Buy Ajanta Pharma, target price Rs 1,880: Edelweiss

Edelweiss has given a buy rating to Ajanta Pharma with a target price of Rs 1,880 based on 25 times FY22E EPS.

Ajanta Pharma is the brokerage’s top pick in the mid-cap pharma space. It is a derisked business model with: i) front-end presence across branded markets of India, Africa and Asia; and ii) a presence in the US generics market, which limits concentration risk. The Q4FY20 results demonstrate AJP’s earnings resilience despite: i) the impact from the Covid-19 lockdown; ii) Rs 150 million post-operative losses after the commissioning of Guwahati and Pithampur; and iii) a complete ranitidine write-off in the US.

Going ahead, as Ajanta Pharma concludes its capex cycle, the brokerage expects strong operating leverage due to: i) in-house manufacturing (currently outsourced); and ii) doubling of US sales, which may drive a 20% earnings CAGR and ~300bps RoCE expansion over two–three years.


The share price moved down by -0.12% from its previous close of Rs 1487.40. The last traded stock price is Rs 1485.65. Incorporated in 1979, Ajanta Pharma has a market cap of Rs 12883.25 crore.

Investment Rationale

The brokerage estimates earnings to expand at a 19% CAGR over FY20–22, led by 11% top-line CAGR and 250 bps margin expansion. The buy rating at a target price of Rs 1,880 implies 30% upside potential.

Key risks: Slowdown in ANDA approvals due to regulatory actions, inability to scale up in India branded business and currency and regulatory risks in EMs.

Financials

For the quarter ended March 31, 2020, the company has reported consolidated sales of Rs 681.96 Crore, up 4.72 % from last quarter Sales of Rs 651.21 Crore and up 32.38 % from last year's same quarter Sales of Rs 515.16 Crore. The company has reported net profit after tax of Rs 129.16 Crore in the latest quarter.

Promoter/FII Holdings

Promoters held 70.51 per cent stake in the company as of March 31, 2020, while FIIs held 8.91 per cent, DIIs 11.36 per cent and public and others 9.21 per cent.