MOSL: AJANTA PHARMA (Buy)-Higher costs dampen FY18 performance-FY19 outlook muted too

Ajanta Pharma: Higher costs dampen FY18 performance; FY19 outlook muted too

(AJP IN, Mkt Cap USD1.9b, CMP INR1340, TP INR1560, 16% Upside, Buy)

• Higher fixed overheads drag operating margins: Revenue grew 11.2% YoY to INR5.3b (our estimate: INR5b), mainly led by growth in the branded generics business in Africa. Although the gross margin improved 166bp YoY to 82.3%, EBITDA margin shrunk 923bp YoY to 26.3% (our estimate: 28.2%) due to higher fixed overheads related to the newly commissioned facilities. As a result, adj. PAT declined 23% YoY to INR945m (our estimate: INR1b) in 4QFY18.
• Lower EBITDA margin impacts FY18 PAT: For full-year FY18, revenue grew 6.5% YoY to INR21.3b, EBITDA margin shrunk to 30.9% (from 34.4% in FY17) and PAT declined 7.5% YoY to INR4.7b.
• Muted anti-malaria sales and higher fixed cost to hurt FY19 performance: AJP expects to outperform the industry in the domestic formulations, Africa and Asia branded generics businesses in FY19. The company also guided for better US sales, led by recent launches and a healthy product pipeline pending for approval. However, AJP has guided for significantly lower institutional anti-malaria business, considering steep price erosion and lower off-take from Global Fund. In addition, increased fixed overheads related to the commissioning of facilities are expected to affect the EBITDA margin in FY19.