With 6,040% returns in a decade, this pharma stock is gearing up for the next leap

Happiness is the best medicine and who’d know it better than the investors of Ajanta Pharma. They are all happy as their decade-old investment of Rs 1,00,000 has now grown into Rs 61,40,242. The stock has rallied 6,040% from Rs 28 in April 2011 to the current Rs 1,727 levels in April 2021. During the same period, Ajanta Pharma’s net sales grew at a 17.9% compounded annual growth rate (CAGR) from Rs 498.83 crores in FY2011 to Rs 2,587 crore in FY2020. Whereas its bottom line or profit after tax (PAT) rose at a faster pace from a mere Rs 50.71 crore in March 2011 to Rs 467.7 crore registering a CAGR of 24.88%. Simultaneously the PAT margins expanded by 790 basis points from 10.17% in 2011 to 18.07% in 2020.

All this was driven by Ajanta Pharma’s ability to stand out amongst peers in terms of novel launches with more than 50% of the portfolio comprising of innovative first-to-market launches. In the past five years, it launched around 150 products with over ~40% in the derma and cardiac category. Even on the U.S. business front, the company maintained its strong revenue growth momentum driven by market share gains in older products.

HDFC Securities believes Ajanta Pharma is gearing up for the next leap given the high exposure in branded generics markets (70%+ revenue from India, Asia and Africa) that offers sustainable growth visibility with superior profitability. Rising scale in the US business is expected to drive margin expansion and increased contribution to the overall profits. With the conclusion of major capex cycle of over Rs 1,600 crore in the past 6 years, which was internally funded and plant opex reflecting in P&L, operating leverage benefits are expected to drive strong earnings growth of 18% CAGR, core-return on capital employed (ROCE) expansion of ~550bps to 28% and free cash flow (FCF) generation of around Rs 1,300 crore over FY21e-FY23e. The brokerage firm has set a price target of Rs 2,250 giving an upside of 30%.

The management indicated it will file 10-12 abbreviated new drug application (ANDAs) over the next 12-15 months. It received nine ANDA approvals in 9MFY21. It has launched 6-7 ANDAs in YTD and had 18 ANDAs pending approval at the end of 3QFY21.

Motilal Oswal is also upbeat on Ajanta Pharma with a price target of Rs 2,030. “Better operating leverage in U.S. generics, and outperformance in branded generics segment and better capacity utilization, given that it is done with major expansion program for the next 2-3 years,” said Tushar Manudhane, Research Analyst at Motilal Oswal.

While Ajanta Pharma is among the few midcap companies that are debt-free. Even the promoter’s stake has gone up by 3.5% to 70.34% as of December 2020 from 66.82% in March 2011.

“Improving operating leverage and moderating capex. Overall, calculated focus, healthy margins, return profile and lighter balance sheet are some key differentiators for Ajanta Pharma. The company remains a play on global branded generics space. We maintain BUY and arrive at our target price of Rs 2,250 based on 24x FY23E EPS of ~Rs 93.7,” mentioned a note released by ICICI Securities.

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