INITIATING COVERAGE

AJANTA PHARMA Branded generic encore

India Equity Research| Pharmaceuticals

COMPANYNAME Ajanta Pharma (AJP), a ~75% branded generics play, boasts of one of the EDELWEISS 4D RATINGS best margin profiles in India pharma. Its de-risked business model with: a) Absolute Rating BUY front-end presence across branded markets of India, Africa, & Asia; and b) Rating Relative to Sector Outperform presence in the US generics market, limits concentration risk. Over FY16-19, Risk Rating Relative to Sector Medium challenges in the anti-malaria tender and domestic slowdown, which Sector Relative to Market Equalweight coincided with aggressive capex, battered the stock—corrected ~50% from peak—souring margin and ROCE. Now, we foresee bright prospects with conclusion of capex and stemming of steep decline in institutional anti- MARKET DATA (R: AJPH.BO, B: AJP IN) malaria business. Moreover, strong operating leverage led by in-house CMP : INR 1,307 manufacturing (currently outsourced) and doubling of US sales is expected Target Price : INR 1,600 52-week range (INR) : 1,211 / 825 to drive 20% earnings CAGR, ~300bps ROCE expansion and 6x free cash flow over FY20-23E. For these best-in-class return metrics, current valuations Share in issue (mn) : 87.3 M cap (INR bn/USD mn) : 98 / 1,368 (~30% discount to peers) present an attractive entry point. Initiate Avg. Daily Vol.BSE/NSE(‘000) : 284.8 coverage with ‘BUY’ and INR1,600 TP.

SHARE HOLDING PATTERN (%) Branded play leads the way; US & India to steer operating leverage Current Q2FY20 Q1FY20 AJP’s branded play imparts visibility and sustainability to earnings, while comparable Promoters * 70.5 70.5 70.5 margin across India, Africa and Asia eliminates concentration risk. We estimate low MF's, FI's & BK’s 12.3 12.3 12.3 double-digit growth momentum in the company’s branded business to sustain and FII's 7.9 7.9 7.9 additional capacities in India to drive operating leverage. We expect the hitherto modest Others 9.3 9.3 9.3 US generics business to fire up—jump 2x by FY23E—and contribute meaningfully to * Promoters pledged shares : NIL overall profitability riding launch of seven-eight products p.a. Moreover, regulatory risks (% of share in issue) are limited as two of its USFDA-approved plants have recently received EIRs. PRICE PERFORMANCE (%)

Stock over Capex end to propel FCF 6x; debt-free balance sheet cherry on cake Sensex Stock Sensex The company’s gross block tripled over FY15–20E led by ~INR16.5bn investment in green 1 month (1.5) 9.6 11.2 field expansion at Dahej & Guwahati and an R&D centre. This will: a) propel in-house 3 months 1.0 35.3 34.2 manufacturing for India to 80% (current 20%); b) boost sales 1.4x; and c) spur FCF 6x over 12 months 15.7 37.9 22.2 FY20-23. What’s commendable is that despite this capex, AJP has INR1.3bn net cash; also, related-party transactions and contingent liabilities are negligible.

Outlook and valuation: Bright prospects; initiate with ‘BUY’ We estimate earnings to clock 20% CAGR over FY20–23 led by 12% top-line CAGR and ~300bps margin expansion. We value AJP at 24x June 2021E EPS, a slight discount (for lower scale) to peers. We initiate coverage with ‘BUY/SO’ and TP of INR1,600, implying

~22% upside. Key risks include slowdown in ANDA approvals due to regulatory actions, inability to scale up in India branded business and currency & regulatory risks in EMs. Ankit Hatalkar, CFA

Financials (INR mn) +91 22 2286 3097 [email protected] Year to March FY19 FY20E FY21E FY22E (Click on image Net revenues 20,154 24,572 27,593 31,022 Aashita Jain to view video) EBITDA 5,665 6,854 8,010 9,370 +91 22 6623 3463 [email protected] Adjusted diluted EPS (INR) 43.8 51.0 63.1 75.6

Diluted P/E (x) 29.9 25.6 20.7 17.3 ROAE (%) 18.1 18.8 20.5 21.4 February 19, 2020 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Pharmaceuticals

Story in charts

Chart 1: De-risked business model, with presence across India, Africa & Asia in branded and US in generics

US 31,975 21% US India India 29% 30% 32% 24,572

Asia Asia Africa 24% Africa 23% Africa Branded 12% Institutiona Africa FY20 FY23 Institutiona l Branded Branded Non-branded l 9% 14% 6%

Chart 2: Spurt in branded and US businesses to propel margin; Estimate 23% earnings CAGR & ROCE expansion to 30% 60.0 100 88 10 3 15 48.0 RoCEs to improve 80 gradually from 23% to 11 (1) 30% over FY20-23E 60 36.0

51 (%) Earnings to grow at ~20% CAGR 24.0

(INR mn) (INR 40 over FY20-23E led by 12% 20 revenue growth and 300 bps 12.0 margin expansion

0 0.0

US

FY20 FY23

India

FY18 FY16 FY17 FY19

FY20E FY21E FY22E FY23E

Others

Other

Africa Branded

EPS Institution ROE RoCE

Chart 3: Nearing last leg of investment phase; FCF to jump 6x over FY20-23E

4,000 7.0 ~18bn FCF over FY20-23E Incurred ~16.5bn 8,000 capex over FY15-20E 3,200 5.8 6,400 2,400 4.6 4,800 1,600 3.4

(INR mn) (INR 3,200

800 2.2 1,600

0 1.0 0

FY16 FY17 FY18 FY19

FY15 FY16 FY17 FY18 FY19

FY20E FY21E FY22E FY23E

FY23E FY20E FY21E FY22E Capex Fixed asset turnover Free cash flow

Source: Company, Edelweiss research

2 Edelweiss Securities Limited Ajanta Pharma

What led to the 50% correction in AJP’s stock price? 1. Decline in anti-malaria institutional business: AJP’s anti-malaria institutional business plunged 55%, contributing mere ~9% to overall revenue from 25% two years ago. This was due to contraction in funding couple with a rise in competitive intensity.

2. Domestic slowdown and forex headwinds in Asia and Africa: GST-led de-stocking, increased competition in dermatology, longer approval timelines for fixed-dose combination drugs and slow uptake in new launches dented AJP’s domestic branded generics business. Also, strong currency headwinds in branded markets like West Asia, Central Asia and Anglo Africa in FY17 and FY18 led to pressure on branded business.

3. Aggressive investment phase coincided with business challenges: AJP entered into an aggressive investment phase, incurring ~INR16.5bn capex over FY15-20 largely on: 1) two green-field facilities in Dahej (for US and EM) & Guwahati (India); 2) expansion of R&D centre; and 3) new building for head office. During this period, AJP’s ROCE plunged from 66% to 23% and asset turnover declined from 5.2x to 1.8x.

Why BUY now? We believe all AJP’s challenges are in the base and have been adequately priced in. And, the current price does not factor in doubling of earnings led by strong product basket with first-to-market combinations, new launches and improved marketing efforts. 1. Branded play to lead the way: About 75% of AJP’s business is branded. A higher proportion of branded business imparts visibility and sustainability to earnings growth. We expect the company’s branded portfolio to grow in low double digits. 2. De-risked business model: Branded peers have a heavier reliance on domestic, leading to concentration risk. On the other hand, AJP has diversified branded generics exposure across India, Africa and Asia, thereby reducing the concentration risk in the portfolio. The company’s domestic and ex-domestic branded businesses have comparable margin profiles. 3. US generics to drive operating leverage: US generics business is still relatively modest, at USD55mn (17% of revenue), and is just breaking even. We expect it to double by FY23 and contribute meaningfully to overall profitability. 4. Erosion in institutional anti-malaria is in the base: As erosion in the institutional anti-malaria business appears in the base, AJP will recoup part of the impact by fulfilling existing orders. 5. Conclusion of capex to steer 6x FCF: AJP’s ~INR16.5bn investment has the potential to expand sales by 1.5x and FCF by 6x over FY20-23E. Also, ROCE and asset turnover are estimated to improve to 30% plus and 2.2x, respectively, in FY23. 6. Strong earnings growth at attractive valuations: We forecast earnings to compound 20% over FY20–23 led by 12% sales CAGR and ~300bps margin expansion. The stock trades at attractive valuation of 17.3 FY22E EPS, ~30% discount to peers.

Chart 4: Stock corrected 50% from peak in Sep’16 Chart 5: Earnings have bottomed out 2,440 45.0 Stock has corrected 2,091 ~50% from its peak in 30.0 Sep 16

1,742 15.0 (%) (INR) 1,393 0.0

1,044 (15.0) 695

(30.0)

17 15 16 18 19

16 17 15 15 16 17 18 18 19 19 20

- - - - -

------

FY16 FY17 FY15 FY18 FY19

Jan Jan Jan Jan Jan Jan

FY20E FY21E FY22E

Sep Sep Sep Sep Sep

May May May May May Stock price EPS growth

3 Edelweiss Securities Limited

Pharmaceuticals

Investment Rationale

AJP has a de-risked business model with presence across branded markets in India, Africa & Asia and generics in the US. The company’s branded business, which accounts for 75% of revenue, imparts visibility and sustainability to earnings growth. Over FY20-23, we estimate 20% earnings CAGR and ~300bps margin expansion spearheaded by India and the US. We liken AJP’s business model to that of its large-cap peers like Torrent Pharma (TRP) and Alkem (ALK), which have a similar branded exposure.

Chart 6: US and India – Key growth drivers

100 10 3 88 80 15 11 (1) 60 51 Earnings to grow at ~20% CAGR

(INR mn) (INR 40 over FY20-23E led by 12% revenue growth and 300 bps 20 margin expansion

0

US

FY20 FY23

India

Others

Other

Africa Branded

EPS Institution

Source: Company, Edelweiss research

Branded play to lead the way With as much as ~75% branded exposure, AJP is the best-in-class branded play among Indian pharma players. While branded peers have a heavier reliance on domestic, leading to concentration risk, AJP has a diversified branded generics exposure across India, Africa and Asia, with comparable margin profiles across geographies. Moreover, the company is known for launching first time combination products in its branded market. We expect the branded business to grow at low double-digit and contribute significantly to AJP’s overall profitability.

4 Edelweiss Securities Limited Ajanta Pharma

Chart 7: AJP has the best-branded exposure among Indian players 100.0

80.0

60.0 5 42

16 10 (%) 40.0 17 60 20.0 42 46 34 28

0.0 Ajanta Alkem Torrent Ipca Glenmark

Domestic Offshore Source: Company, Edelweiss research

India business: Focus on innovative first-to-market products AJP has a strong branded business in India (34% of overall revenue) with ~INR7.6bn revenue (10% CAGR) and 30%-plus EBITDA margin. The company’s strategy is to launch first-time products in India and market them to specialists across four key therapies—cardiology (~40% of domestic revenue), ophthalmology (~23%), dermatology (~16%) and diabetes (~2%).

As a result, it has the crucial first-mover advantage in building strong brand equity with specialists. With the new India-dedicated Guwahati facility, AJP expects to take the percentage of in-house manufacturing for India to 80% from 20% over the next two years. We estimate the company’s domestic business to register ~11% CAGR over FY20-23.

Table 1: Ajanta’s focus remains on these top therapies (INR mn) Therapies Ajanta's Rank Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) Cardio 18 2,066 2,506 2,876 3,306 3,436 13.6 40.5 Ophthal 3 1,417 1,578 1,818 1,867 2,011 9.1 23.7 Derma 13 1,225 1,328 1,251 1,315 1,355 2.5 16.0 Pain 23 313 329 367 433 496 12.2 5.8 Diabetes 25 21 116 159 202 189 73.2 2.2

Total 5,886 6,756 7,306 7,981 8,482 9.6 Source: AIOCD AWACS

Asia: An important branded territory expected to grow in low teens The largest market in the region, Philippines, is posting 12–14% CAGR. With 40 products, 15–20 pending approvals and ~250 MRs currently, AJP expects to grow 12% annually in this market riding launches and market share gains in existing products.

5 Edelweiss Securities Limited Pharmaceuticals

Africa branded business to sustain growth momentum AJP’s portfolio comprises 130 products; besides 40 approvals are pending and the MR count is 471. Management expects this segment to grow 8–10% over the next three–five years.

US generics to drive further operating leverage To gain competitive advantage in the US, AJP is gradually spreading its wings via a select product portfolio, including complex technology products. The company has invested ~INR6.5bn in the US business so far, which currently does not yield any ROCE. It currently markets 27 products in the US, has 26 ANDAs awaiting approval, aims to file 10–12 ANDAs and launch seven-eight products per year. Also, both the Dahej and Paithan plants for the US market are USFDA approved and recently received EIR in August 2019. US generics business is still relatively modest, at USD55mn (17% of revenue), and just breaking even. We estimate it to double by FY23 and contribute meaningfully to overall profitability.

Anti-malaria tender business: Worst seems over The anti-malaria institutional business currently contributes INR1.7bn revenue with a margin of ~20% against INR4.4bn revenue two years ago. With the funding from the Global Fund normalising in 2020-22, we believe the worst seems to be over for AJP. Moreover, the impact of increased competitive intensity, following Ipca’s re-entry in 2018, is already in the base. We expect this segment to decline over FY20-23 at 3% CAGR.

Chart 8: Global Fund tender allocation plummeted in 2017–19, followed by rebound in 2020–22 20 220 600

16 214 480

208 360

12 (mn)

202 240 (''000)

(USD/ bn) (USD/ 8 14.82 11.82 10.30 196 120 4 190 0

0

2012 2011 2013 2014 2015 2016 2017 2018 2014-16 2017-19 2020-22 2010 Country allocations No. of cases Deaths

Source: Global Fund

Last leg of capex; FCF to jump 6x over FY20-23E AJP’s gross block trebled over FY15–20E led by ~INR16.5bn investment in: i) two greenfield facilities in Dahej (for US and EMs) and Guwahati (India);ii) expansion of the R&D centre; and iii) a new building for the head office.

6 Edelweiss Securities Limited Ajanta Pharma

Table 2: Facilities Facility Dosage forms Markets Dahej, Gujarat Tablets, capsules, powder & jelly USFDA approved Paithan, Aurangabad Tablets, capsules & dry powder USFDA approved Guwahati, Assam Tablets, ointments & jelly India & EMs Chikalthana, Aurangabad Liquid & capsules India & EMs Chitegaon, Aurangabad Tablets, capsules, powder & jelly India & EMs Goodlands, Mauritius Tablets & capsules India & EMs Waluj, Ahmedabad API Source: Company, Edelweiss research

Now, AJP is nearing the last leg of its investment phase. We expect it to incur INR2bn in FY21 and INR1bn each in FY22 and FY23. As the new facilities come on stream, this incrementalinvestment has the potential to generate ~INR30bn in annual sales at peak. The company expects to generate ~INR18bn in free cash over the next four years and expand EBITDA margin ~300bps to 30%. Besides, we estimate ROCE and asset turnover to gradually improve to 30%and 2.2x, respectively, by FY23. The company has barely raised any debt and all the investments have been done via internal accruals.

Chart 9: Nearing last leg of investment phase; asset turnover to improve and ROCE to jump to 30% 60.0 4,000 7.0 Incurred ~16.5bn apex over FY15-20E 48.0 RoCEs to improve 3,200 5.8 gradually from 23% to 30% over FY20-23E

2,400 4.6 36.0

(%) (x)

1,600 3.4 24.0 (INR mn) (INR

800 2.2 12.0

0 1.0 0.0

FY15 FY16 FY17 FY18 FY19

FY20E FY21E FY22E FY23E

FY16 FY17 FY18 FY19

FY20E FY21E FY22E FY23E Capex Fixed asset turnover ROE RoCE

Source: Company, Edelweiss research

7 Edelweiss Securities Limited Pharmaceuticals

Chart 10: EBITDA margin to improve 300bps to 30%; INR18bn free cash flow estimated over FY20–23 39 40.0 ~18bn FCF over FY20-23E EBITDA margin to 8,000 37.0 increase with growth in branded and US 6,400 34 businesses 34.0 4,800

34 31 (%) 31.0 Increased 30 30

(INR mn) (INR 3,200 investments and 29 domestic slowdown 28 27 28.0 1,600 impacted margins 0

25.0

FY16 FY17 FY18 FY19

FY20E FY21E FY22E FY23E

FY15 FY16 FY17 FY18 FY19

FY20E FY21E FY22E FY23E EBITDA margin Free cash flow

Source: Company, Edelweiss research

8 Edelweiss Securities Limited Ajanta Pharma

Financial Outlook

Spurt in branded and US business to propel margins As much as~75% of the company’s revenue comes from branded business in India, Africa and Asia while US generics contributes ~17%. We estimate contribution of the US business to increase to 24% over FY20-23. On the other hand, considering challenges persisting in the anti-malaria business and lumpiness of the business, we estimate this segment to contribute low single digit percentage to overall revenue. The company expects its branded business in India, Asia and Africa markets (~70% of overall revenue) to grow at 10-12% over FY20-23E and US markets to clock ~25% CAGR partly led by seven-eight product launches each year.

Chart 11: Revenues to expand at 12% CAGR over FY20–23E

US 31,975 21% US India India 29% 30% 32% 24,572

Asia Asia Africa 24% Africa 23% Africa Branded 12% Institutiona Africa FY20 FY23 Institutiona l Branded Branded Non-branded l 9% 14% 6% Source: Company, Edelweiss research

During the last five years, gross margins increased due to improvement in product mix. However, with increased contribution from the US, where gross margins are lower, it is expected to remain at 75% levels. Over the same period, EBITDA margin plunged ~1100bps due to increased R&D and other expenses. We believe margins have bottomed out and with growth in branded business and US markets, we estimate EBITDA margin to grow~300bps to 30% in FY23.

Chart 12: EBITDA and PAT margin to improve significantly with growth in branded and US business 40.0 39 30.0 EBITDA margin to 37.0 increase with growth PAT margin 27.0 26 in branded and US bottomed out 34 businesses 24 34.0 24.0 25 22 34 31 (%) 21 30 23 30 (%) 31.0 Increased 21.0 20 investments and 29 19 18 domestic slowdown 28 27 28.0 impacted margins 18.0

25.0 15.0

FY15 FY16 FY17 FY18 FY19

FY15 FY17 FY19 FY16 FY18

FY20E FY21E FY22E FY23E

FY20E FY21E FY22E FY23E EBITDA margin PAT margin

Source:Company, Edelweiss research

9 Edelweiss Securities Limited Pharmaceuticals

Table 3: P&L snapshot FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E Revenue 100 100 100 100 100 100 100 100 100 COGS 25 24 21 19 19 25 26 25 25 Gross Margin 75 76 79 81 81 75 75 75 75 Employee expenses 14 15 15 18 21 18 17 16 16 R&D expenses 5 6 8 9 9 6 6 7 7 Other expenses 23 22 23 24 24 23 23 22 22 EBITDA 39 34 34 31 28 27 29 30 30 Source: Company, Edelweiss research

Table 4: P&L comparison with peers Ajanta Ipca Torrent Glenmark Natco Revenue 100 100 100 100 100 COGS 19 33 29 34 17 Gross Margin 81 67 71 66 83 Employee expenses 21 21 18 21 17 R&D expenses 9 2 7 13 5 Other expenses 24 26 20 16 23 EBITDA 28 18 26 16 38 Source: Company, Edelweiss research

Working capital to improve with normalisation in the US

AJP’s working capital days have gone up from 97days in FY15 to 230 days in FY19 due to 1) US business, which has a longer cash conversion cycle due to higher inventory build-up and a higher gross-to-net (on account being a new player in the market); and 2) decline in anti- malaria business, which has a low working capital requirement. Working capital as a % of sales has gone up from 21% in FY15 to 33% in FY19. The company expects it to come down to 29% as US inventory levels and gross to net ratio normalizes with the ramp in business.

Table 5: Expansion of core working capital (INR mn) FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E Trade Receivable 2,588 3,724 3,232 4,598 4,595 6,625 5,645 8,128 7,379 Inventories 1,590 2,046 2,110 3,506 4,357 6,590 5,145 6,882 5,233 Trade payables 1,091 1,456 1,782 2,496 2,252 5,274 3,331 5,415 3,065 Core WC 3,087 4,314 3,560 5,608 6,700 7,941 7,459 9,595 9,547 Add: Loans/Adv & Others 594 662 649 1,377 1,208 1,208 1,208 1,208 1,208 Less: Provisions 643 114 141 288 250 250 250 250 250 Less: Others liab 583 567 544 677 942 1,105 1,105 1,105 1,105 WC 2,455 4,295 3,524 6,021 6,717 7,794 7,312 9,448 9,400 Source: Company, Edelweiss research

10 Edelweiss Securities Limited Ajanta Pharma

Table 6: Working capital as a % of sales has gone up from 21% in FY15 to 33% in FY19; expects to come down to 27% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E Trade receivable days 57 66 63 67 82 82 80 80 80 Inventory days 157 160 183 252 374 320 300 275 250 Payable days 117 112 143 192 226 220 220 200 175 Cash conversion cycle 97 114 104 127 230 182 160 155 155 Working capital 3,087 4,314 3,560 5,608 6,700 7,941 7,459 9,595 9,547 Working capital to sales (%) 21.4 25.0 18.4 27.2 33.2 32.3 27.0 30.9 27.3 Source: Company, Edelweiss research

Table 7: Net cash (INR mn) FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E Gross Debt 512 611 10 10 340 410 410 410 410 Cash 1,562 1,202 2,515 2,755 1,653 1,551 4,551 6,681 11,807 Net debt (1,051) (590) (2,505) (2,745) (1,313) (1,141) (4,141) (6,271) (11,397) Source: Company, Edelweiss research

Table 8: AJP to generate INR18bn free cash flow over FY20-23E (INR mn) FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E Operating cash flow exc. working capital changes 4,541 5,845 5,357 4,660 5,605 6,768 7,913 9,157 Less: Change in working capital 1,244 (259) 2,543 903 1,077 (482) 2,136 (48) Interest paid 36 11 3 9 101 105 106 107 Operating cash flow (excluding int) 3,261 6,093 2,811 3,748 4,426 7,144 5,671 9,098 Capex 2,975 2,959 2,626 3,423 3,000 2,000 1,000 1,000 Free cash flow 286 3,134 185 324 1,426 5,144 4,671 8,098 Source: Company, Edelweiss research

11 Edelweiss Securities Limited Pharmaceuticals

Valuation: Branded play at an attractive price

We estimate AJP's earnings to post 20% CAGR over FY20–23 led by 12% revenue CAGR and ~300bps margin expansion to 30%, spearheaded by India and the US. This is expected to lead to ~300bps ROCE expansion to 30%. Despite these industry-leading metrics, AJP’s stock trades at 17.3x FY22E EPS, ~30% discount to peers. The table below illustrates that TRP, ALK and Ipca, which also have significant contribution from branded business, but lower ROCE profiles (~20%), command ~30% higher valuations.

Table 9: AJP — one of the most undervalued among peers Mcap Branded (%) PE (x) Margins (%) (INR bn) Total Domestic Offshore FY21E FY22E EBITDA RoCE Ajanta 116 76.0 34.0 42.0 20.7 17.3 29.8 29.1 Ipca 177 56.0 46.0 10.0 21.9 18.3 24.3 23.8 Alkem 313 65.0 60.0 5.0 24.5 21.3 19.0 18.0 Torrent 380 58.0 42.0 16.0 33.4 27.8 27.7 20.3 Average 63.8 45.5 18.3 27.0 22.8 discount (%) (23.4) (24.1) Average peer set only 59.7 49.3 10.3 27.9 23.5 discount (%) (25.7) (26.5) Note: Geography breakup is based on historical data on FY19 numbers. Margins are FY22E; Source: Company, Edelweiss research

TRP stands out as the most expensive stock in AJP’s peer set—a group of pharma companies with a portfolio of branded generics across geographies. We appreciate that TRP has a more chronic portfolio and thus commands a higher multiple versus ALK and Ipca, which are more acute. AJP sits plum between the two.

Chart 13: AJP trades at attractive valuations versus peers 35.0

TORRENT 31.0

27.0

23.0 IPCA FY22 P/E (x) P/E FY22 ALKEM 19.0 AJANTA

15.0 10.0 15.0 20.0 25.0 30.0 35.0 FY22 RoCE (%)

Source: Bloomberg, Edelweiss research

12 Edelweiss Securities Limited Ajanta Pharma

We thus value AJP at 24x June 2021E EPS, at a slight discount (for lower scale) to large-cap peers, which we believe are fairly valued.

Table 10: Valuing AJP at 24x June 2021E EPS Mcap (INR bn) EPS (June 2021E) 66.7 Valuation multiple (x) 24.0 Target price (INR) 1,600

Current market price (INR) 1,307 Potential upside (%) 22.4 Source: Bloomberg, Edelweiss research

Table 11: Pharma coverage valuation table Mcap CMP Target Reco Sales (INR mn) EBITDA (INR mn) EPS (INR) P/E (x) EV/ EBITDA (x) (USD bn) INR mn INR Price FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY22E FY20E FY21E FY22E Sun Pharma 404 380 REDUCE 13.57 3,21,810 3,46,637 69,486 78,059 16.2 18.6 24.9 21.7 18.9 14.3 11.9 10.0 Dr. Reddy's 3,278 3,650 BUY 7.59 1,73,773 1,82,945 43,443 46,285 128.0 177.0 25.6 18.5 15.9 12.8 11.3 9.6 Torrent Pharma 2,242 1,850 HOLD 5.30 79,008 85,139 21,463 23,596 54.6 67.1 41.1 33.4 27.8 19.8 17.7 15.4 Biocon 306 225 REDUCE 5.13 66,746 78,539 17,772 21,854 7.2 9.2 42.7 33.3 29.1 20.7 16.9 14.7 Cipla 448 560 BUY 5.03 1,72,091 1,84,777 35,756 38,183 23.7 26.5 18.9 16.9 15.0 10.6 9.1 7.7 Aurobindo 602 530 HOLD 4.92 2,28,019 2,81,014 47,162 56,109 47.4 52.3 12.7 11.5 10.4 8.5 7.3 6.6 Lupin 709 900 BUY 4.47 1,60,850 1,81,909 26,768 34,053 26.8 37.9 26.4 18.7 13.8 13.9 10.0 8.6 Cadila 276 315 BUY 3.95 1,37,595 1,46,900 26,749 28,656 13.5 14.8 20.5 18.6 16.2 13.4 12.1 10.5 Large Cap ####### ####### 317 403 26.5 21.7 18.6 14.2 12.0 10.3 Ipca 1,403 1,340 HOLD 2.47 42,456 48,294 8,922 11,448 49.6 64.0 28.3 21.9 18.3 19.8 15.1 12.4 Ajanta 1,307 1,600 BUY 1.62 24,572 27,593 6,854 8,010 51.0 63.1 25.6 20.7 17.3 16.7 13.9 11.7 Natco 645 660 HOLD 1.57 19,492 21,007 6,403 8,011 30.1 37.1 21.4 17.4 14.3 17.5 13.0 10.1 Glenmark 318 345 HOLD 1.25 1,06,570 1,17,912 15,429 17,216 22.4 24.5 14.2 13.0 12.3 7.7 7.4 7.0 Mid Cap 37,607 44,685 22 24 23.5 19.0 16.1 13.9 11.6 9.9 Overall - Generics 26.2 21.3 18.2 14.5 12.1 10.4 Divi's Labs 2,186 1,855 HOLD 8.1 54,804 62,494 18,751 22,131 51.6 62.4 42.3 35.0 28.6 30.2 25.2 19.6 Overall ####### ####### 340 428 28.2 23.0 19.5 16.5 13.8 11.5 Source: Bloomberg, Edelweiss research

13 Edelweiss Securities Limited Pharmaceuticals

Key risks to our call

Slowdown in ANDA approvals due to regulatory actions The increase in frequency of US FDA inspections poses a risk to all companies supplying to the US. Any inspection with an unfavourable result could lead to a delay in approvals for AJP. As of today, the company has 26 ANDAs pending approval.

Inability to scale up in India branded Ajanta is the third largest in ophthalmology in the IPM. There’s room for growth in cardio- diabetes, pain and dermatology therapies, where AJP ranks low. Inability to scale up the India branded space, particularly in the latter three therapies may pose a risk to our 12% branded domestic growth forecast for AJP. Further elongation of approval timelines in India also poses a risk.

Currency volatility and regulatory challenges in EMs In the past, currency volatility in the Asian and African economies, particularly in Anglo Africa, West Asia and Central Asia in FY17 and FY18 led to pressure in the branded business. Any future aberrations in the EM currencies could increase risks to our call. Also, regulatory delays in EMs, particularly in the Philippines, which is AJP’s single largest market after India and the US, could pose significant risk to our earnings forecast.

14 Edelweiss Securities Limited Ajanta Pharma

Company Description

AJP, a Mumbai-based mid-sized specialty pharmaceuticals company, is a play on branded generics with strong focus on branded formulation business in India and other EMs. India contributes ~30% to overall revenue with focus on ophthalmology, dermatology, pain management and cardiology segments. In Asia and Africa, the company has a strong branded presence with front-ends in markets where it is present and also participates in the anti-malaria tender business in Africa. It has also invested in the US market, which is expected to generate meaningful revenue over the next few years. Management has ramped up filings and has several pending approvals. Revenue, EBITDA and PAT have posted strong growth in recent years driven by sharpened focus on branded formulation and vertical integration in API/formulation.

History Mumbai-based AJP—set up in 1973 by three brothers, Mr. Mannalal Agrawal, Mr. Purushottam Agrawal and Mr. Madhusudan Agrawal—had been incurring losses for many years. In 2000, the company went public by listing shares on BSE and NSE, but evinced negligible investor interest. It was reeling under a debt of INR1.3bn.

It took the second generation of Agrawals—Mr. Rajesh and his older brother Mr. Yogesh Agrawal (Managing Directors) — to change AJP’s fortunesfrom being mired in debt to 65x spurt in market value. The Agrawals brought about this turnaround by changing their strategy and focusing only on specialty generic drugs, identifying the right segments, products & markets and taking the risk of borrowing further to invest in R&D.

While acknowledging lack of financial and operational prowess to compete with big players, they focused on launching first-of-its kind generics. By 2014-15, while AJP’s RoE stood at an impressive 43%, ROCE was at 52%. It reported one of the highest EBITDA margins among listed peers in the pharmaceutical sector at 34%.

AJP is a specialty pharmaceutical company which develops, manufactures and markets quality finished dosages. The business includes branded generics in EMs of Asia & Africa, generics in developed markets of US and institution sales.

In 2002, the company entered the domestic prescription market with a specialty segment field force. In 2007, AJP expanded its R&D facility with independent premises in Kandivali (Mumbai). It also got USFDA approval for its Paithan manufacturing facility in 2008. In 2009, it started an API plant in Waluj (Aurangabad) for captive use. During the year, AJP bought a manufacturing facility at Chitegaon in Aurangabad (Maharashtra) to fuel the company's growth.

Also, during the year, it became the first generic company in the world to bag WHO Geneva pre-qualification for anti-malarial drug. In 2010, the company entered Philippines with a unique product portfolio via Ajanta Pharma Philippines. In 2012, AJP was ranked among the Top 10 pharmaceutical companies in Franco Africa and is currently the third largest in this region.

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India branded business AJP has a strong branded business in India (34% of overall revenue) with ~INR7.6bn revenue logging 10% CAGR over last five years, with 30% plus EBITDA margin.

Chart 14: India business to grow at 11% CAGR 12,500

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AJP has consistently grown faster than the Indian Pharmaceutical Market (IPM) due to its focus on chronic therapies and first-to-market combinations. About 60% of its portfolio is chronic, which is posting 11% CAGR, faster than IPM’s 8%.

Table 12: 62% of portfolio is chronic, which is posting 11% CAGR Mar-16 Mar-17 Mar-18 Mar-19 Share (%) CAGR (%) Acute 2,387 2,649 2,903 3,083 38.0 8.8 Chronic 3,719 4,320 4,523 5,035 62.0 10.5 Total 6,107 6,968 7,426 8,118 Source: AIOCD AWACS

The company has MR strength of ~3,000 and their productivity is INR2.3mn; the company expects to improve it 50% in the next three years.

Table 13: Increase in MR productivity; potential to increase 50% in next three years FY15 FY16 FY17 FY18 FY19 Revenue (INR mn) 4,800 5,480 6,140 6,318 6,919 No. of MRs 3,000 3,000 3,000 3,000 3,000 MR productivity 1.6 1.8 2.0 2.1 2.3 Source: Company, Edelweiss research

16 Edelweiss Securities Limited Ajanta Pharma

Ophthalmology (~23% of domestic revenue): With a portfolio of 84 products, AJP is ranked No. 3 in the ophthalmology market, as per AIOCD AWACS September 2019 data. It has ~8% share in the ~INR26bn market with 85% specialist prescription. Top brands are used to mainly treat dry eye and inflammation. Key brands include largest brand Soft Drops, where Ajanta has been a market laggard over the past 5 years, and Olopat, where it leads the market. Maxmoist, used for post-operative corneal healing and for symptoms of dry is the fastest growing brand, at 20%+. The company has ~1000 MRs for this therapy. Management expects to grow this therapy at ~10%, i.e., 2-3% higher than industry growth.

Table 14: Ajanta is No. 3 in ophthalmology therapy Companies Rank Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) Sun Pharma 1 2,460 2,482 2,746 3,017 7.0 11.8 Novartis 2 2,278 2,522 2,531 2,673 5.5 10.4 Ajanta 3 1,578 1,818 1,867 2,011 8.4 7.8 Cipla 4 1,784 1,847 1,908 1,953 3.1 7.6 Micro Labs 5 1,357 1,322 1,366 1,547 4.5 6.0 Total Ophthal 20,705 21,972 23,534 25,617 7.4 Source: AIOCD AWACS

Table 15: AJP’s major ophthalmology brands versus competition Brands Company Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) CARBOXY METHYL CELLULOSE 3,138 3,285 3,328 3,640 3,854 5.3 REFRESH TEARS Allergan 733 691 726 936 1,041 9.2 27 LUBREX Micro Labs 325 356 374 363 410 6.0 11 REFRESH LIQUIGEL Allergan 295 285 316 344 361 5.2 9 TEARDROPS Sun Pharma 179 177 196 212 222 5.6 6 OPTIVE Allergan 199 167 161 171 181 -2.3 5 SOFT DROPS Ajanta 170 181 182 153 164 -0.9 4 OLOPATADINE EYE DROPS 389 442 424 408 410 1.3 OLOPAT Ajanta 100 104 111 112 123 5.2 30.6 PATADAY Alcon 103 109 104 102 105 0.6 25.7 WINOLAP Sun Pharma 75 90 82 87 85 3.3 20.5 HYALURONIC ACID - OPTHALMIC 116 151 216 386 501 44.1 OPSION HA Allergan - - 33 138 166 - 30.9 MAXMOIST Ajanta 51 75 95 103 111 21.6 22.8 TREHALUBE Micro Labs - - 6 34 54 - 11.5 LOTEPREDNOL + MOXIFLOXACIN 157 192 205 235 269 14.4 APDROPS LP Ajanta 52 63 69 77 83 12.8 31 MOXIGRAM LX Micro Labs 37 38 36 37 46 5.2 18 MAHAFLOX LP Mankind 23 27 31 35 37 12.9 14 Source: AIOCD AWACS

Cardiology (~40% of domestic revenue): Cardiology is one of the fastest growing therapies for the company. It caters to 35% of the total ~INR176bn cardiology market and has 75-80% coverage among specialist doctors. Ajanta’s cardio portfolio comprises statins (~35%), which have grown at 10% 5-yr CAGR, led by rosuvastatin and combinations; Cardio-essentials, mainly metoprolol, comprise ~45% of Cardio portfolio; Sartans (~10%), have grown at ~35% 5-yr CAGR, led by telmisartan and recent launch. Ajanta’s Cardio portfolio currently has 80+

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brands, 70% of which were first-time launches in the market. Key brands include MET XL, its largest molecule, which has been growing faster than the market at 14% 5-yr CAGR. Other brands include Atorfit CV, Rosufit CV and Cinod. The company has ~750-800 MRs for this therapy. Management expects this to be the fastest growing therapy.

Table 16: AJP is No. 18 in cardio therapy Companies Rank Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) Sun Pharma 1 17,136 17,758 18,861 20,088 5.4 11.4 Torrent 2 11,764 11,368 11,965 13,189 3.9 7.5 Lupin 3 8,720 9,223 11,017 12,667 13.3 7.2 USV 4 6,075 6,882 7,823 8,729 12.8 5.0 Glenmark 5 5,482 6,330 7,441 8,656 16.4 4.9 Ajanta 18 2,506 2,876 3,306 3,436 11.1 2.0 Total Cadiac 1,34,747 1,42,162 1,57,379 1,75,773 9.3

Table 17: Ajanta Cardio portfolio by category Categories Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Statins 1,273 1,497 1,618 1,681 1,880 10.2 Atorvastatin and combinations 962 1,055 1,106 1,119 1,103 3.5 Rosuvastatin and combinations 753 934 1,035 1,096 1,300 14.6 Sartans 115 166 294 432 407 37.3 Telmisartan and combinations 92 134 242 372 333 38.1 Olmesartan and combinations 23 32 31 26 19 -4.4 Cardio-essentials 471 1,069 1,479 1,912 2,530 52.2 Metoprolol 449 891 987 1,152 1,706 39.6 Source: AIOCD AWACS Table 18: AJP’s major Cardio brands versus competition Brands Company Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) METOPROLOL 4,745 4,876 4,925 5,325 5,585 4.2 MET XL Ajanta 507 767 860 1,002 1,066 20.4 19.1 PROLOMET XL Sun Pharma 602 689 755 865 889 10.2 16.0 METOLAR Cipla 531 558 552 588 618 3.8 11.1 ATORVASTATIN + CLOPIDOGREL 1,150 1,558 1,773 2,032 2,344 19.5 CLOPITORVA Cadila 472 563 552 528 590 5.7 26 ATORFIT CV Ajanta 442 491 523 533 523 4.3 22 AZTOLET Unimed 17 96 149 239 267 100.0 11 CILNIDIPINE 1,627 2,212 2,653 3,080 3,788 23.5 CILACAR JB Chemicals 680 899 1,048 1,227 1,607 24.0 42.9 LNBLOC Eris 157 219 242 262 328 20.2 8.6 NEXOVAS DS Pharma 125 156 196 228 293 23.9 7.8 CINOD Ajanta - - 164 222 247 - 6.4 ROSUVASTATIN + CLOPIDOGREL 384 637 812 1,025 1,262 34.7 NOVASTAT CV Lupin 132 233 259 294 362 28.7 28.6 ROSUFIT CV Ajanta 143 174 175 169 189 7.3 15.1 ROSUVAS CV Ranbaxy 32 68 112 143 175 52.6 13.8 ASPIRIN + ROSUVASTATIN + CLOPIDOGREL 157 562 1,201 1,909 2,598 101.8 ROZAGOLD Unimed - 57 167 299 367 - 14 ROSUMAC GOLD Macleod's 42 129 210 270 332 67.2 13 ROSUTOR GOLD Ajanta - 33 162 206 211 - 8 Source: AIOCD AWACS

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Dermatology (~16% of domestic revenue): In dermatology, Ajanta is ranked No. 13 and focuses primarily on cosmetic dermatology, which is 100% prescription based and has a market size of ~INR30-35bn (of total INR95bn derma market). Its key brands include Melacare and Aquasoft, both of which have been growing faster than rivals. The company has ~750-800 MRs for this therapy. Going forward, it is expected to grow 7-8% as its largest brand Melacare has recently stabilised post a sharp decline.

Table 19: AJP is ranked 13th in Derma therapy Companies Rank Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) GSK 1 5,544 7,491 8,411 9,325 18.9 9.9 Glenmark 2 7,330 7,665 8,438 8,803 6.3 9.3 Sun Pharma 3 4,647 6,000 6,550 6,783 13.4 7.2 Abbott 4 4,963 4,912 5,279 5,653 4.4 6.0 Cadila 5 3,370 3,644 3,650 4,027 6.1 4.3 Ajanta 13 1,328 1,251 1,315 1,355 0.7 1.4 Total Derma 70,431 78,401 87,486 94,554 10.3 Source: AIOCD AWACS

Table 20: AJP’s major Derma brand versus competition Brands Company Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) HYDROQUINONE + MOMETASONE + TRETINOIN 3,046 3,103 3,164 3,015 2,948 -0.8 SKINLITE Cadila 1,821 1,870 1,980 1,750 1,681 -2.0 56 MELACARE Ajanta 490 494 464 499 496 0.3 17

GLYCEROL 119 175 188 221 248 20.1 SECALIA Micro Labs 55 73 65 64 73 7.3 28.5 AQUASOFT Ajanta 39 45 43 47 47 4.7 18.4 Source: AIOCD AWACS

Pain Management (~6% of domestic revenue): In pain management, AJP is ranked No. 23 and focuses primarily on specialised pain products like those in ortho. It addresses a market size of ~INR10bn (of total ~INR95bn pain management market) and is growing at 13% against 7% therapy growth. It currently has 28 brands, with Feburic being the key brand. We estimate this therapy for AJP to grow at 13-14%.

Table 21: AJP is ranked 23rd in pain management therapy Companies Rank Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) Sun Pharma 1 6,697 6,691 6,944 7,428 3.5 7.8 Ipca 2 4,160 4,202 5,150 5,722 11.2 6.0 Cadila 3 4,149 4,706 4,932 5,588 10.4 5.9 Abbott 4 2,830 2,992 3,319 3,806 10.4 4.0 Alkem 5 3,013 2,978 3,161 3,721 7.3 3.9 Ajanta 23 329 367 433 496 14.6 0.5 Total Pain 78,101 80,866 86,967 95,494 6.9 Source: AIOCD AWACS

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Table 22: AJP’s major pain brand versus competition Brands Company Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) FEBUXOSTAT 1,264 1,562 1,858 2,192 2,529 18.9 FEBUTAZ Sun Pharma 274 322 379 455 501 16.3 19.9 FEBUSTAT Abbott 159 227 296 382 458 30.3 17.9 FEBURIC Ajanta 172 207 258 322 351 19.5 13.7 Source: AIOCD AWACS

Diabetes (~2% of domestic revenue): In diabetes, AJP started as a small player in the sulfonylureas category. In 2015, the company also entered the DPP4 category along with Glenmark’s launch of teneligliptin. AJP’s teneligliptin and combinations are growing at 20% plus CAGR. It currently has 12 brands in anti-diabetes and we estimate it to clock strong 20% plus growth on a low base. Going forward, AJP aims to remain among day-1 generic launches for oral anti-diabetes treatments, like the recently launched vildagliptin. Also, novel combinations like DPP4 + SGLT2 may be on the cards.

Table 23: AJP is ranked 25th in anti-diabetes therapy Companies Rank Dec-16 Dec-17 Dec-18 Dec-19 3-yr CAGR (%) Share (%) Abbott 1 13,446 14,081 15,392 16,640 7.4 12.2 USV 2 10,752 11,810 12,846 13,749 8.5 10.1 Lupin 3 6,922 8,679 10,214 12,640 22.2 9.3 Sun Pharma 4 8,663 9,299 9,874 10,508 6.6 7.7 Sanofi 5 5,964 6,995 8,482 9,362 16.2 6.9 Ajanta 25 116 159 369 202 20.4 0.1 Total Diabetes 94,630 1,07,291 1,21,158 1,36,475 13.0

Table 24: AJP’s major anti-diabetes brands and their trends Brands Ajanta's Rank Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Share (%) Teneligliptin and combinations 419 3,411 5,999 8,383 10,606 Ajanta's sales - - - 142 168 1.6 TIBAN M 18 - - - 80 98 1.5 TIBAN 18 - - - 62 70 1.5 Source: AIOCD AWACS

20 Edelweiss Securities Limited Ajanta Pharma

Table 25: 50% of sales come from top-15 brands and growing in low teens (INR mn) Brands Rank Therapy Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 CAGR (%) Share (%) MET XL 2 Cardiac 224 445 493 573 846 16.5 57.9 ATORFIT CV 2 Cardiac 442 491 523 533 523 21.5 -6.2 MELACARE 2 Derma 490 494 464 499 496 17.2 0.6 FEBURIC 3 Pain 172 207 258 322 351 13.7 5.2 MET XL AM 3 Cardiac 11 89 216 248 257 11.2 1.8 CINOD 4 Cardiac - - 164 222 247 6.4 8.5 MET XL 9 Cardiac 283 321 367 429 221 2.6 -66.8 ROSUTOR GOLD 4 Cardiac 55 83 104 128 209 8.8 79.1 ROSUFIT CV 2 Cardiac 143 174 175 169 189 15.1 13.4 SOFT DROPS 6 Ophthal 170 181 182 153 164 4.2 9.7 VERTIZAC 2 Neuro 89 99 108 116 129 20.1 12.0 CILAMET 1 Cardiac - - 52 107 125 32.9 15.5 OLOPAT 1 Ophthal 100 104 111 112 123 30.6 12.0 MAXMOIST 2 Ophthal 51 75 95 103 111 22.8 14.7 TIBAN M 18 Anti-diabetes - - - 80 98 1.5 -3.0

Top-15 2,230 2,763 3,313 3,794 4,088 16.4 Source: AIOCD AWACS

Asia branded The overall Asia branded business consists of the Philippines, West Asia and Central Asia (CIS). The Philippines is the largest Asian market for Ajanta with INR2.5bn in revenues growing at a CAGR of 12–14%.

AJP ranks 17th in the Philippines (~USD4bn market, growing 3.5% annually) and has 40 products, 15–20 pending approvals and ~250 MRs currently.

West Asia (including Iraq, Jordan, Turkey) is an INR1.75bn market and the CIS is INR600mn.

Chart 15: Asia to clock 11% CAGR over FY20–23E

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Source: Company, Edelweiss research

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Africa branded AJP has a meaningful presence in Africa, generating INR2.25–2.5bn in revenue from 12–13 countries. It ranks third in Franco-Africa. Its portfolio comprises 130 products; besides 40 approvals are pending and the MR count is 471.

Strides (STAR), Sun Pharma (SUNP) and Ipca have been getting aggressive in these markets. Ajanta management expects to grow in this region by 7-8% over the next three–five years.

Chart 16: Africa branded business to sustain growth momentum

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Source: Company, Edelweiss research

US generics The company entered the US four years ago and earned USD40mn in FY19 revenue (21% of exports). It currently markets 27 products in the US, including key products such as Zegerid and Cymbalta, and has 26 products awaiting approval. Ajanta aims to file 10–12 ANDAs and launch 7–8 products per year. The company has two USFDA-approved plants: Paithan (Aurangabad, Maharashtra) and Dahej (Gujarat).

Table 26: Known Para IV filings Drug Brand name Complainant Filing date Other Filers Brexpiprazole Rexulti Otsuka Oct-19 6 Naproxen esomeprazole Vimovo Horizon Sep-19 4 magnesium Nebivolol Bystolic Allergan Jul-19 1 Tofacitinib Xeljanz Pfizer Mar-19 Source: Bloomberg, Edelweiss research

22 Edelweiss Securities Limited Ajanta Pharma

Table 27: USFDA approvals received so far Approval Other Drug Brand name date Innovator approvers Valganciclovir Hydrochloride Valcyte Dec-19 Roche 5 Captopril - Dec-19 - 8 Sildenafil Citrate (Suspension) Revatio Nov-19 Pfizer 3 Doxepin Hydrochloride - Sep-19 - 4 Ranolazine Ranexa May-19 Gilead 8 Solifenacin Succinate Vesicare May-19 Astellas 15 Tadalafil Cialis Mar-19 Lilly 15+ Tadalafil Adcirca Feb-19 Lilly 9 Oxybutynin Chloride Ditropan XL Feb-19 Janssen 8 Silodosin Rapaflo Dec-18 Allergan 7 Sildenafil Citrate Viagra Oct-18 Pfizer 8 Ranitidine Hydrochloride - Sep-18 - 5 Fenofibrate - Sep-18 - 10 Sildenafil Citrate Revatio May-18 Pfizer 10 Clonidine Hydrochloride Kapvay Nov-17 Concordia 8 Rivastigmine Tartrate - Sep-17 - 8+ Entacapone Comtan Aug-17 Orion 5 Eletriptan Hydrobromide Relpax Aug-17 Pfizer 5 Duloxetine Hydrochloride Cymbalta Jan-17 Lilly 15 Lansoprazole Prevacid Oct-16 Takeda 10 Aripiprazole Abilify Sep-16 Otsuka 10 Olanzapine Zyprexa Aug-16 Lilly 10+ Omeprazole; Sodium Bicarbonate Zegerid Jul-16 Salix 5 Voriconazole Vfend May-16 PF Prism 10+ Zolmitriptan Zomig May-16 IPR 10+ Almotriptan Malate Axert Mar-16 Janssen 2 Memantine Hydrochloride Namenda Nov-15 Forest Labs 10+ Montelukast Sodium Singulair Aug-15 Merck 10+ Dapagliflozin (TA) - Sep-19 - 10 Source: USFDA, Edelweiss research

Institutional anti-malaria Ajanta has been a strong player in the institutional anti-malaria business for the Artemether Lumefantrine combination over the past five years, being the 1st generic company to receive WHO pre-qualification for this product. However, in FY18, 30% reduction in overall allocation by the Global Fund and other tender buyers and Ipca’s entry dented Ajanta’s revenue. However, with the increase in the number of malaria cases, the funding bodies increased their allocations by 15% over 2020–22, which started on January 1, 2020.

Also in 2018, Ipca re-entered the market after a two year hiatus, leading to heightened competitive intensity. Also, since Ipca is fully backward integrated and is a leader in this segment, it can offer the tender at a more competitive price than AJP, which lacks its own API.

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Chart 17: Anti-malaria almost halves; worst seems to be over

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Chart 18: Global Fund tender allocation plummeted in 2017–19, followed by rebound in 2020–22 20 220 600

16 214 480

208 360

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202 240 (''000)

(USD/ bn) (USD/ 8 14.82 11.82 10.30 196 120 4 190 0

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2012 2011 2013 2014 2015 2016 2017 2018 2014-16 2017-19 2020-22 2010 Country allocations No. of cases Deaths

Source: Global Fund

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Corporate governance I. Statutory auditors The company appointed B S R & Co. LLP (a partner firm of the KPMG network) as its auditor from beginning of FY18 through FY22, subject to ratification every year.

II. Directors Table 28: Remuneration of key managerial personnel excluding independent directors (INR mn) Designation Rem in FY17 Rem in FY18 Rem in FY19 Change (%) Madhusudan B. Agrawal Executive Vice Chairman 21 19 15 (21.8) Yogesh M. Agrawal Managing Director 21 44 96 118.7 Rajesh M. Agrawal Joint Managing Director 21 44 96 118.7 Gaurang Shah Company Secretary 4 4 5 10.7 Arvind Agrawal Chief Financial Officer 8 15 10 (32.4)

Total 550 251 223 (11.3) Adjusted PAT as per model 5,068 4,868 3,870 (20.5) Rem as a % of PAT 11% 5% 6% Employee Expense (Cons) 2,954 3,765 4,307 EE as a % of PAT 58% 77% 111% Revenue (Cons) 19,326 20,629 20,154 EE as a % of Revenue 15% 18% 21%

Table 29: Ratio of remuneration of each director to that of employees Ratio Name of the Director Designation FY17 FY18 FY19 Mannalal B. Agrawal Chairman 49.0 44.0 2.0 Madhusudan B. Agrawal Executive Vice Chairman 82.0 67.0 48.0 Yogesh M. Agrawal Managing Director 82.0 155.0 312.0 Rajesh M. Agrawal Joint Managing Director 82.0 155.0 312.0 Chandrakant Khetan Independent Director 3.0 2.0 2.0 Dr. Anil Kumar Independent Director (Resigned w.e.f 3rd April 2019) 3.0 2.0 2.0 K H. Viswanathan Independent Director 2.0 2.0 2.0 Prabhakar Dalal Independent Director 2.0 2.0 2.0 Dr. Anjana Grewal Independent Director 2.0 2.0 2.0 Source: Company, Edelweiss research

III. Related-party transactions (RPT) Apart from regular transactions with respect to employee benefits, commission and corporate social responsibility, the company has negligible related-party transactions as per the FY19 annual report.

IV. Other ventures in which relatives of promoters are directors or partners While there are certain pharma & marketing companies, in which relatives of promoters are directors or partners, management confirmed that there are no inter- company transactions.

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Financial Statements Key Assumptions Income statement (INR mn) Year to March FY19 FY20E FY21E FY22E Year to March FY19 FY20E FY21E FY22E Macro Net revenue 20,154 24,572 27,593 31,022 GDP(Y-o-Y %) 6.8 5.0 5.8 5.8 Other Operating Income 400 400 400 400 Inflation (Avg) 3.4 4.3 4.8 4.8 Income from operations 20,554 24,972 27,993 31,422 Repo rate (exit rate) 6.3 5.2 4.5 4.5 Materials costs 3,835 6,243 7,138 7,981 USD/INR (Avg) 70.0 71.5 71.0 71.0 Employee costs 4,307 4,609 4,839 5,178 R&D Cost 1,760 1,523 1,680 2,042 EBITDA 5,665 6,854 8,010 9,370 EBIT 4,944 5,999 7,066 8,382 Less: Interest Expense 12 135 135 135 Add: Other income 210.8 155.13 227.54 267.24 Profit Before Tax 5,143 6,019 7,158 8,514 Less: Provision for Tax 1,273 1,505 1,575 1,831 Reported Profit 3,870 4,514 5,584 6,684 Adjusted Profit 3,870 4,514 5,584 6,684 Shares o /s (mn) 88 88 88 88 Adjusted Basic EPS 43.8 51.0 63.1 75.6 Diluted shares o/s (mn) 88 88 88 88 Adjusted Diluted EPS 43.8 51.0 63.1 75.6 Dividend per share (DPS) 10.9 13.8 18.9 22.7 Dividend Payout Ratio(%) 25.0 27.0 30.0 30.0

Common size metrics Year to March FY19 FY20E FY21E FY22E Materials costs 18.7 25.0 25.5 25.4 Staff costs 21.0 18.5 17.3 16.5 Operating expenses 72.4 72.6 71.4 70.2 R & D cost 8.6 6.1 6.0 6.5 Depreciation 3.5 3.4 3.4 3.1 Interest Expense 0.1 0.5 0.5 0.4 EBITDA margins 27.6 27.4 28.6 29.8 Net Profit margins 18.8 18.1 19.9 21.3

Growth ratios (%) Year to March FY19 FY20E FY21E FY22E Revenues (3.5) 21.5 12.1 12.2 EBITDA (14.0) 21.0 16.9 17.0 PBT (17.4) 17.0 18.9 18.9 Adjusted Profit (20.5) 16.6 23.7 19.7 EPS (20.5) 16.6 23.7 19.7

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Balance sheet (INR mn) Cash flow metrics As on 31st March FY19 FY20E FY21E FY22E Year to March FY19 FY20E FY21E FY22E Share capital 175 175 175 175 Operating cash flow 3,748 4,426 7,144 5,671 Reserves & Surplus 22,277 25,328 28,902 33,179 Financing cash flow (1,475) (1,528) (2,145) (2,541) Shareholders' funds 22,452 25,504 29,077 33,355 Investing cash flow (2,228) (3,000) (2,000) (1,000) Long term borrowings 7 10 10 10 Net cash Flow 45 (101) 2,999 2,130 Short term borrowings 333 400 400 400 Capex (3,423) (3,000) (2,000) (1,000) Total Borrowings 340 410 410 410 Dividend paid (795) (1,463) (2,010) (2,406) Long Term Liabilities 138 138 138 138

Def. Tax Liability (net) 271 271 271 271 Profitability and efficiency ratios Sources of funds 23,201 26,322 29,896 34,173 Year to March FY19 FY20E FY21E FY22E Gross Block 16,152 19,152 21,152 22,152 ROAE (%) 18.1 18.8 20.5 21.4 Depreciation 721 855 944 989 ROACE (%) 23.6 26.8 27.9 29.1 Net Block 11,786 13,931 14,987 14,998 Inventory Days 374 320 300 275 Capital work in progress 2,613 2,613 2,613 2,613 Debtors Days 82 82 80 80 Total Fixed Assets 14,398 16,544 17,600 17,611 Payable Days 226 220 220 200 Non current investments 433 433 433 433 Cash Conversion Cycle 230 182 160 155 Cash and Equivalents 1,653 1,551 4,551 6,681 Current Ratio 3.4 2.4 3.5 3.4 Inventories 4,357 6,590 5,145 6,882 Net Debt/Equity (0.1) - (0.1) (0.2) Sundry Debtors 4,595 6,625 5,645 8,128 Interest Coverage Ratio 426.2 44.4 52.3 62.1 Other Current Assets 1,208 1,208 1,208 1,208

Current Assets (ex cash) 10,160 14,423 11,998 16,218 Operating ratios Trade payable 2,252 5,274 3,331 5,415 Year to March FY19 FY20E FY21E FY22E Other Current Liab 1,191 1,355 1,355 1,355 Total Asset Turnover 0.9 1.0 1.0 1.0 Total Current Liab 3,443 6,629 4,686 6,770 Fixed Asset Turnover 1.8 1.9 1.9 2.1 Net Curr Assets-ex cash 6,717 7,794 7,312 9,448

Uses of funds 23,201 26,322 29,896 34,173 Valuation parameters Year to March FY19 FY20E FY21E FY22E

Free cash flow (INR mn) Adj. Diluted EPS (INR) 43.8 51.0 63.1 75.6 Year to March FY19 FY20E FY21E FY22E Y-o-Y growth (%) (20.5) 16.6 23.7 19.7 Reported Profit 3,870 4,514 5,584 6,684 Diluted P/E (x) 30.0 25.7 20.8 17.4 Add: Depreciation 721 855 944 989 EV / Sales (x) 5.6 4.6 4.0 3.5 Interest (Net of Tax) 9 101 105 106 EV / EBITDA (x) 20.3 16.8 14.0 11.7 Others 51 34 30 29 Dividend Yield (%) 0.8 1.0 1.4 1.7

Less: Changes in WC 903 1,077 (482) 2,136 Operating cash flow 3,748 4,426 7,144 5,671 Less: Capex 3,423 3,000 2,000 1,000 Free Cash Flow 324 1,426 5,144 4,671

Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY20E FY21E FY20E FY21E FY20E FY21E Ajanta Pharma 1,615 25.7 20.8 16.8 14.0 18.8 20.5 Glenmark Pharmaceuticals 1,254 14.2 13.0 8.1 7.4 10.7 10.6 Ipca Laboratories 2,474 28.3 21.9 19.8 15.1 18.3 19.7 Natco Pharma 1,569 21.4 17.4 17.0 13.0 14.1 15.4 Torrent Pharmaceuticals 5,304 41.3 33.4 19.3 17.2 18.2 19.7 Source: Edelweiss research

27 Edelweiss Securities Limited Pharmaceuticals

Additional Data

Directors data Mr. Mannalal B. Agrawal Chairman Mr. Chandrakant Khetan Independent Director Mr. Madhusudan B. Agrawal Vice Chairman Mr. K H Viswanathan Independent Director Mr. Yogesh M. Agrawal Managing Director Mr. Prabhakar Dalal Independent Director Mr. Rajesh M.Agrawal Joint Managing Director Mrs. Anjana Grewal Independent Director

Auditors - B S R & Co. LLP

*as per last annual report

Holding – Top10 Perc. Holding Perc. Holding Mirae Asset Global Investments 4.20 Reliance Capital Trustee 0.51 UTI Asset Management 2.70 Vanguard 0.50 Invesco Ltd. 1.62 SBI Funds Management 0.46 Motilal Oswal 1.02 Blackrock 0.42 Dimensional Fund Advisors LP 0.72 Fundsmith 0.35 *in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price 18 Apr 2019 KOTAK MAHINDRA (INTERNATIONAL) LTD SELL 505977 1033.00

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

28 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk AJANTA PHARMA LTD BUY SO M Aurobindo Pharma HOLD SP H Biocon REDUCE SU H Cadila Healthcare BUY SP M Cipla BUY SO M Divi's Laboratories HOLD SO M Dr.Reddys Laboratories BUY SO M Glenmark Pharmaceuticals HOLD SU H Ipca Laboratories HOLD SP M Lupin BUY SP M Natco Pharma BUY SO M Sun Pharmaceuticals Industries REDUCE SU M Torrent Pharmaceuticals HOLD SP M

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

29 Edelweiss Securities Limited Pharmaceuticals

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research [email protected]

Coverage group(s) of stocks by primary analyst(s): AJANTA PHARMA LTD, Aurobindo Pharma, Biocon, Cadila Healthcare, Cipla, Divi's Laboratories, Dr.Reddys Laboratories, Glenmark Pharmaceuticals, Ipca Laboratories, Lupin, Natco Pharma, Sun Pharmaceuticals Industries, Torrent Pharmaceuticals

Recent Research

Date Company Title Price (INR) Recos

28 -Jan-20 Torrent Weak performance; recovery 1,910 Hold

Pharma in sight;

Result Update 27-Jan-20 Dr Reddy's Operationally strong print; 3,189 Buy Laboratories Result Update 24-Jan-20 Biocon Softer than expected; 294 Reduce Result Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594

One year price chart 446 1,400

(INR) 297 1,200 149 1,000

(INR) 800

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14

14 14

14 14

14

14

14

14

14 14

14 600

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-

-

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-

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Oct

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Sep Feb

Dec

Aug Nov Mar 400 May

Jul 19 Jul

Jan 19 Jan 20 Jan

19 Jun

Oct 19 Oct

Apr19

Feb 19Feb 19Sep

Dec19

Aug 19Aug

Nov 19 Nov

Mar 19 Mar May 19 May Ajanta Pharma

Edelweiss Securities Limited 30

Ajanta Pharma

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