Ajanta Pharma - Limited Upside + Tax uncertainty =Downgrade to Reduce - SBICAP Securities

Ajanta Pharma (AJP) marginally beats 2Q estimate with Sales/PAT at Rs1.8bn/220mn (+36%/23% YoY), driven by strong domestic formulation (30%YoY) and better INR/USD realization on exports (40% YoY). Better-than expected OPM at 22.1% (SSLe 19.5%), higher tax rate 30% (SSLe: 15%) and net forex loss of Rs2mn were some of other key highlights.

Reducing TP to Rs375, Revised to Reduce: We are revising our rating to Reduce from ADD on limited upside (68% run-up btw. Apr'12-till date). Also, our EPS for F13/14 is downgraded to Rs30.1/34.1 (from Rs34.8/38.9), to factor in higher F13 tax rate at 28% (from 17%), prevailing uncertainty over impending payment to IT on account of tax benefits claimed on disallowed expenses + lower than expected US sales.

Expect US sales to defer: Though 2Q witnessed a portion of sales accruing from US (Respiradone supplies worth Rs20mn), the mgmt has lowered its outlook on F13/14 sales to Rs60/120mn (from Rs150/200mn for F13/14e) to factor in 2/4 ANDA launches. As per mgmt there is delay in marketing tie-up for Levetiracetam. To recap, AJP has 2 approved ANDA (Respiradone and Levetiracetam) and is ramping up its filing for US market.

High tax rate (30%); the new norm to impact EPS by 12-14%: Tax rate came in at 30% (SSLe: 15%) and will normalize at these levels for F13/14e causing drag on EPS by ~13/12%.The recent news of IT department search on AJP premises for disallowance of R&D expenses & sales promotion fee for F10-12 has created an uncertainty over potential liability of unpaid dues. Note: AJP has spend ~Rs820mn in R&D between F10-12.

DF growth of 35% YoY, better than industry growth: The 2QF13 YoY growth continue to surprise at 35%, largely driven volume growth across Derma/ CVS/Optha segments + pick up in 3 newer segment. Conservatively, we expect AJP to sustain DF growth of 18-20% (F12-14e), driven by growing leadership in sub-therapy, increased field force productivity, calibrated launch of 14-16 products per year and additional sales from newer therapy segments.

2Q export formulation grew ~32%, Asia continue to remain strong: Growth from export formulations segment was healthy for 2Q (+32% YoY ; 26% QoQ), led mainly by Asia and Africa regions.

Valuation and recommendation: We believe that the long term fundamentals of AJP (backed by commercialization of Gujarat plant by F15) are in tact; though short term outlook remains gloomy on slow US pick up, high tax rate & unpaid IT dues. Factoring the recent run-up in the stock price, AJP offers limited upside hence we downgrade to REDUCE with TP of Rs375 (stock trades at 13.8/12.2x F13/14e EPS).

Source : Equity Bulls

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