It would also establish value for residual biz; Buy retained despite near-term concerns
As per a media report, PE firm Blackstone is nearing a deal to acquire an 8-10% stake in Eugia (Aurobindo’s subsidiary housing its injectable assets). The purported deal values Eugia at $3.5-4 bn (8.5-10x sales and 27-31x Ebitda based on our annualised FY22e sales estimates of $405 m and Ebitda margins of 32%). Listed injectable peer Gland Pharma (GLAND IN, not rated) currently has a market valuation of ~$7 bn – 11.7x sales and 32.8x Ebitda based on Bloomberg consensus for FY22e (Gland, a CDMO player, is not exactly comparable to Eugia, a B2C player though). Eugia’s valuation and discount vs Gland’s is largely along expected lines in our view.
Entry of professional investors will be the key positive: The report said that deal contours and valuations for Eugia are likely to be finalised by mid-April 2022. It also reported that the conclusion of the Blackstone deal would eventually lead to a change of control for Eugia (the promoters will forego their rights over board composition, appointment of key management, etc.). If this were to happen, it would significantly improve market perception of Eugia’s management quality, in our view, which would be a key positive. Business outlook remains strong for generic injectables business where the company reaffirmed its goal of achieving global sales of $650-700 m from generic injectables by FY24 (vs $395 m in FY21), driven by portfolio and capacity expansion.
Eugia deal should also help in establishing a value for the residual business: A successful conclusion of the Eugia deal should also help Aurobindo to establish a value for the residual non-injectable business (~87% of Aurobindo sales in FY21). The current share price values the residual business at 1.5-2.5x FY22e implied Ebitda, versus 6-6.5x Ebitda for comparable names like Viatris (VTRS US, not rated) based on Bloomberg consensus. If we assign a similar multiple (6x) to the residual business, there would be 34%-46% upside to the current valuation for Aurobindo.
Retain Buy and TP of Rs 835 (unchanged): Despite near-term concerns (e.g. US pricing pressure, decline in ARV sales), we believe the long-term outlook remains steady for key segments. US generics (excluding injectables) should sustain single-digit sales growth despite a large base (~$1.3 bn sales p.a., ~40% of total company sales) on new launches and volume gains. Entry in the India B2C market could help it bridge the valuation gap with peers. Long-term R&D projects remain on track. We retain our Buy rating and unchanged TP of Rs 835.