Higher Taxes Eat Into Ajanta Pharma's Net

Ajanta Pharma has been witnessing huge price appreciations for the last two years. In fact, after the last quarter results, its share price has skyrocketed by more than 90%, beating all indices. The high expectations from Ajanta's Q4FY13 results may have taken a hit after the company reported a net profit of Rs 27 crore, that's a mere growth of 15%. The company’s total income, on the other hand, rose by 48% to Rs 249 crore.

Investors have picked the slow rate of growth at the net level and that explains why the stock was down by more than 7% from yesterday's closing as soon as the result was announced.

The real picture is, however, not how it looks like. The company, in fact, has reiterated that it has an earning capability and there is no slowdown at the net level. During the quarter, its earnings before interest, depreciation and tax have rose by more than 66%, which is more than its sales growth. Experienced investors would know that a boost in the operating profit will be aided by margin expansion, which is indeed the case.

Ajanta Pharma has reported a margin expansion of 310 basis points which is commendable. This is mainly due to the higher sales at the same fixed cost, also called as operating leverage.

The quarter has also seen the company reporting multi-fold growth in its other income. It rose by 14x to Rs 6.28 crore. Its finance cost rose by 31.77% to Rs 5.35 crore while the interest cover ratio remained healthy and hence there is no reason to worry. At the PBT level, the company has reported a growth of 93%. Its PBT margins have also expanded by 569 basis points.

A major drag on the net profit was the one time tax expense of Rs 15.75 crore arising out of the filing of revised returns for the earlier year. This increased the total taxes to Rs 33.29 crore. In absolute terms, the taxes rose from Rs 7.65 crore to Rs 33.29 crore which translates into 335% growth. Owing to this, the net profit was only up by 15%. If one excludes this one-time tax expense, its net profit has grown by 81.5% to Rs 42.84 crore.

We believe that there is no reason to worry for investors. The results are very strong and hence the correction in the stock should be used to increase the exposure to the stock. It is trading at the P/E ratio of 16x. The earnings momentum in the stock is not expected to fade soon as it is in the process of launching its products in the US markets. We advise readers to enter the counter at the CMP as it will create huge value in next few years.