Ajanta Pharma Ltd l Management Meet Note 4th November 11

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1 Stock Code BSE Code BSE Group B Bloomberg AJP IN Reuters AJPH.BO Market Data CMP (Rs) 335 Target Price (Rs) NOT RATED Potential Upside (%) - Market Cap (Rs Cr) Wk High/Low (Rs) 368/172 Shareholding (%) Promoter 66.8 DII 0.8 FII 0 Public & others 32.4 Ajanta Pharma is a mid size formulations manufacturing pharma company having presence in Dermatology, Ophthalmology and Cardiology therapeutic segments. It has diversified into niche specialty segments such as Gastroenterology, Orthopedic and ENT therapeutics. APL has a field force of 2,000 for promotion of products in India. 60% of APL s revenues are from exports and the rest from the domestic market. Currently, company is into semi regulated markets of Latin America, Middle East, Africa, South East Asia and Central Asia. APL has received approval of two ANDAs and has filed for three more ANDAs in US. APL is trading at a TTM P/E of 7.2 times which is at a discount to its closest comparable Indoco remedies which is trading at a TTM P/E of 10.2 times despite the former commanding an annualized RoE of 24% which is higher than Indoco s 14.3%. We believe volumes will improve from FY13 onwards as the company will start earning in the US markets and further ANDA approvals will trigger valuation re-rating. Healthy Track Record: The company has grown at a CAGR of 23% in the last ten years with above industry average EBITDA margins of 19%+. The company is expected to grow at a 15%+ CAGR in the next three years. Penetration in US Market: With the ANDA approvals in place for two products, which will start making meaningful contribution from FY13. APL has also filed for 3 more ANDAs. APL further expects to file 5-6 ANDAs which is line with company's strategy to penetrate in US markets. Niche Therapeutic Segments: As APL s presence is in niche therapeutic segments of Dermatology, Cardiology and Ophthalmology with leadership position in the sub therapeutics segments and increasing presence in further niche segments viz. Gastroenterology, Ortho and ENT augurs well for the company in the long term. Afshan Sayyad afshan.sayyad@mlrsecurities.com HFY12 Ajanta Pharma Indoco Remedies Net Sales (Rs Cr) PAT (Rs Cr) EPS (Rs) EBITDA Margin 17.0% 14.1% PAT Margin 9.3% 9.2% RoE* 23.6% 14.3% RoCE* 11.7% 10.5% Mcap P/BV TTM P/E *Annualized 1 MLR Investment Research

2 Ophthalmology Segment The total size of the Ophthalmology Industry in India is Rs 721 Cr and has grown at a CAGR of 17% in the last five years. Allergen, Cipla and Sun Pharma are the top three companies in this segment. Ajanta Pharma ranks 7th in the industry in the domestic market. Its Ophthalmology sales grew faster than the industry at 23% in the last five years owing to its innovative product portfolio, leadership in many sub therapeutic segments, many first to market products, providing patient benefit and compliance Ophthalmology (Rs Cr) FY07 FY08 FY09 FY10 FY11 Revenue APL has brands in this segment out of which following 9 are the leading brands. More than 16 products were launched first time in India. Brand Sub Therapeutic Segment Generic Name IMS Ranking Olopat Anti Allergic OlopatadineEye drops 1 Diflucor Corticosteroid DifluprednateOpth. Emulsion 1 Zaha Anti-Infective AzithromycinEye drops 1 ApdropsPD Anti-Infective + Steroid Moxifloxacin0.5%+ Prednisolone1% 1 Unibrom Anti-Inflammatory BromfenacOpth. Solution 2 Nepaflam Anti-Inflammatory Nepafenac0.1% 2 Macugold Anti-Oxidant Lutein/Zeaxanthin10mg+betacarotene +CEP 3 Gate Anti-Infective GatifloxacinEye drops 4 Apdrops Anti-Infective MoxifloxacinEye drops 5 Source: Company, MLR Research 2 MLR Investment Research

3 Dermatology Segment Dermatology market in India grew at 18% in the last five years to Rs 2,658 Cr. GlaxosmithKline and Glenmark Pharma are the top two companies in the Dermatology segment. Ajanta s ranking improved to 18 in 2011 from 31 in 2007 as its revenue grew by 32% in the last five years, almost double the industry pace Dermatology (Rs Cr) FY07 FY08 FY09 FY10 FY11 Revenue APL has 34 brands in the Dermatology space with 4 leading brands and more than 10 products were launched first time in India. Brand Sub Therapeutic Segment Generic Name IMS Ranking Melacare Demelanizing agents Hydroquinone + Tretinoin+ Mometasone 1 Pacroma Topical Immunomodulators Pimecrolimus 3 Salisia KT Antidandruff shampoo Salicylic acid + Ketoconazole Sunstop Sunscreen MicronisedZinc Oxide Source: Company, MLR Research Cardiology Segment The total market value of the cardiology segment is Rs 5,146 Cr grew at a CAGR of 17% in the last five years. While Ajanta grew at a CAGR of 24% with a ranking of 31 in Cardiology (Rs Cr) FY07 FY08 FY09 FY10 FY11 Revenue 3 MLR Investment Research

4 The company has 51 brands in the cardiology segment. The leading three brands and 6 products were launched first time in India. Brand Sub Therapeutic Segment Generic Name IMS Ranking Atorfit CV StatinPlus Anti Athrosclerotic Atorvastatin+ Clopidogrel 2 Met XL Anti Hypertensive MetoprololSuccinate 3 Met XL AM Anti Hypertensive MetoprololsuccinateER+ Amlodipine 9 Rosufit Lipid Lowering Agents RosuvastatinCalcium 19 Atorfit Lipid Lowering Agents AtorvastatinCalcium 24 Source: Company New Therapeutic Segments Ajanta Pharma ventured into new therapeutic segments viz. Orthopedic, ENT and Gastroenterology. APL currently has 8 brands in the ENT segment out of which 4 are leading brands and 3 products were launched first time in India. In the Ortho & Gastro segments the company has 8 brands. Brand Sub Theraupatic Segment Generic Name ENT VertizacTabs Vertigo Cinnarizine& Dimenhydri Olopat Anti histamine OlopatadineHydrochloride Lidocam Mouth Ulcer BenzoxoniumChloride + LidocaineHcl Ortho & Gastro FeburicTabs AntigoutPreparations Febuxostat ThiofenacTabs Diclofenac+ Thiocolchicoside Diclofenac+ Thiocolchicoside DuranzoTabs AntiinflamAnti Rheumatics-M01 Diclofenac+ Codeine Phosphate Choltran Cholesterol Reducers Cholestyramine Macrogol Oral Saline Preparations Oral Saline Preparations Lafutax AntipepticUlcerants Lafutidine Ilapro AntipepticUlcerants Ilaprazole Palozac Anti Emetics Anti Nauseants Palonosetron Source: Company, MLR Research Manufacturing Capabilities Ajanta Pharma has four manufacturing facilities in India and one manufacturing facility in Mauritius. The company also has a R&D centre in Mumbai which focused on formulation development and API process development. Type Location Product Approval Formulation Paithan Tablets, Capsules and Powders US FDA, UK MHRA, WHO Geneva Chikalthana Liquid & Oral Solids WHO cgmp Chitegaon Tablets, Capsules, Ointments, Oral Jelly WHO GMP Mauritius Tablets, Capsules & Injectibles WHO GMP API Waluj Raw material for formulations R&D Kandivali Formulation & API process development Source: Company, MLR Research 4 MLR Investment Research

5 Global Presence Ajanta Pharma has presence in countries like Africa, South East Asia, Middle East, Central Asia and Latin America for its branded generics. APL has 221 registrations in Africa with 5 leading brands, 248 registrations in South East Asia with 3 leading brands, 591 registrations in Middle East with 5 leading brands, 168 registrations in Central Asia with 4 leading brands, 95 registrations in Latin America with five leading brands. After gaining expertise in semiregulated markets the company is now targeting world s largest generic market (market size of ~$34 bn) US for its next phase of growth. Ajanta Pharma received approval for two ANDAs which belongs to Anti Convulsant (Epilepsy) and Anti Depression sub therapeutic segment. We believe that business from US would be a major push for Ajanta s future growth however meaningful revenues from US would only come from FY13 & FY14. Low Capex going forward In the last three years APL has invested aggressively in its capacities. The company has invested around Rs 158 Cr to expand its formulations capacities and to integrate backward. APL has acquired a formulations facility in Aurangabad to cater to semiregulated markets. Besides quality and cost benefits the integration provides privacy to the company for new innovations. Management has indicated that the increased capacities are enough to take care of growth for next two-three years hence doesn t need any major capex for next two years and just needs to spend maintenance capex of around Rs cr. 5 MLR Investment Research

6 Financials Improvement in Profitability: Company s 60% of the revenues is from exports and the rest from the domestic market. The company is expecting to maintain this ratio going forward. The company s consolidated topline has grown at a CAGR of 21% owing to launch of innovative products which were introduced for the first time in India, while PAT grew at a faster pace with a 37% CAGR during the same period due to backward integration into API. Management guided for 15%+ CAGR growth in the next three years. Domestic Revenue Share (FY11) 7% 23% 27% 21% 22% Dermatology Opthmology Cardiology Institution Others Margin Expansion: Company s EBITDA margins improved from ~16% levels in FY08 to 19%+ range from FY09 because of the acquisition of API manufacturing facility which resulted in backward integration and thus improvement in margins at an operating level FY06 FY07 FY08 FY09 FY10 FY11 EBITDA Margin(%) PAT Margin(%) 6 MLR Investment Research

7 Superior return ratios: Company reduced its debt exposure from Rs 228 Cr in FY10 to Rs Cr in FY11 which resulted in improvement in PAT margin to 9.9% from 8.2% in FY10. Improvement in profitability led to improvement in return ratios. ROE improved to 25% in FY11 from 20% in FY10 and RoCE improved to 18% in FY11 from 14.4% in FY FY06 FY07 FY08 FY09 FY10 FY11 ROCE(%) RONW(%) Concerns APL is exposed to currency fluctuation risk as it derives more than 60% of the revenues from exports Receiving ANDA approvals is a long gestation process, as the company plans to file 5-6 ANDAs going forward increase in marketing cost might pressurize the margins 7 MLR Investment Research

8 Financials (Rs Cr) FY06 FY07 FY08 FY09 FY10 FY11 Inc / Exp Performance Gross Sales Total Income Total Expenditure PBIDT PBIT PBT PAT Cash Profit Balance Sheet Equity Paid Up Reserves and Surplus Net Worth Total Debt Capital Employed Gross Block Investments Cash and Bank balance Net Current Assets Total Current Liabilities Total Assets Cash Flow Cash Flow from Operations Cash Flow from Investing activities (11) (24) (59) (82) (43) (41) Cash Flow from Finance activities (11) (46) (60) Free Cash flow (15) (10) 23 Key Ratios Debt to Equity(x) Current Ratio(x) ROCE(%) RONW(%) PBIDTM(%) PATM(%) CPM(%) Market Cues Market Capitalization Adjusted EPS Price / Book Value (x) CEPS Equity Dividend % Enterprise Value Dividend Yield % MLR Investment Research

9 Research Analyst Afshan Sayyad Head of Research Aditya Damani Head Office 4th Floor, Surya Mahal 5, Burjorji Bharucha Marg Fort Mumbai Disclaimer : This document has been prepared by MLR Securities Pvt. Ltd. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. MLR Securities Pvt. Ltd. or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any information contained in this report. The user assumes the entire risk of any use made of this information. We and our affiliates, group companies, officers, directors, and employees may have potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MLR Securities Pvt. Ltd. and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. 9 MLR Investment Research