Ajanta Pharma Ltd - Stock Valuation and Financial Performance

Ajanta Pharma Quarterly Call: Key Takeaways

1. Buyback: The company has approved a buyback at Rs. 2,770 per share with a total payout of Rs. 351 crores, including tax.
2. R&D: R&D expense for the quarter was Rs. 50 crores (5%), compared to Rs. 63 Crores in Q4FY23. R&D is expected to be maintained at 5% going ahead.
3. Capex: Capex for FY24 was Rs. 160 crores and is estimated to be around Rs. 175 crores to Rs. 200 crores in FY25.
4. Growth: India business is expected to grow around 10-11%. The US generics business is expected to grow in the mid-single digits, while the International business expected to grow in the mid-teens.
5. Guidance: Management expects the EBITDA Margin to sustain at 28%, with a possibility to increase by 100 bps.

We maintain our MRP of Rs. 1355.  

Ajanta Pharma is one of India’s leading multinational pharmaceutical companies. It is one of the fastest growing companies in India’s ophthalmology, cardiology, dermatology and pain management branded generics sub-segments and derives 32% of its revenue from India as of FY23. The company derives 26% and 15% from Asia and Africa respectively through the export of branded generics. The company generates 5% of its revenue from the sale of anti-malarial medicine to institutions operating in Africa. The remaining 22% is attributable to the company’s US Generics business, which has historically been the fastest growing segment at a 5-year annualized rate of 34%, albeit from a low base.

Ajanta Pharma has recorded a 5-year Revenue CAGR of 12%, and 5-year PAT CAGR of 5%. The lower PAT CAGR is primarily attributable to a decrease in operating margins over the period, from 31% in FY18 to 22% in FY23. This decrease is primarily attributable to price erosion in the United States and increase in raw material costs. However, the operating margin deleverage has seen a reversal over the past two quarters, with operating margins improving from 17% in Q3FY23 to 28% in Q3FY24. This is due to new launches, lower price erosion for existing products and normalization of raw material costs.

Can the company continue to maintain its margin and growth profile?

To answer this question, it becomes important to highlight few of the various moving parts that will influence the metric.

USA Business: The US business is subject to the cost of filing Abbreviated New Drug Applications (ANDAs) and price erosion risk. The company has guided judicious ANDA filings with reduced capital allocation. The company currently plans to file 6-8 ANDAs. However, next year shall see 8-12 ANDA filings.

The US business may not witness material margin improvement as Ajanta Pharma is not an early entrant in any of the key generic products. The price erosion for drugs would begin before Ajanta’s entry in the US markets and may witness some more erosion as more companies enter the products. Prices with 12 months of patent expiry are generally less than 40% of the price while the drug was patented. This may vary depending on the number of generic players in a product.

There are three key products drivers in the US Market- Vimovo, Chantix and Topiramate. Vimovo has recently been launched in Q4FY23. Dr. Reddy's was the first generic player to launch in Feb’20, while Lupin and Mylan are other filers. After Ajanta, only one player has received an ANDA approval. Being a late entrant, Ajanta is not expected to enjoy the same margins as early entrants and may see price reduction once more players commercialise production.

Chantix is expected to launch in Q1FY25. Lupin, Zydus Lifesciences and Mankind Pharma are other known filers, which limits Ajanta’s ability to earn high margins on this product. The company’s pipeline further includes Topiramate, and the company’s settlement with innovator Supernus Pharmaceuticals allows it to sell its generic version in February 2026 or earlier. Ajanta Pharma will be a late entrant in this market as Zydus Lifesciences and Actavis Laboratories had launched their product in January 2023, while Par Pharmaceuticals will launch the product in April 2025. 

Therefore, Ajanta’s pricing power will be limited and will further weaken after the product goes off patent as the bulk of price erosion would already occur through the launch of generics by its competitors.

India: The margins in the Indian business are determined by being the first player to the market and launching a large number of products, which allows a company to develop its brand and generate a higher margin. The productivity of medical representatives also plays an important role. The company is on track to continue being a first to market player with improved MR productivity.

Inversely, companies can be forced to reduce prices if a drug is included in the National List of Essential Medicines (NLEM). The company’s brand MET XL was placed on the NLEM which has impacted pricing. The company currently has a 12% NLEM exposure.

Export Branded Generics: The key export destinations for Ajanta Pharma’s drugs are Asia and Africa, and the company is present in various therapies such as cardiac, diabetes, ophthalmology, pain management, antibiotics, gastro, antihistamines, and respiratory. These markets are reliant on imports to meet their drug requirements and Ajanta is strongly positioned in these geographies with its own distribution channels. The growth and margins in these geographies can be impacted due to logistics costs, appreciation of the Indian Rupee, and general slowdown in these foreign markets.

African Institutional: Ajanta serves the African Institutional market through anti-malaria drugs and was the first company to obtain WHO pre-qualification for the antimalarial product Artefan (Artemether + Lumefantrine) Tabs. However, revenues from this business remain uncertain due to high dependency on Global Fund’s allocation to various drugs which changes every year.

Foreign Exchange: With 68% of the business derived from international markets, the company remains sensitive to changes in currency. While the company does hedge at least 50% of its receivables, foreign exchange volatility is a concern.

CAPEX related operating deleverage: Given the nature of the capex, some plants can take up to 4 years from the start of construction to generate revenue. Such plants may incur overheads without generating revenue, which can impact the margin.

What are the growth plans for Ajanta Pharma?

1. CAPEX: The company has no significant Capex plans. The capex for FY24 is expected to be around Rs. 125 crores which includes maintenance capex and plans for a new corporate office. It is reasonable to believe that the current leg of growth will come from capacity utilisation and launch of new products. The company might also consider acquisitions given that it has no long term debt. 
2. Guidance: The Asia business is expected to grow in the low teens, while growth in Africa may be slightly higher. In India, we expect the company’s growth rate to outpace the growth of the Indian Pharmaceutical Market sub-segments the company operates in. Growth in the USA is dependent on the approval and launch of new products. The immediate growth triggers in the US market are the launch of Chantix and Topiramate along with scale up in Vivomo, which has already been commercialized.

What are the concern areas?

Along with the factors that can impact the margin as explained above, we are cautious about the following:

1. Price Erosion: The US Markets are subject to price erosion when products go off patent or when a challenger enters through a bioequivalence route or through a Para IV filing. Early movers have a short term price advantage which erodes over time as the number of players in a drug increase. Prices can fall as much as 60-80% within 12 months of a generic entry, and are only halted if players have exclusivity through Paragraph IV filings.
2. Increase in API prices: Increase in API prices can increase the material cost, inversely impact the Gross Margins. Ajanta sources 98% of its API/KSM requirements through third party vendors.
3. Logistics cost: With the United States as a key market, the ongoing geopolitical situation in the Red Sea can increase the delay in transportation, which can stretch the working capital of the company while increasing costs simultaneously. This is not a major risk for the company, but a general market risk for all export driven businesses.

Resilient performance on the back of increased volumes, price increase and new product launches.

Company reported good results on performance across therapeutic brand portfolio.

Ajanta Pharma Ltd | Market Cap: 14,042 Cr

CMP 1,609 | P/E 22x FY22

Recommendation | HOLD

Results: Ajanta Pharma reported 11% growth in sales year on year and operating profit growth of 54%. 

Click here for 10 year X-ray

Key highlights:

• Ajanta Pharma posted healthy year on year growth across the segments. 10% in Cardiology, 0.5% in Ophthalmology, 2% in Dermatology and 8% in Pain Management.
• The domestic sales declined by 1% while export sales grew 12% year on year.
• US generic business grew by 39% and Africa (branded) business grew 36% year on year. While Asia (branded) and Africa (institutional) business declined by 1% and 28% respectively.
• During the quarter R&D spends was 4% of the revenue (vs 7% in 1QFY21).
• Board has approved the buyback for total consideration of ~Rs. 136 Cr for ~0.84% of the paid-up capital at a price of Rs.1,850 per share through the tender offer process. 
• The company has approved an interim dividend of Rs. 9.50 per share.

Outlook: Ajanta Pharma is expected to launch 8-10 new drugs in US market in similar niche categories. Over past 5 years the company has expanded its manufacturing for filings in US and in house sourcing. Margin expansion will continue till the sales growth is in double digit.

Moneyworks4me Opinion: We have recommended BUY on Ajanta Pharma because of its niche and low-competition portfolio that has helped it command a premium in most products, with prices of 50% products higher than peers. With better growth visibility and improving margins, we find that it can be considered for investment for 3 year horizon. 

At 1600/share, Ajanta Pharma trades at 22x 1 year forward PE. Our estimate is 15-18% CAGR in earning per share over next 2-3 years. We would like to purchase the stock at 1200-1300/share, PEG ratio of 1x approx.

BUYBACK Plan:

Buyback in Ajanta Pharma is like dividend. With less than 1% of total equity shares being bought back.

For investment less than Rs. 2 Lacs, one will have around atleast 6% acceptance ratio.  It could be higher depending on how may retail investors choose to tender their shares.

We will recommend tendering all the shares in buyback, you will receive remaining shares back in your account.

We wouldn’t recommend fresh buying just for taking advantage of buyback.

Ajanta Pharma | Market Cap: Rs. 13,197

CMP 1,512 | PE 21x FY21

Recommendation | BUY partially

Results: Ajanta Pharma reported 9% growth in sales year on year and operating profit growth of 33%.

Click here for 10 year X-ray

Key highlights:

• Ajanta Pharma posted healthy year on year growth across the segments. 10% in Cardiology and in Pain Management respectively, 5% in Ophthalmology and 3% in Dermatology.
• The domestic sales declined 10% while export sales grew 19% year on year. Domestic sales is high margin and sticky sales. This was not impressive due to i) niche products ii) fall in prescription
• Export sales growth was contributed by Asia (28%), Africa (branded) (17%) and USA (46%). Africa Institutional business declined by 10% year on year.
• During the quarter R&D spends was 5% of the operating income (vs 6% in 1QFY20).

Outlook: Ajanta Pharma received 5 final approvals (ANDA) from US FDA in US. Out of 37 final approvals, the company has commercialized 30 products. The Company has been steadily gaining market share in US and plans to file 10 to 12 more ANDAs during this financial year. On India business the management said that there is some softness in Indian Pharmaceutical market and hence the performance will be impacted in similar lines.

MoneyWorks4me Opinion: We have recommended BUY on Ajanta Pharma because of its niche and low-competition portfolio that has helped it command a premium in most products, with prices of 50% products higher than peers. With better growth visibility and improving margins, we find that it can be considered for investment for 3 year horizon. 

At 1400/share, Ajanta Pharma trades at 20x 1 year forward PE. Our estimate is 15-18% CAGR in earning per share over next 2-3 years. We would like to purchase the stock at 1200/share, PEG ratio of 1x approx.