Ajanta Pharma

Nirmal Bang recommends Ajanta buy with a target of 295.

Rgds.

AJANTA MANAGES TO COME OUT WITH OUTSTANDING FY 11 RESULTS.

LAST SIX QTR SALES AND NPâSTANDALONE

QTR

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

SALES

89

84

95

95

108

98

112

120

126

INT

6

5

6

4

4

4

4

3.45

3.49

NP

9

4.4

6.4

7.7

10

7

10

11.94

17.47

LAST FIVE YEARS SALES AND NP

Year

05

06

07

08

09

10

fy11

Sales

179

212

241

291

322

385

457

Int

9

11

12

15

22

19

15.65

NP

7.4

10.3

13.7

17.8

21.4

28.6

46.44

Npm

4.13

4.85

5.68

6.11

6.64

7.42

10.16

Eps

6.3

8.6

11.3

14.7

17.7

23.6

39

BV

86

93

102

114

129

149

ROE

7.32

9.24

11.08

12.9

13.72

15.83

Cons figures for last three years

Year

09

10

11

Sales

349

407

504

EBIT

50

57

71

NP

25

34

50

Eps

21.72

29

43

India Nivesh report on Ajanta Pharma

Hitesh has been advocating Ajanta since long and even now is very bullish on it. We must analyse this stock in more depth.

Why isnt anyone paying heed to the excellent numbers?

Shud we buy the scrip at even these level? The competition in Indian dermatology segment is severe but Ajanta is a fair co as pe my dermatologist in Ghaziabad.

Hitesh is a dermatologist and knows the drugs mfg by Ajanta very well and when he is quite bullish on it, no need to ask anyone else.

3 Likes

Great call, Hitesh. Look forward to more calls from you.

Thanks & Regards,

Ayush

Phenomenal call actually!

Too bad I can’t understand the pharma sector yet and hence haven’t invested. But I still feel bad of having missed an upside of close to 80% in about 5 months. Darn! :slight_smile:

Great call Hitesh.

Thanks

Kiran

In our markets, we always get another chance! usually within 4-6 months:)

Many of us give up on a good idea too early feeling oh! it has run up so much already. This has been the case with most stocks that have run up spectacularly in the last 5-6 months, despite overall market going nowhere, or even downwards.

And in most of these cases, they have got the attention finally because the prospects from here are even better. Take Ajanta, take Mayur Uniquoters, take Astral, or take even a Piccadily Agro!

Most of these, when seen 1 yr forward are quoting at almost the same levels they were available 6 months back! What I do is develop conviction in the stock idea by doing the homework, take initial positions 15-20 Rs up or down doesn’t make a difference in such stocks over a 2-3 yr term, and then track it closely.

Almost always our markets give a second chance, if you are patient. Mayur Uni had run upto 300 almost a year back, I had missed the bus then, but it inexplicably corrected to 230 around March…stayed there for some time, and now reached 350. Same with Ajanta Pharma it had run up to 280-290 pretty quickly but again became available at 250-260…even a month back…and has now reached new highs.

Who is to know, when the markets will allow you another opportunity. Develop conviction and develop patience…you can get your stock and your price levels too. Statistically speaking (I have seen last 12 years data now from 1999) every year there are 3 to 4 occasions at the least, when you get your goodies at pretty decent prices -when you are convinced you have a bargain!

2 Likes

Good to see some interest back in Ajanta pharma. Please take the discussion forward.

Emkay’s take on Ajanta Pharma after management meet

http://www.emkayglobal.com/Uploads/EmkayResearch/Ajanta%20Pharma%20Management%20Meet%20Update.pdf

Pure-branded play ideal for Re-rating

  • Focus on branded generics in the domestic and the exportsemerging market. Gearing for entry into the regulated marketof US
  • Higher thrust on domestic business by launching 10-12 newproducts & 10-15 line extensions per year to fuel 16-18%growth in domestic business over the next 2-3 years
  • RoE of 24.5x, RoIC of 19.4x, asset turnover of 1.2x andworking capital position of 171 days provide comfort toinvestors
  • With pure branded profile, 15-18% sales CAGR going forwardand entry into regulated market through capacity expansionmakes it an ideal candidate for re-rating

Key highlights of management meet

Domestic business a On a steady growth track

In the Indian market Ajanta ranks 63rd with sales growing at 27% CAGR over FY06-11on back of strong foothold in Opthalmology (FY06-11 sales CAGR - 35%), Dermatology(FY06-11 sales CAGR - 57%) and Cardiology (FY06-11 sales CAGR - 34%).

  • In the Opthal segment, the company has 30 brands with 9 of them in the top 5rankings. In the Derma segment, the company has 24 brands and 5 brands standin top 4 rankings. In the Cardio segment, the company 8 brands and 3 are in top 10rankings.
  • 70-75% of the domestic sales are through prescriptions and the rest are tenderbased sales. The company has reduced its exposure to tender based sales (5% inFY11 vis–vis 23% in FY07) as a result of which EBITDA margins have expandedby 386bps to 19.1% in over the same period.
  • With a total field force of over 2400 MRs, the management has guided for 16-18%CAGR growth from this geography over FY11-13E, driven by 10-12 new productlaunches, line extensions and therapy expansions.

Exports a Focus on Asia/ Africa and capacity expansion will drive growth in thelong term

  • During FY11, exports business contributed 63% of the total sales with Asia/ Africacollectively contributing 95% to the export revenues and remaining from the LatAM.
  • In African markets, the company derives 50:50 revenues from Anglo African andFrench African markets. Going ahead, we expect margins in exports segment toexpand as the company has deliberately reduced its focus on tender business inAfrica (16% contribution to exports in FY11) and has not bidden for any of theWHO tenders.
  • The company has planned a capex of Rs350mn in FY11 & Rs1-1.25bn over FY13-14E in order to gear-up for its entry into the regulated market of US. Majority of thecapex will be towards setting-up of manufacturing unit. The company anticipates10-12 ANDA filings going ahead, which is evident from increased R&D spend of4.5%. The company has already filed 2 ANDAs, the approval for which is expectedwithin a yearas time.

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Strong balance sheet, stable returns ratios

Ajanta has an improving profile of asset turnover. The capex guided for FY11E is Rs350mn

(funded through internal accruals). The RoCE and RoE of the company is 16.9% and 24.5%

for FY11. The book value of the company is Rs193 for FY11. However, with net debt to

equity of the company at 0.8x and with increased capex spend in FY13/14E, we believe the

return ratios to remain at current levels.

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Valuations

Ajanta Pharmaas business model is undergoing complete business transformation from

being an emerging market focused company to gearing up for entry into regulated market

and defocusing on tender based business. During FY07-11, sales have grown at a CAGR

of 18%, EBITDA at 25% and PAT at 36% with EBITDA and PAT margin expanding by

368bps and 436bps to 19% and 10%, respectively. Going ahead, management has guided

for over 15-18% growth in top-line driven by 16% growth in domestic business and 18%

growth in Exports business. At CMP, the stock trades at steep discount to its comparable

peers at 7.0x FY11E EPS and 5.5x FY11 EV/EBITDA. With improving growth trajectory, we

believe the valuation gap to narrow going forward. We do not have formal rating on the

stock. However, we are positively biased on the company.

Peer

1 Like

Hi Donald,

To play the contrarian: (and I am not entirely convinced on Ajanta story)

1). The numbers in Ajanta Pharma do not reflect the enthusiasm over “brand play”. 15-18% sales growth is hardly indicative of top brand power. Or teh dermatology segment growth is like 5-10% then

2). RoCE of 20% is not good enough to play the US FDA ANDA game. This is an expensive play and since they are just starting out, margins will be under more pressure going forward

So what’s so exciting about Ajanta, when growth expected is average and the returns from the business aren’t expected to accelerate either?

just a re-rating hoopla, doesn’t that too seem a bit over the top given current performance and vsibility into immediate prospects.

Hi

Thanks for putting up some red flags.

Some of the sheen has gone out of the stock with the recent sharp run up with the stock quoting at around 325. But why argue with the tape?

Coming to growth and prospects going ahead, I dont think consistent 15-20% growth is a bad thing at all. And all the more better if the stock is available at a PE multiple of around 8-9.

Till date I was bemused by the improving margins but the management talk has clarified that aspect too indicating them moving away from the tender space to more lucrative prescription space.

And coming to dermatology segment where I can comment with a lot of confidence, they do have very good molecules with excellent packaging and very good sales force in place. As far as I know their marketing is strong in other segments as well.

And if there are other pharma companies with consistent higher growth they are available at much higher valuations currently. So the current upmove seems to be some sort of rerating bcos the valuation gap was too large especially when the stock was hovering around 200 odd levels.

regards

hitesh.

1 Like

Q1 fy 12 results out and predictably great.

Sales up 127 cr vs 98 cr(q1 fy 10)

NP up from 7 cr to 12.53 cr helped mainly by reduced interest, small increase in other income and lower tax. Operating profit is up around 15-16%.

employee expense has gone up from 13 to 18 crores and R&D expenses up from 5.3 to 9.9 crores and both of these are good signs.

First quarter is usually weak quarter as compared to other qtrs so this result is especially more enthusing.

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Hitesh ji, when you introduced this com the price was Rs 195. Hasnt the stock already ranup quite a bit? Does the current price justify more allocation based on cureent nos according to you?

Rgds

Vinod

hi vinod,

The run up till now has only been a sort of catch up with earnings shown by the company esp in the last quarter of fy 11.

Now if u consider around 20% growth for fy 12 considering consolidated figures, I think company can do eps of around 50. So a company consistently growing at 15-20% cagr and often more, is available at a forward PE of around 7 only.

Another welcome thing in first quarter results was reduction of interest cost.

So yes I would consider this for fresh buying as well-- with a view to average around 320-330 range.

Same holds true for PI Inds and Mayur after looking at the first quarter results for both. Mayur has seen some margin pressure due to high raw material price but that needs to be seen in context of the whole year where things might average out. PI is in a different class of its own and I feel market still does not know the full impact of the custom synthesis order book on the future of the company.

I had loaded up around 185 in ajanta and still feel the itch to buy more if it comes down to around 320-330.

regards

hitesh.

Hi Hitesh,

Great results.They are ramping up entire things.Employee and researchexpensesare indicators for that.I am much enthused in this story.Going by AR-2011 and some reports exports contribute aprox 65 per sales from exports and remaining from domestic sales.In domestic sales i am fully convinced on the brands and their potential.Looking at their R&D exp i hope they will introduce few more.

Reg Exports products wise breakup is not available.I think Artefan and Kamagra together contributes major share.In between those Artefan is tender based drug from UNO.So margins might be thin.So,i am predicting Kamagra drug constitutes major share in volume wise and margin wise.What is your thought regarding this.It might be a risk to the company to depend on one drug.I think here the company is unable to get premium valuations.If and when the companies dependence on one drug reduces and the rate at which ramping up of products done then will only it catches up valuations.

Please share your views regards export products and above mentioned views.

hi omprakash,

Posting some details of concall post fy 11 results.

And regarding the export products contributing majority of share, I dont have exact breakup but since the management talks of maintaining the momentum there also, and talks of exiting tender based business with WHO, margins should only improve.

MANAGEMENT COMMENTARY POST FY 11 â CONCALL DETAILS

Focus is on branded generics in domestic and export markets

Higher thrust will be on domestic market by launching 10â12 new products and 10-15 line extensions to fuel 16-18% domestic growth over next 2-3 years

ROE of 24.5%, ROIC of 19.4%, asset turnover 1.2x and working capital position of 171 days

Entry into regulated markets planned in a phased manner

70-75% of domestic sales is through prescription of branded products and company is reducing share of tender based sales over the years which is helping margin improvement.

Total field force of 2400 MRs which will help in achieving 16-18% CAGR in domestic business

EXPORTS

During fy 11, exports contributed 63% of sales with Africa and Latin America contributing 95% sales.

In African markets, company derives 50% revenues each from Anglo African and French African markets. There also the focus is on reducing dependence on tender based sales. It has not bidden for any WHO tenders in FY 11.

Planned capex for FY 12 is 35 crores and 100-125 crores for FY 13-14 E (to gear up for US market entry)

Company has filed 2 ANDAs for which approval is expected in a yearâs time. Another 10-12 filings are targeted for which there is increase in R&d spend.

I think comparable peers include Indoco Remedies, Unichem Labs, Elder Pharma, etc.

Hitesh,

You are the boss here.

[For those who may not know Hitesh, teh prolific stock picker that he is, by profession he is a Dermatologist!Ajanta has top brands in the skin care category! He should know this company’s prospects pretty well.]

Ajanta corrected to 322 levels today. Given FY12 prospects, could you educate us if this is a good enough entry point already? Have you done rough workings to share with us all.

-Donald

thanks donald for the kind words.

Regarding ajanta, yes I have a direct access to all the developments in one of their niches which is my subject-dermatology. As I mentioned somewhere earlier, this is a company which came to my notice because of their promptness of introducing first in India kind of products aggressively and making successful brands out of them. Just to give an example they introduced an immunomodulator with various uses named pimecrolimus ointment-- brand name pacroma almost 6-8 months back. this was launched for the first time in india and since then only biocon has been able to launch this one and it has not yet got its field force in place to push the molecule to doctors. so effectively ajanta enjoys virtual monopoly till another company launches it. And each tube costs around Rs 500 per around 15 gm pack.

Coming to projections for fy 12, the first quarter results have been excellent to say the least. Sales should reach around 575-600 crores net profits should be around 60-65 crores on a consolidated basis for fy 12. That should provide an EPS of around 50-55 per share. So effectively we have a company growing at around 15-20% consistently available at a forward PE of less than 7.

Company has been increasing the R&D spend in line with filing of ANDA for US markets. It has till date filed two of these and got approval for one which is levetiracetam molecule. And with the early success in getting approvals this process might be hastened. And once it gets a few molecules approved by USFDA, there could be a swift re rating here. But that is for Mr Market to decide. Till now sheer earnings growth is pushing the stock price to new highs.

So yes I think this offers an excellent entry point for someone with a view of 1-3 years.

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Hi Hitesh,

Hats off to your conviction and timing on this one. Yesterday, after having a look at your conviction on Ajanta, i tried updating my excel sheet and I’m surprised to see the ratios improving so quickly.

Earlier there business model was sort of commodity with highinventory& debtors and slow growth rates and hence I used to give it a go. But this is the first year of major improvement. If they can continue the current momentum and improve the ratios further, a big re-rating can also happen.

Regards,

Ayush

Disc: I do not hold.

thanks ayush. the business model is indeed changing gradually without people fully realising it. they are getting out of the tender based business and concentrating on selling their branded products to more geographies.

US foray might take a while to yield results and usually come with their own problems.

If i were in the shoes of the management I would concentrate even more on the Indian domestic branded markets in areas of their strengths like dermatology, cardiology and opthalmology rather than getting after US markets. They have good brands in the domestic space and still if they manage to get more than 60% revenues from foreign markets then I feel it makes sense to concentrate in India. They seem to be ramping up the sales force and hence i think might be entertaining similar thoughts.

They have guided for 16-19% growth for domestic market which is encouraging.

regards

hitesh.