Buy Ajanta Pharma; target of Rs 1700: YES Securities

YES Securities' research report on Ajanta Pharma

Ajanta Pharma reported a largely inline quarter – slight miss on margin can be traced to lower than expected sales in branded Africa due to protests in Franco Africa. Overall, margin came at ~19% vs guided range of 20-21% coupled with revenue decline across US due to ebbing of flu season, 17% YoY growth in domestic business and sharp 26% decline in Africa branded business. Post Q3 result following a wide miss on margin we had commented Ajanta’s ability to report 24-25% margin is not structurally damaged. Considering logistic and input costs, reiterate that FY24 margin guidance of 25% does not look far-fetched as 350-400bps gain can accrue from lower input costs and freight expenses. Indeed, even in FY24, gross margin factored at ~73-74% is still at lower end of last few years as US pricing pressure would still create drag. Growth at 12% in FY23 (though tepid in Q4) is still within expected range especially as US ex of flu gains and currency is still struggling for growth. We have presumed flat US business in FY24 and ~14% growth in branded business of India & Asia/Africa (not much change from earlier estimate). Albeit, our margin assumption gets a leg down as now bump up R&D to 6% of sales vs earlier 5% based on Q4 guidance.

Outlook

We continue with our belief Ajanta remains a 10-12% growth company with high likelihood of margin reversal in current year. Roll over to FY25 estimate and retain BUY based on unchanged 25x PE on a ~10% reduced FY25 EPS forecast (on ~200bps lower OPM assumption) and revised TP Rs1,700 (earlier Rs1,400).