Ajanta Pharma


(Donald Francis) #1

Ajanta Pharmafeatures in Hitesh Patel’s current top 5 picks for a 2-3 year horizon. I had not looked at this at any depth before, but decided to as it came highly recommended from Hitesh. Here is what Hitesh has to say about the stock in brief

Ajanta pharma)-- consistent growth, good brands in domestic markets, strengthening its presence in overseas markets, relatively recession proof, reducing debt since around last few quarters. cmp 192, stock available at a pe of around 5-6. On a scale of 1 to 10, valuation is very attractive and so gets a grade of 9, conviction also at around 9.

Had an initial good look and came away impressed to dig further. My observations/questions:

1). Long term sales CAGR of 23% and PAT CAGR of 47%

2). 5yr Sales CAGR 17% and EPS CAGR of 29%

3). Raw material/Sales has consistently been coming down from 56% of Sales in FY06 to 36% of Sales in FY10

4). NPM has been consistently increasing from 5% in FY06 to 7.5% in FY10

5). Top brand in Dermatology like Melacare

6). New state of teh art API facility set up in Waluj Aurangabad in Fy10

7). Acquired formulations facility to cater to the rest of the world markets in FY10

8). Very impressive 1HFY11 results - Sales growth 18%, PAT growth 58%. This should be maintained as there is no apparent seasonality in Sales as seen from past quarters. NPM has touched almost 9%

Some questions:

1). Tax rate is pretty low ~15-16% for FY10?

2). Promoters had pledged shares - at one point this had gone upto 25% from 14%. Its down to 1.7% of total shareholding. Do we know the circumstances, why??

3). Company has always had high debt. Have been reducing the debt burden of late and in Q2 d/e is down to 0.93

4). What is the reason for the impressive performance in 1HFY11 as compared to say FY10? One factor is that they have been repaying debts regularly so interest cost/Sales is down below 4% from some 6% in FY10 corresponding quarter, but that is probably not telling the whole story

5). Raw material/Sales has seen huge improvements -from 39% to 31% of Sakles in last few quarters. Is this the effect of the new API facility that must be catering to captive use mostly. Does it supply some 50% of captive needs?

Some of these answers may tell us more on the sustainability of growth and profitability going forward.


The Jewels Of India
(Hitesh Patel) #2

Hi donald, thanks for starting the thread.

I am posting the ceo's interview transcript given back in july 2010. The Q & A covers most of the queries you raised.

Over the years, the company has created strong brands in various geographical markets

In interaction with Mr. Arvind Agarwal, CFO of the company after the company's AGM in Mumbai on 9thJuly 2010


Key highlights

  • Strong brands in key markets are the success for Ajanta Pharma. The company has a unique business model which it successfully operates in 52 countries in which it is present.
  • Nearly 60% of total sales of the company come from international markets. In international markets, the company sells its products through its own team of sales representatives.. It has a dedicated chain of salesmen which ensures its brands reach the dealers. Nearly 90% of its exports of around US $ 47 M are through direct marketing men. The rest are sold through distributors and dealers network.
  • The company does not sale all its products in all the geographies in which it operates. Rather it follows a very country specific and product specific model. For example, it sells its Anti malarial products and specialty range of products in African markets which continue to do wonder, while in South East Asian markets, cardiology, ophthalmology and dermatology products are sold. Similarly for Latin American market, the company has cuff syrup dosages. Thus rather than dumping all the products to marketing team, products or rather, the brands are sold depending upon the demand for that particular market.
  • Over the years, the company has created a strong brand of its product in various geographical markets. Within geographical markets, Asia constitutes about 50% of its international sales, 30% would be from Africa and the rest would be from Latin American region. There are no sales to EU and US at present, but in the next 3 years the company has plans to venture into US.
  • The entire export sales are made under $ currency. The company continues to import some of its API requirements from China as it can never match the costs at which they are selling vis a vis manufacturing the same in India. Also the company has its working capital loans ie the PLC in forex currency so to that extent both act as natural hedge. For the rest of the export sale, the company completely hedges on the very day of booking of sale.
  • In domestic market, all its sale come from prescription based model and largely from three segments ie, dermatology, cardiology and ophthalmology. All its sales are from prescriptions from Specialist doctors. The company's brands are the strongest among these specialist doctors. For example for dermatology, Melacare is recommended by most specialist doctors. The company has geographical presence across India; though they are weak a bit in Eastern region.
  • During past 3 years, the company had incurred a capex of aboutRs.100 crore. Nearly 20 crore is spent on upgrading the Paithan facility and the rest is spent on setting up new API facility in Aurangabad and on new R&D centire in Kandivali (W), Mumbai and on warehouse infrastructure. Presently the entire API manufacturing is for its Formulation business and currently is operating at 30% of installed capacity. The company will consider to sell some API even outside. For other API requirements, the company imports the same from China as it is much cheaper option than manufacturing.
  • The company will spend every year aboutRs.20 crore, largely on new products, expansion and up gradation in existing products and on R&D's.
  • NearlyRs.45 crore is standing as WIP as on Mar'10. Of these nearlyRs.30 crore is for expanding its API facility, new product range for its Paithan facility in Aurangabad and for upgrading its R&D centers. The rest is for two new products for which ANDA has been filed which are largely on machineries.
  • The company has filed two ANDA's last year and it will take normally about 24 months, for the ANDA's to get approved. This will be the next future growth driver for the company.
  • Company does not keep any forex positions open and does not speculate in currency.
  • There is some seasonality of business depending upon the product sale in particular region. Generally, the sales of Q4 is maximum and Q1 will always be lower, with Q2 and Q3 in the middle region.
  • The Mauritius Formulation facility is largely for Western part of African markets, where there exists some treaty with the Mauritius country, that the imports are allowed duty free and without any restrictions. The US subsidiary is largely for filing ANDA and other procedural purposes. The Philippine subsidiary acts as a marketing arm for that particular region.
  • The company's locations continue to operate under MAT, plus the R&D tax deductions are also there. Overall the tax rate will be around 15%.
  • There are no plans to raise money. The company had in past declared a buy back plan but with the share price rising, the plan stands cancelled.
  • Some of the list of products (brands) includes Valif, Met XL 100 for cardiovascular, Artefan for Anti malarial segment, Melacare, Nasopat, Fivasa, Salisa for Dermatology segment, Unibom, Apdrops for Ophthalmology. The company also has product called Kamagra for males, which has found strong presence in Gulf and African markets.
  • The company has introduced 28 new products last year and around 20 is planned for FY'11. However new products will take time, before they become a major ones for the company.
  • Nearly 50% of its sales are manufactured by the company and the rest are outsourced from various unorganized players. This model ensures better control over logistic and other costs results in overall better margins.
  • There are no plans to do any CRAMS business at this point of time.
  • The Inspira infrastrucre has plans to set up an Infrastructure Pharma SEZ in Aurangabad. There are no business connection with this company and Ajanta Pharma, except that the promoters are the same.
  • The margin has been continuously improving from around 15% in FY'07 to around 19% in FY'10. The brand value, economies of scale continues to play a key role in the improvement in margins. The company continues to expect healthy margins going forward.
  • Overall the company expects the net sales to grow by 15-20% every year.


(Excel Monkey) #3

Kamagra is a well known brand when it comes to onlinepharmacyin Europe


(Donald Francis) #4

Thanks Hitesh & Satnam.

Most of the questions on the business side do get answered from this detailed interview transcript. Good to know the company enjoys some brand power.

Any idea of the revenue mix? Without proper segmentation, we will not be able to put a finger on the impact/significance of brand power. My educated guess will be that its a small fraction of overall revenues (see below).

How would you rate the Management? I am yet to get comfortable on this count. If you take away the tax advantage for example, then the business/model is not as good as it sounds.

On the other hand, we have not yet taken into account the impact of Consolidated numbers. If that is poised to go up further, that can alter the balance. For e.g as on 31st Mar 2010, Consolidated EPS stood at 29 vs 24 standalone, thats like a 20% add-on which isn’t insignificant!

Anyone has had any contacts with Management? I want to go ahead and meet Management for a first hand look & feel:)


(Excel Monkey) #5

I met them once for somebusiness

that was some 10 years back just after their IPO

and now have no contact with them

not sure if they would entertain individual investors


(Hitesh Patel) #6

Hi

Putting some more thoughts on the topic:

1). Firstly, pharma companies like ajanta etc dont have too much brand/pricing power. And for stocks available at around 5 PE we dont get pricing power as well. Most of companies having pricing power are quoting at above 20 PE.

2). The place where they score is in launching newer drugs (first time in India kind of drugs) where because others are around 6-12 months behind them they have some kind of pricing power. Once others enter the fray it is again back to cut throat competition.

3). Regarding revenue mix, around 60% comes from international markets where again they usually market their own brands and seem to be smart enough to launch country/area specific drugs as mentioned in the ceo transcript.

4). Margins are continuously on an uptrend and we need to see where they settle down. To me this is a company with a wonderful combination of increasing sales with increasing margins. This always is a good recipe for strong re rating.

5). DII/FII holding – Practically nil. If and when these entities do start taking interest, things could get interesting. Would be interesting to find out why these have not noticed the company till now. (On first look there dont seem to be any hidden skeletons) In my experience many a times they start looking at companies only after they reach a threshold market cap of min 300 crores and ideally above 500 crores. So in effect we are sometimes too early for our own good.

6). Promoters have pledged around 2 Lac shares out of a total of 78 lac shares held. I would consider it insignificant.

7). Establishing the API facility looks like a step in the right direction even though capacity utilisation may at present be low. This gives the company quicker access to develop newer molecules which might offer them advantage in terms of quick launches. Flexibility of sourcing raw material from other sources also helps in maintaining costs.

8). As pointed out by Donald, reduced tax rate due to MAT and R&D expenses getting tax breaks plays to the company’s advantage. Any policy decision affecting these may create problems for the company.

9). Company has not diluted equity since many years and still managed to grow by taking and handling debt efficiently. Now I feel company has achieved critical sales level and competency to propel it to next level of growth. If they continue the trend of reducing debt, it could add to the attraction.

Through some scuttlebut talk I came to know that the newer generation is getting into the business and might want to ramp up the growth and image of the company.

Projections of consolidated profits for FY 11 according to some reports project FY 11 (cons ) net profits in the range of 43-45 crores. (reports by sunidhi and some service called bgse financials.) which amounts to EPS on consolidated basis to be around 37-38.

Regarding their products in my speciality, various products like Melacare(cream for hyperpigmentation especially over face) , carofit(antioxidant tablets), carofit ultra( cream for under eye black circles), aquasoft (moisturiser cream ) , pimecrolimus (local application especially for childhood eczema and other applications-- this is a first in India launch for the molecule-- biocon has launched it at a cheaper price but still their marketing strategy is not in place – their representatives are still not meeting dermatologists on a regular basis to re inforce their product) Ajanta seems to occupy a very good place in terms of quality of products and quality of sales force.

Going forward, growth triggers could be :

1). Launching of their products in US and European markets where they have very little presence

2). Improving their presence in the Indian prescription market-- they already are strong and could be stronger.

3). Growth from the existing markets in international space – increase in volumes and launch of newer products.

If some sort of M&A were to happen, this company makes an ideal takeover candidate for some biggie pharma company.

**
**

**
**


(Hitesh Patel) #7

This is a write up I had prepared before buying the scrip. Just like the 5 minute drill Lynch mentions. I continue to add to my position on dips.

AJANTA PHARMA

CMP 180 MCAP212 CRORES 1.18 crore shares outstanding

Ajanta Pharmais a specialty pharmaceutical company engaged in the development, manufacture and commercialization of pharmaceutical products. It employs over2,500 peopleworldwide and its products are sold in over25 countries.

The company continues to focus on New Drug Delivery Systems (NDDS) and new combinations. With the help of its R&D capabilities, it now has1380 product registrationsin different markets of the world and over1029 more are waiting in pipeline


The company develops and commercializes a diverse range of scientifically and medically innovative generic products. It is amongst the front runners in the segments of Cardiology, Dermatology Ophthalmology, and Anti-Malarial. Many of its brands hold leading positions in their respective sub-therapeutic segments. Ajanta Pharma is also expanding our presence in the fields of Respiratory, Gastrointestinal and Musculoskeletal medicine by introducing innovative products in these segments. A clear therapeutic focus has lead to a strong product portfolio for the company.

Modern manufacturing facilities:

Ajanta Pharma operates 5 state-of-the-art manufacturing facilities; 4 within India and 1 in Mauritius. One of these, located at Paithan, India is approved by the US FDA, health authorities of Brazil and Colombia and also holds a WHO pre-qualification for one of its products. Its manufacturing capabilities include a comprehensive range of dosage formulations of allopathic drugs including tablets, capsules, ointments, injections and powders.

Strong R&D base:

The company continues to focus on New Drug Delivery Systems (NDDS) and new combinations. With the help of its R&D capabilities, it now has 1380 product registrations in different markets of the world and over 1029 more are waiting in pipeline. Its R&D facility at âAdventâ, Mumbai, which is approved by Department of Scientific and Industrial Research (DSIR), Ministry of Science & Technology, Government of India, is being expanded which will ensure consistent growth for the organisation in the coming years.

Its R&D facility Advent has more than 150 diligent and committed scientists. Advent, located in Mumbai, houses a range of state-of -the-art equipment for formulation development, working on different dosage forms ranging from topical creams, ophthalmological preparations, nasal sprays and dry powder inhalers to name a few. It has an equally well equipped API lab at Advent to synthesize high value APIs for someof its key products.

Few of its notable R&D achievements are in the segment of anti-malarial with flagship brand,ARTEFAN; the first generic product to have been pre-qualified by the World Health Organization (WHO), Geneva. Its other key brands includeKAMAGRA(Sildenafil Citrate) & APCALIS-SX (Tadalafil), both used in the treatment of Male Erectile Dysfunction. These are available in the conventional tablet as well as in an innovative âjellyâ form which is the worldâs first of its kind dosage form for this molecule.

Strong API player:


Another key component of pharma value chain is manufacturing of critical raw material, commonly known as Active Pharma Ingredient (API). Whenever a new formulation needs to be launched, it has to start from its basic compound, which during initial period, is not easily available in the market place. It is here that, in-house capability for producing such API becomes essential to reach the formulation to the needy patients at the earliest. Further, it also helps to reduce costs by process improvement, thereby improving profitability.

Realising its need and importance in the pharma value chain, Ajanta Pharma has recently set up a state-of-the-art API facility at Waluj, Aurangabad. This plant is equipped to produce different scale of volumes right from laboratory to pilot to commercial level. This enables the company to carry out innovations in both product quality and cost. With this addition, it has mapped the complete pharma value chain. Addition of this component of pharma value chain will accelerate the companyâs growth in the coming years.

FINANCIAL TRACK RECORD

FROM 2002 TO 2010 THE COMPANY HAS SHOWN CONSISTENT GROWTH OF 23% CAGR IN SALES AND 33% CAGR GROWTH IN STANDALONE NET PROFITS.

LAST SIX QTR SALES AND NPâSTANDALONE

QTR

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Fy 10

Confy10

SALES

89

84

95

95

108

98

112

381

408

INT

6

5

6

4

4

4

4

19

20

NP

9

4.4

6.4

7.7

10

7

10

28.5

34

LAST FIVE YEARS SALES AND NP

Year

05

06

07

08

09

10

H1fy11

Sales

179

212

241

291

322

385

210

Int

9

11

12

15

22

19

8.7

NP

7.4

10.3

13.7

17.8

21.4

28.6

17

Npm

4.13

4.85

5.68

6.11

6.64

7.42

8.09

Eps

6.3

8.6

11.3

14.7

17.7

23.6

14.55

BV

86

93

102

114

129

149

ROE

7.32

9.24

11.08

12.9

13.72

15.83

CONSOLIDATED ROE WAS 19.

FY 10 CONSOLIDATED EPS IS AROUND 29 PER SHARE.

THIS IS A COMPANY WHICH CONTINUES TO GROW NEAR TO ITS ROE.



(Tejasvi Mohanram) #8

Am having a bit of trouble reconciling the numbers...on page 30 and 31 of the annual report, we have the quasi-segment-wise sales/turnover and year-end stock/value data. I understand costs here fluctuate quite a bit (and each quasi-product category is not homogeneous)....but am trying to get a sense of contribution margin by quasi-product category. We could drill down into real product/brand contribution after getting this right.

Heading Capacity Turnover Qty Turnover Lacs Stock Qty Stock lacs Price per unit Stock value per unit Est Contribution Margin Est Contribution lacs
Tablets 1500 1023 18,074 160.0 2,310 17.7 14.4 18% 3,304
Capsules 425 363 5,352 30.3 217 14.7 7.2 51% 2,752
Liquids 8 32 7,133 7.4 1,082 222.9 146.2 34% 2,454
Injectibles 15.8 1,865 1.5 142 118.0 97.9 17% 318
Powder 21 7.7 521 3.5 175 67.7 49.4 27% 140
Ointment 4.4 3,674 1.0 550 827.5 578.9 30% 1,103
Others 1,858 118 ???
Total 38,477 4,594 14300

For each row except Total and Others (where there is no qty...and hence no direct contribution calculable), I have calculated contribution as Turnover * (Unit price of sale - Unit Price of stock) / Unit price of sale.

And for Total, I get a total contribution of 14300 (Turnover minus Raw Material minus Manufacturing costs minus Depreciation).

This implies (of course, not correcting for cost fluctuation) that contribution of "Others" is roughly 42 cr...which looks way out of turn, as turnover of Others is 18.6 cr.

AM I MISSING SOMETHING BIG HERE OR COULD THIS BE A RESULT OF COST FLUCTUATION AND PRODUCT HETEROGENITY ALONE?

Can someone pls take a look at this?

Ajanta_Pharma_20110118.xlsx (38.4 KB)

(Donald Francis) #9

Some brokerage reports for us to consider:

1). Sunidhi Report on Ajanta Pharma,30 Nov, 2010

2.Inventure Growth Securities report on Ajanta Pharma, 1 Nov 2010

3). Tata Securities report on Ajanta Pharma, 15 July 2010

4). Firstcall report on Ajanta Pharma, 5 Feb 2010

5). BgSE Financials report on Ajanta Pharma, 16 July 2010 (cant locate this link, But I have a copy; more of the smae but has some projections on Consolidated basis)

Anyone wanting this copy, ask and I can upload it at Acrobat.com ValuePickr shared workspace


(TCX) #10

Any negative news flow on Ajanta?? Down to 177!

Its being battered on consecutive days, another 2% down today after a 7% battering yesterday. And today most small & midcaps are recovering!

Something we don’t know?


(Arindam) #11

Board Meetingon 20-Jan-2011

Quarterly Results


(Hitesh Patel) #12

Hi

I dont know of any negatives. According to my view, results should be fairly predictable with decent sales and net profit growth.

We do get these baffling ups and downs in the short term. I utilised the fall to buy some more. Dont know any definite negatives about the company which could warrant such a drubbing.

I went through the reports posted esp the ones by inveture and tata cap, and mostly everything is what we have discussed. Tata cap report mentions about the JV with a canadian company Medicago to launch vaccine for swine flu, which is news to me.

As mentioned earlier, results due to 20 Jan so should be interesting viewing.

regards

hitesh.


(Hitesh Patel) #13

Ajanta Q3 numbers are out and predictably very good.

** q3 fy 11 q2 fy 11 9Mfy 11 9Mfy10**

sales 120.5 94.65 331 273

NP 11.9 7.7 29 18.5

eps 10.2 6.6 24.7 15.8

**
**

These are standalone numbers. Consolidated usually are slightly better.

**March is usually the best quarter so full year should be great. **

Company continues its consistency in giving good results and in margin improvement.


(Hitesh Patel) #14

In the above results, the second column needs to be read as Q2 fy 10.

error regretted.


(Narender Kumar) #15

The stock surged today 20% because of results and closed around 220. Great going.


(Donald Francis) #16

Thats an amazing run in one day, isn’t it. All the more reason we should get better at this game of focusing on where the odds are stacked!

The other part is being very conscious of the direct link between trigger events and the wider market taking notice of the odds being skewed…especially results season:). for months the stock may be ignored, but come a sure trigger…

Ayush Mittal & Hitesh Patel are 2 guys we are fortunate to know who are very good at this…we all must get better at it!


(Vinod MS) #17

Donald, coudnt agree more…

Thank you for bringing all of us here and doing such a great work, I like your posts aswell. Value Picker is one place where very sensible and thourough analysis takes place. It has been a great learning experience.

I thinkAjanta will give opporutnites to accumulate at lower levels in the next week. Unlike in Pondi, I had taken only a small position in Ajanta. In Pondi the Gravita IPO was a clear trigger (though, surprisinglythe stock came back to the old levels now). But an immediate20% jump in Ajanta was not expected.

Regards

Vinod

** where stacked! ** ** direct events ** season:)).


(Donald Francis) #18

Thanks Vinod for your kind words of encouragement. Yes, the level of discussions is heartening to see. We hope we can maintain this quality and make it more and more participative. Encourage newbies to lean and do their own thinking, ask questions, always ask. (this is where we have failed, just about 2% of the signed up users are participating:. Welcome any ideas on that!

Re: 20% jump in Ajanta not expected

We & better at knowing where - e.g. undervaluation gap is highest in x, and be prepared…with positions…our “Conviction” decides the big or small position…not the (expectation) quantum of jump…that’s really a bonus (if any) for our conviction levels.

This is the “Art” side of stock-picking which I feel is more important, once we are done with the basics! Perhaps this comes only with active experience…and cannot be transferred as easily as the “science” side of stock-picking.

We need to highlight/emphasise each such opportunity we come across, to transfer these learnings to the wider audience.

Thanks

Donald

thinkAjanta surprisinglythe immediate20%


(Abhishek Basumallick) #19

Donald, couldn’t agree with you more. The “art” side, to my mind, is 80-90% of the game. Ajanta’s story does indeed look promising.


(Hitesh Patel) #20

Finally after a long consolidation it seems Ajanta is coming out of hibernation. Volumes were very high today above 10 lacs and stock price up 11% in a weak market. The stock has resistance from the 220-240 range and it still needs to negotiate the resistance band.