindo’s U.S. operations are exposed to pricing pressures and supply chain volatility. The U.S. generic market remains competitive, and any further price erosion in its core products could impact profitability.

High Capex Requirements
The company’s expansion initiatives, particularly in biosimilars and the Pen-G facility, require substantial capital investments. Unexpected cost overruns or delays in regulatory approvals could affect its financial performance and capex schedule.

Conclusion and Investor Recommendation

With an Accumulate rating and a target price of Rs 1,475, Prabhudas Lilladher recognizes Aurobindo Pharma’s robust growth trajectory, bolstered by strategic investments and an expanding product pipeline. The company’s focus on cost reduction and new therapeutic areas positions it well within the pharmaceutical industry. Investors should monitor Aurobindo’s progress in its key projects and regulatory approvals to evaluate sustained long-term growth.