In October, Ajanta came out with its Q2 FY17 results. Let us look at how Ajanta performed during the quarter. Before we go into the results analysis please look at the below links, if you have not gone through them yet.

India:

Indian Sales for Q2 FY17:

India is still a major market for Ajanta pharma. Ajanta has constantly maintained a field force of more than 3000+ medical representatives. There has been no change in the therapeutic areas for Ajanta compared to Q1 FY17. In India the company is predominantly present in Cardiology, Ophthalmology, Dermatology and pain management. Therapeutic area wise sales numbers for Q2 FY17 are given below [1]:

Segment Q2 FY17 (Crores)  Q2 FY16 (Crores) Change (%)
Cardiology 66 54 22%
Ophthalmology 39 35 12%
Dermatology 36 27 32%
Pain management 13 11 14%
Institutional Sales 4 7 -45%
Total 158 135 17%

Continuing the past trend, Cardiology contributes the maximum revenue in Q2 at Rs. 66 Crores. However sequentially (i.e. compared to Q1 FY17) the sales have remained constant at Rs 66 crores. I am not a big fan of comparing sequential results nevertheless I felt let me point out the numbers. Cardiology saw a 22% growth Y-o-Y compared to Q2 FY16. In percentage terms, dermatology grew faster at 32%. Overall a 17% growth was seen in India sales despite an intended slowdown in institutional sales. Ajanta’s management has been stressing the fact that they want to move away from Institutional sales. I would not be surprised if they decide to discontinue Institutional sales.

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 (Sep) 2015 (Sep) 2016 (Jun)
Ophthalmology 5 5 5
Dermatology 13 14 13
Cardiology 20 21 20
Pain management 44 45 44
Overall 33 33 33

Year-on-year, the company has moved one place ahead in Cardiology, dermatology and pain management. However, on a quarter-on-quarter basis the company has stayed put at where it was.

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 (Sep 2016) Indian Pharma Market (IPM)
Dermatology 9% 16%
Cardiology 24% 11%
Ophthalmology 16% 12%
Pain management 15% 11%
Overall 18% 13%

Ajanta has been a clear out-performer in its area of specialization. Barring dermatology, It has beaten its peers by a decent margin as far as growth is concerned. For some reason Ajanta has always fared below par compared to its peers in Dermatology. I haven’t been able to get the details on the reason for this.

One heartening fact is the Cardiology numbers. Cardiology forms a major chunk of the company sales and it is beating its peers in this segment. This is a clear sign of market dominance. Considering that Cardiology is an essential spend (compared to certain aspects of Dermatology) I feel good that Ajanta is doing well here. I hope that the company is able to maintain this out-performance.

Emerging Markets:

As we have been observing over the past many quarters, Ajanta’s major Emerging market revenue comes from Africa. As noted in Q1 FY17, Ajanta is present in 19 countries in Africa, three countries in west Asia, 6 countries in CIS and three countries in south east Asia. There has been no change in this in Q2 FY17. Ajanta’s product registrations in Asia has increased from 334 in Q1 FY17 to 349 in Q2 FY17. In Africa, the number of registrations have increased from 1,190 products in Q1 FY17 to 1,195. As shown below, Ajanta has a region specific product basket. The sales are managed by 700+ medical representatives (Compared to 650+ in MRs in Q1 FY17).

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 Q2 FY17 vis-a-vis Q2 FY16 are shown below:

Regions Q2 FY17 (Crores) Q2 FY16 (Crores) Growth (%)
Africa 175 175 05
Asia 98 124 -21%
Others 1 3 -52%
Overall 274 302 -9.2%

Emerging market sales numbers are disappointing this time. Africa sales are flat. Asia sales are down 21%.  Emerging markets are the company’s bloodline and I see an overall decline of 9.2% Y-o-Y for Q2. I am disappointed. The company tried to cover this by clubbing the US sales with emerging market sales and giving it the “exports” label. Surprisingly the US sales were far better that what I was expecting. This cannot hide the fact that emerging market sales are down this quarter. One needs to watch this Keenly in future quarters. The management partly blames the foreign currency devaluation and scarcity of currency as a reason for this de-growth.

USA

Something that came out of the blue and completely took me by surprise was the US sales numbers. The company clocked 71 crores of sales in Q2 FY17 compared to a paltry 3 crores in Q2 FY16. This is again is startling in contrast to sales of Rs 10 in Q1 FY17. In Q2 FY17, Ajanta got approval for three products, namely:

  • Omeprazole and sodium bicarbonate powder used for treatment of stomach and esophagus problems such as ulcers and acid reflux.
  • g-Relpax which received a tentative approval.
  • Aripiprazole which is a bioequivalent generic of Abilify.

At the end of Q2 the company had 15 final approvals (compared to 11 in Q1 FY17), 2 tentative approval (compared to 1 in Q1 FY17) and 12 pending approvals (compared to 14 in Q1 FY17) from USFA. As stated in Q1, the company aims to file 8-12 products for ANDA approval every year and it has done 3 as of Q2 FY17. Till now the company has commercialized 9 products in US (compared to 8 in Q1 FY17).

Manufacturing Facilities:

There has been no change in the number of manufacturing plants or the status of the manufacturing plants under constructions compared to Q1 FY17

R&D:

In Q2 the number of R&D engineers has stayed constant at 750+ engineers (same as in Q1 FY17). The company spent 37 crores on R&D (compared to 32 crores in Q1 FY17).

Overall Financials:

The table below compares the Q2 numbers for FY17 with the numbers for FY16 [1].

  Q2 FY17 (Crores) As a % of Sales Q2 FY16 (Crores) As a % of Sales % Growth
Total Revenue 516 442 17%
EBITDA 183 35% 154 35% 19%
PBT 165 32% 148 34% 12%
PAT 131 25% 103 23% 26%

Revenue growth was a little disappointing at 17%. EBITDA grew at 19%. EBITDA as a percentage of sales remained stable at 35%. PAT grew at a healthy 26%. PAT as a percent of sales increased to 25% compared to 23% in Q2 FY16. This is in-spite of the fact that PBT as a percentage of sales is down this quarter. This only means that the company paid even lesser tax. This is clear from the P&L statement. We can notice the following:

  • In Q2 FY17 the company paid 34.46 crores tax on a PBT of 165 crores which works out to a tax rate of 20%.
  • On the other hand in Q2 FY16 the company paid a tax of 44.6 crores on a PBT of 148 crores which works out to a tax rate of 30%

No wonder the PAT is higher for Q2 FY17 even though the PBT is lower (The company managed to pay lower taxes). I am not sure of the reason for lower taxes though.

Expenses:

The table below lists the major expenses for Ajanta for Q2 over the past few years.

Expense Type Q2 FY17 (Crores) % of Revenue Q2FY16 

(Crores)

 % of Revenue Q2FY15 

(Crores)

 % of Revenue Q2FY14 

(Crores)

 % of Revenue Q2FY13 

(Crores)

 % of Revenue
Raw Materials 104.31 20.15% 100.48 22.7% 104.59 28.1% 57.16 20.42% 60.4 32.4%
Employee Cost 72.16 14% 63.74 14.4% 47.85 12.86% 37.35 13.3% 27.48 14.7%
Other Expenses 144.05 28% 124.52 28.1% 100.43 27% 65.39 23.36% 55.25 29.6%

One of the major reasons for a decent EBITDA for Ajanta is its constant desire to decrease its input costs. As we can see from the above table, the company, over the years, has been able to reduce its input costs as a percent of sales from 32.4% in Q2 FY13 to about 20% in Q2 FY17. As a percentage of sales, the employee cost and other expenses have been constant. So with increasing revenues and decreasing raw material costs EBITDA has been increasing over the years.

Taxes:

The effective tax rate for Ajanta was 20.7% compared to 30.12%. It is not a good way to compare taxes on a quarterly basis companies could suddenly pay higher taxes in Q4, hence annual tax numbers are a better way to judge a company. Nevertheless for the purpose of records, below are the tax rate for Ajanta.

Q2 FY17 (%) Q2 FY16 (%)
Tax Rate 20.7% 30.12%


Finance Cost:

Over the years, Ajanta has reduced its debt. Now it spends minuscule amount as finance cost (debt servicing). In Q2 FY17 the company paid 0.77 crores as finance cost compared to 1.07 crores in Q2 FY16. Since the finance costs are negligible, Ajanta’s EBIT and PBT are more or less the same.

Assets and Liabilities:

  • On the Liabilities side, out of the 1730 crores, reserves and surplus make up 1423 crores which is roughly 82% of all liabilities. At 150 crores, trade payable make up about 9% more. The long term and short term borrowings make up just about 1% of the total liabilities. Isn’t this a happy situation to be in?
  • On the Assets side, out of the 1730 crores, the fixed assets like property plant and equipment make up about 452 crores which is 26.14% of the assets. 321 crores or 18.5% of Assets are locked in capital work in progress. On the current assets side, inventories amounting to 198 crores (which is 11.5 % of total assets) and Trade receivables amounting to 378 crores (which is roughly 22% of assets).

In summary, the major liability (reserves and surplus) does not pinch the company and the major assets (capital work in progress, inventories and trade receivables) are not long term assets in true sense. My only concern is the trade receivables which is a big number and is growing every year. This could mean that the company might be flooding the stockists with its products and end user sales might not have realized.

Summary:

  • By Ajanta’s standards, the Revenue growth was subdued at 17%.
  • Asia sales were down 21% and Africa sales were flat. Nothing to showcase in Q2 from these two regions. Ajanta’s jewel is Africa and the flat sales in Africa was a disappointment.
  • Cardiology and Dermatology sales numbers in India brought some cheer to the sales.
  • The biggest surprise was the sales numbers from US. This was totally unexpected and I was thrilled to see the numbers. If this is going to be a trend then I am excited to keep a watch on this.
  • I am not expecting anything spectacular in Q3. Q4 should see the Dahej plant up and running. The new plant in Assam needs a CAPEX of 300 crores. This is going to be a strain on Ajanta in the future.
  • The company is expecting a CAPEX of Rs 300 crore for each of the next three years [2]. This is going to be a stretch on the company!
  • Overall, with 26% PAT growth, the company just managed to show a decent growth.

References:

[1] Ajanta Pharma Q2 Results and Investor Presentation for Q2 FY17

[2] ICICI Direct Research report for Q2 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 adviser. I may or may not have position in the above company. Please consult your investment adviser for all your investment needs.