Ajanta Pharma

Here are my notes from their Q1FY22 concall

  • US:
    o 13% YOY growth (gain in market share + new launches)
    o Filed 1 ANDA and plans to file 10 ANDAs during FY22 (1 new launch)
    o Not facing any significant price erosion (out of the ordinary)
    o Profitable in US (net of R&D)
  • Domestic:
    o 32% YOY growth, launched 5 new products (1 is first launch in India). Planning 4-5 new launches in FY22. This is tempered because of the very high number of launches in FY21
    o Cardiology: Growth was 14% vs industry of 15% which is mainly because of anti-coagulant growth due to second covid wave. Excluding that, industry growth was much lower
    o Continuously evaluating M&A opportunities in domestic market, very clear about buying at right valuations
    o 25% of current branded sales are outsourced and this should stabilize at 20%
  • Maintenance of gross margins has been due to product mix
  • Increased hedging policy from 50% to 75%
  • Growth in certain emerging markets slowed down due to covid
  • Current cost base is completely normalized and doesn’t include one-offs
  • CAPEX of 27 cr. in quarter (full year planned capex of 200 cr.)
  • Have invested 400-450 cr. in Guwahati (fixed asset turns 1.5-2x)
  • Reduced MR headcount by 200 (across categories) to 2’800
  • R&D stood at 6% of sales and should be maintained at these levels in FY22

Disclosure: Invested (position size same as before)

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Can someone please help explain the rationale behind frequent pledging and revoking of shares by the promoters? I do not understand this unless they are doing this to move the pledge from one party to another. Also the company is almost debt free, with a lot of access cash. So not sure of the reason for pledging anyways. Some insights from the members would be useful, thanks.

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WHO recommends malaria vaccine RTS,S/AS01 against P. falciparum malaria in children living in sub-Saharan Africa.
Recommendation is based on results from ongoing pilot studies in Ghana, Kenya and Malawi. Vaccine if found to be safe, significant reduction (30%) in severe malaria and highly cost effective.

Good news for mankind.

Ajanta pharma anti-malaria institution business contributed 10% of FY21 sales.
Anti-malarials sales may not go down immediately but certainly will have impact as vaccination gathers pace over years.

Discl: No current positions.

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I am not a subject matter expert, can someone clarify what is happening here - are these guys breaking the law:

Here is the full news report:

NPPA panel fixes MRP of Ajanta Pharma Metoprolol Tartrate, lvabradine Hydrochloride FDC (medicaldialogues.in)

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Another strong quarter.
FY22Q2 concall notes

  • US:
    o 26% YOY growth (gain in market share + 1 new launch)
    o Filed 2 products in H1FY22, expect 10 ANDA filings in FY22. Should file 12+ ANDAs in FY23 (can go up to 15 ANDAs in FY23)
    o US has been profitable since FY19
    o Very strong customer connect
  • Domestic:
    o 23% YOY growth (30 cr. trade generics vs 24 cr. in FY21Q2, 57 cr. in H1FY22)
    o Launched 5 products (3 were first to market)
    o Domestic growth has revived at ~18%
    o In trade generics, covid specific products drove growth
    o Not looking at adding new MRs
    o Black fungus has not been the main reason for ophthalmology growth
  • Emerging market (branded generics)
    o 19% YOY growth, Asia grew by 6% (slightly lower than expectation) and Africa grew by 39% (exceptionally high due to preponement of certain dispatches)
    o Africa market has revived strongly, Asian market has not revived
  • Africa institution
    o 29% YOY growth
    o Impact of vaccine on anti-malaria business: Will probably take a lot of time for penetration. Do not expect any significant impact on anti-malarial business (on private or tender markets) for the next 3-5 years
  • Gross margin reduced to 74% (higher API prices + US price erosion + some bit of product mix). Gross margins should stay at 75±1%
  • CAPEX of 65 cr. in H1FY22 (budget of 200 cr. for FY22: 100 cr. is maintenance + 100 cr. for new office construction)
  • Other expense should be ~225 cr. (quarterly)
  • Direct depend on Chinese sources is very low, however there is significant dependence of Indian API suppliers (to Ajanta) on China
  • Don’t need any further capacity for next 3-5 year growth
  • R&D expenses will stay at 6% of sales
  • Guwahati tax benefits is until 2027

Disclosure: Invested (position size here)

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Putting these two points together, any idea why don’t they backward integrate into manufacturing these API themselves?

Its probably to do with ajanta positioning itself as a company specializing in making formulations which makes perfect sense for branded generics market (as can be seen in financials of Eris Life making 80%+ gross margins without manufacturing APIs).

This being said, Ajanta has also found success in generic generic business as reflected in their US scaleup and anti-malarial tender business where they only made formulations, yet were market leaders despite competition from players like IPCA who were backward integrated. One hint to this puzzle is in their rating report. Ajanta gets better raw material prices by paying their suppliers quickly.

If we think from first principles, if there is a lot of API capacity coming up in the country, it might be more prudent to buy it from other suppliers. Given their very generic ANDAs, I haven’t found any API which had <5 DMF filers, so as a strategy this might make sense.

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Thanks for the comprehensive reply. I think that makes sense, if the APIs are very commonplace there may be no need to backward integrate.

Ajanta Pharma announced share buyback in its board meeting held yesterday. The buyback price is INR 2550. Total capital to be guzzled in this buyback is INR 286 crore.

Do you guys think this is prudent capital allocation?

My view is instead of buying at the peak of bull market, the same amount can be re-invested in form of R&D, sales and marketing, new geographies, acquisitions etc.

P.S: Invested in Ajanta Pharma since 2017.

Hi Sahil,

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.

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Flat Q3 results by Ajanta - Details along with investor presentation.

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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

Disclosure: Invested (position size here)

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Two growth triggers that I could gather:

  1. FDA inspection (whenever it happens) will trigger a spurt of new launches
  2. 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)
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Notes from recent Edelweiss conference.

https://www.edelweissresearch.com/Research/Download/13644

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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

MOSL report on Ajanta Pharma

Ajanta_MOSL.pdf (879.4 KB)

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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?

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Its indeed a little frustrating to see a company with excellent return ratios and most of the capex behind it …… lagging the markets.

To me , its only a matter of time before it starts performing. The best course of action in my opinion is to keep adding or to keep holding tight.

It should only be a matter of time before the Markets rewards Ajanta Pharma.

Disc: holding, biased.

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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.

Note: This inference is a speculation on my part. Their last ANDA approval (before gBystolic) was in June 2021.

Disclosure: Invested (position size here, bought few shares in last 30-days)

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