Aurobindo Pharma (Aurobindo) received approval from government of India for three fermentation based products under Production Linked Incentive (PLI) Scheme. These products include Penicillin G, 7-ACA and Erythromycin Thiocyanate (TIOC). Currently, these products are largely dependent on China imports. Post approval under the PLI scheme, Aurobindo will become a very large player in anti-biotic space. The combined committed capital investment for these three products stands at Rs30.4bn which can easily be funded from internal accruals and can have asset turnover between 1-1.5x. We believe this is a positive development for Aurobindo that would ensure continuous growth momentum over medium term without straining balance sheet.

Wins approval for three products under PLI Scheme: Aurobindo won government approval under PLI Scheme for three anti-biotic products namely, Penicillin G, 7-ACA and TIOC. The respective committed production capacities and committed capital investment for these products are 15,000MT, 2,000MT & 1,600MT and Rs13.9bn, Rs8.13bn & Rs8.34bn.

Financial impact: We assume asset turnover ratio for these capacities as ~1.2x and Aurobindo can generate annual revenue of ~Rs36bn with an EBITDA margin of ~16%, implying annual EBITDA of ~Rs5.8bn (>10% of FY22E EBITDA). Additionally, the cumulative incentive from PLI scheme would be ~Rs24bn over a five-year period.

Valuations & risks    

We expect earnings to grow at a CAGR of 8.9% for Aurobindo over FY20-FY23E. The stock currently trades at attractive valuations of 16.0xFY22E and 14.5xFY23E earnings and EV/EBITDA multiples of 9.7xFY22E and 8.5xFY23E. We raise target P/E(x) to 18x from 16x considering material upside to earnings from FY24E and achievement of net cash status post recent divestment of Natrol business in US. We upgrade the stock to BUY from Add with a revised target price of Rs1,091/share based on 18xSep'22E earnings (earlier: Rs970/share based on 16xSep'22E).