Why analysts are divided on Aurobindo Pharma despite better-than-expected earnings

Pharmaceutical major Aurobindo Pharma reported better-than-expected earnings for the quarter ended March. Even though the company’s net profit of Rs 505.90 crore in Q4 was above CNBC-TV18’s estimate of Rs 497.2 crore, it still reflected a 12.2-percent decline from Rs 576.1 crore in the same quarter last fiscal.

A similar trend was seen on the operational front as EBITDA margin came at 15.5 percent, above expectations of 15 percent but was still lower than 16.7 percent seen in the the corresponding quarter in the preceding fiscal.

However, the topline at Rs 6,472.9 crore not only rose 11.4 percent on year but also topped estimates of Rs 6,382.2 crore.

Moreover, the company also has strong investment plans in place, having invested Rs 190 crore in the biosimilar segment so far. The management also updated that the drugmaker’s ambitious Rs 2,000 crore Penicillin G (Pen G) plant in Andhra Pradesh was also on the path of commissioning in FY25.

Analysts’ view

Brokerage firm DAM Capital, which has the most bullish outlook for the drugmaker, sees the commissioning of this plant in FY25 under the PLI (Production-linked incentive) scheme as a major upside trigger. The brokerage firm also remains positive on the company’s strong investments in injectables, biosimilars, vaccines, and APIs (Active Pharmaceutical Ingredients). On that, DAM Capital believes that a meaningful impact of these ongoing investments will be visible from FY25. Backed by these investment plans, the broking firm retained its ‘buy’ rating for the stock, with a target price of Rs 809 per share.

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Nuvama Institutional Equities also sees strong potential in Aurobindo’s investments. “Aurobindo’s investments in biosimilars, Pen-G, injectables and peptides should start contributing meaningfully from FY25 and generate free-cash-flows from FY26,” the broking firm stated in its report. Moreover, improving growth prospects on the back of an increase in demand, normalisation in pricing, and benefits from drug shortages in the US market prompt Nuvama to raise its target price for the drugmaker by around 17 percent to Rs 700. Nuvama also has a ‘buy’ call for the stock.

Kotak Institutional Equities also anticipates an improvement in the company’s operational performance, driven by a moderation in input costs and guidance for better traction in oral solids and injectables in FY24. The firm has an ‘add’ rating for Aurobindo, with a target price of Rs 625 per share.

However, not all brokerages share the same optimism for the drugmaker. While Motilal Oswal does see improved growth prospect for the company in the coming years, it feels the current valuation of the stock factors in the upside potential in earnings. On that account, the firm gave a ‘neutral’ call for the drugmaker, with a price target of Rs 600. The firm has the most bearish outlook for Aurobindo’s stock performance as its price target reflects a 2 percent downside potential from Monday’s closing price.

Elara Capital on the other hand does see some scope for an improvement in valuation over FY24-25, but believes delays in key launches in the US market and biosimilars in Europe to be a major downside risk. Likewise, the broking house gave an ‘accumulate’ rating for the stock, with a price target of Rs 691.

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