Ajanta Pharma (Initiating Coverage) - Gearing for the next leap - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities

Ajanta Pharma is a diversified branded play with best-in-class return metrics. Its high exposure to branded generics markets (70%+ revenue from India, Asia and Africa) offers sustainable growth visibility with superior profitability. Rising scale in the US business is expected to drive margin expansion and increased contribution to the overall profits. With the conclusion of major capex cycle (Rs16bn+ in the past 6 years, internally funded) and plant opex reflecting in P&L, operating leverage benefits are expected to drive strong earnings growth of 18% CAGR, core-ROCE expansion of ~550bps to 28% and FCF generation of ~Rs13bn over FY21e-FY23e. Initiate with a BUY and target price of Rs2,150/sh.

Niche franchise in India; cardiac, ophthal and derma form ~80% of revenue: Ajanta's distinctive strategy of launching novel first-to-market products (~50%+ of portfolio) has driven its outperformance of ~200bps vs. the IPM in the ast five years. With a recovery in domestic market, we expect India business to grow at ~14% CAGR over FY21e-23e driven by volume growth and new launches. It has managed to held its market share in the lockdown period, which is noteworthy.

Strong traction in the US to continue, margin trajectory to improve: Despite Ranitidine recall (~10% of FY20 sales), US revenue maintained strong growth momentum driven by market share gains in older products. US business (~USD80mn, doubled in 2 years) is expected to grow at ~18% CAGR over FY20- 23e on the back of 8-10 launches per year. Recent approvals - gTamiflu suspension, gDepakote ER, Dapagliflozin (tentative) - provide growth visibility in the near to medium term. With rising scale, EBITDA margins are set to improve over the next two years.

Asia business has reasonably good outlook; Africa stabilises: Asia business is expected to grow at ~13% CAGR driven by steady performance in Phillipines (40% of Asia revenues), new launches and volume growth. Africa business has a stable outlook (branded biz to grow in high single digit, institutional biz to remain flat).

Unleveraged balance sheet; strong FCF generation and RoCE improvement: Ajanta's aggressive capex coincided with several business headwinds (decline in institutional business, currency volatility in EMs, slowdown in IPM), depressing its core-RoCE from 40%+ five years back to ~18% in FY20. Despite the capex, the company remained net debt free and FCF positive. With improving utilisations and asset turns, we expect strong FCF generation of ~Rs13bn and core-ROCE expansion of ~550bps to 28% over FY21e-23e.

Our target price of Rs 2,150/sh provides ~25% upside potential; risks: We value Ajanta at Rs 2,150/sh, based on 23x Mar'23e EPS, largely in line with its 5-year historical average PER. Risks: expansion of NLEM list, lower growth in EMs including India, delay in US approvals, and currency volatility in EMs.

Shares of AJANTA PHARMA LTD. was last trading in BSE at Rs.1748.05 as compared to the previous close of Rs. 1721.35. The total number of shares traded during the day was 11241 in over 1547 trades.

The stock hit an intraday high of Rs. 1792.45 and intraday low of 1698.75. The net turnover during the day was Rs. 19807520.

Source : Equity Bulls

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