AJANTA PHARMA LTD.

Commercial Paper Programme PR1

Rating CARE has assigned the rating of PR1 [PR One] to the Proposed Commercial Paper (CP) issue of APL, of Rs.30 crore, for a maturity not exceeding one year. The CP is carved out of the sanctioned working capital limits of the company. Facilities with PR One rating would have strong capacity for timely payment of short-term debt obligations and carry lowest credit risk. Within this category, facilities with relatively better credit characteristics are assigned PR1+ rating. The ratings continue to derive strength from APLs long track record, experienced management, accredited diversified product facilities, portfolio, growth well-equipped in R&D revenue facilities and and profitability, established

manufacturing

marketing network. However, the ratings are constrained by long working capital cycle, debt-funded expansion activities and competition from dominant multinational as well as Indian drug manufacturers. Ability to generate expected returns from the ongoing expansion and upgradation activities and timely regulatory approval for product launches are the key rating sensitivities.

Background APL was promoted by Mr. Purshottam Agrawal in the year 1973 in Aurangabad, Maharashtra. APL started its operation in 1973 by successfully launching two products viz boric acid and eucalyptus oil, and later on in 1979, the company launched its flagship Over-The-Counter (OTC) brand Pinkoo Gripe Water, a paediatric product, which was also a success. In the early 90s, APL launched the product Thirty Plus and started exporting its products to Commonwealth of Independent States (CIS) countries, Afghanistan and also set up Joint Ventures (JVs) with their Governments. During 1997, APL entered the prescription-drug market with its first patented product Carofit and also focused on marketing its products to speciality segments viz ophthalmology, dermatology and cardiology. As on July 31, 2009, the company had 175 active products (250 products on including line extensions) in 52 countries. As on March 31, 2009, APL was managed by an eight-member Board of Directors, comprising four promoter Directors, and two Nominee Directors, viz nominees of IDBI

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Bank and EXIM Bank. Mr. Mannalal Agrawal, a Promoter-Director is the Chairman and Mr.Yogesh Agrawal is the Managing Director. The Board of Directors is assisted by a team of experienced professionals handling various departments. As on March 31, 2009, APL had two Wholly-Owned Subsidiaries (WOS), Ajanta Pharma (Mauritius) Ltd (APML), a manufacturing arm and Ajanta Pharma Inc. (USA), a marketing arm. Further, APML has one WOS, viz, Ajanta Pharma Philippines Inc., a marketing arm. APL has also formed 50:50 joint venture Turkmenderman Ajanta Pharma with the Government of Turkmenistan. However, due to currency devaluation, APL exited from the management of its JV of Turkmenistan w.e.f. January 01, 2007 and is looking for an opportunity to sell off its investment in the JV.

Operations APL is engaged in manufacturing and marketing of pharmaceutical formulations. The company's product profile includes a wide range of therapeutic products covering segments like Cardiovascular Diseases (CVD), Dermatology, Paediatric, Ophthalmology, Nephrology, Analgesics, Anti-Histaminic, Anti-biotic, GI Tract, Anti-TB, Gynaecology etc. The company has presence in the formulations segment, both in the ethical and OTC segments. In FY09, the company in launched 38 new products (including line and

extensions/product Paediatrics.

variants)

Cardiology,

Ophthalmology,

Dermatology

All the manufacturing facilities of APL have been audited and approved for compliance with international Current Good Manufacturing Practices (CGMP), as laid down by World Health Organisation (WHO). APLs R&D activities are focussed around two main aspects, viz, New Drug Delivery System (NDDS), and Formulation & Development. Until March 2009, APL had filed 1,506 product registrations for its products internationally, including 409 product registrations filed during FY09. Apart from this, APL had 1,306 products applied and pending for registration.

On-going Projects As on March 31, 2009, the details of various projects undertaken which are either completed/to be completed are given below: USFDA-approved plant: APL completed the expansion at its USFDA-approved plant at Aurangabad, Maharashtra and commenced commercial production from March 2009. The

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project cost of Rs.55.30 crore, was funded by debt of Rs.41.00 crore and balance from internal accruals. R & D centre (Phase I): The expansion was completed in FY09. The project cost of Rs.31.13 crore was funded by way of debt of Rs.23.40 crore and balance from internal accruals. API facility: The company completed expansion of its API facility at Aurangabad, Maharashtra and started trial runs from August 2009. The company expects to commence commercial production from October 2009. The project cost of Rs.22.16 crore, was funded through debt of Rs.17.50 crore and balance through internal accruals. Mayo acquisition: In FY07, APL acquired Mayo (I) Ltd. and is currently undertaking the upgradation of its facility. The estimated project cost is Rs.15.96 crore to be funded by way of debt of Rs.12.50 crore and balance from internal accruals. As on July 31, 2009, APL had incurred Rs.9.76 crore towards this project with debt outstanding of Rs.5.62 crore. The said project is scheduled for completion by March 2010. R & D centre (Phase II) and expansion at USFDA plant: The company is undertaking expansion of its existing R&D facility and USFDA-approved plant at aggregate cost of Rs.53.21 crore. The capex is to be funded by way of debt of Rs.26.39 crore and balance of Rs.26.82 crore through internal accruals. The entire debt is being tied up. The project is proposed to be completed in phases by FY11. Product development: Upto March 31, 2009, APL incurred Rs.15.32 crore towards development of Abbreviated New Drug Applications (ANDA). The company expects to incur an additional expenditure of Rs.17.68 crore during the current year. The aggregate cost of Rs.33.00 crore is to be funded through debt of Rs.23.00 crore and balance of Rs.10 crore through internal accruals. The above amount is proposed to be capitalised at the time of registration/market launch of the product.

Industry outlook Based on the global economic environment affecting demand, IMS Health has revised its forecast for CY2009 of the global pharmaceutical market from USD820 billion in October 2008 to USD750 billion in April 2009. As per the revised estimates, global pharma market is expected to grow at 2.5%-3.5% in CY2009. The major growth of the industry stems from therapeutic categories in the lifestyle segments like cardiovascular, central nervous system, anti-diabetic etc., as against old and mature categories like antiinfective, vitamins and analgesics.

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As per industry sources, the Indian Pharmaceutical Industry (IPI) is expected to grow at a CAGR of 12% over CY07-CY12 to reach USD15 billion by CY2012. Further, IPI may have a growth of 12-13% as compared to 10% in CY2008. Opportunities in IPI include Contract Research and Manufacturing Services (CRAMS), R&D and generics, given the expiry of patents worth nearly USD70 billion by the end of CY2011. Exports have been the primary growth driver for the IPI. This is mainly because India is a cost-effective destination with skilled labour force. India manufactures more than 400 bulk drugs and almost the entire range of formulations. Going forward, the drivers of the Indian Pharmaceutical industry would be the growing disposable incomes, changing disease profile, increased spend on healthcare, growing penetration of health insurance, and general expansion of health care services. However, persistent launch of spurious drugs continues to be the primary threat to loss of business for the organised sector of the IPI. Also, strengthening of the regulatory system is a challenge to be met.

Financial Analysis APLs net sales grew at 12.05% Y-o-Y in FY09 driven by new product launches, higher sales realisation from existing products and increase in exports. The sales growth coupled with more than doubling of technology transfer income boosted total income during FY09. PBILDT margin increased by 299 basis points Y-o-Y in FY09 with the favourable change in product-mix (due to contribution of high-margin products), decrease in raw material cost and administrative expenses which was partially offset by higher staff costs and selling expenses. However, PAT margin increased by only 64 basis points Y-o-Y in FY09 due to higher depreciation charges and interest burden on capitalisation of projects. Backed by higher retained earnings, APLs tangible net worth increased to Rs.152.90 crore as on March 31, 2009, from Rs.131.27 crore as on March 31, 2008. However, due to availing of the existing sanctioned term loans to fund capex activities as well as for general corporate purposes, and working capital loan enhancements, the overall gearing ratio of the company increased substantially to 1.57x as on March 31, 2009. On excluding investment in subsidiaries/associates of Rs.17.05 crore from net worth, the adjusted long-term debt-equity and overall gearing ratios increased to 1.08x and 1.77x, respectively, as on March 31, 2009. The decrease in current ratio as on March 31, 2009, was mainly due to substantial increase in bank borrowings and current portion of longterm debt. APLs working capital cycle expanded to 197 days as on March 31, 2009 mainly due to longer inventory holding period due to bulk purchase of raw material to mitigate the risk of price volatility and tranche shipment of finished goods to Kenyan client.
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During Q1FY10, APL registered a 22.06% growth in sales over Q1FY09 driven by pick-up in sales of new products launched in FY09. PBILDT margin expanded due to lower staff costs and administrative and marketing overheads, partially offset by higher material cost. Further, lower interest costs mainly due to lesser working capital utilisation with improvement in receivables management led to higher PAT margins during Q1FY10 compared to Q1FY09. Financial Results For the year / As on March 31, Working Results Net Sales Total Income PBILDT Interest and Finance Charges Depreciation PAT (After Deferred Tax) Net Cash Accruals Financial Position Equity Share Capital Tangible Net worth Total Capital Employed Net Fixed Assets Net Working Capital Ratios Growth (%) Growth in Total income Growth in PAT [after Deferred Tax] Profitability (%) PBILDT / Total Operating Income PAT / Total Income ROCE (Total) Average Cost of Borrowing Solvency (times) Long Term Debt Equity Ratio Overall Gearing Ratio Adjusted LT Debt-Equity Ratio * Adjusted Overall Gearing Ratio * Interest Coverage Term Debt / Gross Cash Accruals (years)
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(Rs. Crore) 2007 238.69 247.38 36.55 11.56 6.78 13.71 21.58 11.80 112.06 220.54 56.37 126.89 2008 285.13 299.65 47.29 15.09 6.97 17.80 27.38 11.80 131.27 296.33 93.89 154.10 2009 319.48 324.22 60.84 22.03 13.15 21.38 34.78 11.80 152.90 393.12 130.19 182.96

19.91 32.47 14.77 5.54 14.94 12.09 0.44 0.97 0.52 1.14 2.58 2.05

21.13 29.88 15.78 5.95 15.37 11.03 0.68 1.26 0.78 1.44 2.67 2.91

8.20 20.09 18.77 6.59 13.92 10.87 0.96 1.57 1.08 1.77 2.17 3.86

Liquidity(times) Current Ratio Quick Ratio Turnover (days) Average Collection Period Average Creditors Average Inventory Working Capital Cycle 106 54 125 176 98 54 131 175 99 57 155 197 September 2009 1.62 0.96 1.62 0.89 1.41 0.82

Excluding investment in subsidiaries from tangible networth

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