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The Healing Dose

With its growth story being scripted both within India & outside, Ajanta Pharma looks to continue its upward surge

Ajanta Pharma Ltd. (APL) is a small-cap specialty pharmaceutical company engaged in the development, manufacture and commercialisation of pharmaceutical products since 1973. The company employs over 3,200 people worldwide and its products are sold in over 30 countries. APL focuses on commercialising unique generic products and pioneering synergistic combination products in therapeutic areas of malaria, cardiology, dermatology, gastroenterology, musculoskeletal disorders, ophthalmology and respiratory system. In India, company’s main focus has been on specialty segments whereas simultaneous opening of new international markets has been the key growth driver for it over the years. The company also engages in contract research for leading multinational pharmaceutical companies to expand its revenue base.

Strengths
APL operates five state-of-the-art manufacturing facilities – four among these are in India while one is in Mauritius. One of these, located at Aurangabad, is approved by the US Food and Drug Administration and health authorities of Brazil and Colombia. The company’s manufacturing capabilities include a comprehensive range of dosage formulations of allopathic drugs, including tablets, capsules, ointments, injections and powders. APL also has an advanced research and development centre for active pharmaceutical ingredient (API) synthesis and finished formulations of different dosage forms.
* Notable R&D achievements to APL’s credit are in anti-malaria segment with its flagship brand Artefan being the first generic product to have been pre-qualified by WHO. Other key brands include Kamagra (Sildenafil Citrate) and Apcalis-Sx (Tadalafil), both used in the treatment of male erectile dysfunction.
* The promoters have been consistently raising their stake which sends a strong signal of confidence to the investors. Their stake stood at 61.8 per cent in March 2008 and currently stands at 70.13 per cent. During Q4FY12, the FIIs also entered the stock and now hold 0.59 per cent stake.

Growth Drivers
* APL received two Abbreviated New Drug Application (ANDA) approvals for its brands Risperidone and Levetiracetam from US FDA in FY12 and has also filed for another seven ANDAs already. The company aims to file 5-6 such ANDAs every year to build up a portfolio of 20-25 products in next 3-4 years. It is now in the process of formulating products to be able to file for product approvals in the regulated markets of USA and Europe. Currently, exports contribute around 60 per cent to its revenues.
* The management has been spending heavily on the capacity additions for past few years. The gross block which stood at Rs 118 crore in FY07 shot up to Rs 313 crore in FY11. It has planned a capex of Rs 390 crores for FY13 and FY14 for setting up two new manufacturing facilities mainly to cater to regulated markets. The financing is likely to be 70 per cent from debt and remaining from internal accruals. These facilities are likely to be operational from FY15 onwards and at full capacity utilization would generate a revenue of around Rs 1,000 crore.

Concerns
* APL is a late entrant in regulated markets and has to encounter pharmaceutical companies from India already having a significant presence.
* Entry into regulated markets will entail increased expenditure on research and development and also on routine maintenance of manufacturing facilities to comply with all the rules and regulations of the various international agencies.
* APL is still in growth stage and brings with it all risks associated with a small-cap growth stock. Also, concerns over litigations and/or cancellation of approvals exist as with all other pharma companies.

Financials
For FY12, APL registered a top line of Rs 671 crore with net profit of 77 crore. In the previous five years, the top line grew at a CAGR of 20 per cent coupled with a 39 per cent growth in earnings per share. This is on the back of improving margins as the company tweaked its product mix and reduced its exposure to institutional segment (Govt.). APL had an operating profit margin of 19.45 per cent in FY11 as against 15.2 per cent in FY07. Similarly, profit after tax (PAT) margin improved to 10 per cent in FY11 from 5.5 per cent in FY07. APL has a debt of Rs 190 crore as on September 30, 2011, which translates into a comfortable debt-equity ratio (DER) of 0.8. However, with planned capex of R390 crore to be supported 70 per cent by raising debt, DER is likely to shoot up in next two years.

Valuations
At Rs 567, APL’s stock is trading at a price-earnings multiple of 8.6 against the median PE of 6.8. The stock has seen a sharp up move post FY12 results. Also, FII’s interest coupled with promoters increasing their stake led to a sustained surge since the beginning of CY12. Though this looks expensive, this may not be so as there is enough growth opportunity to justify this high multiple. An earnings growth of 33 per cent in the previous five years translates into a peg of 0.26. For FY12, the board has declared a dividend of Rs 7.5 which gives a yield of 1.32 per cent. BUY.