In Good Health | Value Research A stellar annual earnings growth of 40 per cent in the last five years sets Ajanta Pharma apart…
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In Good Health

A stellar annual earnings growth of 40 per cent in the last five years sets Ajanta Pharma apart…

With sales of only Rs 600 crore (FY12), Ajanta is a young player and seems to be making all the right moves. The company's current RoCE of 34 per cent beats the 20 per cent average it has seen over the last five years hands down. Similarly, PAT margins at 11 per cent today are higher than their average of 8.7 per cent. It's not only the past record that puts Ajanta here. Its domestic formulations business was up by a third in FY12, international operations up 26 per cent and the company is expected to accelerate its US operations in the current year.
Founded in 1979, Ajanta is a relatively smaller player in an industry populated by older, more established names. Within India, it now has a portfolio of nearly 200 products catering to cardiovascular diseases, dermatology, ophthalmology, paediatrics, orthopedic and nephrology, amongst others. It also does some contract research and has been trying to build its US operations for some time. This nondescript company now ranks in the top 50 pharma companies in India.

Strengths and opportunities
Strong domestic formulation portfolio. A strong volume growth across dermatology, CVS and ophthalmic categories saw Ajanta report a 34 per cent (y-o-y) growth in FY12. What helped the company were key launches during the year. Ajanta launched 10 new products in orthopedic, respiratory, ENT and gynaecology. Revenue contribution from these divisions thus increased from 7 per cent (FY11) to 15 per cent in FY12. Ajanta's derma division has been able to improve its national rank from 18th in FY11 to 14th in FY12. The company has targeted 10-12 product launches every year to keep its momentum going.
US operations to provide a kicker. Ajanta has two approved Abbreviated New Drug Application (ANDA) (Respiradone and Levetiracetam). It filed two ANDAs in Q4FY12 taking its total filings to seven in FY12. A distribution tie-up in place, the company expects revenues to kick in from May 12. While Resperidone, (used to treat psychotic disorders) is expected to be launched in the first quarter FY13, Levetiracetam launch is expected around Q2 FY13. Ajanta has guided to file 5-6 ANDAs every year with USFDA to build up a portfolio of 20-25 products in next 3-4 years. According to Vivek Kumar of SBICaps Securities, the US operations could have a run rate of Rs 18 crore in FY13 and Rs 36 crore in FY14 (factoring in the two ANDA launches).

Concerns
Increase in capex. Though traditionally an increase in capex has been seen as a positive, in a debt reeling world, the accumulation of more debt may not be as financially prudent as before. Ajanta has ramped up its capex plans from Rs 125 crore to Rs 390 crore to be financed likely on a 70:30 debt to internal accruals basis. This could see the company's debt profile increase from current comfortable levels of 0.26 to an estimated 1.07 times in FY13 and FY14. ECBs of an estimated $55 million could be another challenge in an ECB-starved business environment.
Stagnant field force. Ajanta has guided that it will maintain its field force strength at current levels in FY13 and FY14. While on the one hand it smacks of improved efficiencies, how much the limited force will boost scale on the upside is to be seen.

Valuations
The stock trades at 11 times its TTM earnings - this is at the peak of its five year high PE. A strong run-up of 123 per cent in the beginning of the year rules out any huge immediate upside. However, Ajanta is not a one trick pony. The company's domestic formulations business is doing well and US operations could fuel earnings growth ahead. On a PEG basis, the stock quotes at 0.28 times only. Buy on declines.




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