Q1 Results for both Ajanta and Granules are known for some time now. In fact, we have looked at both the results in our previous articles.

We know that Q2 FY17 results for both companies are just around the corner. Before the Q2 results are announced, let us take one parting shot at Q1 FY17 results. Let us look at numbers for both the companies’ side-by-side and see how they fared.

Year-on-Year Revenue for Q1 FY17

The table below compares the YoY Q1 revenue for Ajanta and Granules. From this FY the results are announced in Ind AS (the new accounting standard). However this puts Granules in a position of undue disadvantage because it is not allowed to show its subsidiary sales as a part of revenue. To compare apples with apples, I have taken the IGAAP revenue numbers for Granules and Ind AS numbers for Ajanta. Revenue growth wise, both the companies had near identical growth Y-o-Y for Q1.

Company Q1 FY17 (Crores) Q1 FY16 (Crores) Growth (%)
Ajanta Pharma 476 395 20.5%
Granules India 416 345 20.4%

Year-on-Year EBITDA for Q1 FY17

The table below compares the YoY Q1 EBITDA for Ajanta and Granules. Ajanta shows a higher EBITDA growth compared to granules.

Company Q1 FY17 (Crores) Q1 FY16 (Crores) Growth (%)
Ajanta Pharma 167 123 36%
Granules India 83.2 63.9 30.2%

EBITDA Margins: Ajanta also shows a higher EBITDA margin compared to Granules. The table below shows the values. Since Ajanta focuses on high margin specialized products compared to bulk drugs from Granules, Ajanta’s expenses are less hence EBITDA margins are higher. Also, Ajanta had a higher EBITDA due to below two reasons:

  • Purchase of stock-in-trade was less
  • Changes in inventories of finished goods, work-in-progress and stock-in-trade was a positive 5 crores compared to negative 11 crores in Q1 FY16.

These are not really due to efforts of current quarter, but these may be due to good deeds of past quarter/year.

Company Q1 FY17 (%) Q1 FY16 (%)
Ajanta Pharma 35% 31%
Granules India 20% 18.4%

Year-on-Year PAT for Q1 FY17

The table below compares the YoY PAT for Q1. The PAT growth for both the companies are comparable. Again PAT is higher for Ajanta due to lower taxes paid by Ajanta compared to Granules.

Company Q1 FY17 (Crores) Q1 FY16 (Crores) Growth (%)
Ajanta Pharma 120 86 39%
Granules India 39 28 37%

PAT Margins: Again the PAT margins for Ajanta is way higher compared to Granules for the same reasons as cited for EBITDA margins. Ajanta is way better as far as PAT numbers are concerned. However I get a feeling that Ajanta has hit an upper ceiling on PAT Margins. Growing PAT margins beyond 25% would be a difficult task. I hope I am proven wrong though. However I believe Granules has a long way to go. With its focus on Store brand OTC and Rx products in US, Granules may have scope to grow its PAT margins.

Company Q1 FY17 (%) Q1 FY16 (%)
Ajanta Pharma 25% 22%
Granules India 11.34% 8.2%

Expenses

Let us look at the different expenses incurred by Ajanta and Granules.

  • Employee Expenses:

From the table below it is quite clear that Granules has lesser employee expenses (in absolute numbers as well as a percentage of revenue) compared to Ajanta in Q1 FY17. Ajanta being a specialized generics manufacturer spends more on its scientists. Granules being a bulk generics manufacturer can afford to spend less on employees.

Company Employee Expense (Crores) Employee Expense (as a % of Revenue)
Ajanta Pharma 70 Crores 15 %
Granules India 34 Crores 9.8 %
  • Raw Material Costs:

Again, Granules being a bulk drug manufacturer, has higher Raw material cost compared to Ajanta in Q1 FY17. In case of Granules the decrease in raw material cost to 51% seems primarily use to reduction in fuel expenses.

Company Raw material cost (Crores) Raw material cost (as a % of Revenue)
Ajanta Pharma 95.6 Crores 20%
Granules India 176 Crores 51 %
  • Manufacturing Expense:

Manufacturing expense for Ajanta is not known. However the manufacturing expense of Granules was about 22 crores and forms 6.5% of the revenue.

  • Other Expenses:

Major part of Ajanta’s other expenses is due to sales and marketing expense. Sometimes I feel, Ajanta is more of a specialized drug marketing company J

Company Other expense (Crores) Other expense (as a % of Revenue)
Ajanta Pharma 140 Crores 28 %
Granules India 25.2 Crores 7.3 %

Taxes

The table below shows the tax paid by both the companies. Ajanta has its manufacturing base in SEZs and North eastern states where it has managed to get a tax rebate. Hence the effective tax rate for Ajanta is much less compared to Granules.

Company Tax Paid (Crores) Tax Rate
Ajanta Pharma 38.47 24.3%
Granules India 15.37 32.5%

Promoter Shareholding pattern

Ajanta pharma’s promoters have more or less reached the max limit for promoter shareholding in a single company. Promoters of Granules have recently issued themselves warrants that were converted to shares. The table below shows the shareholding for both the companies as a percentage of total shares.

Company Promoters (%)
Ajanta Pharma 73.78 %
Granules India 49.5 %

PE and Market Capitalization

  • Ajanta Pharma: As of 1st October 2016, Ajanta has a market capitalization of 17,600 crores and commands a TTM PE of 40 which is above the industry PE of roughly 28. In the past one quarter the market capitalization has gone up by 4000 crores. Market participants seem to be showing tremendous faith in Ajanta pharma.
  • Granules India: Granules on the other hand has a market capitalization of 2500 crores with a PE multiple of 20 which is well below the industry average of 20. In the past one quarter the company has lost close to 500 crore of market capitalization. Clearly the Q1 results and the near future outlook did not go down well with the market participants.

If you ask me whether the PE for both the companies are inline or not, I would say that I may not be the right person to answer that. However I feel both the companies seem to be offset from their true value, Ajanta on the higher side and Granules on the lower side. I believe this will correct, either time wise or price wise for both Granules and Ajanta.

Gazing at the Crystal Ball

  • Ajanta Pharma: Existing ANDA filing and pending ANDAs totaling to around twenty six, will keep people excited (even though the revenue from them may be meager). A pile of pending product registrations in India and Africa give visibility into the future and it is a heartening sight.
  • Granules India: Q1 is reflecting most of the expected revenue from the Omnichem JV for this financial year. Q2 and Q3 will have only trickling sales. As usual the base business may grow at medium to high single digit. Store brand OTC and Rx sales, by company’s management’s admission, will take time to improve sales. Even the recent news of USPharma marketing agreement is going to bear fruits by FY18-FY19. Granules seems to be entering a slow growth phase for the next couple of years. A low PE is no surprise for Granules considering the above points.

Summary

Q1 saw interesting set of numbers partly due to the performance of the companies and partly due to accounting standards. Revenue growth for both companies were more or less same. In terms of both EBITDA growth and EBITDA margins, Ajanta was ahead. PAT for both companies are comparable where are PAT margins for Ajanta are way higher compared to Granules.

Ajanta, an asset light, low debt, high margin manufacturer is like a sprint runner. Granules, an asset heavy company with moderate debt and low margin product portfolio, is like a highway truck cruising at moderate pace. Ajanta with its creative mindset may keep churning newer products in emerging markets and US and keep its PAT growth around 30% or more. Granules with a dedicated push towards high margin products may see its PAT margins improve resulting in PAT growth at 30%. However in the near term Granules will drag and due to its asset heavy low margin based core business, positive cash flow will remain a dream for some more time.

I wish both the companies all the very best and may the good times continue! Amen.

References

[1] Granules India results Q1 FY17

[2] Ajanta Pharma results Q1 FY17

Disclaimer

I am not a SEBI registered research analyst. The information provided above is my subjective view based on what I have read on different websites, annual reports, and quarterly reports of various companies which I assume to be accurate. The above information should not be treated as an offer/advise to purchase a specific stock/investment instrument. Since these are my subjective opinions, I could be wrong in my understanding or presentation of information. I do not claim that the above information is complete or can be relied upon as such. I cannot be held responsible for any loss or damage caused due to any inadvertent error in the above information. I will not be liable for investment decisions made by readers of this article based on the above information. I am not an investment advisor. I may or may not have position in the above company. Please consult your investment advisor for all your investment needs.