Branded Generics Growth And Global Expansion Will Accelerate Earnings And Market Share

Key Takeaways

• Ajanta Pharma's strong performance in Branded Generics and effective cash management strategy indicate robust future revenue and margin improvements.
  
• Strategic market expansion in Asia, Africa, and the U.S., along with new product introductions, positions Ajanta Pharma for sustained growth and increased market share.
  
• Unpredictable U.S. growth, increased expenses, and potential revenue tapering in Africa and Asia may challenge Ajanta Pharma's net margins and consistent earnings.

Catalysts

A specialty pharmaceutical formulation company, together with its subsidiaries, develops, manufactures, and markets speciality pharmaceutical finished dosages.

• Ajanta Pharma's strategic approach and focused execution in the Branded Generics sector, which showed a healthy growth of 19%, suggests a strong ongoing momentum that can increase future revenue.
  
• The company's high cash conversion ratio of 121%, stemming from improved working capital cycles, is likely to enhance future net margins by reducing financing costs and improving operational efficiency.
  
• With new product launches and market expansion in Asia and Africa, Ajanta Pharma anticipates sustaining growth in those regions, which could drive higher future earnings.
  
• Investments in expanding the sales force and new product launches in India signal potential for increased market share and revenue growth, particularly in outpacing the Indian Pharmaceutical Market (IPM).
  
• Plans for future product launches in the U.S. and ongoing regulatory activities such as filing and receiving approvals for ANDAs could lead to an increase in future revenue from the U.S. generics market, which is currently underperforming.

Ajanta Pharma Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ajanta Pharma's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.5% today to 22.6% in 3 years time.
• Analysts expect earnings to reach ₹14.2 billion (and earnings per share of ₹104.69) by about December 2027, up from ₹8.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹11.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.9x on those 2027 earnings, down from 40.1x today. This future PE is greater than the current PE for the IN Pharmaceuticals industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 2.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Ajanta Pharma Future Earnings Per Share Growth

Risks

• The company faces unpredictable growth in the U.S. Generics and U.S. Institution business due to reliance on procurement agencies and scheduling uncertainties, which may impact consistent revenue growth.
  
• Increased SG&A costs and foreign exchange losses have caused elevated other expenses, potentially squeezing net margins if they persist.
  
• Revenue growth in the Africa and Asia markets is currently strong, but management expects growth to taper, which could result in lower-than-expected revenue if not offset by other segments.
  
• Interest expenses have increased, primarily due to lease assets, and could continue to rise, affecting net earnings if not managed effectively.
  
• The gross margin improvement is driven by product mix and higher Branded Generics contributions; sustainability is uncertain as future product mix changes may negatively impact net margins.

Valuation

• The analysts have a consensus price target of ₹2973.91 for Ajanta Pharma based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3665.0, and the most bearish reporting a price target of just ₹1981.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹62.7 billion, earnings will come to ₹14.2 billion, and it would be trading on a PE ratio of 39.9x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹2807.45, the analyst's price target of ₹2973.91 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.