Ajanta is a Branded generics manufacturer which is predominantly active in the emerging markets. Ajanta sells its products in 35 countries in Africa, Asia and India. Before continuing with the analysis of Q4 FY16 results, I strongly recommend you to go through the following links, in case you have not read them before.

India:

Let us look at Ajanta’s performance in Indian market. India generates close to 28% of Ajanta’s revenue.

Indian Sales for Q4 FY16:

India makes up an important part of Ajanta’s sales. The company has more than 3000 medical representatives who bring in most of the sales for the company. Ajanta is focused on four areas in India, namely, Cardiology, Ophthalmology, Dermatology and Pain management. For Q4 FY16 the sales numbers are given below [1]:

Segment Q4 FY16 (Crores)  Q4 FY15 (Crores) Change (%)
Cardiology 46 38 22%
Ophthalmology 29 25 16%
Dermatology 30 28 6%
Pain management 8 6 25%
Institutional Sales 6 16 -63%
Total 119 114 5%

Percentage wise, Pain management segment has shown the maximum growth but its weightage in the total revenue is meagre. Cardiology adds major chunk to the Q4 revenue and the growth in revenue is healthy as well. With all the Masala Dosa, Samosa and Kachori sales rising in India, Ajanta seems to have a predictable growth opportunity for Cardiology segment. One point to note is the drop in Institutional sales from 16 crores in Q4 FY15 to 6 crores in Q4 FY16. As per the management, this is a deliberate attempt to bring down institutional sales as these institutional sales are predominantly directed towards government tenders and the revenue in such sales are lumpy and unpredictable. The drop in institutional sales seems to have led to a drop in revenue growth rate. The Q4 revenues from India was 119 crores compared to 114 crores in Q4 FY15.

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

Below table shows Ajanta’s standing in the Indian Pharma market [1]. I am still not sure if the ranking is with respect to Revenue or profits or SKU (Stock Keeping Unit).

Segment 2016 (March) 2015 (March) 2005 (March)
Ophthalmology 5 5 28
Dermatology 13 13 98
Cardiology 20 22 38
Pain management 45 53 Not Applicable
Overall 33 36 88

From the table it is clear that, in the past one year, the company has improved its ranking in Cardiology and Pain Management. Ajanta is a recent entrant into Pain management and hence is in a catch up mode. An interesting thing to note is Ajanta’s relatively slow ascent in cardiology. In the past 11 years the company has moved from 38th position to 20th position which shows that Cardiology is a very competitive area. Overall, as a company, Ajanta has moved up 3 places in the past one year.

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 Indian Pharma Market (IPM)
Dermatology 11% 18%
Cardiology 29% 14%
Ophthalmology 25% 14%
Pain management 27% 12%
Overall 23% 14%

From the table we note that except Dermatology, Ajanta has grown faster than the industry in all of its chosen areas. In case of Cardiology, the company’s the growth rate is twice that of its peers. Similar observations can be made with respect to the other areas as well. I believe one reason for this is due to the concentrated bet by the company on select few areas. When one broadens its areas the depth will be shallow. So a concentrated bet seems like a good plan.

Emerging Markets:

Ajanta reports numbers for India and other emerging markets in two separate buckets. Below are the sales numbers for Q4 FY16 and FY15 for the emerging markets [1].

Regions Q4 FY16 (Crores) Q4 FY15 (Crores) Growth (%)
Africa 174 133 31%
Asia 119 113 6%
Others 2 2
Overall 295 248 19%

Africa has shown good growth during the Q4 FY16. I am guessing this is due to the order cancellation for anti-malarial drug for the competitor company due to quality issues. Some of the orders would have come to Ajanta as it is one of the six global suppliers for this drug. In [2] I noticed that the contribution of the anti-malarial drug is about 113 crores that is close to 65% of the entire sales from Africa! I personally believe this is a major risk. Any issues (regulatory or otherwise) to the supplies of anti-malarial or other drug might cause a setback to the topline and the bottomline. Asia seems to have grown slower. The major market within the Asia basket should be Philippines.

Regulated Markets (USA):

Ajanta recently forayed into the regulated markets. Currently it has 5 products commercialized in USA which are all oral solids. 2-3 more would be commercialized in FY17 [3]. In Q4 of FY16 it launched Levetiracetam immediate-release tablets in four different dosages i.e. 250mg, 500mg, 750mg and 1000mg in US market through its subsidiary Ajanta Pharma USA Inc. Levetiracetam is a drug that is used to cure epileptic neurological disorder like numbness, blindness, paralysis or fits. Levetiracetam is a generic version of Keppra. I was googling about Keppra and noted that there is a delayed release version available as well. I hope Ajanta releases the “delayed release” version as well.

Ajanta has 10 approved ANDAs (out of which eight are final approvals and two are tentative approvals). 16 more ANDAs are under approval process [1][3]. The company plans to file 8-12 ANDAs every year. In another context I got to know that it takes about Rs 4 crores to file one ANDA. So, on an average if the company files 10 ANDAs every year then the filing expense itself would be Rs. 40 crores.

Ajanta earned 5 crores of revenue from the sales in regulated market in Q4 FY16 compared to 2 crores in Q4 FY15. Phew! So much for all the talk about regulated market business :). However, this is just the beginning. One needs to keenly watch the performance over the years.

Research and Development (R&D):

Ajanta has more than 650 engineers working in the R&D department. In Q4 it spent 36 crores on R&D which excludes the CAPEX expenditure on R&D. It plans to spend about 100 crores towards R&D CAPEX in the next 18 months [1].

The company is guiding a 7% (of Revenue) R&D expenditure for FY17. This 7% should be the non-CAPEX R&D expenditure. Assumptions are always dangerous but nevertheless, assuming that Ajanta’s revenue for FY17 is about 2000 crores, the R&D spend would end up being about 140 crores.

Overall Financials:

The table below compares the Q4 numbers for FY16 with the numbers for FY15 [1].

  Q4 FY16 (Crores) As a % of Sales Q4 FY15 (Crores) As a % of Sales % Growth
Total Revenue 426 372 20%
EBITDA 141 33% 133 36% 6%
PBT 131 31% 115% 31% 14%
PAT 106 25% 74 20% 43%

The revenue grew at a lackluster 20% (note that 20% growth is good but then we are talking about Ajanta!). EBITDA growth tanked to 6%! Even the EBITDA as a percentage of sales came down. The main reason for this is the R&D spend (shown as other expenses). Ajanta spent 8.5% of the revenue on R&D. This was higher than the usual 6-7%. This would have resulted in lower EBITDA. Even PBT seems to have grown at a much slower rate with respect to Q4 FY15. But look at the eye popping rate of PAT growth 43%! That is a huge jump considering PBT is not that great! On looking at the tax rate, I see that the tax rate was about 25% [2]. And the reason for the lower tax rate is due to a tax rebate on R&D CAPEX. So if a company spends on R&D CAPEX, it gets a tax exemption. This seems to be the major reason why the tax rate is less resulting in higher PAT!

Expenses:

The table below lists the major expenses for Ajanta for Q4 over the past few years.

Expense Type Q4 FY16 (Crores) % of Revenue Q4 FY15

(Crores)

 % of Revenue Q4 FY14

(Crores)

 % of Revenue Q4 FY13

(Crores)

 % of Revenue Q4 FY12

(Crores)

 % of Revenue
Raw Materials 101.95 24% 70.27 18.8% 105.86 34% 99.36 40% 78.01 44.3%
Employee Cost 69.06 16.2% 54.69 14.7% 37.67 12.1% 34.52 13.8% 24.89 14.1%
Other Expenses 120.68 28.4% 94.68 25.4% 72.34 23.3% 56.49 22.6% 44.94 25.5%

From the table we can see that the employee cost and the other expenses with respect to sales have remained more or less same over the years. Over the past five years, the raw material cost has come down from close to 45% to about 25%. This would naturally aid in better EBIDTA margins. This augurs well for the company.

Also note that with respect to Q4 FY15 there is an increase in all the three expenses in Q4 FY16. Hence it has impacted the EBIDTA for Q4 FY16. The EBIDTA as a percentage of sales has dropped from 36% (in Q4 FY15) to 33% (in Q4 FY16).

 Manufacturing Facilities

The construction work for the new manufacturing facility in Dahej, Gujarat is completed and samples are being drawn from the facility for required approvals. Rs 250 crores has been spent on this facility and another 50-70 crores would be spent in FY17. By November of 2017 the company should have filed for approvals with USFDA and UK MHRA and other regulatory bodies (it would take 12-18 months for the approvals to come through). However the commercial production should start coming out by April 2017. I assume Ajanta will start selling these products in semi-regulated markets like India before starting the exports to regulated markets post the approvals. [3].

What next?

So, what next for this company? The below mentioned points are my way of looking at the near future of the company.

  • The 1800 odd pending brand registrations should help in steady revenue growth.
  • Large CAPEX will weigh in on the balance sheet and might impact the cash flow.
  • The company might show higher PAT by spending more on R&D and thereby have a lower tax outgo, but to me that is NOT the true meaning of PAT growth. PAT growth has to come from sales growth and lower expenses.
  • US sales of new drugs need to be monitored. If [2] is to be believed then the FY17, FY18 projections do not really add up much to the topline.
  • To me it appears that the company, after 5 years of excellent growth, is heading for some consolidation for the next one or two years. I hope that I am proved wrong and the company gets into a 30% kind of sales growth and 30% true/organic profit growth. But then, in the hearts of hearts I know that I am hoping too much too early.

Note: I have deliberately not analyzed the full year performance for FY16 for Ajanta. Let us take it up in a separate post.

References:

[1] Ajanta Pharma Q4 Results and Investor Presentation for Q4 FY16

[2] ICICI Securities Q4 Result Analysis

[3] Interview with Yogesh Agarwal Joint MD Ajanta Pharma

http://www.moneycontrol.com/news/results-boardroom/rd-spends-weighed-heavilyq4-margins-ajanta-pharma_6457261.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 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.