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Managing inflation alongside growth will be the prime focus of companies in the medium term. Ajanta Pharma presents itself as a company with better pricing power compared to its peers owing to its largely branded portfolio of medicines. The pace of product launches, which drove multi-bagger returns in the last decade, may be entering a ‘normalised growth’ stage. But Ajanta Pharma can still inch over IPM (Indian pharmaceutical market) growth by consolidating its diverse operations in high-growth markets. The stock offering margin protection and above industry growth potential is trading at 18.5 times, FY23 earnings making for a good buying opportunity in the present times.
Background
From 2010 to 2016, Ajanta Pharma delivered 30 per cent revenue CAGR with high operating margins (35 per cent) and the stock returned over 100x. The differentiated growth strategy was built on outsourcing API production, focus on marketing, limited therapy focus, all achieved with an abundant field force (for a company of its size).
From 2016, the company ran into mild headwinds in each segment simultaneously. Within its largest geographic segment India - GST transition, ban on fixed dosage combinations, and regulatory hurdles in key product (derma product was used as a cosmetic which had to be re-launched at lower scale) impacted growth. Currency volatility in Asia and loss of institutional sales in Africa (then accounting for 13 per cent of total sales) were the headwinds in emerging markets. The Covid period mainly impacted US business, as product inspections were delayed.
India operations
The company scaled up rankings domestically from 88th rank in 2005 to 29th rank in 2021 as per IQVIA. Ajanta Pharma’s marketing through medical representatives (MR) is pivotal in reaching out to a large portion of key medical practitioners in its four core therapies across cities (tier I to III). The MR strength of 2,800 (rationalised from 3,000) is distributed across cardiology (800), ophthalmology (800), dermatology (800). Even pain management where the company is scaling up gets 300 MRs.
With the optimised field force now fixed for the near term, the focus will shift to improving MR productivity. This focus allows for better reach against the larger domestic peers which manage a distributed therapeutic focus and international majors with narrow geographic reach.
The company identifies service gaps in therapies and hence a large portion of the portfolio of 300 products is from first to market launches in India. New products are key component of IPM growth which has aged from high 15-16 per cent growth in early 2000’s to 10-11 per cent currently. The company’s branded portfolio with new product introductions should most likely better that growth as well.
Ajanta Pharma has built a front end (MR strength and distributor network) in Asia and Africa, similar to its strategy in India. The African market comprises of branded market (across West African countries) and an institutional business supplying anti-malarial medicines to WHO and African governments.
US business
On a smaller base by adding new products, US business has grown by 30 per cent CAGR since FY17 and the company says it is profitable since FY19. US generics business needs a larger portfolio to scale up, much beyond the 30 odd products approved for Ajanta Pharma. Product approvals have been hindered by lack of inspections in Covid period. These products may see the light of day currently as inspectors resume audits but only if the unit economics of the product itself has not degraded significantly (US being a high erosion market typical to generics).
Ajanta Pharma’s commentary may be subdued with a curtailed launch plan. But the expected 10-12 launches per year can still support growth on the smaller base even overcoming the higher price erosion.
Financials and valuation
The branded business from India, Asia and Africa is now better placed with only a lingering supply chain problem in Asia, but impact from waning Covid portfolio has not been high in other markets. In the non-branded side, US generics plans have been moderated and institutional business contribution from Africa has reduced lowering the associated volatility. The company reported 16 per cent revenue growth in 9M FY22 with participation from all segments and 30 per cent EBITDA margins.
The higher input costs in Q3-FY22 are in addition to higher operating costs post Covid and increasing US generics in revenues (lower margins compared to branded products). With raw material costs including API set to increase in the short term, the industry margins can come under further pressure. But Ajanta Pharma derives close to 70 per cent of its revenues from branded generics which allows for better pricing power unlike other generic-generic manufacturers. Currently 15 per cent of domestic portfolio is under price control mechanism. Even so, the company expects to pass on maximum possible (10 per cent) price hike as early as allowed.
The company has invested in capex worth ₹1,600 crores (no debt on balance sheet) since FY16 and anticipates only maintenance capex from here on. The increasing asset utilisation should drive operational leverage while increasing MR productivity can add another lever to cost efficiency.
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