Buy Ajanta Pharmaceuticals Ltd For Target Rs.2,030 - Motilal Oswal Financial Services
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India/US drive earnings
Marketing spend to increase in the near term
* Ajanta Pharma (AJP) delivered in-line 2QFY24 earnings. The operating profit margin has been on a sharp revival trend with 630bp/70bp improvement on YoY/QoQ basis. Healthy performance in domestic formulation (DF), US, and branded Africa markets, coupled with favourable cost factors, is driving better profitability for AJP.
* We maintain our earnings estimate for FY24/FY25. We value AJP at 25x 12M forward earnings to arrive at a price target of INR2,030.
* We remain positive on AJP on the back of sustained better-than-industry growth in the branded generics segment and steady US sales despite price erosion in base portfolio. We reiterate our BUY rating on the stock.
Product mix/better operating leverage led superior margins YoY
* AJP’s 2QFY24 revenues grew 9.6% YoY to INR10.3b (in line), led by growth across branded generics segment of India, US, and Africa, partially offset by challenges in the Asian business. US generic sale was up 28% YoY to INR2.4b (21% of sales). Domestic formulation (DF) sale was up 13.1% YoY to INR3.6b (35% of sales). Africa branded generic and institutional sale was up 8.8% YoY to INR1.9b (19% of sales). Branded generics Asia sale was down 8.4% YoY to INR2.3b, (22% of sales).
* Gross Margin expanded ~280bp YoY to 75.1%, due to a change in product mix and reduced raw material cost.
* EBITDA margin expanded by ~630bp YoY to 28.3% (our est. 26.3%), driven by better gross margins and lower ‘other expenses’ (down 530bp YoY as % of sales), partly offset by higher employee cost (up ~180bp YoY as % of sales).
* EBITDA grew 41% YoY to INR2.9b (our est. INR2.7b).
* Adjusting for the Forex gain of INR128m, Adj. PAT grew 14% YoY to INR1.9b (in line).
* For 1HFY24, Revenue/EBITDA/PAT grew 8%/25%/14% YoY to INR20.5b/INR5.7b/INR3.9b.
Highlights from the management commentary
* AJP guided for low teens YoY revenue growth in branded generics markets of Asia/Africa markets.
* AJP indicated US sales run-rate to be stable for 2HFY24 (INR4.5b in 1HFY24).
* AJP guided for EBITDA margin to be 26% for FY24.
* AJP launched 10 products, including 4 products which are first to launch in DF market.
* AJP witnessed high single-digit price erosion in US base portfolio.
* Reduced international logistics cost led lower other expenses for 2QFY24. However, increased marketing expenses would keep opex at a higher level in 2HFY24.
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