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Buy Ajanta Pharma Ltd For Target Rs.2,150

DF, Institutional Anti-Malaria drive earnings

US ANDA filings to improve going forward

* Ajanta Pharma (AJP) delivered a better-than-expected performance, led by a strong growth revival in Domestic Formulation (DF) and better operating leverage. Growth prospects in Branded Generics exports (Asia) are expected to improve as the COVID-led supply chain disruption eases.

* We have raised our estimates by 3%/5% for FY22/FY23E, factoring in a) a better outlook for the Pain Management therapy in the DF segment, b) reduced opex in DF over the medium term due to COVID-led restrictions, c) new ANDA launches, and d) better capacity utilization. We value AJP at 23x 12M forward earnings to arrive at TP of INR2,150. Maintain Buy.

Better-than-expected earnings led by superior business mix

* AJP’s 4QFY21 revenues were up 11% to INR7.6b (est. INR7b), led by the DF (+23% YoY; 29% of sales), US Generics (+21% YoY; 23% of sales), and Insti Anti-Malaria (+88% YoY; 11% of sales) segments.

* Branded Generics export sales (36% of sales) were down 10% YoY to INR2.7b, which dragged down the overall performance.

* The gross margin (GM) expanded 380bp YoY to 77.8% on a better product mix. The EBITDA margin expanded 990bp YoY to 34.3% (est. 29.2%) owing to a better GM and lower other expenses (-630bp YoY as a percentage of sales).

* EBITDA grew 56% YoY to INR2.6b (est. INR2.1b).

* R&D expense for the quarter stood at INR390m (5.2% of sales).

* PBT grew at a slower rate of 49% YoY to INR2.3b on higher depreciation and lower other income. Moreover, the tax rate during the quarter came in at 30.4% (against 26.6% YoY). Accordingly, PAT was up 41% YoY to INR1.6b (est. INR1.3b).

* FY21 sales/EBITDA/PAT grew 12%/43%/45%YoY to INR29b/INR10b/INR6.5b.

Highlights from management commentary

* AJP targets capex of INR2.5b in FY22, largely for capacity expansions, corporate offices, and the maintenance of existing facilities.

* AJP has guided for a gross margin of 75–77% for FY22.

* AJP aims to file 10–12 ANDAs for the US market in FY22.

* Institutional Anti-Malaria sales are expected to be flat YoY for FY22.

Valuation and view

* We raise our estimates by 3%/5% for FY22/FY23E, factoring in superior execution in DF and lower opex due to COVID.

* Over FY21–23E, we expect a 14% earnings CAGR, led by a revenue CAGR of 18%/11% for US / Branded Generics.

* We continue to value AJP at 23x 12M forward earnings to arrive at TP of INR2,150.

* We remain positive on AJP on a) a healthy outperformance in Branded Generics, b) new launches in the US, and c) better capacity utilization as well as operating leverage. Reiterate Buy.

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