Both Ajanta and Granules have come out with their results for Q4 FY16. We have looked at both the results in our previous articles.

Q1 FY17 results for both companies are just around the corner. Before the Q1 results come out, let us take one last (re)look at their Q4 FY16 results. Let us pit them against each other and see how they fare against each other. Both these companies address different market segments, product categories, so, are they really comparable? Well… let us find out…

Year-on-Year Revenue for Q4 FY16

The table below compares the YoY Q4 revenue for Ajanta and Granules. We see that, for Q4, Ajanta pharma had a higher revenue growth compared to granules. Even in terms of absolute numbers, Ajanta is better than Granules. In fact, co-incidentally, Granules seems to be exactly 1 year behind Ajanta. The Q4 FY15 revenues for Ajanta are same as Q4 FY16 revenues for Granules!

Company Q4 FY16 (Crores) Q4 FY15 (Crores) Growth (%)
Ajanta Pharma 426 372 14%
Granules India 373 354 5%

Year-on-Year EBITDA for Q4 FY16

The table below compares the YoY Q4 EBITDA for Ajanta and Granules. Granules seems to have beaten Ajanta by a huge margin as far as EBITDA growth is concerned.

Company Q4 FY16 (Crores) Q4 FY15 (Crores) Growth (%)
Ajanta Pharma 141 133 6%
Granules India 79 51 53%

EBITDA Margins: However the EBITDA margins are poles apart for both the companies. The table below shows the values. Ajanta, due to its focus on formulations and high margin business, has high EBITDA margins. Granules on the other hand focuses on bulk drugs leading to lower EBITDA.

Company Q4 FY16 (%) Q4 FY15 (%)
Ajanta Pharma 33% 36%
Granules India 21.4% 14.5%

Year-on-Year PAT for Q4 FY16

The table below compares the YoY PAT for Q4. The PAT growth for both the companies are comparable. The higher PAT growth rate in case of Ajanta is due to lower taxes on account of higher R&D spending (PBT for Ajanta was 14%).

Company Q4 FY16 (Crores) Q4 FY15 (Crores) Growth (%)
Ajanta Pharma 106 74 43%
Granules India 33 24 48%

PAT Margins: Again the PAT margins for Ajanta is way higher compared to Granules for the same reasons as cited for EBITDA margins. Clearly Ajanta is way better as far as PAT numbers are concerned. Even the PAT margin growth (vis-à-vis Q4 FY15) seems to be much higher from Ajanta compared to Granules.

Company Q4 FY16 (%) Q4 FY15 (%)
Ajanta Pharma 25% 20%
Granules India 8.9% 6.3%

Net Worth:

  • Ajanta Pharma: As of Q4 FY16 the net-worth of the company is 1,172 crores.
  • Granules India: As of Q4 FY16 the net-worth of the company is 666 crores.

Clearly Ajanta pharma has a higher net-worth compared to Granules. This is in fact inline with the revenue/profit numbers for both the companies. Ajanta generates higher revenues/profits hence is able to generate higher reserves and surplus leading to higher net-worth.

Debt:

  • Ajanta Pharma: Ajanta has a total debt of 73 crores. This includes long term borrowings of 15 crores and short term borrowings of 58 crores.
  • Granules India: Granules has a total debt of 474 crores with a substantial portion of it being long term borrowings.

Ajanta in the early 2000s was saddled with debt. It realized that to be able to compete effectively and to maximize shareholder value, it needs to reduce the debt. This led to a calibrated reduction in debt by moving away from bulk drugs and institutional contracts and moving into niche products in select geographies.

Granules realizes that it needs to reduce the debt. The management has committed to reduce the debt by 60 crores every year. This has two benefits, the interest costs get reduced resulting in higher PAT and the debt-to-equity ratio tilts to a much more favorable number that will draw many more long term investors to the company.

The direct impact of higher debt is on the interest costs for a company. Below are the interest cost for both the companies. Lowering interest cost directly add to a jump in PAT. I am hoping that Granules’s strategy to gradually reduce the debt should show the improvement in the future.

  • Ajanta Pharma: Ajanta had an interest cost of 1.13 crores for Q4 FY16 and about 4.9 crores for FY16.
  • Granules India: Granules had an interest cost of 9.8 crores for Q4 FY16 and about 39.9 crores for FY16.

As described above the direct impact of have lower debt gets reflected in debt-to-equity ratio. This value for Ajanta and Granules is given below:

  • Ajanta Pharma: Ajanta has a debt-to-equity ratio of 0.08
  • Granules India: The debt-to-equity ratio for Granules is 0.7 (if you think this is higher, you should look at the debt-to-equity ratio for FY14 and FY15 J )

Expenses:

From EBITDA numbers it is clear that Ajanta is more efficient compared to granules. Let us look at the numbers that result in higher EBITDA for Ajanta compared to granules in Q4 FY16.

  • Employee Expenses:

Money spent on employees (salaries) is a good indicator on the quality of a company. For a software company, it forms a major chunk of its expenses. For a bulk drug manufacturer it is a minor expenses. Whereas for a company manufacturing specialized drugs, this would form a sizeable chunk of its 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 Q4 FY16. Ajanta being a specialized drug manufacturer, needs to spend more on R&D and hence shells out money on employees. Granules is slowly moving to specialized drugs (Rx as well as store brand OTC) hence I expect the employee expense for Granules to increase in the coming quarters.

Company Employee Expense (Crores) Employee Expense (as a % of Revenue)
Ajanta Pharma 69 Crores 16.2%
Granules India 31 Crores 8.2%
  • Raw Material Costs:

Again, Granules being a bulk drug manufacturer, has higher Raw material cost compared to Ajanta in Q4 FY16.  As a percentage of revenue, Granules spent close to 58% on raw materials. In Q4 FY15 the number was close to 62%. It is a healthy sign that the number is coming down. As the specialized drug sales gather pace, Granules should see this number going down further. I eagerly await for those days. Ajanta has great set of numbers as far as raw material costs are concerned. I hope Ajanta maintains this track record.

Company Raw material cost (Crores) Raw material cost (as a % of Revenue)
Ajanta Pharma 102 Crores 24%
Granules India 213 Crores 58.6%
  • Manufacturing Expense:

I could not find the manufacturing cost number for Ajanta for Q4 FY16. For Granules, the manufacturing expense is about 6% of its revenues. I have nothing much to comment here.

Company Manufacturing expense (Crores) Manufacturing expense (as a % of Revenue)
Ajanta Pharma Data not available Data Not available
Granules India 23.13 Crores 6.19%
  • Other Expenses:

Other Expenses is strictly not comparable between the two companies because what constitutes as other expenses varies between the two companies. Ajanta pharma treats marketing, R&D, administrative and distribution expenses as other expenses. Marketing expense makes up more than 30% of total expense for Ajanta for Q4 FY16. This is understandable as Ajanta has close to 3000 MRs in India and many more in other countries selling the drugs. On the other hand Granules has much less sales expenditure. Moreover Granules treats R&D expense separately and Capitalizes R&D expenses on products whose revenues shall accrue over next few years. Hence the number 25.6 crores for Granules cannot be compared with the 120 crores for Ajanta Pharma.

Company Other expense (Crores) Other expense (as a % of Revenue)
Ajanta Pharma 120 Crores 28.3%
Granules India 25.6 Crores 6.8%

Taxes:

The below table shows the taxes paid by both the companies for Q4 FY16. Unfortunately, herein lies the major difference. Granules pays (or rather had to pay) higher taxes for two reasons in Q4 FY16:

  • They exhausted their MAT credit last year so no extra deductions to rely upon in Q4.
  • They had to make extra provisions for deferred tax due to tax rate change.

These resulted in Granules shelling out (including provisions) a higher taxes. On the other hand, Ajanta paid less tax compared to Granules due to following reasons:

  • They have some of their manufacturing plants in SEZ or tax rebate zones leading to some tax savings.
  • They spent more than planned amount on R&D (8.5% of revenue instead of usual 6%) in Q4. R&D CAPEX gets a tax rebate from government. Hence they could reduce their tax burden.
Company Tax Paid (Crores) Tax Rate
Ajanta Pharma 24 18%
Granules India 19.27 37%

Promoter Shareholding pattern:

In case of Ajanta, it is heartening to see the promoters holding about 74% which is close to the maximum allowed promoter shareholding of 75%. This shows the commitment of promoters in the company. On the other hand the promoters of Granules recently increased their stake by converting their warrants into Shares. They pumped in close to 200 crores. Again, this shows the confidence of promoters in Granules which is a very good sign.

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

 PE and Market Capitalization:

I don’t like to comment on share price or anything connected to it as I lack the knowledge and expertise to comment them. However I can state the facts as I see them.

  • Ajanta Pharma: Ajanta has seen a substantial jump in the market capitalization over the past five years. This is predominantly due to the rerating that the company has seen on the back of increased revenue and profits. In particular, the profit margin growth seems to have led to this huge run up. As of June 2016, Ajanta has a market capitalization of 13,000 crores and commands a TTM PE of 33 which is above the industry PE of roughly 25.
  • Granules India: Granules on the other hand has a market capitalization of 3000 crores with a PE multiple of 25 which is close to the industry average.

If investors pay a premium on one company compared to another, there is a reason for that. In case of Ajanta, investors seem to buy in to the future growth potential of the company based on past growth. They also seem to like the revenue growth rate, profit growth rate, profit margins as well. Granules, on the other hand commands the PE for being a leader in select mass market acute and chronic diseases. To command an even higher PE, Granules will have to improve its profit margins from the current 8-9% to a much higher level. Management understands this and they seem to have the desire to move in this direction.

Please note that a higher PE multiple without the backing of an equally good “future growth potential” is a recipe for disaster.

Gazing at the Crystal Ball

What is in store for the future of both these companies? Management of both companies are growth oriented and understand the importance of having strong profit growth. Revenue growth for both companies have been tepid, however both the companies try to show a profit growth either by legitimately saving on taxes or by increasing efficiencies. I would rather love to see both companies improve the bottom line by improving their revenues. That builds the foundation of a solid budding large-cap company. Having said that I believe the below triggers auger well for the future of both the companies.

  • Ajanta Pharma: Ajanta has a healthy pipeline of products pending approval in different countries. To some extent, these pending approvals give a visibility on the future growth prospects of their bread-and-butter business. The company has lived up to its promise of regular ANDA filings in US and plan to file 10-12 ANDA every year. This should add the needed delta that can bring the incremental revenue growth.
  • Granules India: Granules has many triggers. The Omnichem JV, store brand OTC and Rx products in US (the company proposes to file 6-8 ANDAs every year which should lead to more products being launched), capacity expansion for various molecules backed by increase in demand for such molecules.

I am excited to track both these companies. I wish the management of both the companies a happy ride on this long journey.

References

[1] Granules India results Q4 FY16

[2] Granules India Annual report FY15

[3] Ajanta Pharma results Q4 FY16

[4] Ajanta Pharma Annual report FY15

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.