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Robust outlook in the Branded Generics segment

Slow pace of ANDA filings to hinder US growth over the medium term

Compared to a moderate 5% YoY earnings growth expected in FY22, we expect AJP to deliver 16% earnings CAGR over FY22-24, led by superior performance in the Branded Generics segment across Domestic Formulation, Asia, and Africa

Demand revival in core therapies, inflation-linked price hike benefit for the National List of Essential Medicines (NLEM) portfolio, and enhanced marketing efforts in the Cardiology segment are expected to drive superior performance in the DF segment going forward.

The Branded Generics segment in Asia and Africa remains on a robust footing on the back of launches and market share gains in existing products

We have cut our FY23/FY24 earnings estimate by 4%/6% to factor in a muted outlook for the institutional Anti-Malarial business and temporary slowdown in ANDA filings in the US market

We continue to value AJP at 25x 12M forward earnings to arrive at our TP of INR2,500. We remain positive on AJP on the back of: a) its strong brand franchise in DF/Asia/Africa, b) robust prospects for the US Generics segment, and c) superior profitability and return ratios. We reiterate our Buy rating

Lower than expected price hikes in the DF segment, prolonged delays in ANDA approvals, and lesser than expected traction in Asia/Africa are the key risk to our call.

DF: On track to outperform the industry

AJP delivered 13% sales CAGR from Dec’18 to Dec’21, led by steady traction in existing therapies and ramp-up in newly added therapies and the Trade Generics segment. It delivered a sales growth of 23% YoY to INR7.3b (30% of sales) in 9MFY22. With the easing of COVID-19 cases, doctor-patient connectivity has significantly improved, particularly in the Ophthalmology/Dermatology segment (39% of DF sales in 9MFY22). This bodes well for better growth prospects for AJP. This, along with enhanced marketing efforts in the Cardiology segment (~41% of DF sales in 9MFY22) and benefit from price hikes in the NLEM portfolio, is expected to drive 16% sales CAGR in the DF segment to INR11b over FY22-24.

EM: Branded Generics to drive growth and profitability

AJP has remained a focused player in the Branded Generics business in Asia and Africa with ~40 product registrations over the past 12 months. It already has portfolio of ~200 products for these markets and its own front end presence with 450/400 MRs in Africa/Asia. AJP delivered 53%/2% YoY sales growth in Africa/Asia over 9MFY22 on the back of 20- 22 product launches and market share gain in existing products. The Institutional Anti-Malarial business outlook remains muted for AJP. 1,600 Overall, we expect 10% sales CAGR in emerging markets over FY22-24.

US Generics: Lower pace of approvals to affect its medium term outlook

AJP has garnered sales of INR7b over the past 12M from INR40m in FY16. This is largely led by launches and market share gains in existing products (39 products on the shelf at the end of 3QFY22). Its compliance track record remains sound, implying minimal regulatory risk in the US business. However, there has been some slowdown in the pace of filings in 9MFY22. While this may temporarily moderate US sales growth, AJP continues to invest in product development and intends to improve its annual pace of filings to 10-12. Accordingly, we expect 10% sales CAGR in the US over FY22-24.

Valuation and view

We have cut our FY23/FY24 earnings estimate by 4%/6% to factor in a moderation in the institutional Anti-Malarial business and temporary effect of lower ANDA approvals in the US Generics segment. We continue to value AJP at 25x 12M forward earnings to arrive at our TP of INR2,500.

We continue to like AJP’s Branded Generics business. It is well-placed to perform better-than-industry in DF/Asia/Africa. The increased scope of in-house manufacturing is expected to drive better profitability for AJP. While there has been some slowdown in ANDA approvals and product filing, sound compliance and ongoing product development imply a promising outlook for the US Generics segment. We reiterate our Buy rating.

Lower than expected price hikes in the DF segment, prolonged delays in ANDA approvals, and lesser than expected traction in Asia/Africa are the key risk to our call.

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