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DF, US, Africa drive revenue growth

US ANDA filings to improve going forward

* Ajanta Pharma (AJP) delivered 1QFY22 earnings marginally below our expectation. Robust growth in Domestic Formulation (DF) / Branded Generics (Africa) was offset by moderate growth in US / Branded Generics (Asia) and enhanced opex towards marketing and promotional activities. AJP is on track to outperform in the Branded Generics segment across DF/Asia/Africa and build a product pipeline for the US market.

* We tweak our estimates for FY22E/FY23E, factoring in a) a better outlook for the Pain Management, Opthal, and Derma therapies in the DF segment, b) higher opex in DF due to the ophthalmic unit’s commercialization, and c) enhanced growth in branded formulations in EMs, with the easing of the COVID situation. We value AJP at 25x 12M forward earnings to arrive at Target Price of INR2,780. Reiterate Buy.

Higher opex drags down profitability

* 1QFY22 revenues were up 12% YoY to INR7.5b (in-line) for the quarter, led by 32% YoY growth in DF sales (INR2.2b; ~31% of sales), 13% YoY growth in US Generics (INR1.7b; 23% of sales), and 14% YoY growth in Africa Branded Generics (INR1.3b; 17% of sales).

* Branded Generics Asia sales were up 3% YoY to INR1.6b (22% of sales). Institutional Anti-Malaria sales declined 13% YoY to INR540m (7% of sales).

* The gross margin (GM) was almost flat YoY at 77%.

* The EBITDA margin contracted 400bp YoY to 29.4% (est. 33.7%) on lower operating leverage, with other expenses / employee costs down 310bp/80bp YoY as a percentage of sales.

* EBITDA was flat YoY at INR2.2b (est. INR2.5b).

* Adjusted for forex gains of INR250m, PAT grew 4% YoY to INR1.5b (est. INR1.7b), aided by a lower tax rate.

Highlights from management commentary

* The company plans to file 10 ANDAs and launch 4–5 ANDAs in FY22.

* It launched five new products in DF, with one being in the first-to-market category. It plans to launch 4–5 products over the next 2–3 quarters.

* Despite MR rationalization of ~10% (~200 MRs) across segments, sales grew 29% YoY (ex-Institutional), implying improved productivity for existing MRs.

* AJP remains confident of outperforming the industry in the Branded Generics markets in India, Asia, and Africa on the back of enhanced marketing efforts for new launches as well as existing products.

* R&D expense is expected to be ~6% of sales for FY22.

* AJP has completed its major capex to cater to growth for the next three years. The INR2b capex for FY22 would be only for maintenance purposes.

* Institutional India business revenues stood at INR270m.

* The effective tax rate would be 21–22% for FY22.

Valuation and view

* We expect a 15% earnings CAGR, led by a revenue CAGR of 18%/17%/11% in US / DF / Branded Generics.

* We value AJP at 25x 12M forward earnings to arrive at TP of INR2,780.

* We remain positive on AJP on a) new launches and market share gains in the key markets of the US/DF/Asia/Africa, b) the benefits of major capex (to accrue over the next 2–3 years), c) improved operating leverage, and d) enhanced MR productivity. Reiterate Buy.

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