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Ajanta Pharma Ltd
2 | P a g e
Recommendation BUY Company Overview
Ajanta Pharmaceuticals Limited (APL) is a Mumbai based midsized
pharmaceutical company. It has strong research focus with
250 plus scientists at their R&D center “Advent” and spends 5%
of sales on R&D. Ajanta Pharma deals mainly in branded products
business with presence in niche therapeutic segments like
Ophthalmology, Dermatology, and Cardiology.
Investment Rationale
Consistent Growth on Back of Brands: Ajanta Pharma’s
sale has grown at CAGR of 15.5% for last five years with
bottom-line growing at much faster pace at 28.1% CAGR.
The success can be attributed to the strategy of targeting
niche segments with strong brands.
New Therapeutic Segment: After achieving a remarkable
size in the focused therapeutic segments, Ajanta Pharma is
expanding its reach by targeting new therapeutic segments
-Gastroenterology, Orthopedic, Respiratory and
Nephrology.
Entry in World’s Largest Market – US: APL is a strong
player in Africa, Asia and LatAm. Now the company is
targeting world’s largest generic market (market size of
~$34 bn) – US for its next phase of growth.
Strong Financials: Ajanta reported ROE of 19.9% in FY10
up from 12.0% in FY06. We further expected ROE to
improve to 23.4% in FY12. The company is trading at 4.3x
P/E as against the expected growth in PAT of 31% in FY12E.
We expect the mismatch to correct in future.
Valuation & Recommendation
We believe branded centric pharmaceutical company with strong
R&D capabilities like Ajanta Pharma should command higher
multiple and expect it to get re-rated. We have assigned 6x
multiple which is still 45% discount to average P/E of 11x of its
compared peers. Based on our EPS of Rs. 49.1 for FY12E and a
target multiple of 6x we arrive at target price of Rs. 295.
We recommend “BUY” on Ajanta Pharma Limited with a target
price of Rs. 295 indicating a potential upside of 41%.
New Therapeutic Segment
After achieving a remarkable size in the focused therapeutic segments, Ajanta Pharma
is expanding its reach by targeting new therapeutic segments - Gastroenterology,
Orthopedic, Respiratory and Nephrology. The company entered these segments in late
FY11. To further strengthen its position in these segments and to penetrate deeper in
domestic market, the company is expanding its field force by more than 40% from
current 2100 to 3000 in 1HFY12.
Ajanta’s current business model is tilted towards exports which contributes 60% of the
total revenues. Once these new therapeutic segments start contributing and
expanding reach in domestic market we believe that the company’s exports-domestic
mix would be moderated at 50:50
Entry in World’s Largest Market - US
APL is a strong player in Africa, Asia and LatAm. After gaining expertise in semiregulated
markets the company is now targeting world’s largest generic market
(market size of ~$34 bn) – US for its next phase of growth. Ajanta Pharma has filed
two ANDAs in FY10 from its USFDA approved facility at Paithan and expects approvals
to come in 2HFY12. We believe that business from US would be a major push for
Ajanta’s future growth however meaningful revenues from US would only come from
FY13.
Management expects to file five ANDAs annually from FY12 further driving momentum
to the expansion plans of the company.
Increasing Capacities and Backward Integration
In the last three years APL has invested aggressively in its capacities. The company has
invested around Rs 158 cr to expand its formulations capacities and to integrate
backward. APL has acquired a formulations facility in Aurangabad to cater to semiregulated
markets.
In FY10 Ajanta Pharma has set up an API facility for captive use. Besides quality and
cost benefits the integration provides privacy to the company for new innovations.
Management has indicated that the increased capacities are enough to take care of
growth for next two-three years hence doesn’t need any major capex for next two
years and just needs to spend maintenance capex of around Rs 10-15 cr.
Strong Financials
Low capex in future: After the CIS incident (the company had done JVs in
Russia but due to political unrest in 1999-2000 business prospects died in the
region. As a result APL had to book loss of around Rs 80 cr inclusive of debtors
and investments) the company has become over cautious in it operations and
gives lots of importance to due diligence of the new projects. Although it has
done aggressive capex in last three years but these investments were wellplanned
and strategic in nature like backward integration and capacity
enhancement.
For future APL doesn’t require capex for at least next two years and would
incur only maintenance capex. Management feels that it might need an
additional formulations facility in FY13 and would spend accordingly.
Healthy cash flow enabling the company to repay debt and improve return
ratios: The Company has taken debt to partly fund the expansion plans which
has skewed the debt–to-equity ratio of the company to 1.6x at the end of FY09
from 0.9x in FY06. With revenue stream started from new plants the company
is in comfortable zone to gradually repay its debt and hence reduce its
interest cost burden. As on 31st March 10 the company had Rs 203 cr as debt
(on standalone basis) which got reduced to Rs 179 cr as on 30th Sept 10 and is
expected further to decline to Rs 160 cr by FY11 end. We expect the debt-toequity
ratio to improve to 0.7x by FY12E end.
We are expecting improvement in return ratios of the company on account of
increased profitability. APL has made aggressive capex in the past and doesn’t
need heavy investments for next two years. In addition the company would be
enjoying the profits on its investments. All these factors would help the
company generating healthy cash flows with which company would repay its
debt thereby reducing the interest cost for the company. Ajanta reported ROE
of 19.9% in FY10, up from 12.0% in FY06. We further expected it to increase to
23.4% in FY12E. The company is trading at 4.3x P/E as against the expected
growth in PAT of 31% in FY12E. The fact can be visible from the higher growth
in PAT as compared to EBITDA. We believe the huge mismatch between P/E
multiple and PAT growth is unjustified and should be corrected in future.
Consistently paying dividend: APL has been handsomely rewarding its
shareholders since last five years. It is consistently increasing its dividend %
from 15% in 2006 to 35% in Fy10. Considering the relatively small size of the
company it has strong return ratios of 20% ROE (FY10). We believe the
company has come long way from being considered as a FMCG company
marketing Pinku Gripe Water and 30 plus tablets. Today these products are
not even 1% company’s total revenues. APL has long back made the transition
from being a FMCG company to specialized Pharma. The company has wide
range of brands backed by strong R&D capabilities but still due to past legacy
it is getting very low multiple. We feel the time has come when market should
give the company due weight-age to its branded business and realistic
multiple.
Working Capital: Working capital cycle of the company is improving over the
years. FY10 was extraordinary good for the company in terms of working
capital cycle because of certain one-time events happened during the year.
Learning from economic meltdown which happened in FY09, APL has tightened
its belt and did some serious restructuring in its debtor’s days. As a result
debtor’s day reduced suddenly to 85 days as compared to 102 days in FY09.
Increased awareness of its brands in domestic markets also helped the
company in reducing its debtor’s days. Creditor’s days have also jumped to
171 days in FY10 from 129 days in FY09. The reason cited by the management
is that they got a fairly large order towards the end of FY10 which skewed the
overall creditor’s ratio. The situation is expected to continue in FY11. We
have factored in 165 creditor’s days in FY11 and 160 days in FY12.
R i s k s a n d C o n c e r n s
Currency Fluctuations: Ajanta Pharma derives ~60% of its revenues from exports.
Any adverse currency movements would impact the financials of company and our
estimates.
Regulatory: Every country has its own set of rules and regulations. The company has
to comply with them stringently. Any error could cause a major blow to the revenues
of the company.
V a l u a t i o n a n d O u t l o o k
We believe that APL has laid the foundation for future growth. With its niche specialty
focus it has made a noteworthy presence in emerging markets. With entry in world’s
largest generic market, deeper penetration in domestic markets and addition of new
therapeutic segments under its umbrella we expect Ajanta Pharma to ride on the high
growth wave. To sustain it in future the company has made substantial investments to
increase its capacity and field force.
We expect APL’s net revenues to grow at CAGR of 16.7% during FY11-12 with bottomline
growing at higher pace at 30.5% CAGR during the same period. We expect the
company to earn an EPS of Rs. 37.5 in FY11E and Rs. 49.1 in FY12E. At the CMP of Rs.
209, APL is trading at a PE of 5.6x FY11E and 4.3x FY12E EPS which we believe dearth
cheap considering the revenue visibility of the company.
We believe branded centric pharmaceutical company with strong R&D capabilities like
Ajanta Pharma should command higher multiple and expect it to get re-rated. We
have assigned 6x multiple which is still 45% discount to average P/E of 11x of its
compared peers. Based on our EPS of Rs. 49.1 for FY12E and a target multiple of 6x we
arrive at target price of Rs. 295. We recommend “BUY” on Ajanta Pharma Limited
with a target price of Rs. 295 indicating a potential upside of 41%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ajanta Pharma Ltd
2 | P a g e
Recommendation BUY Company Overview
Ajanta Pharmaceuticals Limited (APL) is a Mumbai based midsized
pharmaceutical company. It has strong research focus with
250 plus scientists at their R&D center “Advent” and spends 5%
of sales on R&D. Ajanta Pharma deals mainly in branded products
business with presence in niche therapeutic segments like
Ophthalmology, Dermatology, and Cardiology.
Investment Rationale
Consistent Growth on Back of Brands: Ajanta Pharma’s
sale has grown at CAGR of 15.5% for last five years with
bottom-line growing at much faster pace at 28.1% CAGR.
The success can be attributed to the strategy of targeting
niche segments with strong brands.
New Therapeutic Segment: After achieving a remarkable
size in the focused therapeutic segments, Ajanta Pharma is
expanding its reach by targeting new therapeutic segments
-Gastroenterology, Orthopedic, Respiratory and
Nephrology.
Entry in World’s Largest Market – US: APL is a strong
player in Africa, Asia and LatAm. Now the company is
targeting world’s largest generic market (market size of
~$34 bn) – US for its next phase of growth.
Strong Financials: Ajanta reported ROE of 19.9% in FY10
up from 12.0% in FY06. We further expected ROE to
improve to 23.4% in FY12. The company is trading at 4.3x
P/E as against the expected growth in PAT of 31% in FY12E.
We expect the mismatch to correct in future.
Valuation & Recommendation
We believe branded centric pharmaceutical company with strong
R&D capabilities like Ajanta Pharma should command higher
multiple and expect it to get re-rated. We have assigned 6x
multiple which is still 45% discount to average P/E of 11x of its
compared peers. Based on our EPS of Rs. 49.1 for FY12E and a
target multiple of 6x we arrive at target price of Rs. 295.
We recommend “BUY” on Ajanta Pharma Limited with a target
price of Rs. 295 indicating a potential upside of 41%.
New Therapeutic Segment
After achieving a remarkable size in the focused therapeutic segments, Ajanta Pharma
is expanding its reach by targeting new therapeutic segments - Gastroenterology,
Orthopedic, Respiratory and Nephrology. The company entered these segments in late
FY11. To further strengthen its position in these segments and to penetrate deeper in
domestic market, the company is expanding its field force by more than 40% from
current 2100 to 3000 in 1HFY12.
Ajanta’s current business model is tilted towards exports which contributes 60% of the
total revenues. Once these new therapeutic segments start contributing and
expanding reach in domestic market we believe that the company’s exports-domestic
mix would be moderated at 50:50
Entry in World’s Largest Market - US
APL is a strong player in Africa, Asia and LatAm. After gaining expertise in semiregulated
markets the company is now targeting world’s largest generic market
(market size of ~$34 bn) – US for its next phase of growth. Ajanta Pharma has filed
two ANDAs in FY10 from its USFDA approved facility at Paithan and expects approvals
to come in 2HFY12. We believe that business from US would be a major push for
Ajanta’s future growth however meaningful revenues from US would only come from
FY13.
Management expects to file five ANDAs annually from FY12 further driving momentum
to the expansion plans of the company.
Increasing Capacities and Backward Integration
In the last three years APL has invested aggressively in its capacities. The company has
invested around Rs 158 cr to expand its formulations capacities and to integrate
backward. APL has acquired a formulations facility in Aurangabad to cater to semiregulated
markets.
In FY10 Ajanta Pharma has set up an API facility for captive use. Besides quality and
cost benefits the integration provides privacy to the company for new innovations.
Management has indicated that the increased capacities are enough to take care of
growth for next two-three years hence doesn’t need any major capex for next two
years and just needs to spend maintenance capex of around Rs 10-15 cr.
Strong Financials
Low capex in future: After the CIS incident (the company had done JVs in
Russia but due to political unrest in 1999-2000 business prospects died in the
region. As a result APL had to book loss of around Rs 80 cr inclusive of debtors
and investments) the company has become over cautious in it operations and
gives lots of importance to due diligence of the new projects. Although it has
done aggressive capex in last three years but these investments were wellplanned
and strategic in nature like backward integration and capacity
enhancement.
For future APL doesn’t require capex for at least next two years and would
incur only maintenance capex. Management feels that it might need an
additional formulations facility in FY13 and would spend accordingly.
Healthy cash flow enabling the company to repay debt and improve return
ratios: The Company has taken debt to partly fund the expansion plans which
has skewed the debt–to-equity ratio of the company to 1.6x at the end of FY09
from 0.9x in FY06. With revenue stream started from new plants the company
is in comfortable zone to gradually repay its debt and hence reduce its
interest cost burden. As on 31st March 10 the company had Rs 203 cr as debt
(on standalone basis) which got reduced to Rs 179 cr as on 30th Sept 10 and is
expected further to decline to Rs 160 cr by FY11 end. We expect the debt-toequity
ratio to improve to 0.7x by FY12E end.
We are expecting improvement in return ratios of the company on account of
increased profitability. APL has made aggressive capex in the past and doesn’t
need heavy investments for next two years. In addition the company would be
enjoying the profits on its investments. All these factors would help the
company generating healthy cash flows with which company would repay its
debt thereby reducing the interest cost for the company. Ajanta reported ROE
of 19.9% in FY10, up from 12.0% in FY06. We further expected it to increase to
23.4% in FY12E. The company is trading at 4.3x P/E as against the expected
growth in PAT of 31% in FY12E. The fact can be visible from the higher growth
in PAT as compared to EBITDA. We believe the huge mismatch between P/E
multiple and PAT growth is unjustified and should be corrected in future.
Consistently paying dividend: APL has been handsomely rewarding its
shareholders since last five years. It is consistently increasing its dividend %
from 15% in 2006 to 35% in Fy10. Considering the relatively small size of the
company it has strong return ratios of 20% ROE (FY10). We believe the
company has come long way from being considered as a FMCG company
marketing Pinku Gripe Water and 30 plus tablets. Today these products are
not even 1% company’s total revenues. APL has long back made the transition
from being a FMCG company to specialized Pharma. The company has wide
range of brands backed by strong R&D capabilities but still due to past legacy
it is getting very low multiple. We feel the time has come when market should
give the company due weight-age to its branded business and realistic
multiple.
Working Capital: Working capital cycle of the company is improving over the
years. FY10 was extraordinary good for the company in terms of working
capital cycle because of certain one-time events happened during the year.
Learning from economic meltdown which happened in FY09, APL has tightened
its belt and did some serious restructuring in its debtor’s days. As a result
debtor’s day reduced suddenly to 85 days as compared to 102 days in FY09.
Increased awareness of its brands in domestic markets also helped the
company in reducing its debtor’s days. Creditor’s days have also jumped to
171 days in FY10 from 129 days in FY09. The reason cited by the management
is that they got a fairly large order towards the end of FY10 which skewed the
overall creditor’s ratio. The situation is expected to continue in FY11. We
have factored in 165 creditor’s days in FY11 and 160 days in FY12.
R i s k s a n d C o n c e r n s
Currency Fluctuations: Ajanta Pharma derives ~60% of its revenues from exports.
Any adverse currency movements would impact the financials of company and our
estimates.
Regulatory: Every country has its own set of rules and regulations. The company has
to comply with them stringently. Any error could cause a major blow to the revenues
of the company.
V a l u a t i o n a n d O u t l o o k
We believe that APL has laid the foundation for future growth. With its niche specialty
focus it has made a noteworthy presence in emerging markets. With entry in world’s
largest generic market, deeper penetration in domestic markets and addition of new
therapeutic segments under its umbrella we expect Ajanta Pharma to ride on the high
growth wave. To sustain it in future the company has made substantial investments to
increase its capacity and field force.
We expect APL’s net revenues to grow at CAGR of 16.7% during FY11-12 with bottomline
growing at higher pace at 30.5% CAGR during the same period. We expect the
company to earn an EPS of Rs. 37.5 in FY11E and Rs. 49.1 in FY12E. At the CMP of Rs.
209, APL is trading at a PE of 5.6x FY11E and 4.3x FY12E EPS which we believe dearth
cheap considering the revenue visibility of the company.
We believe branded centric pharmaceutical company with strong R&D capabilities like
Ajanta Pharma should command higher multiple and expect it to get re-rated. We
have assigned 6x multiple which is still 45% discount to average P/E of 11x of its
compared peers. Based on our EPS of Rs. 49.1 for FY12E and a target multiple of 6x we
arrive at target price of Rs. 295. We recommend “BUY” on Ajanta Pharma Limited
with a target price of Rs. 295 indicating a potential upside of 41%.
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