Ajanta pharma released its FY16 annual report in June 2016. The annual report makes an interesting read. With respect to look-and-feel the annual report has seen a gradual level of professionalism build in over the years. The glossiness has come down. The report lays emphasis on content over presentation which is a good sign. Before we continue further I strongly recommend you to go through the following articles to get a background on Ajanta Pharma

Let us start off with overall information relevant to FY16 [1].

US Markets

FY16 saw 4 product launches in US. In all five products are commercialized in US. With respect to ANDA approvals, the company has eight ANDA approvals with two tentative approvals and sixteen more under review. The company plans to file 8-12 ANDAs every year. For US markets the strategy is to introduce complex products that revolve around Immediate-Release, Extended-Release, Delayed-Release and Orally Disintegrating products.

Emerging Markets

In emerging markets the company has a different mix of products. It includes Anti-Biotic, Anti-Malarial, Anti-Diabetic, Cardiology, Gynecology, Orthopedics, Pediatrics, Respiratory segments. The company is visible in 30 countries with more than 650 medical representatives (MRs) in these countries. According to IMS Health, Africa will be the second fastest growing market in the world with sales going from $30 billion in FY16 to $45 billion in FY20. Ajanta has a sizeable presence in Africa.

Research and Development

Ajanta Increased the R&D spend to 6% of revenue compared to 5% of revenue in FY15. I think this 6% includes only the recurring R&D expense. It may not include the CAPEX for R&D. R&D team comprises of more than 650 employees. Ajanta spent 106 crores as recurring expense on R&D and further 42.86 crores as CAPEX in FY16. Hence, recurring R&D + CAPEX makes up 9.5% of total turnover. The R&D team seems to be split into 3 sub-teams, namely, Formulations development team, Synthetic Development team and Analytical development team. FY16 saw research work in the area of immediate release, extended-release, delayed-release, osmotic release based products that were generated due to R&D efforts. The company released 19 new products in Indian market, 45 new products in Emerging market and 4 new products in US market in FY16.

Manufacturing Facilities

The company has four manufacturing plants in 4 locations namely paithan, Chilkalthana, Chitegaon and Waluj in Maharashtra. The fifth plant in Dahej covering 41,000 sq meters will commence operations in FY18. It has been recently commissioned and may initially produce products for India and Emerging markets till it gets USFDA approval by FY18. A new formulations facility is being developed in Guwahati. The plant will be commercialized in March 2017 and is gearing up to cater to India and Emerging Markets. This plant will produce tablets, capsules, ointments, creams, sterile ophthalmic liquids. The entire CAPEX for this facility is envisaged at Rs. 300 crores. The Mauritius plant is functioning satisfactorily. Additionally an API R&D facility has been setup in Kandivali west, Mumbai.

Other Information

  • Ajanta has a cumulative strength of more than 6000 employees
  • Ajanta can reach more than 4 lakh doctors across India with more than 3000 MRs engaged with these doctors.
  • The company sees four types of risks for its operations. Geopolitical and natural calamities risk, risk due to Competition from peers, risk arising from currency fluctuations and finally risks due to regulatory changes. The regulatory risk is especially dangerous for any company in any sector. This is especially true for pharma since medicines can suddenly be added to essential medicines list and the prices are capped leading to revenue stagnation.
  • Dividends: The company paid dividend of Rs 8 per share (on a face value of Rs. 2/-) leading to an outgo of Rs 70.4 crores (excluding dividend distribution tax).
  • CSR: For CSR calculations, the company takes its FY16 profit as 304.69%. So the CSR compliance cost works out to be 6.09 crores. The company spent 6.39 crores on CSR. Most of the spending was in Maharashtra. As a part of CSR company has undertaken free medical camps, eye surgeries, school renovation, education assistance, clean India initiatives etc.
  • Shareholding: The major shareholders in the company includes Promoters who hold 73.78%. Mutual funds hold 1.89%, NIRs/FIIs hold about 10.28% and Indian public hold about 13%.

As of FY16, in all, there are 30,946 shareholders in Ajanta. Out of these shareholders, 26,852 Shareholders hold 500 or less shares making up 86.8% of all shareholders. 2,184 shareholders hold 501-100 shares making up further 7% of all shareholders. 1,016 shareholders hold 1001 to 2000 shares making up another 3.28% of total shareholders and so on.

Profit and Loss Statement

Let us look at the P&L statement for the company for FY16 [1]. Let us start with the Year-on-year annual performance of the company with respect to parameters like Revenue, EBIDTA, PBT, PAT and EPS.

FY16 (Crores) As a % of sales FY15 (Crores) As a % of Sales % Growth YoY
Total Revenue 1728 1474 17%
EBITDA 581 33.6% 505 34.2% 15%
PBT 547 31.6% 456 31% 20%
PAT 401 23.2% 310 21% 29.4%
EPS 45.62 (Rupees) 35.24 (Rupees) 29.4%
  • The numbers are self-explanatory. PAT has grown at the rate of close to 30% year-on-year which is a heartening news. PAT as a percentage of revenue has grown from 21% in FY15 to 23.2%. This would have aided in improving the PAT YoY.

Historical Performance

The below table lists the performance of company over a period of five years.

FY16 (Crores) FY15 (Crores) FY14 (Crores) FY13 (Crores) FY12 (Crores)
Revenue 1728 1474 1178 937 683.61
EBITDA 581 505 369 230 146.96
EBITDA Margin 33.6% 34.2% 31.32% 24.54% 21.49%
PAT 401 310 234 112 77.26
PAT Margin 23.2% 21% 19.86% 11.95% 11.3%
ROCE 42% 50% 45% 37% 22%

A noteworthy aspect of the five year performance is the PAT margin. It has more than doubled from FY12 to FY16. This is a huge achievement! You can see its impact on PAT, the revenue has grown 150% in these five years but PAT has shot up more than 400%. This is possible because of increase in PAT margins.

Expenditure

The table below describes the expenses over the past five years. The employee expenses seems to have a  slight upward bias. This is because of additional hiring of personnel in Marketing, R&D and other supporting functions. “Other expenses” include the expenses for Marketing, R&D, administration cost and distribution cost.

Expense Type FY16(Crores) % of Revenue FY15(Crores) % of Revenue FY14(Crores) % of Revenue FY13(Crores) % of Revenue FY12(Crores) % of Revenue
Raw Materials 400 24% 325 25% 299.03 25.38% 286.32 30.5% 232.50 34%
Employee Cost 257 14.8% 201 13.6% 156.97 13.3% 123.18 13.1% 93.83 14%
Other Expenses 476 27.5% 420 28.4% 337.10 28.61% 283.45 30.25% 212.87 31.1%
  • Raw Materials Cost: Over the past five years, in absolute numbers the raw materials cost have increased which is expected. But the interesting point to note is that as a percentage of sales, the raw material cost has constantly gone down. This means that the company has been able to generate higher revenue with lesser raw material cost which shows the improvement in efficiencies.
  • Employee Cost: The employee costs, in absolute numbers has increased but as a percentage of sales has remained constant. This is good news. However I wouldn’t mind if it increases a bit more if the increase in employee cost results in higher revenue and PAT growth.
  • Other expenses: Other expenses that includes sales & marketing, travel cost etc has been increasing in absolute numbers. However as a percentage of revenue, other expenses have gone down. Again this is good news.
  • Note: An interesting point to note about raw materials consumed in FY16 is that out of 400 crores, only 303 crores was spent in the raw materials used for manufacturing products. Rest 96 crores was spent on the packaging material ! Wow 25% of total raw material cost is just the cartons, empty bottles, empty sachets and tablet cases!!
  • Note: Other expenses forms a good chunk of expenses. For FY16, out of the 476 crores, the company spent 180 crores as selling expense, 35 crores as travelling expense, 36 crores on consumption of spare parts (what the… ! Spare parts! And I thought we were talking about a pharma company J ), 24 crores on repairs and maintenance, 54 crores on clearing and forwarding (not sure what is the meaning of this), 15 crores on power and fuel expense, 9 crores on rent, 11 crores on legal fees and so on. Company has added another 56 crores as misc expenses. I have nothing much to comment except that close to 50% of these expenses are towards selling and travelling which shows that the company has a sizeable marketing infrastructure in place.

Balance Sheet

Let us look at the balance sheet [1]. The balance sheet of a company can be divided into Liabilities and Assets. For any company the liabilities and assets should balance each other else it will lead to an asset-liability mismatch. Let us first start with the liabilities.

Liabilities

Liabilities and equity are, as the name suggests a liability to the company. Though shareholders treat themselves as an asset to the company, from a company’s perspective they are a liability. Let us look at the different liabilities for Ajanta.

Shareholder Funds:  The shareholder fund increased from 841 crores to 1172 crores. Primarily on the back of increased reserves and surplus. The reserves and surplus increased from 823 crores to 1154. Also the equity share capital saw an increase from 17.68 crores in FY15 to 17.69 crores in FY16. This was due to ESOP allotments. 57,750 shares were allotted as ESOP in FY16. In all the company now is split into 8,80,01,250 shares with face value of Rs. 2 /-.

  • About 76 crores was used up for dividends and taxes on dividends. A cash surplus of 103 crores will be carried forwarded to next year.

Non-current liabilities: The non-current liabilities have reduced from 55.67 crores to 37.9 crores due to repayment of long term loans. That’s a good news. The company has not taken any deposits this year. So there was no additional interest outgo due to deposits in FY16. If I were to further split the 37.9 crores of non-current liabilities the major items are the following:

  • Long Term borrowings are 14.87 crores from banks and an interest free loan from Govt. of Maharashtra.
  • Deferred Tax liabilities are about 20 crores.

Current liabilities: There has been an increase in current liabilities from 249.6 crores in FY15 to 271 crores in FY16. We saw above that the non-current liabilities were impressive. But the Current liabilities at 271 crores look like a damper! Let us split the number.

  • Short term working capital borrowings that matured in FY16 amounts to about 58 crores.
  • Trade payables amount to about 143 crores. These are adequately covered with trade receivables. Hence the company should be able to pay this with ease.
  • Other liabilities stand at 56 crores. I notice that this section also has close to 19 crores of foreign currency term loans. Also this has close to 20 crores of payables towards fixed assets.

If I were to summarize the entire liabilities of Ajanta Pharma, the company has total liability of 1481 crores. Out of this 1481 crores, 1154 crores is the Reserves and Surplus and further 143 crores are trade payables which are adequately covered with receivables. So the touted liabilities are not really a strain on the company. The only liability that is a strain is the long term and short term borrowings that together amount to about 14.87  of long term loans + 58 crores of working capital borrowings + 19 crores of foreign currency term loans which together is about 92 crores! For a pharmaceutical manufacturing company with revenues of 1700 crores and PAT of 401 crores having total borrowings at mere 92 crores is fantastic! Isn’t this a beautiful spot to be in for a company!! Technically, with such a low level of debt, Ajanta should never go Bankrupt (fingers crossed)!

Assets

The liabilities of a company should be matched with Assets so that the balance sheet truly balances. The company has a liability of 1481 crores. So it should correspondingly have 1481 crores. Companies try to avoid an asset-liability mismatch scenario so that all liabilities are covered by assets. This is a healthy pre-requisite especially when a company has high debt. When the debt is covered by an equal amount of assets, it shows that the company can repay its debt by selling assets (if the need arises). Let us look at what are the assets for the company.

Fixed assets: Fixed assets increased by about 233 crores in FY16 due to the investments in R&D facility and manufacturing facility. You would remember that Q4 saw a huge jump in PAT due to tax savings by investing in R&D CAPEX. This CAPEX is visible in this section. Let us see in detail the fixed assets for the company:

  • Tangible assets that are part of non-current assets and include the machinery, buildings, vehicles etc. Tangible assets increased from 283 crores to about 446 crores. The major reason for this increase is due to two items (Company bought land, probably for its factories. Hence freehold land increased from 16 crores in FY15 to 143 crores in FY16. The second item is the Plant and Equipment which increased from 113 crores in FY15 to 157 crores).
  • Capital work in progress that is part of non-current assets stands at 238 crores. Capital work in progress refers to capital that has been employed in generating goods that will not be ready for sales in the current year. So 238 crores is probably currently employed in products that may be sold in next few years. “Capital work in progress” sometimes also includes the factories under construction. But from the Annual report I could not get the details on this. If the increase in capital work in progress is also due to construction activity in Dahej and Guwahati then these might reflect in Tangible assets in upcoming years when they are ready.

Current Assets: The current assets have also increased from 633.4 crores in FY15 to 764 crores in FY16. As stated above this increase is due to an increase in receivables.

  • Inventories: Inventories that are part of current assets stand at 204 crores. In case of Ajanta, the inventories includes 58 crores of raw material inventory, 20 crores of packing material inventory, 11 crores of work-in-progress inventory, 87 crores of finished goods inventories and about 20 crores worth stock-in-trade. All these are treated as assets because they have the potential to generate future revenues.
  • Trade receivables: Trade receivables is a whopping 372 crores. This shows that the company has to receive a huge sum from its customers, traders etc. This is a little concerning that 21% of the sales are still treated as trade receivables.
  • Cash and bank balances forms 54 crores
  • Current investments in mutual funds (both debt and equity) form about 66 crores for FY16. Interesting thing to note is that investments in mutual funds in FY15 was only 19 crores. So, in FY16 the company has pumped 50 crores into mutual funds! I wonder why the company wants to put away its money in mutual funds.

If I were to summarize the Assets, only 446 crores out of the 1481 crores (i.e. 30% of all assets) is in factories etc. Close to 814 crores (i.e.  54% of total assets) is in inventories, trade receivables and capital work in progress which is NOT really a fixed asset that will last for more than a year! Moreover another 100 crores are purely in cash, bank balance and mutual fund investments. For a pharma company, Ajanta pharma seems to be an asset light company. Note that 372 crores of assets are the trade receivables. This is not a good sign that a company has so much of trade receivables. More on this towards the end of the article.

Cash Flow Statement

Let us look at the cash flow statement [1]. The most crucial part of financial year reporting is the cash flow statement. It captures the cash that came into the company and the cash that went out of the company in the form of debt repayment, building factories etc. Let us look at the statement the way it is reported i.e. Cash flow from operating activities, cash flow from Investing activities and cash flow from finance activities.

  • Cash Flow from operating activities: The profit before tax for FY16 was 547 crores. To this when we add back the depreciation and amortization expense (45 crores) and other items we end up with an “operating profit before working capital changes” at 611 crores. This amount is like the cash that came in. Now let us look at the subtractions that we need to do from this 611 crores to come to final “cash generated from operating activities”. About 114 crores is trade receivables which needs to be subtracted. About 45 crores of cash is stuck in inventories which again needs to be subtracted. About 45 crores is trade payable which has not been paid, so the cash is still with company so it needs to be added. There are some more minor items. There was also a negative cash flow of 161 crores due to taxes. After subtracting 114 crores (trade receivables), 45 crores (inventories), 161 crores (taxes) and adding 45 crores (trade payables) and taking care of other minor items we arrive at the final number for “cash flow from operating activities” as 38 crores. If the company did not spend this money on constructing new factories or it did not pay any dividend or it did not pay back loans or interest, this is the positive cash that would have come into the company. But then a company has to build factories and payback loans and pay dividends. So some part of the cash goes out. This is captured under the next two bullet points i.e. “Cash Flow from investing activities” and “Cash Flow from finance activities”.
  • Cash Flow from investing activities: The major investing item the Ajanta did in FY16 was 296 crores which was a “capital expenditure on fixed asset including capital advances”. It appears that the company was busy building factories. Another 46 crores was spent on current investments (though information about this was not available. I am guessing they bought some financial instruments like mutual funds). Some cash inflows were seen in the form of income from investments & deposits (11 crores that might have come in from interest on FD etc), 81 crores positive cash is shows as bank balance that is not cash or cash equivalent, 40 crores of positive cash flow is shown as non-current investments. In all a negative cash flow of about 209.29 crores was seen from investing activities. It is good to see that the major chunk of cash flow due to investing activities are because of CAPEX on fixed assets. Probably the money was spent on upcoming Dahej and Guwahati plants.
  • Cash flow from financing activities: This section captures information related to debt re-payment, new borrowings, dividend payments etc. Generally this section will show a negative cash flow if the company did not borrow a lot this year. Let us see what Ajanta did with respect to financing activities. Ajanta did not have any long term borrowings this year. But it had a short term borrowing of about 40 crores so cash came into the company. Ajanta paid back long term borrowing of about 20 crores resulting in cash outflow. Roughly about 5 crores of cash outflow was seen as interest payment for the debt. A huge outflow of about 122 crores was seen due to dividend payment. A further outflow of 11 crores was seen as dividend distribution tax. In all a negative cash flow of 118.57 crores was seen from financing activities.

If I were to summarize the cash flow we note the following:

  • Positive cash flow of 326.38 crores due to operating activities (which is good)
  • Negative cash flow of 209.29 crores due to investing activities (predominantly due to CAPEX on fixed assets which is again good. The company is preparing itself for the future).
  • Negative cash flow of 118.57 crores due to financing activities (predominantly due to dividend payment which is again good. The company does not have debt repayment obligations).
  • All the above resulted in a final cash flow of “-1. 48 crores”. The cash flow at the end of FY15 was 54.49. So subtracting 1.48 crores from this results in Total Cash or cash equivalents at 53.01 crores at the end of FY16. Phew after all this cash flow analysis we ended up with a negative cash flow of 1.48 crores for FY16!

The Cash flow numbers are better understood when we look at the history of the numbers. The figure below shows the numbers over the past six years. From the numbers it is quite clear that the cash flow from operating activities has constantly increased over the years. Over the past 6 years the negative cash flow due to investing activities has been due to the money on fixed assets which is good. In years where we see a rise in outflow due to financing activity, it has been due to repayment of long term and short term loans. This is again good. Hence, over the past six years the company has had consistently positive cash from operating activities and an increasing “total cash” amount. Overall a satisfying cash flow history for the company.

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Earnings power chart

We have looked at the P&L statement, Cash flow statement and Balance sheet. However these are separate statements. Hewitt Heiserman proves a method to club all the three statements by picking relevant parts from these statements and drawing an earnings power chart. By combining the values from these three statements we can calculate three EPS number, namely, Accural EPS, Defensive EPS and Enterprising EPS. The graph below shows my calculations for these EPS values for the past 4 years. For a well-managed growing company, all the three values should be positive. Ajanta pharma is able to achieve positive EPS for all the four years which is a very positive sign. It may be tough to make anything meaningful from the below chart. You can assume that if all the three values are positive and growing with passing year, then it is good for the company.

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These EPS values can be plotted as scatter points on a 4-quadrant earnings power chart. The best companies fall in the 2nd quadrant. A company falling in 2nd quadrant has positive Defensive EPS and positive Enterprising EPS. From the graph we see that Ajanta has been in the 2nd quadant for the past four years. That’s a very positive news for a company! However in FY16 the defensive profits for Ajanta pharma has come down. The reason for this is the fact that the company had a CAPEX spend which reduces the defensive EPS. Again, I understand, it may be tough for you to conclude anything from the chart. You can just remember that if the dots are in the 2nd quadrant then the company is on the path to glory.

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Note: I have not provided the exact values for Defensive and Enterprise EPS because the parameters that I have used to compute these values may vary from the ones that you may choose to use. To avoid confusion and debate I am refraining from providing the values. Please note that the trend is more important than the exact values.

Summary

In summary we can note the following:

  • PAT growth came in at close to 30% for FY16 (compared to FY15). Pat margins were at 23.3% and there was an improvement seen over FY15.
  • The company had CAPEX investment without incurring any additional debt (in fact the company paid back some debt). The major liability for the company is the Shareholder funds!
  • The company had positive Defensive EPS and Enterprising EPS in FY16, on the same lines as the past 3 years.
  • Cash flow from operating activities was positive for this year and has been positive and growing for the past 5 years.

Overall I felt that this was a satisfying year for Ajanta.

References

[1] Ajanta Pharma – Annual Report – FY16

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.