Why Aurobindo Pharma’s Shares Ended At A Record High
Aurobindo Pharma has received approval for three fermentation-based products under India’s production-linked incentive scheme.
Shares of Aurobindo Pharma Ltd. jumped to a record high after the drugmaker received approval for three fermentation-based products under India’s incentive programme to set up local manufacturing.
The Hyderabad-based drugmaker has received approval for Penicillin G, 7-ACA and Erythromycin Thiocyanate, involving a committed investment of Rs 1,392 crore, Rs 813 crore and Rs 834 crore, respectively, according to a Press Information Bureau statement.
The production capacity of the three drugs would be 15,000 MT, 2,000 MT and 1,600 MT, respectively. “The commercial production is projected to commence from April 1, 2023, and disbursal of production-linked incentive by the government over the six years period would be up to a maximum of Rs 3,600 crore,” the statement said.
The government on Nov. 11, 2020, extended its Rs 1.46-lakh-crore production-linked incentive scheme to 10 sectors to make India a manufacturing hub, and create jobs in the economy ravaged by the coronavirus. That increased allocation for the pharma sector—the world’s third-largest by volume—to Rs 22,000 crore in incentives over five years. The maximum number of selected applicants for the fermentation-based key starting materials will be four, and two each for all other categories.
“Post-approval under the PLI scheme, Aurobindo will become a very large player in the antibiotic space,” ICICI Securities said in a note. “This is a positive development that would ensure continuous growth momentum over the medium term without straining the balance sheet.”
ICICI Securities expects an asset turnover ratio for these approved drugs at about 1.2 times and the company to generate annual revenue of Rs 3,600 crore. “Additionally, the cumulative incentive from the PLI scheme would be Rs 2,400 crore over a five-year period.”
The research firm also upgraded Aurobindo’s stock to ‘buy’ from ‘add’, citing a strong U.S. pipeline with a potential to launch more than 30 products every year, significant benefits of scale in active pharmaceutical ingredients and growing contribution from complex generics. “We expect it to register 5.5% revenue and 8.9% earnings CAGR over FY20-23.”
According to Credit Suisse, large-cap companies are expected to benefit more from this PLI scheme, given a head-start in strong R&D skills and distribution strength globally. “Aurobindo has a large vaccine manufacturing facility, which should be fully ready next quarter and it can also benefit from more Covid-19 vaccine tie-ups,” the research firm said in a separate note.
Shares of Aurobindo ended 8.1% higher—the most in a day since April 2020—at Rs 998.6 a piece. The stock gained for the second straight session. Of the 33 analysts tracking the company, 27 have a ‘buy’ rating, four suggest a ‘hold’ and two recommend a ‘sell’. The average of Bloomberg consensus 12-month price targets implies an upside of 5.1%.