Eris Lifesciences Ltd. Subscribe RETAIL EQUITY RESEARCH. Right prescription...

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1 IPO Note RETAIL EQUITY RESEARCH Eris Lifesciences Ltd Sensex: 31,076 Nifty: 9,578 Subscribe Price Range Rs600-Rs th June, 2017 Right prescription... Eris Lifesciences Ltd (ELL) is a developer cum manufacturer of branded pharmaceutical products in select therapeutic areas of cardiovascular, anti-diabetics, vitamins, gastroenterology and anti-infectives. Company's product portfolio comprises of 80 mother brand groups with the top 10 brands contributing as much as 75% of their total revenues. ELL is primarily focusing on lifestyle diseases encompassing both the chronic (65%) and acute segments(35%). They are currently the fastest growing company among the top 25 players in the chronic segment. It ranks first in terms of revenue growth in the chronic category during FY13-17(CAGR of 28.9%) and third in both cardiovascular and anti- Diabetics therapeutics. Doctor prescription statistics(rx) shows that ELL is one of the favourite choices of practitioners and is among top five companies in India by prescription share. The Company is consistently showing improved top and bottom lines with revenue and EBITDA growing at a CAGR of 16.5% and 32% respectively during FY Over the same period PAT grew at a CAGR of 41.7%. We believe that ELL s healthy revenue growth, high EBITDA margins and low debt bodes well for the company to accelerate growth in the coming years. At the upper price band of Rs603, ELL is available at a P/E of 34x on FY17 EPS which is reasonable given its unique business model and strong focus in Tier 1 cities and Metros. Hence, we recommend SUBSCRIBE to the issue, with a medium-to-long term perspective. Purpose of IPO At the upper price band, total issue size stands at Rs1,741cr. The issue consists of only offer for sale (OFS) wherein the promoters and existing shareholders will dilute 2.9cr shares of the company. Although ELL will not receive any proceeds from this offer yet the prime purpose of the issue is to achieve the benefits of listing shares on stock exchanges. Key Risks... Any disruption in production at Guwahati plant(~80%sales) will adversely affect the revenue. Any reduction or termination of tax incentives they are currently enjoying will affect the PAT detrimentally. Increased future competition can de stabilise the company if they fail to respond adequately. Issue Details Date of Opening 16 th June 2017 Date of Closing 20 th June 2017 Total no. of Shares offered (cr) 2.9 Post Issue No. of shares (cr) Price Band Rs Face Value Rs 1 Bid Lot Listing Lead Manager Registrars Issue size (at upper price) Multiples of 24 shares BSE & NSE Axis Capital, Citigroup Global, Credit Suisse Securities Link Intime India Rs. Cr OFS 1,741 Total Issue 1,741 Shareholding (%) Pre Issue Post Issue Promoters Others Total Size Rs.cr Issue structure Allocation % (at upper band) Employee Reservation Retail Non Institutional QIB 75 1,299 Total 100 1,741 Y.E March (Rs cr) FY15 FY16 FY17 Sales Growth (%) EBITDA Margin% PAT Adj Growth (%) EPS P/E (x) EV/EBITDA P/BV (x) Peer Valuation... Company Sales (Rs.cr) MCap(Rs.cr) EBITDA % P/E EPS FY17 FY17 FY15 FY16 FY17 FY15 FY16 FY17 Abbott India Ltd 2,903 8, Ajanta Pharma Ltd 1,932 13, ELL Lifesciences Ltd 725 8, Source: Geojit Research, Bloomberg; Note: Valuations of ELL are based on upper end of the price band

2 Company Description Incorporated in 2007, Eris Lifescience Ltd (ELL) is a Gujarat based (Ahmedabad) pharmaceutical company engaged in research, development, manufacturing and selling of branded pharmaceutical products in the chronic and acute therapy segments of IPM. The company owns and operates a manufacturing facility in Guwahati, Assam and outsources some of its manufacturing activities to outside parties (presently 20 such manufacturers). Company's product portfolio comprises of 80 mother brand groups with the top 10 brands such as Glimisave, Eritel and Rabonic contributing 75% of the total revenue. In addition ELL has also developed a strong sales team comprising of 1501 marketing representatives till date. ELL strategically use a division-based marketing approach to cater to specialist and super specialists and currently has seven different sales divisions. Source:Company Cardio and Diabetes the prime areas... ELL sells branded pharmaceutical formulations in key therapeutic areas (TAs) within the chronic and acute segments of the (IPM), such as cardiovascular, anti diabetics, vitamins, gastroenterology and anti-infectives. It is disproportionately focused on diseases in the chronic space which are linked to lifestyle related changes. Though the overall rank is outside top 25, the company is ranked 20th in the chronic category with a revenue growth CAGR of 28.9% over FY Chronic category contributed ~66% of FY17 revenues. Acute category contributing the rest of the revenue, posted a CAGR of 12% over FY The Assam manufacturing facility alone accounts for 80% of total sales while the rest are outsourced from ~20 third party manufacturers. Targets specialists in metros and Tier I towns... ELL portfolio primarily focused on areas which require the intervention of specialists and super specialists such as cardiologists, diabetologists, endocrinologists and gastroenterologists. Understandably, given that majority of super specialists reside in metros and Tier I towns, these accounted for ~77% of FY17 revenues. Further, super specialists, specialists and general physicians contributed to 23.3%, 38.3% and 38.4% of the total prescriptions for the IPM, respectively, as compared to 53.5%, 42.6% and 3.9% of total prescriptions for ELL's mother brand groups as per IMS Medical Audit and TSA MAT. In July 2016, ELL acquired 40 brands from Amay Pharma for Rs330mn, at 1.7x sales, which brought additional strength to their cardiovascular and anti-diabetics product portfolios. Prescription Share in IPM Super Specialists Specialists General Physicians Prescription Share in Eris Super Specialists Specialists General Physicians 31% 26% 4% 43% 54% 43% Source:RHP, Geojit Research

3 ELL among the top five in prescription ranks... India being a prescription driven pharmaceuticals market, most drugs are sold through specialist and super specialist prescriptions accounting for ~62% of the Indian pharma market share. As the speciality therapy sector is poised to grow, it is expected to further enhance the importance of specialists and super specialists in the pharmaceuticals value chain. Based on favourite choice of practitioners in India ELL ranks 2nd, 3rd and 5th among Cardiologists, Diabetologists and Consulting Physicians respectively. Doctors prescribing ELL products has increased to 50,282 (from 37, 842 in FY13) with a prescription share of 1.3% in FY17. Average prescription per doctor per month Cardiologists Diabetologists Consulting Physicians Sun Eris UVS Lupin Glenmark Source:RHP, Geojit Research, Note: Based on MAT, 31 March 2017 Robust financial performance... ELL has a proven track record of strong financial performance. The company's revenue and EBITDA has grown at a CAGR of 16.5% and 32% respectively over FY13-17 with a healthy average EBITDA margin of 26% on back of a change in product mix, strong growth in chronic segment and lower outsourcing post commercialisation of the Guwahati facility. During the same time its PAT grew at a CAGR of 41.7% backed by better margins and revenue growth Revenue grown at 16.5% CAGR over FY13-17 Revenue (Rs cr) 44% Growth 29% 21% 9% 7% 50% 40% 30% 20% 10% 0% % EBITDA margins healthy at 37% 19% EBITDA (Rs Cr) Margins 22% 29% 37% 40% 35% 30% 25% 20% 15% 10% 5% 0% FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 Source:RHP, Geojit Research Expending product line and capabilities through strategic acquisition... In addition to organic growth, Eris intends to continue its brand acquisitions and joint ventures. For instance, effective July 1, 2016, the company acquired trademarks in relation to 40 brands, from Amay Pharma in the cardiovascular and antidiabetics therapeutic areas. Further Eris acquired 75.48% of the outstanding equity shares of Kinedex last year, which focuses on products catering to mobility related disorders in the musculoskeletal therapeutic area. The company has also entered into a tie-up agreement dated May 1, 2017 by way of which they obtained the exclusive right to market in India certain formulations in the acute pain-analgesics therapeutic area manufactured by Pharmanza, under license from the Council of Scientific and Industrial Research Central Drug Research Institute.

4 Industry Outlook The global pharmaceuticals market is estimated to grow at a CAGR of 5.6% between calendar years 2015 and 2020 (Source: IMS Prognosis Global ). IMS has identified 21 pharmerging markets, including China, India, Brazil and Russia, based on macroeconomic metrics and pharmaceuticals market forecasts. India is one of the largest contributors to the global pharmaceuticals market growth and is ranked third among the pharmerging markets in terms of pharmaceuticals sales. According to IMS, pharmaceutical sales in pharmerging markets are expected to grow at a CAGR of ~7.6% between 2015 and 2020, which is higher than major developed countries and rest of the world, which are forecasted to grow at a CAGR of approximately 5.5% and 2.6%, respectively, between the same periods. Pharmerging markets are expected to increase their share in the global pharmaceuticals market sales growth from 25.1% in calendar year 2016 to 30.5% in calendar year 2020 (Source: IMS Prognosis Global ). India is currently one of the largest pharmaceuticals markets in the world. Between FY13 and FY17, the IPM revenues grew at a CAGR of 11.8% to reach Rs1,143.26bn driven by favourable demographic and macro-economic trends, the rising prevalence of chronic diseases, increasing insurance spending and the under-penetration of medical infrastructure and talent. In addition to a large domestic formulations market, India has also emerged as a hub for exporting finished formulations, APIs and excipients to several countries globally. Promoter and promoter group The company has 5 promoters, jointly holding 81,373,000 Equity Shares, which constitutes 59.18% of the company's paidup Equity Share capital. Some of the prominent share holders are listed below. Mr. Amit Indubhushan Bakshi is the Chairman and Managing Director of the company. He has more than 10 years experience in the pharmaceutical industry. Mr. Amit Indubhushan Bakshi has been recognized as an Entrepreneur of the Year, 2013 by Ernst & Young. From a humble beginning as a sales staff to later become the head of sales and marketing in Intas, his story is really inspirational. With the confidence he gained from his immense experience in working across different pharma companies, he left Intlas with a group of field staff to float Eris betting on super- speciality niches in chronic lifestyle illness and in less than a decade built up the company to its present state. Investors can definitely bank on the expertise and entrepreneurial spirit of him in leading the company in near future. Mr. Himanshu Jayantbhai Shah is one of the Promoters and an Executive Director of the company. He also holds a diploma in pharmacy from Gujarat University and a diploma in management from the Indira Gandhi National Open University with than 10 years experience in the pharmaceutical industry. Mr. Inderjeet Singh Negi is one of the Promoters and an Executive Director of the company. He holds a bachelor s degree in science from Hemwati Nandan Bahuguna Garhwal University, Srinagar (Garhwal) with years of experience in the pharmaceutical industry.

5 Standalone Financials Profit & Loss Account Balance Sheet Y.E March (Rs cr) FY14 FY15 FY16 FY17 Sales % change EBITDA % change Depreciation EBIT Interest Other Income PBT % change Tax Tax Rate (%) Reported PAT Adj Adj PAT % change No. of shares (mn) Adj EPS (Rs) % change Y.E March (Rs cr) FY14 FY15 FY16 FY177 Cash Accounts Receivable Inventories Other Cur. Assets Investments Gross Fixed Assets Net Fixed Assets CWIP Intangible Assets Def. Tax (Net) Other Assets Total Assets Current Liabilities Provisions Debt Funds Other Liabilities Equity Capital Reserves & Surplus Share capital sus. ac - - Shareholder s Fund Total Liabilities BVPS (Rs) Cash flow Ratios Y.E March (Rs cr) FY14 FY15 FY16 FY17 Net inc. + Depn Non-cash adj. 0 (0) 2 (1) Changes in W.C 21 (8) (8) (16) C.F.O Capital exp. (52) (13) (24) (50) Change in inv. (17) (47) (3) (77) Sale of investment (16) (33) (18) (59) Other invest.cf C.F - investing (83) (92) (44) (184) Issue of equity Issue/repay debt (2) (1) (1) (6) Dividends paid - - (83) (17) Other finance.cf (0) 1 (0) (0) C.F - Financing (2) 0 (84) (23) Chg. in cash 5 (2) 4 (8) Closing cash Y.E March FY14 FY15 FY16 FY17 Profitab. & Return EBITDA margin (%) EBIT margin (%) Net profit mgn.(%) ROE (%) ROCE (%) W.C & Liquidity Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover &Levg. Net asset T.O (x) Total asset T.O (x) Int. covge. ratio (x) , , ,012.0 Adj. debt/equity (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x)

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