Annual Report Analysis: Aurobindo Pharma 2016

This post is a continuation of our series "Annual Report Analysis". We read annual reports daily and pick out the most important ones where we feel something is happening which might be of interest to others as well. This is in attempt from our side to portray in words what we could decipher from an annual report.
However, one should keep cognizance of the fact that this is an academic exercise on our part to better educate fellow investors and in turn learn from the masters. Here i present you what we found most interesting in Aurobindo Pharma (Auro Pharma) for 2016 and beyond

• Headquartered at Hyderabad, India, Auro Pharma is the 5^th largest Indian pharma company in terms of consolidated revenues
• Auro Pharma employs more than 15,000 professionals, from over 30 countries
• Auro Pharma exports to over 150 countries across the globe with more than 87% of its revenues derived out of international operations
• Auro Pharma has a robust product portfolio spread over seven major therapeutic/product areas encompassing neurosciences, cardiovasculars, gastroenterologicals, antibiotics, anti-retrovirals, anti-diabetics and anti-allergics (well diversified portfolio and not concentrated to any particular segment)
• Auro Pharma has been ranked as #7 prescription supplier in the US as per IMS total prescriptions dispensed as at March, 2016. The Company is among the top 15 generics companies by sales in Europe (US formulation business contributed 55% to the overall formulation revenue during the year)
• Auro Pharma is driving growth through several verticals. There is a determined foray into oncology and hormonal products, enzymes, peptides including microspheres, oral contraceptives, steroids, OTC offers, differentiated technology viz. nasal products, inhalers, patches and films (in coming few years Aurobindo will be in every segment to tap every opportunity)
• Auro Pharma is in the process of developing a wide range of oncology and hormonal products. A new R&D Centre dedicated for generic research in the field of oncology and hormones has been set up at Hyderabad to develop anticancer drugs and hormonal products, both for solid and parenteral dosage forms. (Aurobindo spent 3.38% of revenue (Rs 470 crore vs Rs 347 crore YoY) on R&D in FY16
• Auro Pharma has over 50 candidates for oncology in the pipeline, with over 15 products pegged for early stages of development (Oncology market set to grow from USD107 billion in 2015 to USD150 billion in 2020). The oral, solid dose formulations sections of oncology & hormone manufacturing facility has been completed and commissioned. The injectable areas of the oncology facility are expected to be commissioned in the later part of 2016
• A new block to manufacture oncology API is being added keeping the future requirements. The manufacturing facility is expected to be operational in 2017-18 (backward integration to reduce cost and stable source of quality APIs )
• Auro Pharma is foraying into inhalation and dermatology specialties with a basket of products. Initially, development work has commenced for 2 inhalation products, with another 4 in the pipeline, and 18 dermatology products have been selected for development (the global dermatology market stood at USD20 billion in 2015 and is poised to touch USD33.7 billion by 2022, rising at a 7.73% CAGR from 2015 to 2022)
• Auro Pharma is striving to become a scientifically stronger company, with newer technologies and difficult to develop specialty generics. Aurobindo is foraying into specialty injection products. Plans are on-going to file the first product in 2017-18. The objective is to launch four identified products, which together account for a market size of around USD 3 billion
• Auro Pharma is entering the vaccines business with a joint venture for developing pneumococcal conjugate vaccine (Global branded market of more than USD 6 billion and competition is limited)
• Auro Pharma's subsidiary, Aurohealth manufactures and markets a robust pipeline of innovative liquid and solid dose store brand (OTC) over-the-counter products. The mission is to develop as many OTC products for the US retail market as possible, providing a consistent and reliable supply, at a fair price and of the highest quality
• Auro Pharma's
•  newly acquired US based entity Natrol manufactures and sells quality nutritional supplements in the US and select international markets. It offers branded products including vitamins, minerals, and supplements; diet and weight management products; sports nutrition products; and products for hair, skin, and nails  ( Nutraceuticals market is currently at around USD 38 billion and is expected to grow to USD 46 billion by 2018)
• In terms of the filings to US FDA, a total of 398 ANDAs have been filed by Aurobindo as on March 31, 2016 out of which 251 ANDA approvals (215 final approvals including 10 for Aurolife Pharma LLC, and 36 tentative approvals; Tentative Approvals include 21 ANDAs approved under PEPFAR) have been received. The balance 147 ANDAs were under review for approval. During the year, Aurobindo filed 22 ANDAs, while 49 final approvals were received (strong pipeline to drive revenue going forward)

We view this not as an end result but a starting point in analysing a company, of noting down things which interests us and which we feel could act as a trigger going forward. We will continue this series with many more companies. Some of which are of interest and some are not. However, we want to use this as a measure of enhancing our learning of the subject. Till then Happy Learning.

Sanjoy Bandopadhyay

Sundaram Finance Annual Report 2016 Review

This post has been inspired by the fact that Non Banking Finance Companies have ruled the roost in the past few months. I wanted to understand what is cooking in the sector and hence chose to go through the annual report of one of the most respected NBFC in the Indian arena. If something is actually brewing up lets see what they have to say.
So, I picked up the annual report of Sundaram Finance and these are the key points I could notice in that:

• Global oil prices are expected to remain in the band of $40-50 per barrel but unlikely to fall further(On eye on oil prices shows just how important oil is with respect to India) 
• Government has accelerated efforts to boost public investments, with a particular focus on roads, railways and power sector, partially reflected in the 69% yoy increase in projects awarded by NHAI(So the efforts of the Government are showing on ground, Nice eh)
• The Commercial Vehicle (CV) segment led the growth in automotive sector due to two reasons namely; replacement demand and pre buying ahead of mandatory changes in emission norms. Also stable diesel prices provided impetus to truck operators(Highlights that there have been some one off reasons for the recent uptick in the MHCV industry, makes it all the more important to track how the industry moves in FY17)
• Competition for available business intensified during the year putting pressure on margins(Highlighting the competition is making life difficult, expect some pressure on NIM's)
• Has already advanced NPA recognition to 90 days ahead of the last date as prescribed by RBI norms(Best in class, expect no negative surprises on asset quality front)
• Gross & Net NPA stood at 2.08% and .92% making it the best performing portfolio among peers(The figures put even some private banks to shame considering NBFC's have higher cost of funds and effectively lend to the un banked. More so considering the size of the book)
• The net accretion to fixed deposits this year was Rs 321.56 crores which is the highest in the history of the company(Trust in the management, also some of it could be the effect of rush for yields in a falling rate environment)
• With most macroeconomic indicators remaining stable, the various measures initiated by Central Government are likely to have a salutary impact on the automotive sector. The continuing thrust on infrastructure and revival of mining activities, coupled with increase in budget allocation for rural sector and fast tracking of irrigation projects augurs well for growth of Medium & Heavy Commercial Vehicle as well as construction equipment. With diesel prices remaining stable, the outlook for automotive sector appears reasonably optimistic(The most important statement, guiding for a better year ahead, highlighting the measures taken. Management sounds optimistic
• Increased budgetary allocation for rural sector, fast tracking of irrigation projects, increase in farm credit, targeted increase in construction of roads and bridges and implementation of pay commission is expected to augur well for the Indian economy(Confirming the earlier view)
• Your company hopes to post reasonable growth in its chosen line of business and also continue to explore new, profitable business opportunities(Continuing on the optimistic tone)
• Competitive pressures in the vehicle financing market are likely to remain high with banks increasing focus on retail lending(Highlighting competitive intensity again. Knowing this it would be a safer option to be conservative as lenders might compromise on asset quality front in a competitive environment to buttress growth rates)
• Preservation of asset quality will always remain a key imperative. Growth with Quality & Profitability has been underlying philosophy that has guided your company over years and shall continue to do so in future as well(The mantra of Sundaram Finance)

We will keep bringing up more such posts covering the whole NBFC sector to know what are the views of different managements in such an environment. 

Karan Sharma

What bull market, Eh !!

This post is inspired by a lot of noise which is being generated in the investment community over the last one year. Now there are two sides to everything and even now we have one faction of the stock markets who are sounding out caution and ringing alarm bells pointing out the fact that broad market indices are trading at high valuations (Nifty 50 PE: 23.44 & Nifty 500 PE: 26.97) as on 10th August 2016. While there seems to be many advising caution there seems to be this other side which is saying that earnings are on the cusp of growth and hence the P/E which looks expensive on a trailing basis will look cheaper as earnings come out.
To dwell more on this the second group (bull case) made this similar argument last year when markets topped out around March as earnings growth didn't come of and thus tanked the markets. Now, this group again makes the same case. Considering the fact that they turned out wrong once if earnings don't turn up markets wont take it lightly, though i am not suggesting anything, it's just an observation.
However, the purpose of my post was not to make a bull or bear argument. I don't follow indexes or P/E levels hence i am ignorant to these vagaries. The basket of companies i venture in are completely unrelated to indices, ignoring minor similarities in the case of one or two companies. What really caught my attention was some people suggesting the fact that this is a bull market, crap companies are shooting through the roof, there is no sanity, people are not evaluating what they are buying.
This caught my eye because as a regular follower of markets i know that this fact is horribly wrong. Hence, i chose to present my fact with some statistical evidence with the following exercises (This is just a start of a long exercise, I will be doing lot more studies on the similar subject so expect a lot more to come in the following days)

Selected Sensex (Period YTD (year to date) as on 9th August 2016)

1. Compiled returns data for all 30 companies
2. Out of 30 companies 8 companies have shown negative YTD returns with the worst being CIPLA at a negative 18.64%
3. Out of 30 companies 10 have delivered single digit YTD returns with the best being TCS at 9.70 percent while the worst was Coal India at 0.9 percent
4. So out of a total of 30 companies 18 companies have delivered returns which are not reminiscent of any bull market
5. Of the 12 companies delivering double digit returns the best is Tata Steel with YTD returns of 45.92 percent while NTPC comes last registering gains of 10.66 percent
6. All the companies are trading below their 52 week highs with 16 companies trading within a 5 percent band to their all time highs

Selected BSE 500 (Period YTD as on 9th August 2016)

1. Compiled returns data for all 500 companies
2. Out of 500 companies 210 companies have shown negative YTD returns with the worst being LYCOS Internet with a negative return of 67.23%
3. Out of 500 companies 96 have delivered single digit YTD returns with the best being EClerx at 9.85 percent while the worst was Lakshmi Machine Works at 0.09 percent
4. So out of a total of 500 companies 306 companies have delivered returns which are not reminiscent of any bull market
5. Of the 194 companies delivering double digit returns the best is Manappuram FInance with YTD returns of 196 percent while Oberoi Realty comes last registering gains of 10.15 percent
6. All the companies are trading below their 52 week highs with 127 companies trading within a 5 percent band to their all time highs, while 164 companies are trading 20% or greater below their 52 week highs
   
   
   I don't know what bull market others have been talking about but what I could infer from the data is that
   1. Market seems to be judging companies based on their performance
   2. With more than 40 percent companies posting negative returns on a YTD basis the argument that crap seems to being bought and junk is getting value is absolutely wrong
   3. What seems to be happening is that junk is getting perfectly valued and the universe of companies posting good results and with good corporate governance track record getting smaller day by day the usual set of companies are getting bid up higher. (Effecient market)
   4. If this was a bull market what market are companies like LYCOS, INOX WIND, AMTEK AUTO witnessing. The shareholders in these companies have seen just bearishness. If I add the JP's & Unitechs and like the list would get endless. 
   5. If even after such judgement and more than 2/3rds of the invest able universe delivering negative returns I wish the much talked about bull market arrives for these companies (for the sake of the poor shareholders)
   Note: If investing was as easy as buying when P/E is 14 and sleeping when P/E is 24 well then people are just reading too many books. 

Karan Sharma