Ajanta Pharma: Relief in sight

The company’s long-term prospects seem robust, given its strong domestic presence

 

Pharma firms with a strong domestic presence, apart from a growing US business, and with focus on niche and high-margin generics, are likely to deliver improved performance in the medium and long run.

Ajanta Pharma is one such company. Strong domestic presence, growing US pipeline especially in selected generics, and a strong position in high-growth therapeutic areas, including cardiology, ophthalmology, dermatology and pain management are positives.

The stock corrected significantly over the last two years — it has halved in this period — due to waning opportunity in its institutional business. However, it bounced back from its lows, as the company’s earnings visibility improved in its domestic and generic businesses.

 

 

At the current price of ₹1,132, the stock trades at about 20 times its estimated 2019-20 earnings, compared with its three-year historical average of 28 times. This PE multiple is lower than the valuations that peers Torrent Pharma and Alembic Pharma enjoy — 21 times and 27 times respectively.

In the first half of FY19, Ajanta Pharma’s consolidated revenue grew by 4 per cent (year-on-year) to ₹1,055 crore and net profit was up by 2 per cent to ₹231 crore. The company’s operating margin stood at 31 per cent during the period.

Over the short term, Ajanta’s earnings visibility seems to be moderate due to lower institutional business opportunity in Africa, modest realisation in new launches and growing competition in the domestic business. However, its long-term prospects seem robust, given its presence in niche therapies in domestic formulations, focussed approach in the US and excellent execution capabilities.

 

 

Healthy business model

Ajanta Pharma is a mid-sized pharma company operating in India and in other markets such as Asia and Africa. Though a late entrant, Ajanta has a meaningful presence in select generics spaces in the US as well. As of September 2018, its domestic market and export business contributed 33 and 65 per cent of the total sales respectively.

In the domestic market, Ajanta built its portfolio by launching first-to-market products using in-house R&D capabilities. In the export business, while many pharma majors were focusing on the US market, Ajanta preferred tapping the African market with branded generics and institutional business. These helped the company clock a compounded annual growth (CAGR) of 15 per cent in the past five years (FY14-18) in its consolidated revenue (₹2,155 crore) and 19 per cent in the consolidated net profit (₹469 crore).

Waning institutional business

The Franco-African region (French speaking African countries) is one of the key markets for the company — Ajanta is the fourth largest company in terms of sales there. The company’s portfolio consists of more than 1,000 products in that market, with presence in specialised segments, including anti-malaria, cardio, ophthalmology, multivitamins, antibiotics, gynaecology and pain management. While the company has registered consistent growth in the branded generic business over the period, its institutional sales (anti-malaria drug) witnessed a sharp fall in the last few quarters.

In FY18, its institutional business fell 13 per cent due to pricing pressure, rise in raw material costs and market share erosion. The management expects a two-third reduction in its Africa institutional revenue in FY19, which may put pressure on its operating margin. As of September 2018, the Africa institutional business and Africa branded business constituted 13 per cent and 26 per cent of the export revenue respectively. Ajanta is looking to enhance its focus on the branded generic business in Africa to fill the gap arising from the institutional segment.

Strong domestic business

Ajanta follows a concentrated approach in the Indian market by focusing on four fast-growing therapeutic categories — cardiology, ophthalmology, dermatology and pain management. Barring dermatology, Ajanta holds a strong position in these segments with the portfolio including a significant number of first-to-market launches (around 130 of 270 products). The first-mover advantage helped the company outperform the industry growth by a significant margin in these segments.

The management has guided for 10-11 per cent growth in FY19. Though there are near-term challenges in the Indian market, including slow offtake in new launches and increasing competition, Ajanta is expected to post higher revenue growth, driven by a strong field force, novel delivery system and continued focus on specialty therapies and niche products. The company does not have any exposure to banned fixed dosage combination (FDC) drugs.

Traction in the US

The US business would be a major growth driver for Ajanta Pharma. Though a late entrant in the US, Ajanta has 24 ANDA (generic drugs) approvals, while 17 are pending for approval (including five tentative approvals). The company is focusing on selective segments and gaining market share with competitive pricing. The company plans to launch 10-12 ANDAs annually in the US. As of September 2018, its US sales contributed 22 per cent of the export business.

The company’s R&D spend was around 9 per cent (₹186 crore) in FY18, which was among the highest R&D spend rates in the industry. The capacity utilisation at Dahej and Guwahati facilities is expected to reach an optimum level in FY20, which will help expand its generic business in the US and emerging markets.

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