Ajanta Pharma - Downgraded to ADD - India shines, margins a tad lower - HDFC Securities

Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities

Ajanta's Q1 revenue was in line, as strong India and Africa business offset the muted Asia, US, and institutional businesses. EBITDA margin came in lower-than-expected at 29% (~200bps miss), primarily on account of higher-than-expected staff costs and other expenses. Ajanta's India business is on a strong footing and grew by 32% YoY (~9% 2-yr CAGR), led by outperformance across therapies. While the US business was muted (+13% YoY, -3% QoQ), we expect it to improve in the coming quarters as the company plans to ramp up its recent launches. We expect the EBITDA margin to stabilise around 30% in FY22 (vs. 26%/34% in FY20/21) and improve to ~32% in FY23, aided by operating leverage. While the stock has outperformed the sector by ~12% in the past 6M, at ~24x FY23 EPS, the upside appears limited; hence, we downgrade it to ADD. Our revised TP stands at INR2,520/sh.

In-line revenue, miss on margins: Revenue grew by 12% YoY as strong growth in India (+32% YoY), Africa (+16% YoY) offset muted growth in the US (-3% QoQ, lack of new launches), institutional business (-13% YoY) and Asia (+2% YoY, lockdown-led disruption). EBITDA margin declined to ~29% (-484bps QoQ) on account of moderation in gross margin (-76bps QoQ), increase in staff costs (+186bps QoQ, incentives, commissioning of ophthal block) and other expenses (+221bps QoQ). Adj. PAT came in line, aided by higher other income (INR 250mn forex gain) and lower tax rate of 21%.

Key therapies continue to outperform in India: Ajanta's India revenue grew by 32% YoY, primarily led by market share gains in key therapies, new launches, and price increases. As per the AIOCD, cardiac, ophthal and derma outperformed the therapy growth by 3%, 24% and 11% respectively in Q1. Ajanta is confident of outperforming the industry growth of ~11-13%, led by ramp-up in existing brands and new launches. It will focus on scaling up newly launched brands and plans to introduce 4-5 new products in FY22.

Strong recovery in Africa, Asia; US trajectory to improve: The Africa branded business recovered strongly, growing 16% YoY while the Asia business grew at a modest 2% YoY as some countries continued to face COVID-led disruptions. Ajanta expects to outperform in these markets, led by market share gains and new launches. The US business grew by 13% YoY but declined 3% QoQ to ~USD23mn, primarily due to fewer launches (QoQ). The company plans to launch ~3 more products in FY22 and ramp up the recent ones (nine in FY21). We expect 19% US sales CAGR over FY21-23e.

Key call takeaways: (a) US - aims to file 10-12 ANDAs p.a., gChantrix: advanced stage of review, awaiting approval; (b) plant capacity utilisation at 60-70%; (c) guidance - to maintain current EBITDA margin, ETR: 22%

Downgrade to ADD: We raise our EPS by 3% for FY23 to factor in lower tax rate and revise the TP to INR2,520/sh, based on 25x FY23e EPS (23x earlier), in line with the company's five-year historical average. Risks: lower growth in India/EMs, delay in US approvals, and currency volatility in EMs.

Shares of AJANTA PHARMA LTD. was last trading in BSE at Rs. 2289.1 as compared to the previous close of Rs. 2394.15. The total number of shares traded during the day was 17881 in over 3292 trades.

The stock hit an intraday high of Rs. 2381.65 and intraday low of 2270. The net turnover during the day was Rs. 41410342.

Source : Equity Bulls

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