Bhagwan Singh Chaudhary, Daljeet’s second-in-command in IndiaNivesh Securities, is no slouch when it comes to identifying multi-bagger stocks.
In June 2011, Bhagwan homed in on Ajanta Pharma (pdf), then a small cap company, quoting at Rs. 96 (adjusted for split & bonus).
At the time Daljeet & Bhagwan recommended Ajanta Pharma, it was considered to be a marginal player supplying drugs to Government hospitals at low margins. It was quoting at a rock-bottom P/E of 5 and not many investors were gung-ho about it.
However, demonstrating remarkable foresight, the duo recommended a buy on the logic that Ajanta’s fortunes were about to change. They said:
“In the last five years business model has transformed from drugs supply to govt. institutions (low margin and tender based) to prescription based business (high margin & sustainable). We consider the initiatives taken by management for investment in its R&D for establishing brands in domestic market would bode well on sustainability of margins. At CMP of Rs 290 (Rs. 96 after split & bonus), the stock is trading at PE 5.1x & 4x of FY12E & FY13 E earnings estimates respectively. We believe that given the rationales (above) Ajanta is trading at low valuations. We value the stock at PE 8x (relative basis of peers) of FY12e and recommend strong BUY with long term (12 to 15 months) price target of Rs 454.”
After that, it has been a thrilling ride for Ajanta Pharma’s delirious shareholders as the stock moved from one high to the other.
Throughout the journey, Daljeet & Bhagwan kept on a running commentary, advising investors to remain invested in the stock for more and more gains.
Today, just 3 years later, Ajanta Pharma is quoting at Rs. 1043, giving its lucky shareholders a return of 980%, nearly a 10-bagger.
Now, the best part is that the investors who have lost out on this super-duper multibagger need not despair because Daljeet Kohli & Bhagwan Singh have assured that there is a lot of steam left in the stock.
In their latest report dated 6th May 2014 (pdf), Daljeet & Bhagwan have once again conducted a brilliant analysis of Ajanta Pharma’s prospects in the wake of the Q4FY14 results. With their customary clarity of thinking & confidence, they have said:
“Since June 2011, we had recommended buy rating on the stock at prevailing adj market price of Rs 97 level (adjusting 1:1 split & 1:2 bonus issue). Our recommendation was based on the continuity in robust performance and expansion in P/E multiple to Industry level. In line with our expectations, company has maintained robust performance & its valuations have expanded accordingly from forward P/E multiple of 4-5x to 15x level.
At CMP of Rs 1,060, the stock is trading at P/E multiple of 13.7x of FY15E & 11.5x of FY16E earnings estimates. Given continuous out-performance, capacity expansion, entry into regulated markets & penetration in emerging markets, company’s outlook seems robust. We roll over P/E multiple of 15x from FY15E to FY16E & maintain BUY rating on the stock, while increase target price from Rs 1,216 to Rs 1,385.”
Personally, I don’t see any merit in ignoring the predictions of Daljeet & Bhagwan. Firstly, at a market capitalisation of Rs. 3600 crore, Ajanta Pharma is still a small-cap/ mid-cap. When you compare it with behemoths like Sun Pharma (Rs. 1,29,219 crore), Dr. Reddy (46,195 crore) or Lupin (Rs. 43,334 crore), you will see that Ajanta Pharma has a very, very long way to go. Secondly, the ROCE and ROE for FY 2014 are quite high at 21.9% & 38.9% respectively and this shows the management’s capability and efficiency. Thirdly, Ajanta is implementing capacity expansion & entry into regulated (USA, Europe) & emerging (Africa) markets which means that the top-line and bottom-line will surge. Fourthly, the valuation at 13.7x FY 2015E & 11.5x FY 2016E is extremely reasonable when you compare it with the valuations that Ajanta’s peers are commanding.