Ajanta has come out with its Q1 results in July 2017. Ajanta is a branded generics manufacturer which sells its products in more than 35 countries worldwide. Before continuing with the analysis of Q1 results, I strongly recommend you to go through the following links, in case you have not looked at the articles.

India:

Indian Sales for Q1 FY17:

India as a major market for Ajanta pharma. With a field force of more than 3000+ medical representatives, Ajanta is spread across the entire country. There has been no change in the therapeutic areas in which the company focuses, namely, Cardiology, Ophthalmology, Dermatology and pain management. The sales numbers for Q1 FY17 are given below [1]:

Segment Q1 FY17 (Crores)  Q1 FY16 (Crores) Change (%)
Cardiology 66 50 32%
Ophthalmology 42 37 13%
Dermatology 37 35 7%
Pain management 12 10 21%
Institutional Sales 5 16 -68%
Total 162 148 9%

As seen in Q4 FY16, Cardiology added the maximum revenue in Q1 at Rs. 66 Crores. Cardiology saw a very good growth of 32% vis-a-vis Q1 FY16. In terms of percentage growth pain management saw the next best numbers at 21% though in absolute numbers the sales are still small. However we need to keep in mind that Ajanta is a recent entrant into Pain management. Overall a 9% growth was seen in India sales. As expected the institutional sales have seen a drop. Management has clearly said that they want to move away from Institutional sales, so the drop in sales is not a surprise.

Ajanta’s segment wise ranking vis-a-vis competition in India

Below table shows Ajanta’s standing in the Indian Pharma market [1].

Segment 2016 (June) 2015 (June) 2016 (March)
Ophthalmology 5 5 5
Dermatology 13 13 13
Cardiology 20 21 20
Pain management 44 46 45
Overall 33 33 33

Year-on-year, the company has moved one place ahead in Cardiology and two places ahead in pain management. However, on a quarter-on-quarter basis the company has moved one notch up in pain management. From the year-on-year numbers it is quite clear that the company is facing competition from its peers and surpassing them seems a challenge in the near term.

Ajanta’s segment wise growth vis-a-vis competition in India

Below table shows Ajanta’s growth with respect to Indian Pharma Market (IPM) [1]

Segment Ajanta (June 2016) Indian Pharma Market (IPM)
Dermatology 10% 17%
Cardiology 29% 13%
Ophthalmology 20% 13%
Pain management 20% 10%
Overall 21% 13%

From the table it is quite evident that the company is far ahead of its peers in its focus areas. However the company has consistently lagged its peers in Dermatology market. We have noted this in Q4 FY16 as well. Overall the company has fared better than the IPM. Which is a good sign.

Emerging Markets:

Among the emerging markets, Ajanta has a major presence in Africa. As seen in previous quarters, Africa tops the sales numbers. Ajanta is present in 9 countries in Africa, three countries in west Asia, 6 countries in CIS and three countries in southeast Asia. Ajanta has 334 products registered in Asia and 1,190 products registered in Africa. It has different set of products for different regions in Emerging Markets as shown below. The sales are managed by 650+ medical representatives.

Region Therapeutic Area
Asia Cardiology, Pain Management, Gastro intestinal, Antibiotic, Dermatology, Anti Histamine
Africa Pain Management, Gynecology, Multivitamin, Cardiology, Anti-malaria, Antibiotic

The sales (in rupee terms) for Q1 FY17 vis-a-vis Q1 FY16 are shown below:

Regions Q4 FY16 (Crores) Q4 FY15 (Crores) Growth (%)
Africa 194 147 32%
Asia 93 89 4%
Others 0 3 -86%
Overall 287 239 20%

Africa has shown a very decent growth in the topline. Africa is a major contributor to the topline and hence higher growth in Africa results in a meaningful growth of overall topline. One reason for this could be the fact that one of the competitors was barred from supplying anti-malerial drugs to the Global Fund resulting in some additional sales in Africa. From [2] it is seen that, out of 194 crore sales, 120 crores is due to Anti-Malerial drugs. As of Q1 FY17 the company has registered 1190 products in Africa [2].

Asia has shown a tepid growth. An interesting point to note is the fact that sales in Other regions (LATAM) is 0. From what I remember, the company was facing issues with currency in LATAM hence they must have withdrawn altogether from LATAM. As of Q1 FY17, the company has registered 334 products in Asia [2].

USA

In Q1 FY17 the company saw sales of Rs 10 crores compared to Rs  3 crores in Q1 FY16. The numbers are miniscule and I hope that as the quarters go by, the company will be able to improve the sales numbers. The company claims to have got approval for 2 products and 1 product launch this quarter from the USFDA, however as per my tracking, they should have got 3 approvals in this quarter, namely:

  • Zolmitriptan tablets for treatment of acute migraine in dosages of 2.5mg and 5 mg.
  • Voriconazole tablets for treatment of fungal infection in dosages of 50 mg and 200 mg.
  • Memantine Hydrochloride tablets an anti-dementia tabled in dosages of 5mg and 10 mg.

At the end of Q1 the company had 11 final approvals, 1 tentative approval and 14 pending approvals from USFA. In all 8 products have been commercialized till now. The company aims to file 8-12 products for ANDA approval every year.

Manufacturing Facilities:

  • There has been no change in the manufacturing facilities. The company has 4 manufacturing facilities (3 in Aurangabad and 1 in Mauritius).
  • The regulatory samples are being taken from the 5th Plant in Dahej. Work has commenced on the 6th Plant in Guwahati with an investment of more than 300 crores.
  • Additionally the company has one API facility in Waluj, Aurangabad. The APIs are used for captive consumption (to generate Formulations).

Essentially there is no additional input with respect to manufacturing facilities compared to Q4 FY16.

R&D:

In Q4 FY16 the company had 650 engineers. In Q1 FY17 the number has increased to 750+ engineers. In Q1, the company spent 32 crores on R&D (compared to Q1 FY16).

Overall Financials:

The table below compares the Q1 numbers for FY17 with the numbers for FY16 [1].

  Q1 FY17 (Crores) As a % of Sales Q1 FY16 (Crores) As a % of Sales % Growth
Total Revenue 476 395 20%
EBITDA 167 35% 123 31% 36%
PBT 158 33% 119 30% 33%
PAT 120 25% 86 22% 39%

Revenue has grown at a steady pace of 20%. EBITDA as a percentage of sales has increased from 31% in Q1 FY16 compared to 35% in Q1 FY17. Due to higher EBITDA the PBT as a percentage of sales has gone up from 30% to 33%. This also means that the interest costs are lower (anyways we know that Ajanta has miniscule loans!). Subsequently the PAT margins (PAT as a percentage of sales) has reached 25% in Q1 FY17 compared to 22% in Q1 FY16. This has a huge impact in the profit growth.

Expenses:

The table below lists the major expenses for Ajanta for Q1 over the past few years.

Expense Type Q1 FY17 (Crores) % of Revenue Q1 FY16

(Crores)

 % of Revenue Q1 FY15

(Crores)

 % of Revenue Q1 FY14

(Crores)

 % of Revenue Q1 FY13

(Crores)

 % of Revenue
Raw Materials 95.63 20% 79.39 20% 58.77 18.2 50.83 23.2% 44.38 25.49%
Employee Cost 70 15% 59 15% 45.97 14.28 33.85 15.4% 25.63 14.72%
Other Expenses 140 28% 118 28% 99.14 30.81 59.44 27.14% 46.19 26.53%

The Expense numbers are saying a completely different picture. The Raw material cost, employee cost and the other expenses as percentage of sales are EXACTLY same as Q1 FY16. Which means there was no reduction in raw material cost or employee cost or even the other expenses. So where is this EBITDA improvement coming from?

There are two items that contributed in generating higher EBIDTA.

  • 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

So the EBIDTA improvement was mainly because the company managed to sell more of inventory that it was not able to sell in previous quarter. Not because of any improvement in efficiency. Ah this is sad! I was expecting an improvement in EBIDTA due to normal sales! I am disappointed 🙁 . If increase in EBITDA is possibly due to sale of past unsold inventory, how can the company replicate it in future quarters!

Summary:

  • The company had a lackluster Y-o-Y growth in revenue at 20%.
  • The PAT Y-o-Y growth was much higher at 39% but this could be due to sale of unsold inventory from previous financial year. Again nothing much to be happy about.
  • Couple of ANDA approvals and one product launch seen in this quarter in US. But then, the revenues from US are just a trickle.
  • Hence, for me, this was a very dull quarter despite the higher PAT numbers.

References:

[1] Ajanta Pharma Q4 Results and Investor Presentation for Q1 FY17

[2] ICICI Direct Research report on Ajanta Pharma –

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.