Recent interaction with Management: Ajanta Pharma :: IndiaNivesh

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Recent interaction with Management:
Our recent interaction with Ajanta Pharma (AJP IN) management has strengthened
our conviction on business of the company. We raise the PE multiple from 17x to
20x to factor AJPs efforts to have strong footing in regulated market over next 2-
3 years and sustained momentum in existing business in domestic formulation
segment and emerging markets. The capex as well as R&D work is on track for
next phase of growth. Accordingly, we raise our PT from Rs1,569 to Rs1,846.
Despite our PT being 21.6% lower than current market price, we upgrade from
SELL to HOLD. We have not yet factored the potential upside in earnings from
regulated market as it is subject to approvals. The under-estimation has also led
to lower price target. However, we maintain positive stance on the stock.
AJP to start reaping benefits from foundation built for regulated markets: AJP’s
R&D efforts for past 2-3 years have resulted in 25 ANDA filing for US market as of
now. Out of 25 ANDA filings, 2 have been approved and one has been launched in
the US market. AJP has launched Risperidone in the market and have accrued sales
of Rs10mn and market share of 6% in Q2FY15. There has been delay in getting
further approvals which is in line with other pharma players. There could be volatility
in revenue from US market because of timing of approvals; however, pipeline of 23
ANDAs pending for approvals gives us comfort for better future. The ANDAs are
mix of Para II, Para III and Para IV with expected market size of US$1.5bn. Assuming
20 product launches and atleast US$2-3mn of sales per product on an average, AJP
may garner peak sales of US$60mn from these products over next 2-3 years.
Recently, AJP has been sued for its para IV filing on a product which has annual
sales of ~US$5bn for 12 months ending September 2014. Though there could be
stiff competition post genercization on this product since there are atleast five other
companies which have been sued, sales could be considerable for AJP on account
of low base (if litigation outcome is in favor of generic players). AJP has also made
capital expenditure of Rs1.79bn (out of total capex of Rs2.2bn) at Dahej and expect
commercialization to start from 1QFY16 from the facility.
New product launches and increased traction in existing products to drive growth
for domestic formulation: AJP intends to launch 10-12 products including line
extensions on annual basis for next two years. AJP has been introducing products
in pain segment, which could support such high growth going forward. AJP had a
phenomenal CAGR of 39% over FY05-14 in domestic formulation (DF) market, mainly
driven by Ophthalmology, Cardiology and Dermatology. AJP has launched about
175 products over FY05-14, out of which 127 has been new to market. AJP has
guided to maintain 30% y-y growth for FY15, however, the y-y growth rate may
taper down to 25% post FY15 due to high base effect and lesser number of new
launches on account of delay from regulatory authorities.
Emerging markets remains the focus area for AJP: Africa and Asia market are the
other key drivers for AJP’s revenue as well as profitability. Overall exports have
grown at CAGR of 27% over FY07-14. Anti-malaria and branded generics led higher
growth in Africa, while branded generics led higher growth in Asia region. However,
with lower pricing for anti-malaria business, AJP has guided for relatively lower
CAGR of 13-15% in Africa region over FY14-16. AJP would be able to maintain
momentum on the back of new product launches and increased traction in existing
products in Asia region.
Valuation: We raise PE multiple from 17x to 20x to factor enhanced visibility for
growth in revenue as well as profitability from regulated market and sustained
growth in earnings from existing branded business in domestic formulation segment
and emerging market. Accordingly, we raise our price target from Rs1,569 to Rs1,846.
Despite our price target being lower by 21.6% from current market price, we upgrade
the stock from SELL to HOLD on increased confidence on business as well as
management execution. Also, we have not yet factored any upside in earnings from
regulated market in our current estimates, which makes our earning estimates look
subdued. However, we remain positive on the stock on long term basis.

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