MOSL: AJANTA PHARMA (Buy)-Higher operating expenses hurt margins

​Ajanta Pharma: Higher operating expenses hurt margins

(AJP IN, Mkt Cap USD1.7b, CMP INR1204, TP INR1606, 33% Upside, Buy)

• Ajanta Pharma (AJP) delivered sales of INR4.7b in 1QFY18, better than our estimate of INR4.2b. EBITDA margin, adjusted for forex loss on account for mark-to-market, stood at 27.6%, significantly lower than our estimate of 33.7%, due to GST-led impact on domestic business and incremental overhead expenses associated with commissioning of facilities. As a result, adjusted PAT declined 18.5% YoY to INR948m (est. of INR985m).
• Domestic formulation and Africa disappoint…: Sales were flat YoY at INR4.7b in 1QFY18, affected by a decline in domestic formulation (DF) and Africa sales. The decline in revenue was offset by strong growth in the US and moderate growth in Asia.
• …led by geography-specific issues: DF sales declined 14% YoY to INR1.4b, led by loss of one month of business due to GST rollout. Africa sales continued to decline, albeit at a lower rate, to INR1.7b due to a reduction in institutional business.
• Better US sales from already approved products: US sales (at INR540m in 1QFY18) continued to exhibit strong growth from the 13 commercialized products. US sales share is now 11.6% v/s 2.2% in 1QFY17. AJP maintained its guidance of 12-15 ANDA filings for FY18.
• Change in estimates: We have lowered our FY18/19/20 sales and PAT estimates by 7%/10%/11% and 20.2%/19.2%/19.5%, respectively, to factor in reduced DF and Africa institutional sales. We have also incorporated incremental expense associated with the commissioning of Guwahati and Dahej facilities, resulting in higher reduction in PAT estimate compared to sales estimate.