MOSL: AJANTA PHARMA (Buy)-Revitalizing growth; US/branded generics to drive earnings delta
AJANTA PHARMA: Revitalizing growth; US/branded generics to drive earnings delta
(AJP IN, Mkt Cap USD1.7b, CMP INR1400, TP INR1655, 18% Upside, Buy)
We recently met management of Ajanta Pharma (AJP) to understand the growth prospects in greater detail for its key markets of India, Asia, Africa and the US. Key takeaways:
- Earnings have been under pressure for the past two years (down 16% YoY) on account of (a) reduced Institutional Anti-malaria business, (b) moderate growth in Domestic Formulation (DF), (c) inventory rationalization in Africa and (d) increased operating cost associated with commissioning of new facilities.
- With (a) healthy momentum in US sales, (b) renewed focus on delivering results in the derma portfolio in DF, (c) domestic industry outperformance in cardiology/pain and (d) favorable macro scenario for branded Africa/Asia segment, we expect 16% earnings CAGR over FY19-22. Further, we also raise the P/E multiple to 22x (prior: 21x) to factor in superior profitability/return ratios and arrive at a target price of INR1,655. We reiterate our Buy rating.
Earnings back on track after bottoming out in FY19
- After delivering phenomenal earnings CAGR of 44% and RoE of 35-40% over FY12-17, AJP appeared to lose momentum over FY17-19 with sales remaining flat and earnings declining from INR5b to INR4b. DF faced pressure from GST/demonetization/increased share of generic-generic segment and product-specific issues, while Institutional Anti-malaria business was hurt by reduced procurement from the global fund. Moreover, a sharp fall in crude oil prices impacted its branded generics segment of Asia/Africa, while supply side consolidation and intense competition on the manufacturer side affected growth in the US market to some extent.
Ajanta Pharma Limited. Ajanta Pharma Limited is a holding company. The Company is a specialty pharmaceutical company engaged in developing, producing and marketing a range of branded and generic formulations. Its business includes branded generics in emerging markets of Asia and Africa, generics in the developed markets of the United States and Institutional sales. The branded generics business is spread in India and over 30 emerging countries across Africa, Commonwealth of Independent States (CIS), the Middle East and South East Asia. The Company serves a range of therapeutic segments, such as anti-biotic, anti-malarial, anti-diabetic, cardiology, gynecology, orthopedics, pediatric, respiratory and general health products. Ajanta has six formulations manufacturing facilities located in India and 1 in Mauritius. In addition, the Company also has an API manufacturing facility located at Waluj, India. The Company's subsidiaries include Ajanta Pharma (Mauritius) Ltd., and Ajanta Pharma USA Inc.
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