Maintain BUY on Ajanta Pharma - Poised to re-rate - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities

Ajanta's Q3 revenue grew by 15% YoY driven by strong performance in branded markets and Africa Institutional business. Despite normalisation in fixed costs (at pre-Covid levels), EBITDA margin came higher at 32% (+372bps YoY) driven by improvement in gross margin (+344bps YoY). We believe Ajanta is poised to re-rate as: a) it's high exposure to branded business (~70% of revenue) offers good growth visibility with superior margins; b) rising scale in the US (USD 80mn, doubled in 2 years) will lead to meaningful improvement in profitability; c) with conclusion of major capex cycle (INR 16bn+ 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 15% CAGR, core-ROCE expansion of ~465bps to 29% and FCF generation of ~INR 14bn over FY21e-FY23e. Maintain BUY with a revised TP of INR 2,250/sh. Refer our initiation report - Gearing for the next leap.

Strong operational beat: Revenue at INR 7.5bn (+15% YoY) was driven by India (+13% YoY), EMs (+20% YoY) and Africa Institutional biz (+57% YoY). Gross Margin remained healthy at 77% (+344bps YoY, -83bps QoQ). Despite normalisation of other expenses (27% of sales, flat YoY, +525bps QoQ), EBITDA margin came higher at 32% (+372bps YoY, -603bps QoQ). Adj. PAT grew by 64% YoY aided by lower tax rate of 18%.

India growth bounces back: Ajanta's India revenue grew by 13% YoY and outperformed the IPM by ~675bps in the quarter. As per AIOCD, all key therapies - Cardiac, Ophthal, Derma and Pain outperformed the therapy average. With a recovery in domestic market, we expect India business to grow at ~13% CAGR over FY21e-23e. Ajanta has managed to hold on its market share in the lockdown period, which is noteworthy (Exhibit 3).

Healthy performance in EMs, double digit growth to sustain: EM business (Asia and Africa branded) grew by ~20% YoY and declined 2% QoQ. We expect Asia business to grow at ~13.5% CAGR driven by steady performance in Philippines (40% of Asia revenues), new launches and volume growth across markets; whereas Africa branded business to grow at high single digit rate over the next two years.

US remained flat despite Ranitidine recall; rising scale to drive higher profitability: US biz at ~USD 22mn was largely flat on a YoY basis (Ranitidine in the base) and QoQ basis (weak gTamiflu season, new launches at the end of Dec Q). The company launched 3 products in Q3 (36 products on shelf) and has a pipeline of 18 pending ANDAs.

Maintain BUY, risks: We increase our EPS estimate by 10% for FY21e to factor the Q3 beat and by 3-4% for FY22-23e on the back of improved growth visibility for the branded business. We revise our TP upwards to INR 2,250/sh, based on 23x FY23e EPS. Key risks: Expansion of NLEM list, lower growth in EMs, delay in US approvals, and currency volatility in EMs.

Shares of AJANTA PHARMA LTD. was last trading in BSE at Rs.1799.05 as compared to the previous close of Rs. 1746.15. The total number of shares traded during the day was 32166 in over 2268 trades.

The stock hit an intraday high of Rs. 1879.45 and intraday low of 1760. The net turnover during the day was Rs. 59008750.

Source : Equity Bulls

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