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Margin concerns behind; growth intact

Result Synopsis

Ajanta Pharma clocked an in-line revenue quarter driven by strong growth in India (+27% YoY) offset by decline in Africa as Euro depreciation against INR took its toll (flat in cc terms). US continues to struggle with decline YoY owing to lack of new launches. Higher freight costs (~Rs100mn impact), preponement of 3Q expenses and elevated COGS YoY led to gross margin decline and increased other expenses which should partly reverse in H2 with guidance of 74% gross margin and about 26% OPM.

India business has emerged as a faster growth territory with increased management expectation of high teens growth for FY23 vs low teens earlier. Asia branded has been growing strong reflected in 20%+ growth which is likely to moderate in FY24. US business is dependent on an EIR for Dahej which underwent an inspection in August which we expect to come in over next few months, thereby not changing our 15% US growth forecast in FY24. Chantix opportunity reflects additional upside not built in our numbers. Given the guidance on COGS, margin and H1 performance, we do not find any need to change estimates in any major way; retain BUY based on 25x FY24 EPS for an unchanged TP Rs1,575, offering 17% upside.

Result Highlights

* Revenues up 6% YoY driven by strong domestic performance (+27% YoY) while US expectedly struggled with +3% YoY

* Africa branded declined 8% YoY while Asia branded jumped 31% YoY

* Gross margin rebounded to 72% as 1Q had one-offs

* Margin at historic low of 21% as other expenses jumped 28% YoY due to freight (Rs100mn), preponement of 3Q expenses

* R&D at Rs590mn vs Rs490mn last year

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