ajanta pharma ltd Management discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

ECONOMIC OVERVIEW AND OUTLOOK

Early signs in 2023 that the world economy could achieve a soft landing with inflation coming down and growth remaining steady, have receded with stubbornly high inflation and recent financial sector turmoil.

The International Monetary Funds (IMFs) baseline forecast, assuming the recent financial sector stresses are contained, is for growth to fall to 2.8% in 2023 from 3.4% in 2022. For the next five years, it is expected to average out to 3% as it rises slowly. It is IMFs lowest medium-term forecast in decades. Advanced economies are expected to see an especially pronounced growth slowdown to 1.3% in 2023, from 2.7%, in the previous year. In a plausible alternative scenario, with further financial sector stress, global growth is expected to decline to 2.5% in 2023 with the growth of advanced economies falling below 1%.

The anaemic outlook reflects the tight policy stances needed to bring down inflation. Global headline inflation is set to fall to 7% in 2023 from 8.7% in 2022 on the back of lower commodity prices. But underlying (core) inflation is likely to decline more slowly.

PHARMACEUTICAL SECTOR OVERVIEW

After the disruptions of the past three years, the outlook for global spending on medicines has become clearer as the uncertainties give way to more predictable challenges. Policymakers across developed and emerging economies are shifting from crisis to rebuilding modes with a focus on longer-term sustainability issues. The pharmaceutical industry has and will continue to have a significant impact on the global economy in terms of contribution to GDP.

INVOICE SPENDING AND GROWTH

The use of medicines globally plateaued in 2022 following a significant rebound in 2021 as markets recovered from the pandemic. As per the IQVIA report, "Global use of Medicines 2023", overall volume is expected to grow 1.6% CAGR through 2027 driven by Asia-Pacific, India, Latin America, Africa, the Middle East, and China. All of these regions are expected to exceed global volume growth.

As per the IQVIA report, the global medicine market - using invoice price levels - is expected to grow at 3-6% CAGR through 2027, reaching about USD 1.9 trillion in total market size. Spending and volume growth will follow diverging trends by region, with larger established markets growing more slowly, and growth markets in Eastern Europe, Asia, and Latin America growing in both volume and spending.

Exhibit 1: Global Invoice Spending and Growth

Invoice Spending and Growth	2027 Spending USD Bn	2023-2027 CAGR	2022 Spending USD Bn	2018-2022 CAGR
Developed	1,370-1,400	2.5-5.5%	1,088	5.7%
Pharmerging	487-518	5-8%	371	7.2%
Lower-income countries	29-33	4.5-7.5%	23	6.0%
Global	1,900-1,930	3-6%	1,482	6.1%

Source: IQVIA January, 2023 Report "Global use of Medicines 2023"

The USAs share in global invoice spending is projected to increase to USD 763 billion in 2027 from USD 629 billion in 2022. This will be at 5.5% CAGR for the 2023 to 2027 period against 6.2% CAGR for the previous five years.

But off-invoice discounts and rebates resulted in estimated spending of 36% lower than the invoice spending in 2022.

It is also projected to be 45% lower than invoice levels in 2027. At the net level, spending in the USA is projected to grow at -1 to 2% as rising off-invoice discounts and rebates are expected to be amplified by the provisions of the Inflation Reduction Act. This is in comparison to a 4% growth in net level spending for the 2018 to 2022 period.

Over the last decade, the relative spending of countries has shifted; while slower-growing developed markets have dropped, pharmerging countries have risen. In the next five years, global spending will increase by nearly USD 440 billion, lifting spending to nearly USD 1.9 trillion in 2027, with most of the absolute increase from developed countries, despite their lower rates of growth.

Exhibit 2: Invoice Spending and Growth in Pharmerging Markets

Pharmerging Markets	2027 Spending USD Bn	2023-2027 CAGR
China	180-210	2-5%
Brazil	57-77	9-12%
India	35-39	7.5-10.5%
Russia	25-29	6-9%
Total Pharmerging	487-518	5-8%

Source: IQVIA January, 2023 Report "Global use of Medicines 2023"

Strong growth in pharmerging markets and new brands in developed markets will lift global spending through 2027. Brazil, India, and Russia are the next three largest pharmerging markets and all are expected to grow by more than 7% CAGR through 2027.

India continues to grow through volume while costs remain low and medicines focus on generics; spending will increase 7.5-10.5% through 2027, reaching USD 35-39 billion.

COMPANY OVERVIEW

Ajanta Pharma is a specialty pharmaceuticals formulation company with a well-diversified Branded Generics business spread across India, the rest of Asia, and Africa. The Company has a strong chronic-focused product portfolio led by a first-to-market strategy and front-end presence which helps it outgrow the market. The Company is committed to investing in innovative products to fill identified gaps and putting major capital allocation into this business.

Ajcintas business also consists of two more verticals:

US Generics and Institutional business in Africa. These two verticals are facing headwinds and we remain cautiously opportunistic for them.

PERFORMANCE HIGHLIGHTS

The following analysis and discussion are based on the consolidated financials of the Company for the financial year 2023. It covers different business verticals as well as the consolidated financial position as a whole.

Branded Generics

During the year, Branded Generics business in India, the rest of Asia, and Africa contributed 73% to the total sale of t 3,708 cr.

Exhibit 3

Branded Generics	Sales (Rs. cr.)	Growth	% to Total Sales
India	1,174	20%	32%
Asia	957	18%	25%
Africa	559	(5%)	15%
Total	2,690	13%	73%

Ajanta significantly outperformed the IPM on the back of 23 new product launches, including sis first-to-market, and consistent growth in the existing products. This helped the Company climb two ranks to 27^th in IPM from 29" in the previous financial year.

Exhibit U: Market Size and industry vs. Ajanta Pharma Growth

IMS MAT March 2023

Particulars	Mar-23	Mar-22
Indian Pharma (Rs. cr.)	2,00,507	1,85,498
Industry	8%	18%
APL	16%	18%
APL Rank	27	29
Ophthalmology (Rs. cr.)	3,943	3,386
Industry	16%	21%
APL	16%	25%
APL Rank	2	2
Cardiology ( Rs.cr.)	24,336	22,282
Industry	9%	10%
APL	13%	11%
APL Rank	16	18
Dermatology (? cr.)	13,895	13,055
Industry	6%	10%
APL	26%	17%
APL Rank	15	15
Pain Management (Rs. cr.)	15,896	14,117
Industry	12%	22%
APL	23%	28%
APL Rank	27	32

Branded Generics business in Asia and Africa consists of eight major therapeutic segments and we hold the leading position in all our sub-therapeutic segments.

We have a basket of more than 200 products for these markets.

Our Asia business is spread across the Middle East, South East Asia, and Central Asia regions with a presence in 10 countries. This business saw a growth of 18% in the year and contributed 26% to total sales. The growth was well-diversified in terms of both volume and prices, where we saw improvement in the market share of some of our products. In the last four years, our CAGR growth in Asia has been robust at 12% and we expect better growth in the upcoming year.

Our Africa business de-grew by 5% in the year on the back of Euro depreciation against the Rupee for the most part of the year and supply chain issues in the last quarter. However, over a period of four years, our growth from this region has been a robust 16%, which we are quite confident to achieve in the coming years. Here also our product basket is spread across various therapeutic segments and enjoys leadership position in some of them.

The US Generics

The US generics recorded 19% growth for the year and contributed 22% to total sales. This growth was on the back of tailwinds from the high flu season. However, this growth also incurred huge costs in logistics, which substantially eroded our margins. We have 40 products on the shelf and have 21 pending approvals to be commercialised in the coming years. Ajanta has decided to reduce capital allocation to this business due to increased uncertainty and continuous price erosion.

Africa Institutional

This business consists of antimalaricil products being distributed through multilateral aid agencies, which saw de-growth of 8% and contributed 5% to total sales. As this business is dependent on the availability of funds with agencies, there is a high level of uncertainty and we remain neutral on this vertical.

Exhibit 5: US Generics and Africa Institutional Sales (Rs. cr.)

OPERATIONAL AND FINANCIAL PERFORMANCE

During FY 2023, we significantly enhanced capital allocation to the Branded Generics business with accelerated product filing and enhanced ground presence, which we will continue to do in the upcoming year. This higher operating expenditure came at a time when raw material and freight costs touched record highs. The price erosion in the US made the situation worse and this brought our profit margins to the lowest level in the last decade.

We are confident to scale up our margins again in the coming years on the back of the enhanced contribution of Branded Generics business and normalisation of freight costs. This will also add surety, scalability, and sustainability to the business.

Exhibit 6

				(Rs. cr.)
Particulars	FY 2023	% to RO	FY 2022 % to RO	% Growth
Revenue from Operations	3,743	-	3,341	12%
EBITDA	783	21%	928 28%	(16%)
Profit Before Tax	745	20%	909 27%	(18%)
Net Profit	588	16%	713 21%	(17%)
Total Comprehensive Income	603	16%	705 21%	(14%)

Revenue from Operations

Revenue from operations stood at Rs.3,743 cr. in FY 2023 against Rs.3,341 cr. in FY 2022, registering a growth of 12%. While Branded Generics grew 13%, Institutional business brought down the overall growth of the Company. We continue to aim for low to mid-teen growth in Branded Generics going forward.

Material Costs

Material cost moved to 28% in FY 2023 from 25% in FY 2022, an increase of 300 basis points. This higher cost was due to higher API prices resulting from the conflict and uncertain world scenario, higher price erosion in the US, and a few one-time inventory write-offs. We expect this to improve by 200 basis points in FY 2024.

Employee Expenses

Personnel expenses accounted for 21% of the revenue from operations in FY 2023 against 19% in the previous year. Total cost stood at Rs.785 cr. in FY 2023 against Rs.646 cr. in FY 2022. The increase during Q4 was on account of some re-grouping of related expenses from selling expenses following the best practices. For 12M FY 2023, the increase in cost mainly relates to expansion in the international field force by 50% and small addition in production and R&D. All these are investments for future growth and we expect to reap benefits of the same in the coming years.

Other Expenses

Other expenses stood at Rs.1,124 cr. in FY 2023 (31% of revenue from operations) against Rs.934 cr. in FY 2022 (28% of revenue from operations), a 300-basis point increase over the previous year. This was mainly because of higher freight costs impacting by 200 basis points and forex derivative loss impacting by about 100 basis points. R&D cost remained flat at 6% of revenue from operations in FY 2023 against the previous year. In absolute amount, it stood at Rs.237 cr. in FY 2023 against Rs.204 cr. in FY 2022.

With our continued focus on Branded Generics business, we have allocated higher resources on product registrations, promotions, and the launch of new products, resulting in higher marketing expenses. However, with freight costs coming down to pre-COVID levels, we estimate other expenses to come down in FY 2024, which will help improve our EBITDA margins.

Operating Profit Margin

EBITDA in FY 2023 stood at Rs.783 cr. against Rs.929 cr. in FY 2022, a de-growth of 16% over the previous year. The higher costs as explained in earlier paragraphs brought it down by 700 basis points to 21% in FY 2023 from 28% in FY 2022 as a percentage to revenue to operations. With improvement in material and freight costs, we expect it to climb back to about 25% in FY 2024 and see more improvement ahead.

Other Income

Other Income stood at Rs.99 cr. in FY 2023, against Rs.116 cr. in FY 2022. It mainly consisted of a forex gain of Rs.66 cr. and a balance from investment income.

Net Profit Margin

Profit After Tax was at Rs.588 cr. in FY 2023 against Rs.713 cr. in FY 2022. PAT margins stood at 16% in FY 2023 against 21% in FY 2022. The de-growth was in line with the decline in EBITDA margins and is expected to improve in the coming years.

Return on Net Worth

Return on Net Worth came down to 18% in FY 2023 against 23% in the previous year due to decline in profits.

Return on Capital Employed

Return on Capital Employed stood at 22% in FY 2023 compared to 28% in FY 2022 again only due to decline in profits.

Balance Sheet

Non-current Assets

The non-current assets have gone up to Rs.1,845 cr. in FY 2023 from Rs.1,791 cr. in FY 2022. Our CAPEX was Rs.160 cr. for the year which was mostly the normal maintenance CAPEX. The CAPEX including maintenance CAPEX for FY 2024 is estimated to be about Rs.200 cr.

Current Assets

Current Assets stood at Rs.2,834 cr. in FY 2023 against Rs.2,264 cr. in FY 2022 mainly because of investment in debt funds accumulated for buyback pay-out. Receivables days decreased to 104 days from 113 in FY 2022 mainly due to the higher Branded Generics business. The absolute amount stood at Rs.1,057 cr. against Rs.1,020 cr. in FY 2022.

Inventory in terms of the number of days to sales has improved to 80 days in FY 2023 from 88 days in FY 2022 due to the easing of the supply chain. In absolute amounts, it has increased to Rs.816 cr. in FY 2023 from Rs.791 cr. in FY 2022. Current Ratio for FY 2023 stood at 2.49 against 3.5 in FY 2022.

Shareholders Funds

Shareholders funds increased to Rs.3,388 cr. in FY 2023 from Rs.3,264 cr. in FY 2022. Earnings per share stood at Rs.46 in FY 2023 against Rs.55 in FY 2022. During the year, the Company returned Rs.479 cr. against Rs.436 cr. in FY 2022 to its shareholders through dividends and share buyback (including tax).

Non-current Liabilities

Non-current liabilities in FY 2023 stood at Rs.152 cr. against Rs.144 cr. in FY 2022, mainly consisting of deferred tax and lease liabilities.

Current Liabilities

Current liability stood at Rs.1,139 cr. in FY 2023 against Rs.647 cr. in FY 2022. The increase is mainly on account of the provision made for a buyback of Rs.389 cr. as the same was paid in April 2023. Trade payable days increased from 70 in FY 2022 to 79 in FY 2023. Our strong balance sheet combined with a focus on cash conservation provides us the confidence that we will continue with our consistent performance.

CONSOLIDATED CASH FLOW

The Company had a healthy cash flow during FY 2023; the snapshot of this is in Exhibit 7

Exhibit 7

		(Rs. a.)
Particulars	FY 2023	FY 2022
Opening Cash and Cash Equivalents	206	178
Cash flows from:
a) Operating Activities	792	562
b) Investing Activities	(560)	(74)
c) Financing Activities	(108)	(460)
Closing Cash and Cash Equivalents	330	206

EMPOWERED TEAM

We are proud to mention that your Companys Human Resource Development efforts to make Ajanta a preferred place to work got the prestigious "Great Place to Work" recognition. Our people practices which are now benchmarked globally, including skill development, personality enhancement, and employee engagement through internal communications foster happiness at work.

Ajantaites are truly empowered. This is best reflected with the world-renowned professional service firm, Deloitte, conferring your Company with the "Best Managed Companies for 2022" award. Ajanta was selected for the award through a rigorous process which benchmarked us with global best practices under four distinct parameters: Strategy; Capabilities and Innovation; Governance and Financials; along with Culture and Commitment.

Ajanta matched the global leaders in all these parameters providing a testimony to our purposeful work culture. The Companys culture is centred on the four core values of Excellence, Transparency, Integrity, and Discipline. These values drive over 7,700 Ajantaites on the mission to provide life-saving drugs to needy patients.

Your Company is committed to providing a safe, secure, and healthy work environment to employees.

We continuously strive to exceed our own internal and industry benchmarks in workforce productivity and performance.

The professional objectives for employees and teams across levels are directly linked with the organisations objectives and philosophy. This conveys and provides a sense of purpose and direction to all employees. The key areas for driving HR initiatives include a strong emphasis on building a culture of inclusion and respect, ensuring a safe work environment, focusing on building capabilities and careers and protecting human rights.

The Company continues to support the capabilities of differently-cibled employees. We ensure strict adherence to our internal codes and have a clearly defined zero-tolerance policy towards discrimination of any kind. The Occupational Health and Safety (OHS) system at our manufacturing facilities has enabled workers and employees to operate in a safe and healthy working environment.

RISK MANAGEMENT

We operate in over 30 highly regulated countries with their own specific complex operating environments. In addition, this business landscape is dynamic and constantly evolving. This brings to the fore a multitude of risks which are closely monitored, mapped, and mitigated through our robust Enterprise Risk Management (ERM) framework. By effectively identifying, assessing, and mitigating risks we strive to enhance our resilience, drive sustainable growth, and maximise value creation.

The ERM involves engaging with all functional heads to identify internal and external events that may have an adverse impact on the achievement of the Companys objectives. It also entails periodic monitoring of changes in both the internal and external environment leading to the emergence of a new threat/risk. The major risks identified are regulatory, competition, supply chain disruption, cyber & data security, economic & political, and Environmental, Social, and Governance (ESG) risks. A review of the risk management policy is carried out annually by the Risk Management Committee. Our ERM framework plays a significant role in safeguarding the interests of our Company, our shareholders, and our stakeholders.

INTERNAL CONTROLS AND ADEQUACY

Your Company has a robust and reliable system of internal controls as we believe that it is the prerequisite of governance. The control framework is designed to continuously assess the adequacy, effectiveness, and efficiency of internal controls. The management is committed and ensures an effective internal controls environment, commensurate with the size and complexity of the business. This assures compliance with interna policies, applicable laws, regulations, the accuracy of records, operational efficiency, protection of resources and assets, and overall risk minimisation. These controls have been designed to provide reasonable assurance over.

The current system of Internal Financial Controls (IFC) is aligned with the requirement of the Companies Act, 2013 and is in line with the globally accepted risk-based framework. The Internal Audit (IA) function of the Company reports to the Chairperson of the Audit Committee, thereby maintaining its objectivity. Our dedicated internal audit team supported by external audit firms help to enhance and protect organisational value by providing risk-based objective assurance, advice and insight.

The annual internal audit plan is carved out from a comprehensively defined Audit Universe that encompasses all businesses, functions, risks, compliance reguirements, and maturity of controls.

The internal audit plan is approved by the Audit Committee at the beginning of every year. Each quarter, the Audit Committee of the Board is presented with key control issues and the actions taken on issues highlighted in the previous reports. The Audit Committee deliberates with the management, considers the systems as laid down, and meets the internal auditors and statutory auditors to ascertain their views on the internal control framework.

The Company recognises the fact that any internal control framework would have some inherent limitations and hence has inculcated a process of periodic audits and reviews to ensure that such systems and controls are updated at regular intervals.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, and expectations may be forward-looking statements. Actual results may differ materially from those expressed or implied due to various risks and uncertainties. Important factors that could make a difference to the Companys operations include global and Indian demand-supply conditions, finished goods prices, changes in government regulations and policies, tax regimes, economic conditions within India and the countries within which the Company conducts business and other such factors. The Company does not undertake to update these statements.