Above Par Performance; Upgrade to BUY
Ajanta Pharma (AJP) has delivered a better-than-expected performance on all operational metrics in 1QFY19 led by strong sales growth in domestic branded business. While its sales rose by 8% YoY to Rs5.1bn, PAT grew by 11.6% YoY to Rs1.1bn. EBITDA rose by 20.5% YoY to Rs1.6bn and gross margin improved by 333bps YoY (+122bps QoQ) due to better product-mix and favorable currency. EBITDA margin expanded by 320bps to 30.8% (vs. our estimates of 26%). Despite 1% decline in derma segment vs. 14% IPM growth, domestic business grew by 24.5% YoY (+20.3% QoQ) led by healthy growth in CVS, Ophthalmology and pain management segments. The Management has maintained its guidance of muted sales and EBITDA margin in FY19E. However, we upgrade our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs1,360 (from Rs1,337 earlier), valuing at 24x FY20E EPS of Rs56.7.
Key Quarterly Highlights
* Domestic Biz (35% of Sales):
AJP reported strong sales growth (+24.5% YoY and +20.3% QoQ) led by healthy growth in CVS (+10% YoY vs. IPM 7%), Ophthalmology (+11% YoY vs. IPM 7%), and Pain Management (+12% YoY vs. IPM 5%) segments. Its ranking in IPM improved from 33 in Jun’17 to 32 in Jun’18. We expect its domestic business to clock 15% CAGR over FY18-20E led by new product launches (15-20 products/annum).
* Africa Biz (26% of Sales):
Weak institutional anti-malaria sales (Rs 540mn vs. Rs 630mn in 4QFY18 and Rs970mn in 1QFY18) due to increased competition, pricing pressure and lower procurements led to 21% YoY decline in overall Africa sales. Branded business grew by 10% YoY. AJP pegs Africa’s institutional sales at Rs1.35-1.4bn for FY19E/20E (vs. Rs3.8bn in FY18), while branded business (Rs3.6bn in FY18) is likely to grow by 14-15% in next two years.
* EBITDA Margin:
The Management has maintained its EBITDA margin guidance to remain in the range of 26-27% and 30-31% in FY19E and FY20E, respectively due to higher expenses towards commercialisation of 2 plants (Guwahati Phase-I and Dahej) and increased R&D spend (9% of sales) in FY19E. It also indicated EBITDA margin might improve by further 200bps to 28-29% in FY19E provided INR/USD pair stays at current level (INR/USD- 68.5).
* ANDAs Filings:
AJP’s cumulative ANDA filings stood at 40 as of 1QFY19-end, while 18 ANDAs are pending for approvals. AJP is expected to file 10-12 ANDAs with the US FDA in FY19E.
Outlook & Valuation
Though we expect weak numbers in terms of sales growth (-2% YoY) and PAT (-24% YoY) in FY19E owing to higher operating expenses and lower institutional business, we see strong recovery in FY20E with sales and PAT growth of 14.3% YoY and 40% YoY, respectively. Though EBITDA margin is likely to decline by 490bps to 26% in FY19E, it is expected to rise by 400bps YoY in FY20E. We expect AJP’s overall sales/PAT to clock 5.7%/3.4% CAGR, respectively over FY18-20E. Following 15% correction in stock price since our 4QFY18 earnings update. Hence, we upgrade our recommendation on the stock to BUY from HOLD with a revised Target Price of Rs1,360 (from Rs1,337 earlier), valuing at 24x FY20E EPS of Rs56.7.
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