The Q2 results for Ajanta and Granules have been declared way back in November and we have looked at them in the below articles.

The Q3 FY17 results for both companies are just around the corner. Before the Q3 results are announced, let us take one last look at the numbers for Q2 FY17. Let us look at numbers for both the companies’ side-by-side and see how they fared.

Year-on-Year Revenue for Q2 FY17

The table below compares the YoY Q2 revenue for Ajanta and Granules. To give the benefit of doubt to Granules, I took the old Accounting standard (IGAAP) numbers and used the IndAS accounting standard for Ajanta. The reason I did this is because In IndAS standard the revenues for subsidiaries are not considered. This puts Granules at a loss as both the biocause and Omnichem revenues would not be counted. However it did not make much of a difference. The revenue growth for Granules was disappointing. As we noted in the Granules Result analysis, the reason for this disappointing growth in revenue is due to the fact that the API capacity has hit the peak (80% utilization), and in order to generate more revenue, Granules badly needs new factories. The other reason is the huge reduction in the input costs resulting in corresponding decrease in selling price of the medicines and hence the lower revenue numbers. On the other hand, Ajanta does not have such constraints. Moreover it is a specialized generics manufacturer and hence can command a higher price for its products leading to a relatively higher revenue.

Company Q2 FY17 (Crores) Q2 FY16 (Crores) Growth (%)
Ajanta Pharma 516 442 17%
Granules India 378.5 366.43 3.29%

Year-on-Year EBITDA for Q2 FY17

The table below compares the YoY Q2 EBITDA for Ajanta and Granules. Again, I have considered the IGAAP numbers for Granules and the IndAS numbers for Ajanta. Both Ajanta and Granules are on par as far as EBITDA numbers are concerned.

Company Q2 FY17 (Crores) Q2 FY16 (Crores) Growth (%)
Ajanta Pharma 183 154 19%
Granules India 83.5 70 19.2%

EBITDA Margins: Ajanta shows 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. However the margins have stayed put at 35%. Granules on the other hand has been able to improve its margins from 19.1% to 22% that is a healthy sign. Granules has some more catch up to do.

Company Q2 FY17 (%) Q2 FY16 (%)
Ajanta Pharma 35% 35%
Granules India 22% 19.1%

Year-on-Year PAT for Q2 FY17

The table below compares the YoY PAT for Q2. Again, both the companies showed similar profit growth of close to 26% pretty consistent performance I must say.

Company Q2 FY17 (Crores) Q2 FY16 (Crores) Growth (%)
Ajanta Pharma 131 103 26%
Granules India 40.82 32.27 26.4%

PAT Margins: The PAT margins show a slightly different story. For Ajanta, the PAT margins are way higher compared to Granules. In case of Ajanta the PAT margins for both Q1 (not shown below) and Q2 are the same i.e. 25%, I am not a big fan of sequential results, but nevertheless even Y-o-Y basis the PAT margin growth is stagnating for Ajanta. 25% is a huge number for a generics (specialized generics or otherwise). Growing PAT margins beyond 25% would be a difficult task. However Granules has some maneuvering space as it increases its formulations sales, Store brand OTC and Rx products sales in US.

Company Q2 FY17 (%) Q2 FY16 (%)
Ajanta Pharma 25% 23%
Granules India 11.2% 9.17%

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 Q2 FY17. Again there is a reason for this. We know that Ajanta thrives on new drugs (first to market kind of drugs). So needs employees of specialized knowledge to generate these new drugs. Granules on the other hand is a bulk drug manufacturer and does not need specialized people and hence can pay lesser salary. But with this new found desire to manufacture specialized drugs in Virginia facility, Granules could see its employee cost going higher in future.

Company Employee Expense (Crores) Employee Expense (as a % of Revenue)
Ajanta Pharma 72 Crores 14 %
Granules India 34 Crores 9.3 %
  • Raw Material Costs:

Being a bulk drug manufacturer means you consume lot of raw materials which is getting reflected in the raw material cost for Granules. Ajanta being a specialized drug manufacturer consumes less Raw materials to generate its revenue. By the way, in Q2 FY16 the raw material cost as a percentage of revenue for Granules was a mammoth 58%! Granules has taken a huge stride in reducing its raw material consumption resulting in a reduction in costs from 58% down to 46.5% Y-o-Y! Kudos!

Caveat: The prices of raw have also reduced due to market factors so the credit does not go entirely to Granules.

Company Raw material cost (Crores) Raw material cost (as a % of Revenue)
Ajanta Pharma 104 Crores 20.1%
Granules India 169 Crores 46.5 %
  • Manufacturing Expense:

Manufacturing expense for Ajanta is not known. However the manufacturing expense of Granules was about 25.6 crores and forms 7% of the revenue.

  • Other Expenses:

As we have seen in previous quarters as well, the major part of Ajanta’s other expenses is due to sales and marketing expense. Indeed Ajanta is an equal portion marketing company as much as it is a drug manufacturing companyJ

Company Other expense (Crores) Other expense (as a % of Revenue)
Ajanta Pharma 144 Crores 28 %
Granules India 24 Crores 6.6 %

Taxes:

The table below shows the tax paid by both the companies. As noted in the past, 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 34.6 20.8%
Granules India 15.6 30.3%

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 51.88 %

 PE and Market Capitalization:

  • Ajanta Pharma: As of 12th January 2016 the market cap stood at 15,900 Crores with a TTM PE of 34.01. However in October 2016, Ajanta has a market capitalization of 17,600 crores and commands a TTM PE of 40 which was above the industry PE of roughly 28. Hence, compared to June, in October, the market capitalization had gone up by 4000 crores. And between October (end of Q2 FY17) and January (End of Q3) the market capitalization has reduced by 1700 crores.
  • Granules India: On 12th January 2016, the market cap of Granules was 2315 crores with a TTM PE of 16.5 compared to TTM industry PE average of 27. In October 2016, Granules on the other hand had a market capitalization of 2500 crores with a PE multiple of 20 compared to industry average of 30. Compared to June quarter, by October, the company had lost close to 500 crore of market capitalization. And by January 2017 the company has further lost market capitalization of 185 crores.

My personal feeling is that the price-to-earnings multiple may be just right at this point for Ajanta. Granules on the other hand might have got overly punished (considering the future potential as described below).

Gazing at the Crystal Ball

  • Ajanta Pharma: In October of 2016, the company had, in all, 26 ANDAs filed with USFDA. By January of 2017, the number of ANDAs filed stands at 32. Out of which 17 are approved, 2 are tentatively approved and 13 are pending approval. So the ANDA filing has gone up within one quarter! In the article on Q1 results comparison, I had a feeling that the revenue from these ANDAs would be meager, but in Q2 we saw a revenue of 70 crores from US sales which was a pleasant surprise! I guess the company knows a thing or two on filing right ANDAs and generating revenue from them using their marketing skills! No wonder Ajanta has a sizable “other expense” in its P&L statement with marketing expense forming a major chunk of it. Other than the bunch of ANDAs, A pile of pending product registrations in India and Africa give visibility into the future and it is a heartening sight.
  • Granules India: As we noted in Q1 comparison that “Q2 and Q3 will have only trickling sales”. This came true for Q2. I also felt in Q1 that “the base business may grow at medium to high single digit” which may again have come true. As expected and intimated by the company, Q3 will see meager sales from Omnichem JV due to the current cyclical nature of sales from Omnichem JV. Store brand OTC and Rx sales, by company’s management’s admission, will take time. USPharma marketing agreement is going to bear fruits by FY18-FY19. Granules seems to be going through a slow growth phase for the next couple of years. A low PE is no surprise for Granules considering the above points.

Summary:

In Q2 the Y-o-Y revenue growth tanked for Granules. Even Ajanta saw a slowdown in the revenue growth. Both the companies were on-par as far as EBITDA growth is concerned which shows that Granules saw lower expenses. With respect to PAT growth, Granules had a slight edge (in spite of higher TAX rate) compared to Ajanta. So the PAT growth for granules is coming more from internal efficiencies where as in case of Ajanta, it seems to be coming from secular revenue growth. Granules HAS to find ways to improve its revenue growth (with increased sales) to maintain the current PAT growth, else, I believe, it will enter a period of lower PAT growth for sustained period of time in the near future.

As I have said before in Q1 results comparison, 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 and manufacturing efficiencies may see its PAT margins improve resulting in PAT growth of about 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.

References

[1] Granules India results Q2 FY17

[2] Ajanta Pharma results Q2 FY17

[3] http://www.business-standard.com/content/b2b-pharma/ajanta-pharma-receives-us-fda-approval-for-antidepressant-drug-duloxetine-117010900775_1.html

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.