When Rakesh Jhunjhunwala took stock of his investment in Aurobindo Pharma

In a chat with big bull investor Rakesh Jhunjhunwala, N Govindarajan, MD, Aurobindo Pharma, explains the foray in vaccines, microsphere and oncology products and says these will yield result only after 3 years. Edited excerpts


Rakesh Jhunjhunwala: What is the interest rates you are paying to the bank? Are they competitive, are they good?

N Govindarajan: It is less than, in fact, 1.5% on annualised yes.

Rakesh Jhunjhunwala: And will you be able to do this on a continuous basis?

N Govindarajan: We can do it because this improves the liquidity and it is… I mean obviously strategically it is good for us to keep doing it.

Rakesh Jhunjhunwala: So then why do not you consider this a permanent reduction in working capital? The accounting standards may say anything but in reality it is an actual reduction in your working capital cycle because you are paying the cost for it and you are receiving the money in advance.

N Govindarajan: That is true but see the reason why we have brought it up this as a separate subject is this is the first time we are doing it even though there are companies which have been doing it for long. We just wanted to give the clarity but your point is well taken in terms of like relooking at the entire working capital.

Rakesh Jhunjhunwala: It is not debt at all. And if it going to take place on a continuous basis, is not it a permanent reduction in working capital?

N Govindarajan: Yes. We can look at that as well.

Rakesh Jhunjhunwala: My second question is there are a lot of initiatives that you are taking which are not giving any return today. There is talk about you having invested in vaccines. So can you tell me which are the initiatives which may not give you revenues this year or next year but post say 2018-2019 will yield result?

N Govindarajan: I will list out what are the ones which you cannot expect revenues over the next two-three years. Vaccine is one, microsphere is one and oncology in terms of larger quantity of products. So while we will start filing, then please understand the fact that approval will take approximately around one-and-a-half to two years. Even the majority of oncology hormone and steroids would be post the two, two-and-a-half years time cycle and even liposomal and certain other fillers patches what are we are working also would be like after the two-and-a-half, three years time cycle only.

Rakesh Jhunjhunwala: What would the revenue potential be? I am a long-term investor. Can these initiatives, really turn to be very large revenue and profit potential?

N Govindarajan: I will give you one example. There are four peptide based microsphere products which have around $3 billion top line. In terms of opportunity, we do not see more than three-four players getting into that so that is the level of opportunity which exists.
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Rakesh Jhunjhunwala: How sure do you feel that you will be able to launch this product?

N Govindarajan: We have obviously have higher level of confidence, otherwise we would have not been investing our efforts on this.

Rakesh Jhunjhunwala: There is a lot of talk in the markets about some raising of equity. Can we get some clarity on it?

N Govindarajan: As we have clarified before, any fund raising as far as Aurobindo is concerned right now is more strategic rather than for capex and for improving our cash flow. So it will be more strategic. Let me tell you two things – one is, we are not in any hurry to do it just for the sake of it. Second thing is obviously at some point of time we will get closer to it and move on with that.

Rakesh Jhunjhunwala: And you do not think that other than acquisition in your normal business today, next year you should not commit more than $100 million capex?

N Govindarajan: Yes.

Rakesh Jhunjhunwala: What is it this year?

N Govindarajan: This year we had projected around Rs 1200 crore plus or minus Rs 100 crore. Rs 1200 crore to Rs 1300 crore.

Rakesh Jhunjhunwala: So that means next year you should have Rs 500-600 crore of additional capital expenditure.

N Govindarajan: That is right.