Buoyed by US revenues, higher growth trajectory awaits Ajanta Pharma

Completion of capex, improving prospects among positives

A strong uptick in US revenues, traction in the Africa business, and consistent performance in the domestic market have led to brokerage upgrades for Ajanta Pharma. The stock is up 27 per cent since the start of February.

Analysts at SBICAP Research have upgraded the stock to a “buy” on improved growth visibility across businesses, sustained outperformance in India business, and structural margin expansion from leverage. They expect revenue growth to be in high teens in the FY19-22 period, driven by 25 per cent growth in the US and low-to-mid teens growth in its branded business across India, Asia and Africa.

The stock had seen a sharp correction from its highs, given the challenges during the FY16-19 period. This was because of a slowing institutional business (tender-based anti-malarial segment) and a sluggish domestic pharma market. The Street is now more confident about the company’s ability to sustain its growth trend in the coming quarters. In fact, it was better-than-expected revenues in the Africa institutional business and growth in the North American sales which led to the revenue outperformance in the December quarter. Expectations of improved ordering from institutions like Global Fund is expected to be positive for companies in the anti-malarial market. Its US business grew 43 per cent on the back of product launches, as well as volume growth, and these trends are expected to continue.

Further, with capex coming to an end, it is expected to benefit from volume expansion.  Analysts at Edelweiss Research highlight tripling of assets, led by a Rs 1,650-crore investment over FY15-20. The money was incurred on greenfield expansion in Dahej and Guwahati, as well as on a research and development facility. They expect the share of in-house manufacturing to increase to 80 per cent from the current 20 per cent as most of it is outsourced. They also expect sales to grow by 1.4 times and improve the free cash flow over FY20-23 by six times. Given the sharp rally in the stock price in recent and target prices, investors should await a correction before making an investment.