Ajanta Pharma 1QF13: Result Review

Stellar Sales, Lower Taxes; sustains the dreamrun (July 19, 2012)

Ajanta Pharma (AJP) beats 1Q estimate despite the weak quarter seasonality. Sales at Rs1.7bn (+35% YoY), driven by strong domestic formulation (DF) and better INR/USD realization on exports. Better-than expected EBITDA margins of 20.3% (SSLe 19%), recurring PAT at Rs215mn (SSLe: Rs143mn), lower tax rate 14% (SSLe: 21%) and net forex loss of Rs19mn (on ECB) were some of other key highlights.

Raising TP to Rs805, Revised to ADD: We are revising our rating to ADD from BUY on limited upside potential (35% run-up between Apr’12-till date). Our EPS for F14 is marginally tweaked to Rs76.6 with F13 EPS at Rs70.3, driven by higher avg. INR/USD realization of Rs52 (earlier Rs48). Over the long term (3-5 Yr), we believe the underlying fundamentals are favorable.

DF growth of 39% YoY, better than industry growth: The 1QF13 YoY growth continue to surprise at 39% with 68% QoQ, largely driven volume growth across Derma/ CVS/Optha segments + pick up in 3 newer segment. Conservatively, we expect AJP to sustain DF growth of 18-20% (F12-14e), driven by growing leadership in sub-therapy, increased field force productivity, calibrated launch of 14-16 products per year and additional sales from newer therapy segments.

Export formulation grew ~31%, Asia continue to remain strong: Growth from export formulations segment was healthy for 1Q (+31% YoY), led mainly by Asia and Africa regions.

Future boosters – upside in the US market to start from 2QF13: With distribution tie-up in place, AJP expects to commence the US sales from 2QF13 (July end) which got delayed (from May’12) due to technical reasons (at distributor level). We maintain our forecast with US being the key revenue driver over 3-5 years. To recap, AJP has 2 approved ANDA (Respiradone and Levetiracetam) and is ramping up its filing for US market (pending c.7 ANDA).  Further AJP plans to file 5-6 ANDA in F13.

EBITDA margins surprised at 20.3% (SSLe: 19%):  EBITDA margins improved surprisingly by 360bps to 20.3% (16.7% in 4QF12), partially aided by better product mix + favorable impact of rupee depreciation. However, owing to better exports realization, we have revised our OPM estimates for F13/14 to 21% (earlier 20).

Valuation and recommendation:  We believe that AJP could get re-rated to the fresh peak valuation (moving gradually toward mid-tier Pharma P/E multiples of ~10-12x) amid the strong growth outlook, conservative company guidance and more importantly, improving investment sentiment. However factoring the recent run-up in the stock price, AJP offers limited upside potential hence we revise our rating to ADD with TP of Rs805 (stock trades at 9.5x F14e EPS)