The stock that I am going to discuss is one of the plain vanilla pharmaceutical company. In the pharma space we have many companies with almost the similar line of products. They are mostly into manufacturing Bulk drugs, APIs etc. Ajanta Pharma is also into the business of manufacturing and marketing innovative, unique pharmaceutical formulations with a focus on providing convenience and compliance to ailing patients. However, unlike many other companies they market their products, under their own brand name, in India and across other countries. Exports constitute a major portion i.e. 55% of their sales with 45% coming from domestic market.
Now, analyzing pharmaceutical companies is in itself a tough task because it sometimes becomes difficult to measure the impact of any new drug discovery. Also in India companies have not been able to make any path breaking drug discovery. But still, many are performing well with consistent growth. Ajanta is amongst those which has grown at a healthy pace over the last 7 years and has few plans and expansion processes in place to maintain the same level of growth.
Ajanta could clock in growth of 20% in profit after tax on the back of 11% growth in total income for the year 2008-09. This was rather reasonable considering the fact that year 2008-09 was one of the toughest for all the industries across the board. There was a conscious effort on the part of the management to control costs and increase margins. The net profit after tax could have been a lot better than Rs 21.3 crore, if we do not account for the Rs 6.2 crore increase in depreciation charge over the previous years. However one cannot just simply ignore such a figure, and this is also indicative of the fact that the company has recently concluded certain expansions. The details of which are as below.
The company's manufacturing facility at Paithan, Aurangabad got approval from USFDA. The capacity expansion at this plant has been completed successfully with tablet capacity getting enhanced to 1500 million from 900 million earlier. There's another small bulk drug facility that's been set up at Waluj, Aurangabad.
There's been another positive development as informed by the management in their Annual report 2008-09. Company's subsidiary in Mauritius has wiped out all accumulated losses and has attained positive net worth. Its recorded sales growth of 66% and profit growth of 51% for the FY2008-09. Also, Mauritius subsidiary entered Philippines by setting up its subsidiary to bring special focus on this large and growing market. Consequently, Philippine company has become a subsidiary of the company.
A look on their expenditure on R&D suggests that the company spent a total of Rs 22.39 crore on the same out of which Rs 6.86 crore was recurring while Rs 15.52 crore was on capital and ANDA development cost. The total represents 7% of the total turnover of the company for FY2008-09. Considering the fact that the company is into pharma space, the expenditure is on a reasonable side. No matter of expenditure on R&D is sufficient if it does not result into much innovation and monetary success. So, it is rather difficult to parametrize as to what amount the company should be spending.
As I mentioned earlier that the company has maintained a rather good pace of growth over the years, which if averaged over the last 7 years amounts to Compounded Annual Growth Rate (CAGR) of 40% in net profit and 24% in total income. In terms of figures the company has improved its revenues from Rs 178 crore to Rs 319 crore in the last 4 years, while the bottom line has improved from Rs 7 crore to Rs 21 crore over the same period. Now, at a P/E ratio of 6-6.5 and with the company already lined up with its blue print of further expansion, one can expect a appreciation with little downside risk.
Now, analyzing pharmaceutical companies is in itself a tough task because it sometimes becomes difficult to measure the impact of any new drug discovery. Also in India companies have not been able to make any path breaking drug discovery. But still, many are performing well with consistent growth. Ajanta is amongst those which has grown at a healthy pace over the last 7 years and has few plans and expansion processes in place to maintain the same level of growth.
Ajanta could clock in growth of 20% in profit after tax on the back of 11% growth in total income for the year 2008-09. This was rather reasonable considering the fact that year 2008-09 was one of the toughest for all the industries across the board. There was a conscious effort on the part of the management to control costs and increase margins. The net profit after tax could have been a lot better than Rs 21.3 crore, if we do not account for the Rs 6.2 crore increase in depreciation charge over the previous years. However one cannot just simply ignore such a figure, and this is also indicative of the fact that the company has recently concluded certain expansions. The details of which are as below.
The company's manufacturing facility at Paithan, Aurangabad got approval from USFDA. The capacity expansion at this plant has been completed successfully with tablet capacity getting enhanced to 1500 million from 900 million earlier. There's another small bulk drug facility that's been set up at Waluj, Aurangabad.
There's been another positive development as informed by the management in their Annual report 2008-09. Company's subsidiary in Mauritius has wiped out all accumulated losses and has attained positive net worth. Its recorded sales growth of 66% and profit growth of 51% for the FY2008-09. Also, Mauritius subsidiary entered Philippines by setting up its subsidiary to bring special focus on this large and growing market. Consequently, Philippine company has become a subsidiary of the company.
A look on their expenditure on R&D suggests that the company spent a total of Rs 22.39 crore on the same out of which Rs 6.86 crore was recurring while Rs 15.52 crore was on capital and ANDA development cost. The total represents 7% of the total turnover of the company for FY2008-09. Considering the fact that the company is into pharma space, the expenditure is on a reasonable side. No matter of expenditure on R&D is sufficient if it does not result into much innovation and monetary success. So, it is rather difficult to parametrize as to what amount the company should be spending.
As I mentioned earlier that the company has maintained a rather good pace of growth over the years, which if averaged over the last 7 years amounts to Compounded Annual Growth Rate (CAGR) of 40% in net profit and 24% in total income. In terms of figures the company has improved its revenues from Rs 178 crore to Rs 319 crore in the last 4 years, while the bottom line has improved from Rs 7 crore to Rs 21 crore over the same period. Now, at a P/E ratio of 6-6.5 and with the company already lined up with its blue print of further expansion, one can expect a appreciation with little downside risk.
Note: The stocks discussed at MPS thru blog postings are neither a part of “Business Insights” issue nor a “Penny Stocks” which we reco/publish for paid subscribers. These are just stock specific views by MPS team; one MUST do the due diligence before doing any investment based on our reco.
To contact the Lead associate on this story: Ekansh Mittal in Noida (New Delhi) at Ekansh@hbjcapital.com
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