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Poised to re-rate

Ajanta’s Q3 revenue grew by 15% YoY driven by strong performance in branded markets and Africa Institutional business. Despite normalisation in fixed costs (at pre-Covid levels), EBITDA margin came higher at 32% (+372bps YoY) driven by improvement in gross margin (+344bps YoY). We believe Ajanta is poised to re-rate as: a) it’s high exposure to branded business (~70% of revenue) offers good growth visibility with superior margins; b) rising scale in the US (USD 80mn, doubled in 2 years) will lead to meaningful improvement in profitability; c) with conclusion of major capex cycle (INR 16bn+ in the past 6 years, internally funded) and plant opex reflecting in P&L, operating leverage benefits are expected to drive strong earnings growth of 15% CAGR, core-ROCE expansion of ~465bps to 29% and FCF generation of ~INR 14bn over FY21e-FY23e. Maintain BUY with a revised TP of INR 2,250/sh. Refer our initiation report - Gearing for the next leap.

* Strong operational beat: Revenue at INR 7.5bn (+15% YoY) was driven by India (+13% YoY), EMs (+20% YoY) and Africa Institutional biz (+57% YoY). Gross Margin remained healthy at 77% (+344bps YoY, -83bps QoQ). Despite normalisation of other expenses (27% of sales, flat YoY, +525bps QoQ), EBITDA margin came higher at 32% (+372bps YoY, -603bps QoQ). Adj. PAT grew by 64% YoY aided by lower tax rate of 18%.

* India growth bounces back: Ajanta’s India revenue grew by 13% YoY and outperformed the IPM by ~675bps in the quarter. As per AIOCD, all key therapies – Cardiac, Ophthal, Derma and Pain outperformed the therapy average. With a recovery in domestic market, we expect India business to grow at ~13% CAGR over FY21e-23e. Ajanta has managed to hold on its market share in the lockdown period, which is noteworthy (Exhibit 3).

* Healthy performance in EMs, double digit growth to sustain: EM business (Asia and Africa branded) grew by ~20% YoY and declined 2% QoQ. We expect Asia business to grow at ~13.5% CAGR driven by steady performance in Philippines (40% of Asia revenues), new launches and volume growth across markets; whereas Africa branded business to grow at high single digit rate over the next two years.

* US remained flat despite Ranitidine recall; rising scale to drive higher profitability: US biz at ~USD 22mn was largely flat on a YoY basis (Ranitidine in the base) and QoQ basis (weak gTamiflu season, new launches at the end of Dec Q). The company launched 3 products in Q3 (36 products on shelf) and has a pipeline of 18 pending ANDAs.

* Maintain BUY, risks: We increase our EPS estimate by 10% for FY21e to factor the Q3 beat and by 3-4% for FY22-23e on the back of improved growth visibility for the branded business. We revise our TP upwards to INR 2,250/sh, based on 23x FY23e EPS. Key risks: Expansion of NLEM list, lower growth in EMs, delay in US approvals, and currency volatility in EMs.

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