Flat revenue trajectory for Ajanta Pharma in 2018-19

Reduction in Africa business expected to offset higher branded generic sales

The Ajanta Pharma stock has shed over 28 per cent in May on the back of brokerage downgrades triggered by a muted 2018-19 outlook, especially in the African tender (malaria) business, and higher costs. In 2017-18, the Africa institutional anti-malaria business accounted for 20 per cent of Ajanta Pharma's sales and recorded a decline of 13 per cent year-on-year (y- o-y). The management has guided for a lower Africa tender business, considering steep price erosion and lower offtake from the Global Fund. Analysts at Anand Rathi expect revenues from this business to slide 65 per cent in 2018-19 (estimates of ~2.5 billion reduction) on lower funding for anti-malaria globally and huge price erosion due to competition.

The other worry is the effect on operating profit margins, given the increased overheads related to the commissioning of manufacturing units. The company is planning to commercialise its new plants at Dahej and Guwahati (Phase II and III). Given the process involves seeking approvals from multiple countries, final approvals could take another year. The company, thus, has to bear the additional overheads till the plants come on stream. Brokerages have revised the operating profit margins to 28.5 per cent over the next couple of years from the earlier estimate of 31 per cent. The margins for 2017-18 were down about 400 basis points y-o-y to 30.6 per cent.

While revenues from the Africa institutional business are witnessing a decline, revenue loss is expected to be offset by gains from branded generic sales in Africa, Asia and the US. The company is bullish about the prospects of its Africa generic business.

While forex currency availability and slowing economies were issues earlier, revival, led by higher crude oil prices, has brought the situation back to normal. Led by a near doubling of its Africa branded business, with 20 launches and existing base, the company's sales were up 30 per cent y-o-y in 2017-18.

Analysts at Motilal Oswal Securities say while overall growth in Africa (generic plus institutional) may moderate in 2018-19, given the higher base, the company's domestic business is expected to outperform on the back of launches and increased traction in existing products. Yet, on the whole, it is likely to end 2018-19 with flat top line growth and margin pressure. Thus, analysts believe the stock may remain rangebound.