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Brokerage Report On Ajanta Pharma, March 2023. Should You Buy, Sell or Hold?



Motilal Oswal’s research team maintains a buy rating on Ajanta Pharma.


The report is written by Ajanta Pharma Tushar Manudhane - Research Analyst (Tushar.Manudhane@MotilalOswal.com), Sumit Gupta (Sumit.g@MotilalOswal.com,) Akash Manish Dobhada- (Akash.Dobhada@MotilalOswal.

Find below Synopsis of the research team.



We met with the management of Ajanta Pharma (AJP) recently to understand its business outlook in further details.


AJP has enhanced its efforts to improve profitability over the next 2-3 years. n Superior execution in the branded generics segment across domestic formulation (DF), Asia and Africa would result in industry outperformance. This will be further supported by relief on the cost front, which would pave the way for at least 200bp margin expansion over FY23-25E.

However, the US generics growth prospects might moderate due to slowdown in the pace of approvals over the near term. n We expect 15% earnings CAGR over FY23-25 v/s 4% YoY earnings decline in FY23.

We continue to value AJP at 22x 12M forward earnings to arrive at our TP of INR1,410. AJP had multiple headwinds such as higher raw material costs and operating deleverage over the past 12-15M, leading to historically lower margins in 9MFY23. However, with efforts in place to overcome these hurdles, there is scope of better margins from FY24 onwards. Maintain BUY.


Inferior execution in branded generics market of India/Asia/Africa, untoward regulatory outcome at Dahej, Paithan site and adverse currency headwinds are the key risk to our rating/estimates.


Margin recovery – key for earnings growth

Over 9MFY23, the various factors that hit AJP were: a) inventory write-off (1% of 9MFY23 sales), b) adverse currency (EUR-INR) movement that impacted 0.5% of 9MFY23 sales and c) a spike in raw material prices (0.7% of 9MFY23 sales).

Historically, AJP had taken inventory write-off to such extent only twice so far and it has been one-time in nature. The INR depreciation is expected to reverse the impact of currency movement from 1QFY24. Further, there is scope of passing some increase in raw material cost in the branded generics segment, thereby improving its overall gross margin going forward.

Further, the freight cost (which was ~6x from pre-Covid to post-Covid phase) has fallen considerably, providing comfort on the cost front as well.


DF – new launches/better MR productivity to drive industry outperformance

AJP has delivered consistent 20%+ YoY growth in revenue over the past two years on 9M basis.

In ophthalmology and cardiology, AJP has been gaining market share over the past five years. Particularly, in cardiology, there has been a shift towards trade generics at the industry level, thus moderating the growth prospects of this therapy. Despite this, AJP has been able to outperform in this therapy.

The benefit from restructuring exercise is now reflected in dermatology therapy (strong 24% YoY growth v/s +4% for IPM over 12M ending Dec’22).

In addition, AJP has reduced the field force by 200 to 2,800 and still managed to deliver robust growth in the DF segment, thereby driving sales and profitability. We expect 16% sales CAGR in DF to INR15.6b over FY23-25.


Asia/Africa – newer geographies/MR additions to boost outlook

AJP has increased the field force by 50% over the past 9M to 1,500 to cater to Asia/Africa’s branded generics segment.

Further, the increased penetration to newer geographies in Africa (Uganda/ Kenya/Tanzania) as well as in Asia (Uzbekistan/Kazakhstan/Krygzsthan) would brighten the growth outlook in these geographies.

Besides, the favorable currency in Africa would have a positive impact on AJP’s sales growth and margins in the branded generics segment.

We expect 12% sales CAGR in Asia/Africa’s branded generics segment to INR22b over FY23-25.

The US generics – yet to revive!

AJP had two approvals (including one tentative approval) and filed just four ANDAs in 9MFY23. While AJP intends to improve the pace of filing ANDAs, the gestation period would be there for a meaningful pick-up in the US generics business.

Management indicated the US sales to be flat YoY for FY24E.


Valuation

The overall investments in terms of field force additions in Asia/Africa and manufacturing capacity expansion to cater to focus markets are already in place. Further, the cost pressures are likely to ease from FY24 onwards. AJP has cash to the tune of INR6b for inorganic growth opportunities.

Further, AJP is trading at 20x FY24E EPS of INR60 and 17x FY25E EPS of INR69. We continue to value AJP at 22x 12M forward earnings to arrive at our TP of INR1,410. Maintain BUY.


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Disclosure:

All Investment, including one made in equities are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from expectations as expressed or implied under this document. Past performance is used to show actual performance for that period of time and in no ways assures similar performance for investments in the future. Wiremesh does not assure any financial goals to be attained, any profits to be made, or losses to be avoided, whether directly, indirectly. Investors must therefore exercise due caution and consult their financial planner and stock broker before making any decisions. This article only incorporates recent stock-related information about the companies from the brokerage report of Motilal Oswal. Wiremesh, and the author are not liable for any losses caused as a result of decisions based on the article.


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