Buyback should be looked at as a superior mechanism for payback (especially for promoters as they have to pay higher taxes on dividends). In the case of Ajanta, its a promoter run business with high promoter holdings (70%+).
What is the right buyback price? If the idea of buying back is to return money to shareholders (as an alternative to dividend), it should be carried out at fair prices. This way its a fair deal for everyone. If the idea is to take advantage of depressed stock prices, it should be done through open market purchases.
In the case of Ajanta, its definitely to return capital to shareholders as promoters will participate in this buyback. Now fair price can be very subjective. Here is their track record of buybacks.
FY20: share price of 1300
FY21: share price of 1850
FY22: share price of 2550
In this time frame, profits have increased from 468 cr. in FY20 to 700+ cr. (TTM). I guess they should end somewhere around 750-800 cr. of profits for FY22, so increase in buyback prices is not out of whack. Also, Ajanta’s stock price was 2000+ in 2016, so in the last 5-6 years prices have not moved a lot.
About reinvestments
Management has clearly said that they are targeting mid teens sales growth in FY22, this growth doesn’t require much capital (only maintenance capex of 100-120 cr.) as most capex has been completed. Its time to reap benefits of 2000 cr.+ capex over the last 5 years through increased payout (dividend + buyback).
Hope this helps!
Disclosure: Invested (position size here). Have bought few shares in the past 1 month.
Sales grew at 12%, Gross margin ~77%, EBITDA margins ~ 29%, PAT margins ~ 23%. I feel results were actually good. Despite no new US launches and aggressive price erosion in base portfolio (in double digit), US sales have increased which means they are gaining significant market in some molecules. Gross margins have expanded to 76% which means branded business is compensating for US pricing erosion. A key was management commentary on US operations, they have toned down US growth ambitions as they want to be very careful about maintaining return ratios. Below are my concall notes
US:
o 3% YOY growth (no new launches). Saw aggressive price erosion in base portfolio (double digits) resulting in lower growth. Impact on gross margin has been neutralized by branded business in India and emerging markets
o No new product launches or approvals, 1 product filed this quarter
o Filed 1 product in Q3FY22 (total 3 in 9MFY22), expect 10-12 ANDA filings in FY22 (7 in Q4FY22). This bunching up of filings is only limited to FY22 and going forward it will be evened out
o Will get new ANDA approvals once FDA reinspects their facilities (got this input in one CRL)
o Very judicious about allocating capital to ANDA filings, have scaled down the ambitions to 10-12 filings from 18 filings earlier
Domestic:
o 18% YOY growth (30 cr. trade generics, 87 cr. in 9MFY22)
o Growth is higher than IPM in all the 4 segments (cardiology, ophthalmology, pain, dermatology)
o Launched 11 products (1 was first to market), cumulative launches in 9MFY22 was 16 (4 first to market). Most launches have been in cardiology and diabetes
o NLEM is ~15% of India sales
o Inorganic opportunities are coming with a large price tag, very careful about overpaying for any asset
Emerging market (branded generics)
o Africa branded grew by 87% YOY
o Asia branded de-grew by (-1%) YOY. This is largely because of supply chain disruptions and lockdown in certain markets. Company is confident of reasonable grow in the coming quarters
o 60-65% of countries where Ajanta Pharma is present has price control where government fixes prices
Africa institution
o De-growth of (-53%) YOY
CAPEX of 116 cr. in 9MFY22 (budget of 200 cr. for FY22)
Quarterly other expense rate is close to 250 cr. (increased from 225 cr. levels)
Have added people in R&D, new blocks at Guwahati facility also employs more people now. Quarterly run rate is ~160 cr. and there should be only incremental changes going forward
FDA inspection (whenever it happens) will trigger a spurt of new launches
Revised price fixation under NPPA will be 10% higher, since WPI is at 10.5 % now which will lead to higher price realizations and better margins. (Higher input costs are already in the current prices)
Any body tracking the pledge position recently there is some further pledging by the promoter for shortfall of margin has it exceeded 15 percent.
When they are able to do buy back why pledge shares I have not gone deep if some regulars who are tracking can give any info in this regard please.
15 percent at present m.cap is approx 1600 cr so how much is the pledge amount.
Disl . tracking qty
Any reason why the stock is trading at the lowest valuation in the recent years. Almost all of its capex got over and its only opex going forward. All its past capex will start bearing fruits going forward. Then why this disparity? Is street seeing what we are unable to?
On 24th and 29th there seems to be some release of pledged shares…though the magnitude of release is not large still it appears the current pledged % is below 12% currently. not sure if i have the right figures…docs on BSE not opening. My source is Moneycontrol announcements section.
On 31st March 2022, Ajanta got ANDA approval for gBystolic. In the last concall, management had said that new approvals in US will come after FDA inspects their facilities. Given that they have got a new approval it might imply they got inspected by FDA and also cleared it.
Did mgmt give any guidance on margins going forward ? On ttm basis the ebitda margin is less as compared to previous fy and any major improvement on this front due to normalization, improved US pricing scenario, price rise on NLEM portfolio etc should be an added booster to margins.
This article says “…The Indian government has approved a 10.8% increase in the prices of essential drugs regulated…”. Is this correct, has the order been issued for FY22-23?
FY22 was overall a good year, sales grew at 16% (vs 12% in FY21) and PAT grew by 9%. Gross margin reduced to 75% (vs 78% in FY21), EBITDA margins: 28% (vs 35% in FY21), PAT margins: 21% (vs 23% in FY21). Management is confident of maintaining 28% EBITDA margins in FY23. Notes from concall below.
Gross margins came down to 72% due to: 1) 1.5% one-time charge for 1 flu product sent to US 2-years ago which will expire and 2) 1.5% due to US price erosion. Expect to maintain 75% gross margin going forward as branded business should compensate for US price erosion. There has also been increase in API prices which can impact gross margin in the coming quarters
Q4 sales grew at 15%, Gross margin ~73%, EBITDA margins ~ 24%, PAT margins ~ 17%.
US:
o (-3%) YOY de-growth (no new launches). Saw very aggressive price erosion in base portfolio (around 18%). Expect this to normalize to 8-10%
o Filed 5 products in Q4FY22 (total 8 in FY22), expect 10-12 ANDA filings in FY23. Currently, 20 ANDA are under approval
o Out of 42 final ANDA approvals (3 tentative), have launched 39 products (3 in FY22)
o Will get new ANDA approvals once FDA reinspects their facilities. FDA normal overseas inspections has not yet started, they are only doing mission critical inspections
o The Bystolic approval was FDA’s call. There has been no inspections from FDA
o US market demands higher inventory and receivables than other markets
Domestic:
o 13% YOY growth (and 21% for FY22) (30 cr. trade generics, 117 cr. in FY22)
o In domestic trade generics, company is focusing on specialty molecules more than just volumes. This is lower gross margins than branded but lucrative enough on ROCE basis
o Growth is higher than IPM in all the 4 segments (cardiology, ophthalmology, pain, dermatology)
o Launched 0 products in Q4, cumulative launches in FY22 was 16 (4 first to market). Most launches have been in cardiology and diabetes
o NLEM is <20% of India sales. Passed on 10.5% price hike allowed by government
o Expect mid-teens growth in FY23 (and faster than market)
Emerging market (branded generics)
o Africa branded grew by 37% (and 42% for FY22)
o Asia branded grew by 50% (and 14% for FY22)
o Expecting mid-teens growth in FY23
Africa institution
o De-growth of (-38%) YOY (and -24% de-growth for FY22)
Redirecting growth effort towards branded business
Forex gain of 73 cr. made majority of other income of 116 cr.
CAPEX of 154 cr. in FY22. Net fixed asset turns have increased to 2x
55% of R&D expenses was directed towards US generic market and rest for branded generic market
Estimated maintenance capex is 200 cr.
Quarterly other expense rate was 258 cr. (increased slightly from 250 cr.)
Deterioration in receivable days (from 95 to 113 days in FY22): Receivables have gone back to pre-covid levels. During covid, receivables came down to abnormally low levels. Receivable days should stay at these levels
Inventory was ramped up last year to take advantage of covid opportunities. This year, its normalizing.
Disclosure: Invested (position size here, bought few shares in last-30 days)
In the Cipla concall, the management said inspections have started in the country, and in quite significant way. That is quite opposite of what Ajanta said. Any view on this?
Ajanta management had mentioned that current FDA inspections are targeted towards facilities that produce mission critical products, so its largely at FDA discretion. I have no idea how FDA categorizes mission critical products (maybe based on shortages?). I do expect FDA inspection on Ajanta’s facilities sometime this year, that should fuel next leg of US growth.
Currently, market share gains may have peaked out for Ajanta (as reflected in the highest ever US sales per ANDA launch). US sales will start de-growing if they cannot launch more products.
It is very irksome to see constant promoter pledging & re-pledging in Ajanta Pharma. Now there is a margin shortfall and they have to pledge more shares. Does anyone have any idea why there is constant pledging, what is the end use of the borrowed funds or what the promoters do with the money?
Launched 16 (vs 21 in FY21) products in India out of which 4 (vs 5 in FY21) were first to market. Have a basket of 300+ products (vs 300 in FY21) with 50% being 1st to market
3 launches in USA
Developed 14 APIs (vs 23 in FY21)
Branded Generics (73% of revenues; grew @23% to 2’382 cr.):
Indian branded generics (982 cr.) grew at 21% (IQVIA reported Ajanta growth of 18% vs 18% for IPM). IPM rank dropped to 29 from 28 in FY21
India ophthalmology: Growth of 25% vs industry growth of 21% (IPM rank maintained at 2)
India cardiology: Growth of 11% vs industry growth of 10% (IPM rank maintained at 18)
India dermatology: Growth of 17% vs industry growth of 10% (IPM rank maintained at 15)
India pain management: Growth of 28% vs industry growth of 22% (IPM rank improved from 33 in FY21 to 32 in FY22)
Emerging market branded generics (1’400 cr.) grew at 24%
Generics and Institutional (27% of revenues; de-grew @(-1%) to 902 cr.):
Africa anti-malaria institutional business (206 cr., 6% of revenues) de-grew at (–24%)
US generics business (696 cr., 21% of revenues) grew at 9%. Filed 8 ANDAs (vs 2 in FY21) vs target of 10-12 ANDAs and launched 3 new products. Plans to file 10-12 ANDAs in FY23. Awarded as the Best Overall Generic Manufacturer in the category of less than USD 100 million sales for the 2nd time by Distribution Industry for Notable Achievements (DIANA)
R&D
Developed Extended-Release/Delayed-Release oral solid dosage form products using Matrix technology (repeat of FY21 AR)
Developed products based on solid dispersion technology similar to innovator products (repeat of FY21 AR)
750+ scientists
Total R&D expenses was 6% (vs 5% in FY21) of revenue (204 cr. vs 139 cr. in FY21) most of which was expensed
Financial Performance:
Consolidated revenue grew by 16% to 3’341 cr.
EBITDA margin normalized at 28% (vs 35% in FY21) due to resumption of marketing and R&D activities
PAT grew by 9% to 713 cr.
Cash ~ 334 cr. (vs 375 cr. in FY21), Paid back 436 cr. (vs 250 cr. in FY21) (buyback + dividend) and generated operating free cashflow of 453 cr. (vs 284 cr. in FY21)
Gross margins compressed from 78% to 75% due to API price increase, USA price erosion, and product mix change
ROCE was down from 30% in FY21 to 27% in FY22
Employee cost remained at 19% of sales and other expenses increased from 24% of sales in FY21 to 28% in FY22
Strategy:
Three pillars: Smart product selection, superior formulation development capabilities, focused business segments
Will focus on branded generic business and allocate more resources on product registrations, team, and launch of new products which will increase marketing expenses
Be a niche player in global pharma space with a customized market specific product portfolio focusing on 1st to market products
US: Launch of limited competition products and have an impeccable service record thus becoming a preferred partner for customers
Share issuances:
ESOP: During the year, 4’000 shares were issued against options exercised (vs 5’500 in FY21) and 3’000 new options were granted (vs 3’000 in FY21)
Bought back 1’120’000 shares at 2’550 price (vs 735’000 shares at 1’850 price in FY21)
Other Points:
Spent 154 cr. on CAPEX (vs 145 cr. in FY21). FY23 maintenance capex will be ~200 cr.
Net fixed asset turns improved to 2x in FY22 (vs 1.8x in FY21)
Receivable days increased to 113 days (vs 95 days in FY21) due to US
Inventory days reduced to 88 days (vs 98 days in FY21) due to supply chain normalization
Trade payable was reduced to 70 days (vs 91 in FY21) to take advantage of early payment discounts from suppliers
Sources raw materials from over 2,550 suppliers
Invested 25 cr. in ABCD Technologies LLP (to be renamed as Indo Health Services LLP) for 4% equity
Auditor remuneration at 1.1 cr. (vs 0.99 cr. in FY21)
Hedging policy: ~70% of company’s income via exports with major currency exposure being in USD, the company generally does currency hedging up to a maximum period of 6 to 18 (vs 12 in FY21) months and up to the extent of 50% to 150% (vs 75% in FY21) of its net foreign exchange earnings.
Non managerial remuneration hike was 12.67% and managerial remuneration hike was 41% (in-excess of performance)
CSR: Spent 13.13 cr. vs obligation of 12.60 cr. (0.53 cr. available for set off)
Share price high: 2435, low: 1631.15
Number of shareholders: 62’139 (vs 45’826 in FY21)
Ajanta Pharma Mauritius Limited (APML) closed down its 25-years old manufacturing unit as it needed upgrade involving major capex that was commercially unviable. Company has sufficient manufacturing capacity in India and all supplies would be catered from India. APML will continue to operate with trading activities. APML’s subsidiary Ajanta Pharma Mauritius (International) Limited located in the Free Trade Port is being wound up as it has lost its relevance due to rationalization of tax structure in Mauritius
Disclosure: Invested (position size here, no transactions in last-30 days)
