Investors are banking on Aurobindo’s US pharma revenues getting a boost on the back of improving injectable sales in the second quarter. But a part of that growth seems to be already reflecting in the stock price gains of about 86% in 2020.

No doubt, injectables have been a focus area as it contributes about 11% of generic injectable revenues. The company’s target of about 20% growth in revenues from this segment over the next three years is good. Aurobindo Pharma Ltd is ramping up injectables business with a new facility aimed at Europe and other emerging markets.

The firm is likely to see sales of about $600 million from the current $340 million in this segment, point out analysts. The management’s also targeting medium-term revenue growth of about 10% annually over the next three-five years, which seems achievable.

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Some of that growth will also come from the anti-retroviral segment, which is growing at a faster clip and expected to grow at about 20% in the next three years. With patients migrating to a new regiment for HIV treatment, the growth outlook can persist, point out analysts. Number of patients under this treatment could rise to 14 million from the current 8-9 million.

In the short run, though, growth could show a blip. Aurobindo Pharma has sold its over-the-counter dietary supplement business to a private-equity firm for about $550 million.

“Natrol is 12% of Aurobindo Pharma’s US sales. New launches may not be able to completely offset the revenue decline in the near term,” analysts at Nirmal Bang Securities said in a note to clients.

Besides, as the company files for more biosimilars, nasals and other drugs, its research and development (R&D) expenses are set to rise. “While promising, it also involves high research and development expenses that are likely to push R&D to 6% of sales and lower probability of success versus generics,” analysts at Edelweiss Securities Ltd said in a note.

Nevertheless, Aurobindo Pharma’s gross margin improvement is encouraging. While revenues grew about 16% y-o-y, Ebitda increased 23% y-o-y in Q2. Ebitda is earnings before interest, tax, depreciation and amortization.

Still, earnings growth is likely to be in a steady range in the coming years with FY22 earnings per share expected to be around 59 per share. While the pharma sector tailwinds cannot be ignored, the stock price has jumped significantly this year, as mentioned above. While investors should keep an eye on injectable growth, the stock’s valuations 15-16 times its forward earnings seems to be fair. “Aurobindo’s business is steady but unlikely to throw up any major earnings surprise. Reduced debt and low concentration risk lead us to raise our multiple to 16 times,” said the Edelweiss note.

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