I chose to value Aurobindo Pharma based on a screen of high growth, low PE ratio companies for which the EPS growth rate has been greater than stock price growth rate.
Numbers and Narratives
Aurobindo Pharma is a mature pharmaceutical company that is witnessing a second lease of growth. I expect it to continue growing better than the industry average for the next 5 years while keeping its industry average margins.
The core numbers that I arrive at based on the story are
- Compounded revenue growth for next 5 years = 12% (14% last 5 years)
- EBIT margin in year 5 = 20% (industry average)
- Initial cost of capital = 9.99%
Valuation
I’ve used the above numbers along with the financial information to compute my DCF valuation for Aurobindo Pharma as seen below.
As you can see, the valuation price came out to ₹1396.12, about 43% higher than the current trading price of ₹975.55.