MOSL: AJANTA PHARMA (Buy)-Expect improvement from FY19 after a trough this year

Ajanta Pharma: Expect improvement from FY19 after a trough this year

(AJP IN, Mkt Cap USD2.0b, CMP INR1460, TP INR1790, 23% Upside, Buy)

We recently interacted with Ajanta Pharma (AJP) management. With enough levers in place across business segments, the company appears confident about returning to the growth path FY19 onward after a trough in FY18. We estimate a CAGR of 14% in sales and 11% in PAT over FY17-20 (as against 9% CAGR in sales and 6% CAGR in PAT over FY16-18E), led by an improvement in the overall business environment in the emerging markets and the company’s superior execution.

• Inventory has been gradually restoring post GST roll-out from very low levels, and the streamlining of supply-side system is leading to sustained better off-take in domestic formulation (DF). AJP is building a facility at Guwahati to reduce outsourcing, and thus, ensure better administrative control/compliance and also enjoy tax benefits.
• Although only five ANDAs were filed for the US market in 1HFY18, the company has maintained its guidance of 10-15 filings over FY18. After declining sharply in 2QFY18, US sales are expected to pick up, led by the launch of recently approved products and increased traction in existing products.
• AJP has been selected as a supplier in the institutional anti-malaria business from the Global Fund, but is yet to obtain orders. The company maintained its guidance of 15-20% YoY lower sales in FY18 due to lower allocation from the Global Fund.
• AJP launched 14-15 products in branded generics in Asia and Africa. With a gradual recovery at industry level, the company is well placed to grow better than industry.
• AJP has incurred capex of INR1.75b in FY18 till date. It also remains on track to incur overall capex of INR3b in FY18.