B&K Securities Sept 2017

48 Pages·2017·0.75 MB·English

Ajanta Pharma
Sapna Jhawar
[email protected]
022-4031 7130
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM
Outperformer
Ajanta Pharma
07 September 2017
INITIATING COVERAGE Risk reward favorable post sharp correction
Ajanta has corrected ~38% YoY, with shares now trading at 16x FY20E (down from peak of
MIDCAP
30x). Afteraspectaculargrowth during FY10-16, itreported moderateperformance inkey
Share Data
business markets of Africa and Asia (59% of sales) in FY17. While India business faces a
MarketCap. Rs10.5 bn(US$1,644mn)
near term hiccup (31% of sales;temporary in nature), US has now become 10% of sales in
Price Rs1,193
FY17. Slowdown in Africa (tender business), Asia (repatriation issues) and higher
Target Price Rs1,350
BSE Sensex AJANTPHARM investments towards US will keep its sales and EBITDA growth in check in near term. We
Reuters Code AJPH.BO expect FY18E to be a muted year based on challenges highlighted above, but pencil in
Bloomberg code AJP IN rampupfromFY19Eonwardsasbusinessesstabilize.WebelieveAjantapresentsaunique
6m avg. daily turnover 4.2
business model offering a hybrid of growing domestic formulations, solid EM franchise
52-weekHigh/Low (Rs) 2,150/1,106
Issued Shares 88 with strong cash flows, debt-free balance sheet and reasonable valuations along with an
emergingUSformulationsbusiness.InitiatewithanOutperformer.
ValuationRatios
Yrto 31 Mar FY 17 FY 18E FY 19E Reboundingrowthpostchallengingphase:WithAfricatenderbusinessshrinkinginmarket
EPS (Rs.) 57.3 51.0 61.2 and volumes and Asia suffering from volatile economies, FY17/18 will be challenging years.
+/-(%) 21.9 (11.0) 19.9
However, strong chronic led growth in India, stability in Asia and US (small base, improved
PER (x) 30.7 23.4 19.0
filing)shouldaidin12%salesCAGRoverFY17-20E.
PBV (x) 9.9 5.7 4.7
Dividend/Yield (%) 0.7 1.3 1.3 EBITDA margin to pick up in FY19E: Over FY15-17, growth in Asia was flattish, this coupled
EV/Sales (x) 7.9 5.0 4.4
with 300bps jump in R&D expense led to stagnancy at operating level (40bps increase).
EV/EBITDA (x) 22.3 16.6 13.6
Challenging business environment would depress margins in FY18E (expect 29.6% EBITDA
Shareholding Pattern (%)
margin,down490bpsinFY18E).However,reboundinIndia,stabilityinAsiaandaswiftramp
Promoters 71
upinUStoaidmarginsat31.5% byFY19E.
FIIs 12
MFs 4 RoCE-moderating but better than peers: With quality becoming of paramount issue (US is
BFSI's 0 now10%ofsales),higheropexwilllowerRoCE,butgivenlesserexposuretogenericmarket,
Public & Others 13
weexpectittobebetterthanpeersat30%+.
Relative Performance
Adjusted Shareholders' Total Adjusted RoE RoCE
2,500 (Rsmn) Revenues EBITDA
Pat Funds Assets EPS (Rs) (%) (%)
2,000
1,500 FY17 19,326 6,890 5,068 15,677 18,227 57.3 36.7 45.3
1,000
FY18E 20,470 6,217 4,515 18,600 21,253 51.0 26.3 33.1
500
0 FY19E 22,956 7,395 5,413 22,421 25,377 61.2 26.4 32.6
2 2 3 3 4 4 5 5 6 6 7
1 1 1 1 1 1 1 1 1 1 1
pr- ct- pr- ct- pr- ct- pr- ct- pr- ct- pr- FY20E 26,396 8,911 6,578 27,407 31,710 74.4 26.4 32.6
A O A O A O A O A O A
CAGR (%) 12.0 9.0 9.1
Ajanta Pharma (Actual) Sensex
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM 2
Index Page No.
Investment Arguments 4
Financial Outlook 8
Outlook and Valuation 12
Key Risks 14
Business Model 15
Company Overview 32
Comparative Case Study (Ajanta vs. Torrent) 35
Financial Analysis 38
Detailed Financials 40
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM
Investment Arguments
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM
Investment Arguments
Rebound in growth post challenging phase : After a superlative performance from FY11-15 (31% sales CAGR, 57% PAT CAGR), Ajanta has
shownsignsofmoderationfromFY15-17(15%salesCAGR,28%PATCAGR).WebelieveslowdowninAsia,baseeffectinIndiaandAfricaled
tomoderation.WithAfrica tenderbusinessshrinkinginmarketandvolumes,Asiasufferingfromvolatile economiesandIndiaformulations
impacted by GST (1H), we reckon FY17/18 will be challenging years. However, strong chronic led growth in India, stability in Asia brand
businessandUS(smallbase,improvedfiling)shouldaidgrowthinthemediumterm.
Expect rebound in FY19E led by growth resumption in India
Branded formulations reported 34% CAGR (FY11-15) with3 key chronic
therapies: Derma, Cardiac, Ophthalmic. Slowdown in industry restricted 26,000 45
growth to 19% CAGR in FY15-17,with derma segment getting impacted most
40
Africa reported 33% CAGR duringFY11-15 as Ajanta recorded higher growth 21,000 35
in the malarial tender business (43% CAGR). Growth contracted to 19% CAGR
30
due to volatility in crude sensitive geographies in branded segment , thereby 16,000
at 16% CAGR in FY15-17 mn 25 %
Rs 20
11,000
Asia, the third pillar of growth for Ajanta reported 30%CAGR during FY11-15
15
until repatriation issues in select geographies hampered growth to -1% in
FY15-17 10
6,000
5
In the meanwhile, US emerged as low base high growth market for Ajanta,
surging to US$28mn in FY17 from US$0.5mn in FY15 with 12 products in 1,000 0
the market 11 12 13 14 15 16 17 8E 9E
Y Y Y Y Y Y Y 1 1
F F F F F F F Y Y
F F
India US Africa Asia % YoY
We expect Ajanta to report 12% CAGR over FY17-20E led by slowdown in Africa as India,
Asia and US offer sustainability
India is expected to grow ahead of IPM as new product launches and price hikes in
selectportfoliooffsetlowervolumegrowth.StabilityincurrencywillaidgrowthinAsian
markets.Wepegin14%CAGRoverFY17-20Eforeachsegment
We build in 35% growth CAGR for the US segment over FY17-20E factoring in 12 filings
and 8-10 launches p.a. Our assumptions factor in continued price erosion given the
generic portfolio
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM 5
Investment Arguments
EBITDA margin to pick up in FY19E: Ajanta reported astonishing growth at operating level with margins scaling higher from 19.4% in
FY11 to 34% in FY15 largely attributed to the branded business across India, Asia and Africa, supported by institutional tender business
(43% CAGR over FY11-15). Over FY15-17, growth in Asia was flattish owing to currency devaluation in crude sensitive countries. This
coupled with 300bps jump in R&D expense led to stagnancy at operating level (40bps increase). We believe, challenging business
environmentwoulddepressmarginsinFY18E(expect29.6%EBITDAmargin,down490bpsinFY18E).However,reboundinIndia,stability
inAsiaandaswiftrampupinUStoaidmarginsat31.5% byFY19E.
High margins trajectory (FY11-15)... EM branded business led to high value margins in past
13,000 35
High margin led chronic Step by step acceleration Low base growth in the 11,000 30
India play in Africa tender business US starting FY15
n)
Rs m 9,000 25%
(
...stabilized during FY15-17... 7,000 20
5,000 15
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
...& reduced supplies to
India continues to remain ...slowdown in Africa Asia due to repatriation EM branded business EBITDA margin
high marginsegment... branded market...
issues
To be offset by growth in India, Asia & US in the medium term
7,700 35
...to rebound in FY19E post a challenging FY18E
5,800 30
n %
m3,900 25
Rs
...lower procurement
...& ramp up in the US
Price hikes and new and donor funding in 2,000 20
to result in improved
launches offset volume Africa tender business
business mix, resetting
decline in India... would be offset by
stability in Asia... 30%+ margin profile 100 15
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
India Africa Asia US EBITDA margin
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM 6
Investment Arguments
RoCE-moderating but still better than peers: Ajanta has one of the best in class RoCE credited to its high margin branded business in
India, Asia and Africa coupled with low capex and higher third party manufacturing (peak at 55.4% in FY15). However, with quality
becomingofparamountissue(USis now 10% of sales),higheropex isexpectedto moderateRoCE,butgivenlesserexposuretogeneric
marketunlikethebrandedbusinesslegacyofAjanta,weexpectittobebetterthanpeersat30%+.
RoCE-moderating but still better than peers
60
RoCE
• Launch of First-to-
RoCE-peak at 55% 50
market products in India
in FY15 for Ajanta
and EM led to high RoCE
40
• Increasing capexfor % 30
Moderated to
future growth led to
45% in FY17
lower R0CE
20
• Expect RoCEto
stabilize at 30%+ levels 10
To stabilize at 32- as capacity utilization
33% over the increases from newly
medium term commissioned Dahej 0
and Guwahati from FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
FY20 onwards
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM 7
Financial Outlook
 We compare Ajanta with peer group companies both which has near similar business model (Torrent, Alembic, Cipla, Natco) and
companies which have proven track record across parameters (Sun, Lupin, Cadila). We observe that Ajanta has been beating the
bestoftheleagueonquiteafewparametersconsistentlyforpast10yearsnow.
 What:Acombinationofgeographicalspread,segments,FTMcontribution,blockbusterslikeMetXL,Atorfit,Melcare,etcdrivehome
afavorablepoint.
 How:AjantahasshownexemplarygrowthoverFY12-17withitsEBITDAmarginssurgingto34.4%inFY17from18%inFY10.While
Indiaisachronicledhighmarginplay,thetopproductswereintroducedasearlyorevenbefore2010,implyingthatFTMdoesnot
meanforevermarketmonopoly.SothenextlogicalanswerisAfricabusiness,withcustomizedportfolioAjantarecorded27%sales
CAGR over FY11-17 in the branded segment. Key notable is the institutional tender business which contributed ~4% of total sales
in FY10 and accounted for ~24% of sales in FY16 before contracting to 20% in FY17. Higher market share through continued new
launchescoupledwithoperatingefficiencyledtophenomenalriseattheoperatinglevel.
Growth Revenue growth CAGR (%) Operating income growth CAGR (%) Net income growth CAGR (%)
Company 3 Year 5 Year 10 Year 3 Year 5 Year 10 Year 3 Year 5 Year 10 Year
Ajanta 16.7 23.3 21.9 22.7 38.1 31.4 29.4 45.7 13.2
Alembic 19.7 16.8 16.6 24.5 26.3 20.4 26.5 30.8 22.2
Torrent 12.3 17.1 16.3 11.6 24.0 19.7 12.0 26.9 18.5
Cipla 13.4 15.3 15.3 5.1 5.1 12.0 -9.3 -4.3 4.5
Sun 23.4 30.3 30.6 10.3 23.8 30.0 29.3 20.6 24.1
Lupin 9.4 13.9 18.3 13.7 25.5 30.3 11.7 24.1 29.4
Cadila 9.3 12.6 17.8 17.8 13.2 18.6 22.8 17.9 20.3
Natco 40.9 31.6 23.9 56.2 44.1 36.7 67.8 51.8 31.9
Ajanta has dominated the 5 year growth chart across parameters through its USP: Introducing first-to-market (60% branded formulations)
and targeted marketing approach (company/geography specific go to market approach)
However, post challenging FY17/18E, macroeconomic indicators hint towards stability in EM. Coupled with sustenance in India and
low base growth in the US, we expect rebound in growth from FY19E onwards
With top-line traction moderating, we expect PAT CAGR of 9% over FY17-20E
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM 8
Financial Outlook
Margins Gross Margins (%) Operating Margins (%) Net Margins (%)
Company FY11 FY14 FY17 FY11 FY14 FY17 FY11 FY14 FY17
Ajanta 63.2 71.6 78.5 17.8 30.3 32.1 10.2 19.2 26.2
Alembic 50.1 60.9 72.6 12.0 17.5 19.7 5.9 10.9 12.9
Torrent 67.1 69.3 68.6 14.4 22.0 21.6 12.8 16.4 16.3
Cipla 56.1 60.5 62.8 21.7 18.7 14.9 18.9 14.2 7.3
Sun 74.5 82.6 77.1 34.2 43.3 30.9 31.7 19.6 22.6
Lupin 60.8 65.6 70.8 18.7 25.3 24.1 15.1 16.6 14.9
Cadila 67.0 61.6 62.6 19.3 14.7 18.4 15.9 11.4 16.1
Natco 59.5 68.4 71.0 19.7 24.3 33.1 11.3 13.3 23.5
EBITDA margins to stabilize at ~29-30% for FY18E on the back of adverse currency and higher opexfor new facilities at Dahejand
Guwahati. With investments fructifying from FY19E onwards, we expect steady performance
Gross margins have been consistently climbing up, even better than peers. We expect gross margins to remain above 75% over the
next 4 years as businesses scale up
Ajanta has pricing power by virtue of first-to market strategy and has gained significant operational efficiency across each possible step.
While further squeezing looks difficult, improving business mix shall aid in margin sustenance
Prepared for [email protected] - Sent on Thursday, September 07, 2017 5:57:54 PM 9
Financial Outlook
Cash Flow Operating Cash Flow growth YoY(%) Free Cash Flow/Sales (%) Capex(% of sales)
Company FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17
Ajanta 9.9 20.2 81.0 9.8 1.9 10.4 9.3 16.1 15.5
Alembic 9.0 453.2 -59.2 7.0 20.7 4.8 9.7 9.5 15.3
Torrent 75.8 166.7 -62.1 -30.3 23.3 7.1 46.4 10.2 10.1
Cipla -46.0 112.0 -13.2 -9.7 -6.3 6.4 20.5 24.4 7.5
Sun -37.7 126.1 37.9 -14.0 13.7 12.8 23.5 12.1 13.4
Lupin 67.9 -115.7 925.3 5.6 -31.8 -3.2 4.3 35.5 13.5
Cadila -0.7 146.9 -31.7 6.1 16.0 8.9 5.0 10.3 11.0
Natco -29.9 -15.9 322.7 -3.3 -7.0 4.5 15.2 12.7 13.7 Far ahead of
Liquidity Current Ratio Net Debt/Equity Financial Leverage peers in
return ratios
Company FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17
(excluding
Ajanta 3.4 2.9 3.8 -0.1 0.0 -0.1 1.4 1.3 1.2
the gAbilify
Alembic 1.6 2.0 1.9 0.2 -0.2 0.0 1.7 1.6 1.5
effect from
Torrent 1.5 1.4 1.7 0.7 0.3 0.2 2.9 2.8 2.4
Torrent and
Cipla 2.0 1.1 2.7 0.1 0.3 0.2 1.4 1.7 1.7 Alembic in
Sun 1.8 2.3 2.4 -0.1 -0.2 -0.2 1.7 1.7 1.6 FY16)
Lupin 2.3 2.0 2.0 -0.2 0.6 0.4 1.4 1.7 2.0
Cadila 1.3 1.3 1.4 0.4 0.3 0.1 2.2 2.0 1.8
Natco 1.2 1.7 1.8 0.3 0.0 0.0 1.6 1.5 1.4
Profitability RoA(%) RoE (%) RoIC(%)
Company FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17
Ajanta 45.0 42.9 39.4 41.4 39.7 36.7 46.1 43.5 40.4
Alembic 25.4 46.5 20.9 34.1 56.2 23.1 29.4 60.7 26.6
Torrent 17.2 32.0 13.5 32.9 62.8 23.8 25.1 43.3 22.0
Cipla 12.6 10.6 6.6 11.4 12.5 8.6 14.4 12.6 8.5
Sun 19.2 16.0 17.8 21.5 16.5 20.1 37.1 29.9 30.1
Lupin 29.6 19.2 15.2 29.8 22.2 20.7 38.9 20.8 16.1
Cadila 17.9 22.6 15.6 31.1 40.3 25.1 20.4 28.9 20.6
Natco 14.0 Prepared1 f4o.3r [email protected] - Sent on1 5T.3hursday, S3e1p.7tember 07,1 22.0817 5:57:541 4P.5M 31.8 10