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US approvals can drive rerating

Result Synopsis

Ajanta clocked 15% growth in 4Q, higher than our 4% forecast driven by resilient performance in India business along with strong performance in branded business. Margins during the quarter were impacted due to one-time write off of certain products and high price erosion in US. Increased raw material prices also impacted margins but the company is still sure of maintaining 75% gross margin in FY23. US business is expected to pick up once the FDA commences inspections of various facilities as company is sitting on a healthy pipeline awaiting approvals. Branded business is expected to grow in mid-teens despite having a high base. R&D spends have gone back to pre-Covid levels while working capital is on the higher side but could be new normal as US share in revenues inches up compared to previous years.

Ajanta Pharma guided to 75% gross margin in FY23 and margin similar to FY22. Management unveiled enhanced capex of Rs2bn (earlier guided to just maintenance capex of Rs1-1.5bn) coupled with investments in promotion, product registration and R&D. Hence, current fiscal is likely to witness EBIDTA growth at best matching revenue growth. While domestic business would continue to clock early teens growth, a big unknown is the trajectory of US business. Ajanta does have few good products like Chantix, Vimovo though we understand these would require FDA inspection. With significant R&D for India/emerging markets, expected relief in US price erosion, reckon gross margin have bottomed out aided by price increase in domestic business in the non NLEM portfolio. Guidance for increased investments in opex leads to ~200bps & 9% cut in FY24 margin & EPS estimates respectively. Reduced FY24 estimate lead to corresponding cut in TP to Rs2,350 (earlier Rs2,620) though BUY stays based on unchanged 26x PE. Key trigger would be a successful FDA inspection which would open up approval to several important products.

Result Highlights

▪ Revenues ahead of estimate at +15% YoY vs estimated +4% YoY led by 13% growth in India and sharp jump in branded exports of +46% YoY – remains to be seen if a case of channel filling as base does not appear unduly low last year

▪ US sales flat QoQ and -3% YoY as expected due to high price erosion & no new approvals in 4Q; institutional business volatile with -38% YoY decline

▪ Gross margin declined ~500bps QoQ and YoY each as input costs surged; R&D also jumped to Rs590mn, up ~50% YoY leading to sharp contraction in margin to 23.7% (vs expected 27.5%)

▪ About 10-12 filings target vs 8 filed in FY22

▪ Bal sheet – receivables jumped 38% YoY in FY22 vs 16% revenue growth leading to decline in operating CF YoY

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