Ajanta Pharma Ltd. Rating: BUY. Pharmaceuticals. Ajanta Pharma STOCK IDEA

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1 Ajanta Pharma Ltd Pharmaceuticals Date July 8, 215 CMP (Rs.) 1594 Target (Rs.) 19 Potential Upside 19% BSE Sensex NSE Nifty 8363 Scrip Code Bloomberg AJP IN Reuters AJPH.BO BSE Group A BSE Code NSE Symbol AJANTPHARM Market Data Market Cap.(Rs. Cr) 1416 Equity Sh. Cap. (Rs Cr) Wk High/Low 1669/567 Avg. Quarterly Volume 167 Face Value (Rs.) 2 Shareholding Pattern (As on 31 st Mar 215) FII 7.6 DII 1.6 Promoters 73.8 Public & Others 17. Total 1. Comparative Price Chart Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 APL BSE HC Atul Karwa Research Analyst atulkarwa@systematixshares.com Arun Gopalan VP Research & Investments arungopalan@systematixshares.com STOCK IDEA Rating: BUY Established in 1973, Ajanta Pharma (APL) is a specialty pharmaceutical company engaged in development, manufacture and marketing of quality finished dosages in domestic and international markets. The company has 5 state-of-the art manufacturing facilities. Ajanta has extensive presence in many countries in Asia, Africa and Latin America employing over 4, people worldwide and its products sold in over 5 countries. The company has also started commercial operations in the US market in the first quarter of 213 which it plans to scale up in the coming couple of years. APL has improved its ranking in the Indian Pharmaceutical Market to 36 at the end of FY15 from 45 in FY13. With APL focusing on new therapeutic areas like pain management and increasing ANDA filings in US to 5-6 per annum we expect the company exhibit robust growth in the coming years. Export traction from emerging markets: APL has been cautiously scaling up its exports business by setting up strong franchises in Asia, Africa and Latin American markets. With a presence in more than 5 countries in the branded generic space, Ajanta has established ground presence through its field force of over 55 MRs in over 3 countries who aggressively promote its brands taking them to leadership positions. The emerging market business has been registering strong growth driven by 2+ product basket, 1445 registered brands and ~16 brands under registration. The recent weakening of the rupee will also aid margin expansion. We expect exports to emerging markets to post revenue CAGR of 17% over FY15-FY17. Focus on new launches in domestic market: Over the last five years the domestic revenues of the company have grown at CAGR of over 3%. Sale of branded formulations in India contributes to ~1/3 rd of company s revenues. The company which earlier focused on therapeutic areas of ophthalmology, dermatology and cardiology is now focusing on musco-skeletal in pain management. The market size of entire pain management area is estimated to be Rs 5-6 cr. At the end of FY15, APL had 181 products in the domestic market of which 127 were first to market. During FY15 the company launched 26 products in the domestic market of which 12 were first to market. With its focus on launching new products in th fast growing therapeutic areas and first to market products APL intends to increase R&D expenses to ~5-6% of sales to drive domestic revenue growth. We expect domestic sales to grow at CAGR of 22% over FY15-FY17 driven by branded generics. Entry into US markets to drive future growth: To tap the increasing opportunities in the regulated markets due to patent expiration of block-buster drugs, Ajanta Pharma entered the US markets, in FY13. One of its plants has been approved by the US FDA and the UK HRA. It has currently filed for 25 ANDA s of which 2 products have been approved. APL had launched 1 product on its own in May-14 (earlier marketed through tie-up with Breckenridge Pharmaceuticals) getting revenues of Rs 4 cr in FY15. It also plans to commercialize the second product by Q2FY16. The branded potential market size of ANDAs filed is ~US$1.5 billion. It plans to increase ANDA filings to 5-6 per annum as the time frame for approvals shortens post Jun-15, building a differentiated product pipeline encompassing niche opportunities. Diversified revenues across segments: Revenues of the company are evenly diversified among segments. Ophthalmology, Cardio-vascular and Dermatalogy each contribute to ~25% of the company s revenues in the domestic markets. Even in the emerging markets revenues of the company are largely diversified. No dependence on any single segment or product provides stability to the revenues. Valuation & Outlook: With 14+ product registrations in hand and another 16+ waiting for approval in various countries we expect the company would be able to maintain its growth momentum. Entry in the US markets and strong traction in domestic markets will further bolster the topline of the company. At CMP of Rs 1594 the stock is trading at PE of 28.4x of its FY17E earnings and we recommend BUY at current levels with a target of Rs 19. Particulars Sales (` Cr) EBITDA (` Cr) EBITDAM (%) PAT (` Cr) FY FY15P FY16E FY17E PATM (%) EPS (`) BVPS (`) P/E (x) P/BV (x) RoNW (%)

2 Sales & Growth Sales breakup % 35% 28% 23% 2% 16% % 35% 3% 25% 2% 15% 1% 5% % Net Sales Growth (%) Exports Domestic Domestic Sales breakup Export Sales breakup Inst. 13% Pain Mgmt 8% Ophthal 24% LatAm 1% Asia 45% Cardio 3% Derma 25% Africa 53% PAT & Margin RoNW & RoCE % 21% 23% 24% 3% 25% 2% % 11% % 1% 5% % PAT (Rs Cr) PATM (%) RoNW RoCE Source: Company, Systematix Research

3 COMPANY BACKGROUND Ajanta Pharma is a specialty pharmaceutical formulation company. Ranked 36 th in the Indian formulation market (IMS MAT Mar'15); company has leading brands in therapeutic segments of Ophthalmology, Dermatology and Cardiology. Many of company's products are first in the market place and are leading in their sub therapeutic segments. Company has a well established branded generic business in emerging markets of Asia, Africa and Latin America. It has entered in the regulated markets of USA in FY13 and is building a portfolio of ANDAs for this market. It has also received marketing authorization in 11 EU countries including UK, for one of its product. Ranking in the domestic market improved to 36 at the end of FY15 from 45 in FY13 Domestic Market: Domestic market contributes to ~35% of total revenues. Ajanta has a significant presence in the fast growing specialty therapeutic segments of cardiovascular, dermatology, ophthalmology and musculoskeletal. It has introduced many first-to-market products catering to unmet medical needs of the market. Gaining first mover advantage, many of its brands hold leadership positions in their respective sub- therapeutic segments. The company has improved its ranking in the Indian pharmaceutical market to 36 at the end of FY15 from 45 in FY13. It has a domestic field force of 25+ MR. Emerging Market: Ajanta has succeeded in establishing a strong brand presence across Africa, CIS, West Asia, South- East Asia and Latin America. Currently, emerging markets account for about ~65% of its business. Products of the company are sold in more than 5 countries. However, out of these 5 countries Ajanta has ground presence in 3 countries with a field force in excess of 55. Currently, Ajanta holds product registrations of 1,445 products and another 1,6+ products are awaiting approvals in various countries. Besides gaining market share from existing products, new product launches which are awaiting approvals will ensure sustained growth in years to come. APL has 23 ANDAs under approval stage and plans to file 5-6 ANDAs every year Regulated Market: Regulated markets are expected to be the key growth drivers of the company in the coming years. Focus of APL is on difficult to make niche products where it will have pricing power and superior margins. Currently the company has 2 products approved by USFDA of which it has launched 1 product. Additionally 23 products are under approval stage. Further the company plans to file 5-6 ANDAs in the US market every year. It has also received marketing authorization for one of its products in 11 European countries and it is awaiting approval in 3 countries. Manufacturing facilities: Ajanta Pharma operates 5 state-of-the-art manufacturing facilities; 4 within India and 1 in Mauritius. In India, 3 facilities manufacture finished formulations and 1 manufactures Active Pharmaceutical Ingredients (APIs) primarily for captive consumption. All the manufacturing plants are located in Aurangabad. Its facility at Paithan has approvals from stringent regulatory authorities such as US FDA, UK MHRA, WHO Prequalification, Brazil ANVISA, etc. All the plants are running at peak capacity and the company is outsourcing 3-35% of the products to be manufactured. APL is building 2 manufacturing facilities one for regulated markets and other for emerging markets at a total capex of Rs 4 cr To meet the increasing demand APL is building 2 separate formulations manufacturing facilities one for regulated markets and other for emerging markets. Construction work has been completed at the regulated markets facility at Dahej and regulatory filing batches are expected to be taken in Q2FY16. The construction of the 2nd facility at Savli near Vadodara has been delayed due to land issues with government and APL is looking at alternate locations which would be finalized in the next 3 months. This facility meant for domestic markets is expected to be commercialized in FY18. Total capex expenditure for these facilities would amount to ~Rs 4 cr which APL is looking to finance through internal accruals.

4 Key Management Personnel : Name & Designation Yogesh Mannalal Agrawal Managing Director Rajesh Mannalal Agrawal Jt. Managing Director Arvind K. Agrawal Brief profile Mr. Yogesh has been the MD of the company since 27 and has been handling the global business of APL. He was a Business Management Graduate from Johnson & Wales University U.S.A. He has been involved in financing, implementing and commercializing a Business Unit at Mauritius. He has been handling the company s entire operations for last 5 years Mr. Rajesh has been the Jt. MD of the company since 213. He holds a Masters in Marketing Management from Bentley College, US and has served the company is various positions since 22. Mr Agrawal is a CA and law graduate. He joined the company in 1998 and currently serves as the CFO of the company.

5 FINANCIAL PERFORMANCE PROFIT & LOSS (Rs Cr) CASH FLOW (Rs Cr) Particulars FY13 FY14 FY15P FY16E FY17E Particulars FY13 FY14 FY15P FY16E FY17E Operating Income Profit Before Tax Materials consumed Depreciation Employee cost Others Other operating expenses Change in working capital 39. (73.8) (53.8) (46.8) (45.4) EBITDA Tax expenses (33.1) (93.7) (146.2) (173.) (183.5) Depreciation Cash flow from Ops EBIT Net Capex (91.2) (134.8) (137.) (14.) (15.) Interest Other investing activities. (55.) 4. (5.) (5.) Other Income Cash flow from Invest (13.7) (187.8) (133.) (19.) (2.) Profit Before Tax Proceeds from Eq Cap..... Tax Borrowings / (Repayments) (74.8) 5.7 (61.7) (12.4) 9.1 PAT Dividends paid (1.2) (17.1) (62.1) (7.8) (87.1) Interest paid (19.5) (8.7) (5.9) (4.5) (4.4) Cash flow from finance (14.5) (2.1) (129.7) (87.7) (82.4) Net Cash Flow BALANCE SHEET (Rs Cr) RATIO ANALYSIS Particulars FY13 FY14 FY15P FY16E FY17E Particulars FY13 FY14 FY15P FY16E FY17E Share Capital EPS Reserves & Surplus BVPS Total Shareholder funds P/E Minority Interest..... P/BV Non Current Liabilities RoNW 28.5% 39.4% 36.8% 34.4% 31.3% Total borrowings RoCE 36.7% 44.9% 49.9% 45.6% 4.1% Deferred tax liabilities EV/EBITDA Other long term liabilities Growth Net Sales 37.1% 28.1% 23.3% 2.3% 16.1% SOURCES OF FUNDS EBITDA 7.% 64.3% 37.% 23.8% 18.2% Fixed Assets PAT 45.1% 18.6% 32.5% 3.3% 22.9% Investments Profitability Other Non-current Assets EBITDA Margin 24.1% 3.5% 34.1% 35.1% 35.7% PBIT Margin 2.4% 26.9% 3.6% 31.5% 31.9% Current Assets PAT Margin 12.% 19.4% 2.9% 22.6% 24.% Current Liabilities Stability Net Current Assets Debt/Equity Current Ratio TOTAL ASSETS Interest Coverage

6 DISCLOSURES/ APPENDIX I. ANALYST CERTIFICATION We, Atul Karwa & Arun Gopalan, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report, (2) No part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) have taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclosure of Interest Statement Response Analysts holding in the stock No Served as an officer, director or employee No II. ISSUER SPECIFIC REGULATORY DISCLOSURES, UNLESS SPECIFICALLY MENTIONED IN POINT NO. 9 BELOW: 1. 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