JPMorgan Makes A Case For Aurobindo Pharma Stock’s Re-Rating

Aurobindo Pharma Ltd. remains best-positioned among Indian generic peers to capture additional new business opportunities in the U.S. and Europe, according to JPMorgan.

“The diversified earnings and upside in its key business segment are underappreciated despite continued execution, accretive M&A and deleveraging,” the research firm said in a report dated April 20. “The valuation discount to peers with U.S. dependent earnings growth is unwarranted, given superior execution of organic and inorganic efforts. Any unlocking in the injectables business could be a trigger for a re-rating of the stock.”

That caused the Hyderabad-based drugmaker’s stock to rise as much as 2.7% on Thursday to Rs 1,014, just shy of its all-time high, before paring gains. To be sure, the stock has been rallying for five straight sessions, gaining nearly 9% during the period. The relative strength index of the stock was above 70, indicating it may be ‘overbought’.

The rally, however, is in line with the healthcare index as investors took refuge in the so-called defensive sector amid a renewed surge in Covid-19 cases in India.

Aurobindo’s stock re-rated post-termination of the Sandoz deal with two key inflection points — clearance of the injectables unit and benefit from higher U.S. demand in early FY21, JPMorgan said. Its current generic injectables franchise alone can be d at about $4.3 billion, assuming a 30% discount to the listed generic injectables maker Gland Pharma Ltd., and implies 6x EV/Ebitda for the remaining business, the research firm said. “Moreover, given the growth pipeline, its FY23 injectables business can be d at $7 billion and implies nearly nothing for the remaining business.”

Key risks for Aurobindo, according to JPMorgan

• Adverse regulatory action (particularly from the U.S. FDA) on facilities.

• Delays in abbreviated new drug application approvals over the next two years.

• Weaker-than-expected margin performance.

Of the 33 analysts covering Aurobindo Pharma, 29 have a ‘buy’ rating, three suggest a ‘hold’ and one recommends a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price targets implies an upside of 9.2%.