Buy Ajanta Pharma; target of Rs 1400: YES Securities

YES Securities' research report on Ajanta Pharma

Ajanta reported a big miss on margin at ~17% vs expectation of 24% and guidance of 24-26% in H2 FY23. Revenues were better than expected as surge in Tamiflu sales in US led to ~Rs800-850mn of additional revenues offset by weaker Africa branded sales (-13% YoY) due to currency. Other expenses included Rs370mn of forex loss and Rs160mn of additional freight expenses due to use of air freight for supplying flu products. Adjusted for these, margin would have been in 23% ball park and closer to guided range. Our thoughts on the wide gap between reported and guided margin leads us to believe the delta is explained by 1) Excess Rs800mn of US sales which was a surprise and corresponding need to incur air freight to supply flu drugs 2) Adverse mix as US share jumped to 27% of sales vs 19% in the past thereby suppressing potential gross margin improvement. Hence, we reckon probability of achieving 25% + margin in FY24 may not be far-fetched given that freight + forex loss is non-recurring in nature and some COGS benefit may be presumed after an elevated year of high input costs. We cut FY23 and FY24 forecast by 10-13% on back of margin cuts in the range of 250-400bps. Albeit, we do not think Ajanta has lost any structural ability to generate 25% margin and view last 4 quarters as an aberration. Moreover, growth expectation in domestic business (+12%) and branded exports remain intact and with the hiring of 50% MRs (to 1200) creates better visibility on faster branded exports growth in FY24/25. While near term (Q4) outlook might be suppressed, we remain confident on underlying better margin trajectory next fiscal.

Outlook

Our BUY stays based on 25x FY24 EPS with revised TP Rs1,400 (earlier Rs1,575) with scope for further gains as execution on domestic and branded exports unfolds. Additionally, our US sales do not include Chantix which would represent further upside.