634759591944218750_India Healthcare - New Booster Doses on the Anvil

Anand Rathi Share and Stock Brokers Limited, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities

India I Equities Healthcare

Sector Report

Sriram Rathi+9122 6626 6737

[email protected]

Sanjeev Chiniwar +9122 6626 6716

[email protected]

20 April 2012

India Healthcare

New booster doses on the anvil

Overweight Sensex: 17503

Nifty: 5332

Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities


[email protected]


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Healthcare

Sector ReportIndia I Equities

Key data (FY13e) Rating CMP (`) Target price (`) M-cap (`bn) P/E (x) EV/EBITDA (x) P/BV (x) RoE (%) RoCE (%)

Aanjaneya Life Buy 612 737 8.5 13.1 8.9 2.1 16.5 11.4 Apollo Hospitals Buy 605 735 83.3 27.0 13.6 2.9 11.5 9.7 Cipla Buy 320 400 248.7 19.1 13.1 3.0 16.7 16.0 Claris Life Buy 177 250 11.3 8.3 5.0 1.0 12.3 10.8 Dr Reddy’s Lab Hold 1,807 1,910 305.7 20.4 13.7 4.6 24.4 20.0 Elder Pharma Buy 324 450 6.7 5.8 5.4 0.8 15.7 11.7 Fortis Healthcare Hold 111 120 45.4 33.8 11.7 1.3 3.9 4.6 Glenmark Buy 321 398 86.6 15.0 10.7 2.9 21.1 11.1 Indoco Buy 460 591 5.7 8.7 7.0 1.3 15.7 11.7 Ipca Labs Buy 354 430 44.5 12.4 8.4 2.9 25.7 19.0 Lupin Sell 552 547 246.3 22.0 15.1 5.0 25.1 20.9 Natco Buy 370 468 11.5 14.1 9.5 2.1 15.9 13.1 Ranbaxy Hold 517 536 218.2 17.2 12.8 4.1 36.2 16.8 Strides Arcolab Hold 654 718 38.2 18.7 10.2 1.5 10.5 8.0 Sun Pharma Hold 585 614 605.8 24.8 17.3 4.7 20.0 18.2 Unichem Sell 151 143 13.6 13.8 8.8 1.9 14.1 12.8

Source: Company, Anand Rathi Research

20 April 2012

India Healthcare


Strong growth prospects in the global generics market, steady growth with better profitability in the domestic market and emerging additional growth avenues are key positives for Indian healthcare. We are Overweight on the sector. Top picks: Cipla, Ipca Labs and Indoco Remedies. We also initiate coverage on Natco and Claris with Buy ratings and on Strides Arcolab with a Hold.

Growth via patent expiries, licensing deals and ready capacity. We expect the strong growth momentum in exports, at 20% revenue CAGR over the last decade, to continue due to patent expiries (~US$150bn over CY11-15), increasing generic penetration in regulated markets, emerging licensing deals and sufficient ready capacity along with regulatory filings and competent technical expertise. We also expect the current 14-15% revenue CAGR in the domestic market to continue for 5 years, led by rising healthcare spend and the rising incidence of lifestyle diseases.

Emerging additional growth avenues. Growth avenues are emerging in terms of increasing generics penetration in Japan, dossier-licensing and supply deals with MNCs and biosimilars in regulated markets, which would take another 2-3 yrs to pan out. We believe these opportunities should maintain the growth momentum even beyond FY14.

Overweight on the Indian healthcare sector. Top picks: Cipla, Ipca Labs and Indoco Remedies. We initiate coverage on Natco and Claris Life with Buys, and Strides Arcolab with a Hold. We upgrade Cipla to a Buy, downgrade DRL and Ranbaxy to Holds, and Lupin to a Sell. Risks: Regulatory hurdles and currency fluctuations.

Overweight Sensex: 17503

Nifty: 5332

20 April 2012 India Healthcare – New booster doses on the anvil

Anand Rathi Research 2

India Healthcare


Investment Argument and Valuation .................................................................3

Strong & sustained growth momentum .............................................................5

Emerging opportunities ...................................................................................11

Company Section............................................................................................13

Aanjaneya Lifecare...................................................................................14

Apollo Hospitals........................................................................................16

Cipla .........................................................................................................18

Claris Life Sciences ..................................................................................24

Dr Reddy’s Labs.......................................................................................38

Elder Pharma ...........................................................................................40

Fortis Healthcare ......................................................................................42

Glenmark Pharma ....................................................................................44

Indoco Remedies......................................................................................46

Ipca Labs..................................................................................................48

Lupin.........................................................................................................50

Natco Pharma ..........................................................................................52

Ranbaxy Laboratories ..............................................................................66

Strides Arcolab .........................................................................................68

Sun Pharma .............................................................................................84

Unichem Labs ..........................................................................................86



Investment Argument and Valuation Strong growth prospects in the global generics market, steady growth with better profitability in the domestic market and emerging growth opportunities are key positives for Indian healthcare. We are Overweight on the sector and recommend Cipla, Ipca Labs and Indoco Remedies as top picks. We also initiate coverage on Natco and Claris with Buy ratings, and on Strides Arcolab with a Hold.

Exports key to growth, domestic market drives margins The growth prospects of Indian healthcare companies are being driven by rising demand from global generics as well as growth in domestic branded formulations. We expect the strong growth momentum in exports, at 20% revenue CAGR over the last 10 years, to continue over FY12-15, led by patent expiries, expansion in emerging markets and further upsides from Para IV opportunities. The home market is likely to sustain steady 14-15% revenue CAGR in the next 4-5 years, led by rising spend on healthcare and the increasing incidence of lifestyle diseases.

In total, companies under our coverage reported better results for 9MFY12 than we estimated. The out-performance was led by Sun Pharma and Dr Reddy’s Labs among large caps, and Ipca Labs, Aurobindo and Apollo Hospitals among mid-caps. However, Cipla and Indoco Remedies disappointed with their lower margins. FY13 and FY14 are likely to be strong for the sector and we expect the companies we cover to report a good set of figures, led by a consistent growth outlook for the home market and increasing generic penetration in international markets.

Emerging growth avenues New growth avenues are emerging in terms of increasing generic penetration in Japan, dossier licensing and supply deals with MNCs and biosimilars in regulated markets, which would take another 2-3 years to materialize. We believe these opportunities should help maintain the growth momentum beyond FY14. Japan is the world’s third-largest market in terms of value but is largely dominated by patented products, as generics comprise just ~10% of Japan’s pharmaceutical market. The government’s focus on reducing healthcare spending in Japan and promoting generics should open up a large growth opportunity for generics players and low-cost manufacturing countries.

Dossier licensing and supply contracts have emerged as a new business stream for Indian generic companies as seen in case of Aurobindo-Pfizer, Strides-Pfizer and DRL-GSK. Such deals provide substantial cash-flows initially in terms of licensing fees, and later regular business in terms of supplying products to partners. Further, we believe that biosimilars would turn out to be another big business opportunity when guidelines for launches in regulated markets such as the US and EU are clear. This should take another three years, in our view.

Growth of ~20% in exports and 14-15% in domestic market is

likely to be sustained



Fig 1 – Companies and emerging growth drivers Key drivers Rural

penetration Lifestyle

segments Licensing & supply

deals

Exclusivity product pipeline

Biosimilars Sterile products

Japanese market entry

NCE pipeline

Aanjaneya Cipla Claris Dr Reddy's Elder Glenmark Indoco Ipca Lupin Natco Ranbaxy Strides Sun Unichem

Note: - Good; -Strong; -Very strong Source: Companies, Anand Rathi Research

Valuation We maintain an Overweight stance on the Indian healthcare sector, due to the sustainable growth momentum and emerging opportunities for additional growth in terms of increasing generic penetration in international markets and long-term supply contracts for Indian companies with MNCs. Top picks: Cipla, Ipca Labs and Indoco Remedies.

We initiate coverage on Natco and Claris with Buy ratings, and on Strides Arcolab with a Hold. We upgrade Cipla to a Buy on its better profitability and reasonable valuations. We downgrade Lupin to a Sell and Dr Reddy’s and Ranbaxy to Holds. We have Buy ratings on Cipla, Apollo Hospitals, Glenmark, Ipca Labs, Natco, Indoco, Elder, Aanjaneya and Claris, and Hold ratings on Sun Pharma, DRL, Ranbaxy, Strides Arcolab, and Fortis. We maintain a Sell on Unichem.

Fig 2 – BSE HC one-year-forward PE

0

5

10

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20

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30

35

40

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-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

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-08

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-09

Mar

-10

Mar

-11

Mar

-12

Average 23.2x

Source: Bloomberg, Anand Rathi Research

Risks New pricing policy by the Health Ministry to include more products

under price control

Regulatory hurdles

Currency fluctuation.



Strong & sustained growth momentum Growth prospects for Indian healthcare companies are driven by increasing demand from global generics as well as growth in domestic branded formulations. We expect the strong growth momentum in exports, at 20% revenue CAGR, to continue over FY12-15, led by patent expiries, expansion in emerging markets and further upsides from Para IV opportunities. We estimate the steady 14-15% revenue CAGR to continue in the home market, led by rising healthcare spend and the rising incidence of lifestyle diseases.

Domestic market to drive strong margins The domestic pharmaceutical sector has seen 15% revenue CAGR in the past five years. We expect the momentum to continue at 14-15% CAGR, to reach an industry size of US$17.5bn by CY14. We expect overall growth to be driven mainly by 18-20% CAGR in the chronic diseases sub-segment, which makes up ~25% of the market, and ~12% growth in acute therapies. Increasing healthcare penetration in rural areas would add to the growth. Segment-wise growth is driven primarily by strong growth in the anti-diabetic, cardiac, gynaecology and anti-infective segments. Abbott, Cipla, GSK, Ranbaxy, DRL and Sun Pharma are the key large players in domestic formulations and mainly operate in lifestyle-related diseases as well as acute therapies.

Fig 3 – Steady growth expected in the domestic market

100

200

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800

2005

2006

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2010

2011

e

2012

e

2013

e

2014

e

9

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17

18

Domestic Pharma market Growth (RHS)

(`bn) (%)

Source: OPPI, Anand Rathi Research

The home market slowed down in 2Q FY12 due to subdued growth in the anti-infectives and to seasonal issues. However, the industry saw a significant revival from Nov ’11, with 21% growth. This was followed by 14% and 16% industry growth in Dec ’11 and Jan ’12, respectively, and by 18.5% growth in Feb ’12. CY11 domestic pharma industry growth paralleled our 14-15% estimate. We expect such double-digit growth to continue in the next 4-5 years, led by deeper penetration in rural markets, rising healthcare spend and a higher incidence of chronic diseases.

Domestic formulations is likely to sustain mid-teen growth, led by the

chronic segment and rising healthcare spend



Fig 4 – Monthly growth rate has risen in the domestic healthcare market

14.813.3 13.1 12.8

14.312.1

8.9

14.2 15.113.7

21.5

15.7 16.518.5

21.9

0

5

10

15

20

25

Jan'

11

Feb'

11

Mar

'11

Apr'1

1

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'11

June

'11

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'11

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st'1

1

Sep'

11

Oct

'11

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'11

Dec

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Jan'

12

Feb'

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Mar

'12

(%)

Source: AIOCD

Contributing 19% of revenue, anti-infectives remain the largest segment of the domestic pharma market. Chronic diseases such as cardiac, diabetes and CNS cumulatively brought in 27% of revenues, growing at 18-20% for more than five years, faster than the industry growth rate of 14-15%. The respiratory and pain segments individually accounted for 9% of revenues, while vitamins and minerals contributed 10%.

The prevalence of chronic diseases in India is growing alarmingly, due to increasing sedentary lifestyles and unhealthy eating habits. Lifestyle diseases offer sustainable sales and better operating margins than acute segments. Besides MNCs, a significant portion of the sales of Indian companies such as Sun Pharma, Cadila Healthcare, Lupin, Ipca Labs, Unichem Labs and Torrent Pharma arise from these segments.

Fig 5 – Break-up of the home pharmaceutical market, by segment

Anti-infective19%

Cardiac13%

Gastro13%

Respiratory9%

Pain9%

Gynaec7%

Anti-diabetic7%

Derma6%

Neuro / CNS7%

Vitamins / Minerals

10% Source: AIOCD

Segment-wise, chronics such as cardiac, anti-diabetes and neurology/CNS categories continued to register strong growth, with a higher-than-industry growth rate. The cardiac and diabetes categories grew 19.5% and 24.9%, respectively, in CY11, compared to 14.5% growth for the sector. Anti-infectives, the largest segment, saw lower, 10.8%, growth during CY11, mainly from keener competition and seasonal causes such as a lower incidence of malaria.

Lifestyle-related illnesses – cardiac, diabetes and gastro-intestinal diseases –have been on the rise in the last few years. Further, changing lifestyles resulted in a significant rise in the incidences of high blood pressure and elevated cholesterol levels. Globally, these ailments have contributed ~20%



to the revenues of the top-10 therapy segments. (Diabetes, cardiovascular, asthma, obesity, and a few types of cancer are considered lifestyle diseases.)

The anti-diabetes market in India has seen 25% revenue CAGR over FY05-10, while the cardiac market saw 21% CAGR. We expect the ~20% growth rate in revenue to continue for both these sub-segments in the next 4-5 years, led by a consistent rise in the number of patients. The lifestyle pattern in India is undergoing a massive change, leading to increased lifestyle-related issues such as obesity and stress, which, in turn, lead to cardiovascular diseases and diabetes. The anti-diabetic and cardiovascular markets are expected to grow at a significantly higher rate (+20%) than the average sector growth rate of 14-15%.

Fig 6 – Growth in CY11, by segment

10.8

19.5

12.3

17.3

13.512.1

14.4

24.9

14.716.4

0

5

10

15

20

25

30

Anti-

infe

ctiv

e

Car

diac

Gas

tro

Vita

min

s/M

iner

als

Res

pira

tory

Pain

Gyn

aec

Anti-

diab

etic

Neu

ro/C

NS

Der

ma

(%)

Source: AIOCD

About 65% of the population in India does not have access to essential affordable medicine, against only 15% in China and 47% in Africa. This is despite the fact that a stringent price-control mechanism is in force in the country and the government has been able to provide medicine in India at a price that is lower than even in smaller economies such as Sri Lanka, Pakistan and Bangladesh. However, rising income levels of the Indian population and increasing healthcare awareness are likely to increase affordability.

Fig 7 – WHO: Percentage of population lacking access to essential medicines

30

65

47

29

26

22

15

14

14

0 10 20 30 40 50 60 70

All countries

India

Africa

East Mediterranean

SE Asia

America

China

West Pacific

EU

Source: OPPI

Cardiac and anti-diabetic continue to grow faster than the industry and

other acute segments



Indian market driven by brand consciousness The Indian pharmaceutical sector is largely a brand conscious market, where brand recall is the most important driver of its future. It is also a doctor-driven market, as the Indian population prefers to consume branded medicine prescribed by its doctors. These prescriptions are key to revenue generation for a pharma company. Therefore, for a pharmaceutical company to succeed in the Indian formulations market, strong brands need to be well-established in order to ensure sustainable revenue momentum and good margins.

Brand-building involves promoting a product to doctors through market representatives (sales people). These representatives brief doctors about the benefits and risks of a product and the added advantages of their products over those in the market. Many companies also conduct seminars for doctors, showcasing features of their products and brands, and provide relevant information that helps a doctor understand the benefits of a medicine in order to generate more prescriptions.

However, in recent times, some small and large companies have launched generic products with the aim of marketing them directly through distributors and chemists, unlike with brand-named prescription products. These companies do not spend on marketing and promotional activities and on a dedicated sales force. Generic product launches generally occur in acute categories such as colds and coughs, pain, etc. However, this marketing method cannot be applicable to special diseases such as chronic ones, where doctor consultation is required. We believe that brand-named products would generate sustainable and steady revenue in the long term in India, as it is a very brand-conscious market.

Products for chronic diseases offer better margins The increasing sedentary lifestyle and unhealthy eating habits spreading across India is also leading to an alarming growth in the prevalence of chronic diseases. Lifestyle diseases offer sustainable sales and better operating margins than acute segments. Apart from MNCs, Indian companies such as Sun Pharma, Cadila Healthcare, Lupin, Ipca Labs and Torrent Pharma obtain a significant portion of their sales in the lifestyle diseases segments.

Further, drugs for lifestyle diseases offer better prices than acute segments. The margin enjoyed in lifestyle segments is 35-40%, against 15-20% in acute segments. The major difference is in gross margins, whereas other cost items are more or less similar.

Top 10 companies by market share On its acquisition of Piramal Healthcare in Aug ’10, Abbott became the largest pharmaceutical company in India, with a consolidated market share of 6.13% (Abbott plus Piramal Healthcare and Solvay India). On Abbott’s acquisition of Piramal, Cipla dropped to second position, after a long stint at the top slot. However, Cipla (standalone) is still the largest, with 5.16% market share. Ranbaxy is the third largest, followed by GSK Pharma, Sun Pharma, Zydus Cadila, Alkem, Mankind, Pfizer and Lupin, in that order. All these companies focus on creating established brands for their version of medicines. This helps them ensure sustainable growth momentum and better margins than in other business segments, whether at home or for export.

EBITDA margin in chronic categories is much higher at 35-40%

vs 15-20% in the case of acute categories



Fig 8 – Market share of top 10 players Company Market share (%) Abbott 6.13 Cipla 5.16 Ranbaxy 4.47 GSK Pharma 4.70 Sun Pharma 4.49 Zydus Cadila 3.80 Alkem 3.52 Mankind 3.22 Pfizer+Wyeth 3.42 Lupin 3.00

Source: Industry

India’s economic parameters ensure strong growth India’s economic parameters strengthen the strong growth story for the domestic pharmaceutical market. India is still far behind other developed and emerging countries in terms of per-capita healthcare expenditure, proportion of population lacking access to essential medicines, and public healthcare expenditure as percentage of GDP. Further, India has seen a consistent increase in the proportion of private final consumption expenditure (PFCE) on healthcare versus total PFCE, from 1.5% in FY1951 to 4.7% in FY11. This indicates increasing awareness of the population and affordability of healthcare.

Fig 9 – Continuous rise in proportion of PFCE on healthcare

0

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51

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81

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(%)

At constant prices At current prices Source: Industry

International markets: the key growth opportunity Export growth in revenues is continuing at a strong 20%, driven by patent expiries in regulated markets such as the US and EU, expanded business and product baskets in emerging markets, dossier licensing and supply deals among MNCs and Indian generic companies, as well as a consistent increase in regulatory filings by our coverage universe companies in various markets. Indian companies are poised to capitalize on emerging opportunities in generics, driven by patent expiries worth ~US$150bn over CY11-15, the push by global governments for generic drugs, and emerging innovator generic partnerships (such as Pfizer-Aurobindo, GSK-DRL).

We believe the generics business will be the key growth driver due to India’s low-cost manufacturing advantage, the established operations of Indian pharma players across the globe, increasing generics penetration (in regulated markets such as the US and Japan) and patent expiries. Further,

Indian players are well placed to monetize huge exports opportunities

arising from patent expiries, increasing generic penetration and

MNC licensing deals



large innovators are now focusing on generics to maintain their growth momentum and revenue share, which indicates a strong future for the generics market. Teva is the largest generic company globally, with revenue of US$12bn, six times that of the largest Indian generic company, Ranbaxy.

Fig 10 – Top generic companies in terms of revenue (US$bn)

12.0

8.5

5.1

2.3 2.1 2.01.5 1.3 1.2 1.1 0.9

0

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Teva

Sand

oz

Myl

an

Wat

son

Acta

vis

Ran

baxy

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a

Sun

DR

L

Lupi

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Par

(US$bn)

Source Teva presentation, Companies

Patent expiries in the next 3-5 years will offer significant opportunities for generics manufacturers – both for sustainable growth as well as one-time opportunities. Drug patents worth US$150bn are set to expire over 2011-15, indicating significant growth opportunities for generics. Generally, the expiry of a patent leads to intense competition with the entry of generics players. This, in turn, results in significant price erosion (in some cases more than 90% in a year). Nevertheless, patent expiries entail strong growth opportunities for generics. Hence, we expect additional business of over US$2bn every year for generics from patent expiries over the next few years.

Fig 11 – Opportunities from patent expiries (at innovator prices)

28 28 27

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(US$ bn)

Source IMS Health, Glenmark Pharma

Indian generics players are well placed to capitalize on this opportunity with ready regulatory filings, technical capabilities and sufficient capacity. In addition to the regular generics business, post-patent-expiry, Para IV filings with first-to-file (FTF) status offers generics players the opportunity to co-market a product exclusively with the innovator for 180 days. During this period, the generics player captures more than 50% market share, with less price erosion (30-40%). Therefore, this period provides, to the generics player, huge one-time cash-flows from the expiring product patent.



Emerging opportunities Fresh growth avenues are emerging in terms of increasing generic penetration in Japan, dossier-licensing and supply deals with MNCs and biosimilars in regulated markets, which would take another 2-3 years to pan out. We believe these opportunities would help maintain the growth momentum even beyond FY14.

Additional growth avenues Japan is the world’s third-largest market in value but is largely dominated by patented products, as generics comprise ~10% of its market (by value). The government’s focus on reducing healthcare spending in Japan and promoting generics should open up large growth opportunities for generics players and low-cost manufacturing countries. Dossier licensing and supply contracts have emerged as fresh business streams for Indian generic companies such as Aurobindo-Pfizer, Strides-Pfizer and DRL-GSK. Such deals provide substantial cash-flows initially through licensing fees; and later through the regular business of supplying products to partners. In addition, we believe that biosimilars could turn out to be another huge business opportunity once guidelines regarding launches in regulated markets like the US and the EU are clear. This would take another 3-4 years, in our view.

In addition, there are other opportunities for Indian pharma players, such as increasing healthcare penetration in rural areas of the country (at a faster growth pace than that of the overall pharmaceutical sector), the rising incidence of lifestyle diseases in urban India, Para IV products pipeline for the US market – which would drive significant cash flows in the next 2-3 years, shortage of sterile products in regulated markets, providing an opportunity for Indian sterile injectable manufacturers – and an NCE (new chemical entity) pipeline as companies focus on innovative R&D. Innovative R&D, though, is a high-risk, high-reward play, with uncertainty in terms of outcome.

Fig 12 – Companies and upcoming growth drivers Key drivers Rural

penetration Lifestyle

segments Licensing & supply

deals

Exclusivity product pipeline

Biosimilars Sterile products

Japanese market entry

NCE pipeline

Aanjaneya

Cipla

Claris

Dr Reddy's

Elder

Glenmark

Indoco

Ipca

Lupin

Natco

Ranbaxy

Strides

Sun

Unichem

Note: - Good; -Strong; -Very strong Source: Companies, Anand Rathi Research

Licensing deals with MNCs, launch of biosimilars in regulated markets

and generic entry into Japan are emerging as new growth avenues



Healthcare spend rising faster than income The proportion of medical and healthcare expenditure in overall personal consumption expenditure in India has risen considerably over the years. Despite the decline, post-FY05, the proportion has more-than-doubled since the early 1990s to 4.7% in FY10. The real growth in medical and healthcare expenditure has generally surpassed that for overall consumer spend.

Further, the Indian healthcare market is largely private driven, unlike in the case of other nations, where public spend drives the healthcare market. India’s proportion of public and private spend in healthcare is a skewed picture. The private sector’s share in spend is ~74%, one of the highest in the world and about 14 percentage points above the world average. The contribution of public expenditure on healthcare to healthcare spend in India is about 26%, one of the lowest and about 23 percentage points lower than the world average.

Fig 13 – Country-specific share of public and private healthcare spend

26.2

44.7 41.645.5

81.7

59.6

73.8

55.3 58.454.5

18.3

40.4

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USA U

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Public Private

(%)

Source: WHO, Industry data



Company Section



[email protected]


[email protected]

Key financials (YE Mar) FY10 FY11 FY12e FY13e FY14e

Sales (`m) 1,617 3,203 4,756 7,800 9,455

Net profit (`m) 151 361 428 648 927

EPS (`) 26.1 47.6 30.8 46.7 66.8

Growth (%) 151.9 82.0 -35.2 51.3 43.1

PE (x) 24.7 13.1 19.9 13.1 9.2

EV/EBITDA (x) 32.6 14.6 12.8 8.9 7.1

P/B (x) 7.5 3.6 2.5 2.1 1.7

RoE (%) 48.7 39.2 17.4 16.5 19.7

RoCE (%) 23.5 23.1 11.7 11.4 13.4

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

Net gearing (%) 113.2 99.1 109.9 108.7 83.5


India I Equities Pharmaceuticals

Update

20 April 2012

Aanjaneya Lifecare

Strong growth with compelling valuations; we maintain a Buy

Strong positives for Aanjaneya are its successful shift to formulations, continuing growth trajectory, focus on high-margin, niche APIs and improving financials. Its recent acquisition of Apex Drugs is likely to accelerate its revenue growth. We maintain a Buy, with a revised price target of `737 (from `542 earlier).

Successful vertical integration. Successfully transforming its business model to a sharper focus on formulations, in its first year of formulations (FY11), Aanjaneya’s formulations revenue touched `1.3bn, 40.9% of revenue. As the company is one of the largest quota holders of codeine (a narcotic product), we expect a substantial contribution from codeine-based products to total formulations revenue and better profitability due to limited competition. We expect formulations to register a 31.3% revenue CAGR over FY11-14.

Apex merger to accelerate revenue growth. Aanjaneya recently announced its assets buyout of Apex Drugs for `2.5bn, valuing it at ~1.4x FY11 revenue. We expect Apex to contribute ~29% of revenue in FY13. The acquisition would be funded through an equity issue of `650m and additional debt of `1.9bn.

Revised estimates. We revise our estimates to factor in the integration of Apex Drugs. Hence, we raise our revenue estimates for FY13 and FY14 respectively 41% and 41.6%. We cut our EPS estimates, though, 4.9% for FY13 and increase 6.3% for FY14, due to the higher interest cost and equity dilution on the issue of shares for the Apex acquisition.

Valuation. At our target price, the stock would trade at 15.8x FY13e and 11x FY14e earnings. We maintain a Buy on it. Risks: Pricing pressures in domestic generic formulations and regulatory hurdles.

Rating: Buy Target Price: `737 Share Price: `612

Relative price performance

AALL

Sensex200

300

400

500

600

700

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

Source: Bloomberg

Key data AALL IN / AANJ.BO52-week high / low `671 / `224Sensex / Nifty 17503 / 53323-m average volume US$1.7m Market cap `8.9bn / US$0.17bnShares outstanding 13.9m

Shareholding pattern (%) Dec ’11 Sep ’11 Jun ’11

Promoters 60.43 60.24 60.24 - of which, Pledged 2.93 0 0Free float 39.57 39.76 39.76 - Foreign institutions 4.46 4.57 4.81 - Domestic institutions 0 0 0 - Public 35.11 35.19 34.95

Estimates revision (%) FY12e FY13e FY14e

Sales 9.3 41.0 41.6EBITDA 14.0 29.6 34.1EPS (11.9) (4.9) 6.3Target multiple (x) - - -

Change in Estimates Target Reco

20 April 2012 Aanjaneya Lifecare – Strong growth with compelling valuations; we maintain a Buy


Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)

Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Net revenues 1,617 3,203 4,756 7,800 9,455Revenue growth (%) 79.4 98.1 48.5 64.0 21.2- Op. expenses 1,324 2,496 3,748 6,301 7,568EBIDTA 293 706 1,009 1,499 1,887EBITDA margin (%) 18.1 22.1 21.2 19.2 20.0- Interest expenses 60 136 285 447 465- Depreciation 9 26 140 162 174+ Other income 5 2 50 36 40- Tax 78 186 206 278 361Effective tax rate (%) 34.0 34.0 32.4 30.0 28.0Reported PAT 151 360 428 648 927+/- Extraordinary items 0.0 -1 0.0 0.0 0.0+/- Minority interest 0.0 0.0 0.0 0.0 0.0Adjusted PAT 151 361 428 648 927Adj. FDEPS (`/share) 26.1 47.6 30.8 46.7 66.8Adj. FDEPS growth (%) 151.9 82.0 -35.2 51.3 43.1Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

PAT 151 360 428 648 927 + Non-cash items 22 52 140 162 174 Cash profit 173 412 568 810 1,101 - Incr./(decr.) in WC (229) (1,006) (1,107) (1,222) (543)Operating cash-flow (56) (594) (539) (412) 558 - Capex (388) (685) (3,900) (250) (250)Free cash-flow (444) (1,279) (4,439) (662) 308 - Dividend 0 0 0 0 0 + Equity raised 223 486 1,820 0 0 + Debt raised 221 792 2,810 551 (200)- Investments (0) 0 0 0 0 - Misc. items (1) Net cash-flow 0 (0) 191 (112) 108 + Op. cash & bank bal. 7 8 7 197 86 Cl. cash & bank bal. 8 7 197 86 193 Source: Company, Anand Rathi Research

Fig 5 – Valuation chart (P/E)

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Fig 2 – Balance sheet (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Share capital 58 76 139 139 139Reserves & surplus 439 1,268 3,453 4,101 5,028Net worth 497 1,344 3,592 4,240 5,167Minority interest 0 0 0 0 0Total debt 597 1,388 4,198 4,749 4,549Def. tax liab. (net) 24 50 50 50 50Capital employed 1,118 2,782 7,840 9,039 9,766Net fixed assets 511 1,170 3,931 4,018 4,094Investments 1 1 1 1 1 - of which, Liquid 0 0 0 0 0Net working capital 598 1,605 2,712 3,934 4,478Cash and bank balance 8 7 197 86 193Capital deployed 1,118 2,782 7,840 9,039 9,766Net debt 589 1382 4001 4663 4356WC days 122.0 153.6 200.3 181.1 188.5Book value (`/sh) 86.1 177.4 258.7 305.3 372.1Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `612 Year-end: Mar FY10 FY11 FY12e FY13e FY14e

P/E (x) 24.7 13.1 19.9 13.1 9.2P/B (x) 7.5 3.6 2.5 2.1 1.7EV/EBITDA (x) 32.6 14.6 12.8 8.9 7.1RoE (%) 48.7 39.2 17.4 16.5 19.7RoCE (%) 23.5 23.1 11.7 11.4 13.4Dividend yield (%) 0.0 0.0 0.0 0.0 0.0Dividend payout (%) 0.0 0.0 0.0 0.0 0.0Asset turnover (x) 5.4 5.5 2.1 2.0 2.3Net debt/equity (x) 1.1 1.0 1.1 1.1 0.8Net debt/EBITDA (x) 2.0 2.0 4.0 3.1 2.3Net debt/op. CF (x) -10.6 -2.3 -7.4 -11.3 7.8Interest coverage (x) 4.7 5.0 3.0 3.0 3.7P/CEPS (x) 56.0 23.2 15.8 11.1 8.1EV/ sales (x) 5.9 3.2 2.7 1.7 1.4M-cap/sales (x) 5.5 2.8 1.9 1.1 0.9Source: Company, Anand Rathi Research

Fig 6 – Share of revenue, by segment (FY12e)

Domestic formulations

38%

Domestic APIs54%

Export formulations

2%

Export APIs6%

Source: Anand Rathi Research



[email protected]


[email protected]


Sales (`m) 20,265 26,054 31,883 38,605 46,164

Net profit (`m) 1,389 1,839 2,293 3,088 3,913

EPS (`) 11.2 14.7 17.1 22.4 28.4

Growth (%) 30.4 32.4 24.7 34.7 26.7

PE (x) 60.0 45.3 36.3 27.0 21.3

EV/EBITDA (x) 26.7 19.9 16.8 13.6 11.2

P/B (x) 4.6 4.0 3.3 2.9 2.6

RoE (%) 9.0 10.4 10.5 11.5 12.9

RoCE (%) 7.0 8.0 8.7 9.7 10.9

Dividend yield (%) 1.0 0.6 0.4 0.6 0.7

Net gearing (%) 55.7 50.9 38.5 33.5 30.1


India I Equities Hospitals

Update

20 April 2012

Apollo Hospitals

Increasing visibility; we raise our price target and retain a Buy

Apollo Hospitals is our preferred pick in the hospitals sector. We raise our price target to `735 (from `620 earlier), as we now value its pharmacy business at 0.5x one-year-forward sales on account of a likely turnaround in its operations, the possibility of divestment and a better EBITDA margin.

Momentum continues in hospitals business. In its core hospitals business, the company continues to do well, with 20.2% yoy revenue growth in 9MFY12. We expect the steady growth phase to continue for the next two years, leading to 21.6% CAGR in revenue from the hospitals segment over FY11-14. We have assumed an addition of 200, 300 and 950 beds FY12, FY13 and FY14, respectively.

Visibility improves in pharmacy business. The strong ~25% growth each year in Apollo’s pharmacy business is likely to continue, led by the continuous addition of new stores and the increasing maturity of the earlier pharmacies, leading to better EBITDA margins. We expect a possible divestment of a partial stake in the non-core pharmacy business, thereby unlocking value.

Raise estimates. We maintain revenue estimates but raise margin and EPS estimates due to the improving EBITDA margin on the rising maturity of beds and better margins in the pharmacy business. We raise EPS estimates 2.4%, 4.4% and 2% for, respectively, FY12, FY13 and FY14, led by the 30-50bps improvement in margins.

Valuation. At our target price, the stock would trade at 16.3x FY13e and 13.4x FY14e EV/EBITDA. We maintain a Buy, with a revised price target of `735 (from `620 earlier). Risks: High capex and delay in executing expansion projects.



APHS

Sensex300

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12

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Source: Bloomberg

Key data APHS IN / APLH.BO52-week high / low `717 / `432Sensex / Nifty 17503 / 53323-m average volume US$2.6m Market cap `81.3bn / US$1.6bnShares outstanding 134.5m


Promoters 33.1 31.53 33.24 - of which, pledged 54.9 59.01 58.96Free float 66.9 68.47 66.76 - Foreign institutions 31.83 34.83 30.53 - Domestic institutions 2.61 3.2 3.42 - Public 32.46 30.44 32.81


Sales - - -EBITDA 1.6 3.0 1.5EPS 2.4 4.4 2.0Target multiple (x) - - -


20 April 2012 Apollo Hospitals – Increasing visibility; we raise our price target and retain a Buy




Net revenues 20,265 26,054 31,883 38,605 46,164Revenue growth (%) 25.5 28.6 22.4 21.1 19.6- Op. expenses 17,238 21,865 26,702 32,042 38,200EBIDTA 3,026 4,189 5,181 6,563 7,963EBITDA margin (%) 14.9 16.1 16.3 17.0 17.3- Interest expenses 602 814 863 863 863- Depreciation 750 948 1,096 1,318 1,492+ Other income 322 187 120 140 140- Tax 676 873 1,141 1,536 1,947Effective tax rate (%) 33.5 32.4 33.2 33.2 33.2Reported PAT 1,376 1,839 2,293 3,088 3,913+/- Extraordinary items (21) - - - -+/- Minority interest (36) (15) - - -Adjusted PAT 1,389 1,839 2,293 3,088 3,913Adj. FDEPS (`/share) 11.2 14.7 17.1 22.4 28.4Adj. FDEPS growth (%) 30.4 32.4 24.7 34.7 26.7Source: Company, Anand Rathi Research


PAT 1,339 1,824 2,293 3,088 3,913 + Non-cash items 878 1,254 1,096 1,318 1,492 Cash profit 2,218 3,078 3,390 4,406 5,406 - Incr./(decr.) in WC 473 1,057 456 875 1,056 Operating cash-flow 1,745 2,020 2,934 3,531 4,350 - Capex 4,091 3,566 4,500 4,500 3,500 Free cash-flow (2,346) (1,546) (1,566) (969) 850 - Dividend 504 544 402 542 687 + Equity raised 973 982 4,190 1,159 0 + Debt raised 2,426 453 0 0 0 - Investments (1,749) 854 0 0 0 - Misc. items 57 (174) 0 0 0 Net cash-flow 2,241 (1,336) 2,221 (352) 163 + Op. cash & bank bal. 876 3,117 1,781 4,002 3,649 Cl. cash & bank bal. 3,117 1,781 4,002 3,649 3,812 Source: Company, Anand Rathi Research

Fig 5 – Valuation chart (EV/EBITDA)

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(`m)



Share capital 618 624 672 689 689Reserves & surplus 15,917 18,366 24,398 28,086 31,313Net worth 16,535 18,989 25,070 28,775 32,001Minority interest 241 249 249 249 249Total debt 9,132 9,585 9,585 9,585 9,585Def. tax liab. (net) 536 845 845 845 845Capital employed 26,444 29,668 35,748 39,453 42,680Net fixed assets 16,257 18,905 22,309 25,491 27,499Investments 4,166 5,020 5,020 5,020 5,020 - of which, liquid 0.7 882.6 882.6 882.6 882.6Net working capital 2,905 3,962 4,418 5,293 6,348Cash and bank balance 3,117 1,781 4,002 3,649 3,812Capital deployed 26,444 29,668 35,748 39,453 42,680Net debt 6,015 6,922 4,700 5,053 4,890WC days 4.9 3.4 7.7 7.7 7.5Book value (`/sh) 133 151 185 208 231Source: Company, Anand Rathi Research


P/E (x) 60.0 45.3 36.3 27.0 21.3P/B (x) 4.6 4.0 3.3 2.9 2.6EV/EBITDA (x) 26.7 19.9 16.8 13.6 11.2RoE (%) 9.0 10.4 10.5 11.5 12.9RoCE (%) 7.0 8.0 8.7 9.7 10.9Dividend yield (%) 1.0 0.6 0.4 0.6 0.7Dividend payout (%) 31.1 25.4 15.0 15.0 15.0Asset turnover (x) 1.3 1.4 1.4 1.5 1.5Net debt/equity (x) 0.6 0.5 0.4 0.3 0.3Net debt/EBITDA (x) 2.0 1.7 0.9 0.8 0.6Net debt/op. CF (x) 3.4 3.4 1.6 1.4 1.1Interest coverage (x) 3.8 4.0 4.7 6.1 7.5P/CEPS (x) 35.0 27.1 24.0 18.9 15.4EV/ sales (x) 4.0 3.2 2.7 2.3 1.9M-cap/sales (x) 3.7 2.9 2.6 2.2 1.8Source: Company, Anand Rathi Research

Fig 6 – Share of Hospitals revenue, by segment (FY12e)

Chennai cluster46%

Hyderabad cluster17%

Other owned16%

Significant subs and JVs

20%

New additions1%




[email protected]


[email protected]


Sales (`m) 56,057 63,145 69,594 79,827 91,044

Net profit (`m) 10,565 9,791 11,127 13,423 15,803

EPS (`) 13.2 12.2 13.9 16.7 19.7

Growth (%) 5.2 -7.3 13.6 20.6 17.7

PE (x) 24.3 26.2 23.1 19.1 16.3

EV/EBITDA (x) 18.1 19.1 15.7 13.1 11.1

P/B (x) 4.3 3.9 3.4 3.0 2.6

RoE (%) 20.6 15.6 15.7 16.7 17.3

RoCE (%) 18.6 14.7 14.6 16.0 16.7

Dividend yield (%) 0.7 0.9 0.9 1.1 1.3

Net gearing (%) -5.1 3.4 -1.3 -4.9 -9.3



Update

20 April 2012

Cipla

Reasonable valuations, strong growth prospects; Buy

Cipla has witnessed a ~10% correction in its stock price in the past three months leaving room for an upside and offering more growth assurance. We expect an 18-20% rise in net profit in the next two years, led by ~15% growth in domestic revenue, better capacity utilization at Cipla’s Indore SEZ plant, which is boosting export revenue (a 13.4% CAGR over FY12-14), and better margins. We upgrade the stock from a Sell to a Buy, with a revised price target of `400.

Domestic formulations to grow faster than the sector. We estimate 14.8% CAGR in revenue over FY11-14, on the low base of Cipla’s lower-than-industry growth in FY10 and FY11, better growth in the acute category for the industry as a whole and increasing productivity of its new field force. Higher domestic growth would also lead to better margins.

Exports to see gradual pickup. Cipla’s exports business is likely to register 13.4% CAGR over FY12-14, led by 14% CAGR in export formulations over FY12-14 on the increasing capacity utilization at its Indore plant. We have not built in any upside from the possible launch of combination inhalers in regulated markets, which may offer a substantial upside to our estimates. For aerosol inhaler devices, the company has built up huge capacity, more than half of which is unutilized.

Revising estimates. We lower our FY12 revenue and EPS estimates 2.3% and 3%, respectively, due to slower growth in exports. However, we raise FY13 and FY14 EPS estimates 1.4% and 4.1%, respectively, considering strong domestic growth and better margins.

Valuation. At our revised target price of `400 (`330 earlier)., Cipla trades at 22.8x FY13e and 19.5x FY14e earnings. We upgrade the stock from a Sell to a Buy. Risks: Currency fluctuations; regulatory hurdles.



CIPLA

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Source: Bloomberg

Key data CIPLA IN / CIPL.BO52-week high / low `381 / `274Sensex / Nifty 17503 / 53323-m average volume US$10.2m Market cap `250bn / US$4.9bnShares outstanding 803m

Shareholding pattern (%) Dec ’11 Sep ’11 Jun ’11Promoters 36.8 36.8 36.8 - of which, pledged 0 0 0Free float 63.2 63.2 63.2 - Foreign institutions 13.09 13.57 14.73 - Domestic institutions 20.41 19.86 19.08 - Public 29.7 29.77 29.39


Sales (2.3) (0.0) 1.6EBITDA (2.3) 1.0 2.6EPS (3.0) 1.4 4.1Target multiple (x) - - -


20 April 2012 Cipla – Reasonable valuations, strong growth prospects; Buy




Net revenues 56,057 63,145 69,594 79,827 91,044Revenue growth (%) 7.1 12.6 10.2 14.7 14.1- Op. expenses 42,312 49,878 53,628 61,035 69,306EBIDTA 13,745 13,267 15,966 18,792 21,738EBITDA margin (%) 24.5 21.0 22.9 23.5 23.9- Interest expenses 230 173 159 72 55- Depreciation 1,653 2,542 2,899 3,100 3,412+ Other income 1,076 945 1,000 1,158 1,483- Tax 2,435 1,952 2,782 3,356 3,951Effective tax rate (%) 19.8 16.8 20.0 20.0 20.0Reported PAT 10,815 9,896 11,127 13,423 15,803+/- Extraordinary items 950 0 0 0 0+/- Minority interest 0 -224 0 0 0Adjusted PAT 10,565 9,791 11,127 13,423 15,803Adj. FDEPS (`/share) 13.2 12.2 13.9 16.7 19.7Adj. FDEPS growth (%) 5.2 -7.3 13.6 20.6 17.7Source: Company, Anand Rathi Research


PAT 10,815 9,896 11,127 13,423 15,803 + Non-cash items 1,803 2,874 2,899 3,100 3,412 Cash profit 12,617 12,769 14,026 16,523 19,216 - Incr./(decr.) in WC 1,150 3,029 2,075 5,137 5,705 Operating cash-flow 11,468 9,741 11,951 11,385 13,511 - Capex 5,201 9,468 5,000 5,000 5,000 Free cash-flow 6,267 273 6,951 6,385 8,511 - Dividend 1,873 2,615 2,604 3,141 3,698 + Equity raised 6,691 0 0 0 0 + Debt raised (9,352) 5,668 (3,500) (846) 0 - Investments 1,838 3,253 1,137 0 0 - Misc. items (182) (329) 0 0 0 Net cash-flow 78 402 (289) 2,398 4,813 + Op. cash & bank bal. 530 608 1,010 721 3,119 Cl. cash & bank bal. 608 1,010 721 3,119 7,932 Source: Company, Anand Rathi Research


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Share capital 1,606 1,606 1,606 1,606 1,606Reserves & surplus 57,535 65,056 73,579 83,860 95,966Net worth 59,141 66,661 75,184 85,466 97,572Minority interest 0 0 0 0 0Total debt 51 5,719 2,219 1,373 1,373Def. tax liab. (net) 1,792 2,131 2,131 2,131 2,131Capital employed 60,983 74,511 79,535 88,970 101,076Net fixed assets 26,954 33,799 35,900 37,800 39,388Investments 2,651 5,904 7,041 7,041 7,041 - of which, liquid 2,464 2,465 2,466 2,467 2,468Net working capital 30,770 33,798 35,873 41,010 46,715Cash and bank balance 608 1,010 721 3,119 7,932Capital deployed 60,983 74,511 79,535 88,970 101,076Net debt -3022 2244 -968 -4214 -9027WC days 167.6 154.6 157.0 150.0 150.3Book value (`/sh) 73.7 83.0 93.6 106.4 121.5Source: Company, Anand Rathi Research


P/E (x) 24.3 26.2 23.1 19.1 16.3P/B (x) 4.3 3.9 3.4 3.0 2.6EV/EBITDA (x) 18.1 19.1 15.7 13.1 11.1RoE (%) 20.6 15.6 15.7 16.7 17.3RoCE (%) 18.6 14.7 14.6 16.0 16.7Dividend yield (%) 0.7 0.9 0.9 1.1 1.3Dividend payout (%) 14.8 22.7 20.0 20.0 20.0Asset turnover (x) 1.0 0.9 0.9 0.9 1.0Net debt/equity (x) -0.1 0.0 0.0 0.0 -0.1Net debt/EBITDA (x) -0.2 0.2 -0.1 -0.2 -0.4Net debt/op. CF (x) -0.3 0.2 -0.1 -0.4 -0.7Interest coverage (x) 52.7 61.9 82.3 218.5 333.8P/CEPS (x) 22.0 24.1 21.5 18.0 15.3EV/ sales (x) 4.4 4.0 3.6 3.1 2.7M-cap/sales (x) 4.4 3.9 3.6 3.1 2.7Source: Company, Anand Rathi Research



46%

Export formulations

42%

Export APIs10%

Technical know-how & Others

2%




On reasonable valuations, greater revenue assurance On the ~10% correction in its stock price in the past three months leaving upside room and offering more growth assurance, we upgrade Cipla from a Sell to a Buy, with a revised price target of `400. We expect an 18-20% rise in net profit in the next two years, led by ~15% growth in domestic revenue, better capacity utilization at its Indore SEZ plant that is boosting export revenue (a 13.4% CAGR over FY12-14), and better margins.

Recovering domestic formulations growth We expect Cipla to report a 14.8% CAGR in revenue over FY11-14, due to the low base on account of its lower-than-industry growth in FY10 and FY11, improving growth of the acute category for the industry as a whole and increasing productivity from a new field force. We believe that higher growth in the home market would lead to better margins. For more than eight quarters the company has been seeing lower-than-industry growth (till 2QFY12), in line with our estimates. Its market share dropped to 5.24% in CY11 (from more than 5.4% in CY10). However, Cipla recovered in 3QFY12 with 18.4% revenue growth in the home market led by recovery in revenue in acute categories.

We expect the higher-than-industry growth to be sustained for the next two years on the low base, recovery in growth in acute categories, product launches and increase in the sales-force productivity as new representatives were added in the past two years. We estimate a 15% revenue growth in FY13 and FY14 each in the domestic formulations segment compared to expected industry growth of 14-14.5%. Management has “guided” to over 15% growth in the next 5-6 quarters, which can be relied upon, considering the above-mentioned factors and performance in line with the “guidance” in the past.

Fig 7 – Quarterly revenue growth in domestic formulations

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Fig 8 – Monthly growth rate in the home market reviving

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Source: AIOCD



Exports to scale up gradually We expect Cipla’s exports business to see a 13.4% CAGR, led by a 14% CAGR in export formulations over FY12-14. The growth rate appears modest despite improving capacity utilization at the Indore SEZ plant because the company is reducing its exposure to the low-margin ARV business. This constituted ~25% of export revenue in FY11 and has come down to ~20% now. We expect the Indore SEZ plant to bring in `6bn to revenue in FY12, comprising ~15% of export revenue.

Fig 9 – Export formulations growth trend

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Revenue Growth (RHS) Source: Company

Further, its API business would see a modest 11% CAGR over FY12-14 led by increased capacity, supply of Lexapro APIs to Teva and higher revenue from the supply of vancocin APIs to Akorn for the US market providing better margins.

Fig 10 – Export APIs revenue growth trend

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Revenue Growth (RHS) Source: Company, Anand Rathi Research

We have not built in any upside from the possible launch of combination inhalers in regulated markets, which may provide a substantial upside to our estimates. For aerosol inhalers, the company has built up huge capacity, more than half of which is unutilized. We expect approval for combination inhalers in the EU, and the pickup in revenue on the launch of Seroflo in South Africa and Russia to improve capacity utilization and provide upside to our estimates, along with better margins. Capacity utilization for aerosol inhalers, including at the Indore SEZ plant, was 38.5% in FY11.



Fig 11 – Aerosol devices capacity and utilization details

67.0

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Revise estimates We lower FY12 revenue and EPS estimate 2.3% and 3%, respectively, due to lower export growth on account of reduced exposure to ARVs. We maintain FY13 estimates, though we raise API export revenue but lower export formulations revenue due to lower ARV revenue. We raise our FY14 revenue estimate 1.6% on account of greater assurance regarding domestic formulations revenue. However, we raise FY13 and FY14 EPS estimates 1.4% and 4.1%, respectively, considering that the strong domestic growth would lead to better margins.

Fig 12 – Estimates revision FY12e FY13e FY14e

(`m ) Previous Revised % chg Previous Revised % chg Previous Revised % chg

Revenue 71,238 69,594 (2.3) 79,850 79,827 (0.0) 89,639 91,044 1.6

EBITDA 16,349 15,966 (2.3) 18,598 18,792 1.0 21,189 21,738 2.6

PAT 11,474 11,127 (3.0) 13,232 13,423 1.4 15,180 15,803 4.1

EPS 14.3 13.9 (3.0) 16.5 16.7 1.4 18.9 19.7 4.1


Valuations Considering the recent 10% correction in its stock price, increased growth assurance and better profitability, we upgrade Cipla from a Sell to a Buy. We also raise our price target to `400, based on 22x one-year-forward earnings (from `330, based on 20x one-year-forward earnings).

We also raise our target P/E multiple, from 20x to 22x, on the greater revenue growth assurance and expecting an 18-20% growth in net profit, compared to single-digit and low-double-digit growth in the past three years. The one-year-forward P/E average of the last two years was 23x; all the valuation multiples (including PE, EV/EBITDA and P/BV) are now at the lower part of the band.



Fig 13 – One-year-forward PE

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Fig 14 – One-year-forward EV/EBITDA

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[email protected]


[email protected]

Key financials (YE Dec) CY10 CY11 CY12e CY13e CY14e

Sales (`m) 7,523 7,388 8,319 9,368 10,492Net profit (`m) 1,365 1,279 1,367 1,592 1,874EPS (`) 21.4 20.0 21.4 25.0 29.4Growth (%) -41.7 -6.3 6.9 16.5 17.7PE (x) 8.3 8.8 8.3 7.1 6.0EV/EBITDA (x) 4.8 5.8 5.0 4.3 3.6P/B (x) 1.2 1.1 1.0 0.9 0.8RoE (%) 19.2 13.0 12.3 12.8 13.4RoCE (%) 15.6 11.1 10.8 11.7 12.0Dividend yield (%) NA 1.1 1.2 1.4 1.7Net gearing (%) 1.8 28.0 23.1 15.1 8.6


Pharmaceuticals

Initiating CoverageIndia I Equities

20 April 2012

Claris Life Sciences

High-margin niche business, strong growth opportunities; Buy

A niche business in high-margin sterile injectables that are used in hospitals globally, high entry barriers in the industry, large product basket, possible upside from US market if import alert is lifted by US FDA, and attractive valuations contribute to our positive stance on Claris Life Sciences. We initiate coverage on the company with a Buy rating and a price target of `250.

Niche business of sterile injectables. One of India’s largest companies in the high-margin business of sterile injectables, Claris has few competitors due to high entry barriers such as high capital intensity, complex formulations and tough regulatory requirements. We estimate the potential market for global generic injectables by CY14 at US$33bn.

Well-placed to monetize the vast opportunities. The company has built a niche portfolio of complex products – propofol and iron sucrose –for the base and critical-care segments of hospitals. Claris aims at a 20% market share for each product in all areas.

Improving financials. We estimate 12.4% CAGR in revenue over CY11-14 and 13.6% in adjusted net profit for Claris. We have not factored in its US businesses due to the import alert imposed by the US FDA. Clearance of import alert would offer upsides to our estimates. While return ratios have been hit by Claris’ recent IPO, we expect a gradual improvement in returns from CY13e.

Valuation. Claris trades at attractive valuations of 8.3x CY12e and 7.1x CY13e earnings. We value the stock at a target price of `250 based on 10x CY13e earnings. Risks: Delay in resolving the US FDA issue and currency fluctuations.



CLAR

Sensex

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Key data CLAR IN / CLAI.BO52-week high / low `199 / `98Sensex / Nifty 17503 / 53323-m average volume US$0.5m Market cap `11.3bn / US$0.22bnShares outstanding 63.8m

Shareholding pattern (%) Mar ’12 Dec ’11 Sep ’11Promoters 69 69 69

- of which, Pledged 20.8 22.8 19.8

Free Float 31 31 31

- Foreign Institutions 8.4 11.3 9.0

- Domestic Institutions 11.6 12.0 12.0

- Public 11.0 7.7 10.0

20 April 2012 Claris Life Science – High-margin niche business, strong growth opportunities; Buy



Year-end: Dec CY10 CY11 CY12e CY13e CY14e

Net revenues 7,523 7,388 8,319 9,368 10,492Revenue growth (%) 1.2 (1.8) 12.6 12.6 12.0 - Op. expenses 5,239 4,986 5,615 6,401 7,155EBIDTA 2,284 2,402 2,704 2,967 3,337EBITDA margin (%) 30.4 32.5 32.5 31.7 31.8- Interest expenses 362 343 361 311 311- Depreciation 467 547 637 669 687+ Other income 149 3 3 3 3- Tax 240 236 342 398 468Effective tax rate (%) 15.0 15.6 20.0 20.0 20.0Reported PAT 1,365 1,263 1,367 1,592 1,874+/- Extraordinary items 0 0 0 0 0+/- Minority interest 0 0 0 0 0Adjusted PAT 1,365 1,279 1,367 1,592 1,874Adj. FDEPS (`/share) 21.4 20.0 21.4 25.0 29.4Adj. FDEPS growth (%) -41.7 -6.3 6.9 16.5 17.7Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e

PAT 1,365 1,279 1,367 1,592 1,874 + Non-cash items 504 627 637 669 687 Cash profit 1,869 1,906 2,004 2,261 2,561 - Incr./(decr.) in WC 1,438 2,467 322 556 597 Operating cash-flow 431 (562) 1,682 1,705 1,964 - Capex 1,946 2,374 1,250 750 1,000 Free cash-flow (1,516) (2,936) 432 955 964 - Dividend 149 148 159 185 218 + Equity raised 0 0 0 0 0 + Debt raised 466 502 (1,000) 0 0 - Investments 0 0 0 0 0 - Misc. items (2,785) Net cash-flow 1,587 (2,582) (727) 770 746 + Op. cash & bank bal. 2,369 3,956 1,593 867 1,637 Cl. cash & bank bal. 3,956 1,593 867 1,637 2,383 Source: Company, Anand Rathi Research


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Fig 2 – Balance sheet (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e

Share capital 638 638 638 638 638Reserves & surplus 8,508 9,883 11,091 12,498 14,154Net worth 9,146 10,521 11,729 13,136 14,792Minority interest 0 0 0 0 0Total debt 4,128 4,710 3,710 3,710 3,710Def. tax liab. (net) 521 601 601 601 601Capital employed 13,273 15,231 15,439 16,846 18,502Net fixed assets 7,642 9,495 10,108 10,189 10,502Investments 0 0 0 0 0 - of which, liquid 0 0 0 0 0Net working capital 1,675 4,142 4,464 5,020 5,617Cash and bank balance 3,956 1,593 867 1,637 2,383Capital deployed 13,273 15,231 15,439 16,846 18,502Net debt 171 3,117 2,843 2,073 1,327WC days (48.3) 61.2 118.7 114.1 114.1Book value (`/sh) 143.3 164.9 183.8 205.8 231.8Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `177 Year-end: Dec CY10 CY11 CY12e CY13e CY14e

P/E (x) 8.3 8.8 8.3 7.1 6.0P/B (x) 1.2 1.1 1.0 0.9 0.8EV/EBITDA (x) 4.8 5.8 5.0 4.3 3.6RoE (%) 19.2 13.0 12.3 12.8 13.4RoCE (%) 15.6 11.1 10.8 11.7 12.0Dividend yield (%) 1.1 1.1 1.2 1.4 1.7Dividend payout (%) 9.4 10.0 10.0 10.0 10.0Asset turnover (x) 1.1 0.9 0.9 0.9 0.9Net debt/equity (x) 0.0 0.3 0.2 0.2 0.1Net debt/EBITDA (x) 0.1 1.3 1.1 0.7 0.4Net debt/op. CF (x) 0.4 -5.6 1.7 1.2 0.7Interest coverage (x) 5.0 5.4 5.7 7.4 8.5P/CEPS (x) 6.2 6.2 5.6 5.0 4.4EV/ sales (x) 1.5 1.9 1.6 1.4 1.1M-cap/sales (x) 1.5 1.5 1.4 1.2 1.1Source: Company, Anand Rathi Research

Fig 6 – Share of revenue, by segment (CY12e)

Domestic47%Exports

53%




Investment Argument and Valuation Claris Life Sciences has a niche business model of sterile injectables used in hospitals globally, high entry barriers, large product range, possible upside from US market if import alert is lifted by US FDA, and attractive valuations. We are positive on the stock and initiate coverage on the stock with a Buy and a target price of `255.

Niche business of sterile injectables Claris is one of the largest Indian companies in sterile injectables, a high-margin business. It has little competition due to high entry barriers (high capital intensity), complex formulations and tough regulatory requirements. The market size for global generic injectables is estimated at US$33bn by CY14. Claris supplies products only to hospitals in both the infusion and critical-care segments. Key therapeutic areas are anaesthesia, critical care, infusion therapy, renal care, anti-infectives, parenterals and nutrition.

Due to little competition and its operations in a niche category, this business segment has better margins, currently over 30%, compared to the 22-23% average for Indian pharmaceutical companies. A further upside to these margins is possible in case the US FDA issue is resolved and the company commences supplies to the US market, where these products are in shortage.

Well-placed to monetize the large opportunity The company has built a niche range of complex products, such as propofol and iron sucrose, for the base and critical-care segments of hospitals. It has developed a range of 128 formulation products in different therapeutic areas for various markets. Of these, 48 have been commercialized in international markets. The launch of the rest of the products, post-approval, would be the key growth driver. Claris markets its products to 91 countries and aims at 20% market share for each in all geographical areas.

Further, it has approvals for its plants from most regulatory bodies, including the US FDA, the UK-MHRA, TGA-Australia and ANVISA-Brazil. In total, it has in place approval for 1,228 dossiers, with 357 pending approval. In regulated markets, it has filed for 329 products and has already received approvals for 207 registrations, including 25 in the US. We believe that such an extensive product range with strong products such as propofol and iron sucrose would enable Claris to monetize this large opportunity in the sterile injectables business segment.

Improving financials We estimate 12.4% CAGR in revenue over CY11-14 (and 13.6% in adjusted net profit). We have not factored in any business in the US due to the import alert. A resolution of the US FDA issue would offer some upside to our estimates. We expect the EBITDA margin over CY11-14 to hold at ~32%. Return ratios have taken a hit due to the recent IPO. However, we expect a gradual improvement in returns from the commercial utilization of IPO funds and possible supplies to the US on a resolution of the US FDA concerns.

One of the few players with complete focus on sterile injectables business and building the required technical

expertise



Valuations The stock trades at attractive valuations of 8.3x CY12e and 7.1x CY13e earnings. We value Claris at `250, based on 10x CY13e earnings. We expect a re-rating on the improvement in return ratios and a resolution of the US FDA issues, which would open doors to supplies to the US.

Risks Delay in the resolving the US FDA import alert

Currency fluctuations.



Niche sterile injectables business Claris is one of the largest Indian companies in sterile injectables, a high-margin business. It has little competition due to the high entry barriers (high capital intensity) in the industry, complex formulations and tough regulatory requirements. The market size for global generic injectables is estimated at US$33bn by CY14. Claris supplies its products only to hospitals in both the infusion and critical-care segments. Key therapeutic areas include anaesthesia, critical care, infusion therapy, renal care, anti-infectives, parenterals and nutrition.

Business model Claris’ business model consists of developing sterile injectable products to supply to hospitals. It is one of the few Indian companies to have successfully developed a sterile injectables range for emerging and regulated markets, and caters to hospital requirements of generic injectables. Its products are predominantly used in critical care and infusion therapy in hospitals. This is a niche business segment due to the complexity in developing such products, strict regulatory guidelines and limited competition, leading to the shortage of such products in regulated markets.

The company currently supplies products in various containers, such as glass and plastic ampoules, glass vials, glass and plastic bottles, PVC bags and non-PVC bags. At present, it has technological capabilities such as emulsion technology, aqueous technology, form-fill-seal technology for bags and blow-fill-seal technology for plastic bottles.

Fig 7 – Current delivery systems and technologies at Claris

Claris’ current delivery system and technical capabilities

Delivery systems Technological capabilities

Glass & Plastic Ampoules

Glass vials

Glass & Plastic bottles

EURO Head

PVC Bags

Non-PVC Bags• Single chamber bags• Double chamber bags• Triple chamber bags

Emulsion Technology

Aqueous Technology• SVP• LVP

Form-Fill-Seal technology for bags

• Non-PVC Bags

Blow-Fill-Seal technology for plastic bottles


Generic injectables – huge opportunity Led by patent expiries of a number of injectables in the non-biological space, the generic market size of sterile injectables is expected to increase to US$33bn in CY14, from US$20bn in CY09. Competition is low on account of the high entry barriers in terms of the capital-intense nature of this segment, the complexity of product development and stiff regulations.

Developed several delivery systems and technical capabilities to be able

to monetize growth opportunities

Global generic injectable market growing at faster rate than the non-

injectable generic market



Due to low competition and its niche category, this business segment has better margins, currently over 30% compared to the average 22-23% for Indian pharmaceutical companies. A further upside to these margins is possible if the US FDA issues are resolved and the company commences supplies to the US market where such products run short.

Claris is well-placed to benefit from this opportunity, given the regulatory approvals from most countries for its manufacturing plants and its extensive product range. In terms of revenue and market share, the base of the company is quite small. Considering Claris’ target of achieving 20% market share in each of the geographical areas in which it operates (achievable in our view due to the limited competition), it is likely to see sustainable revenue growth momentum in the next 3-4 years as a result of its present product basket.

Fig 10 – Claris’ revenue growth trend

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Fig 8 – Global generic injectables market to see 11% CAGR

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Set to monetize injectables opportunityClaris has built up a range of niche complex products such as propofol and iron sucrose, for the base and critical-care segments of hospitals. It has developed 128 formulation products across therapeutic areas for various markets. Of these, 48 have been commercialized in international markets. The remaining launches, once product approval is obtained, are likely to be key growth drivers. Claris markets its products to 91 countries and aims at 20% market share for each product in all geographical areas.

Claris – well positioned Claris is poised to capture growth opportunities from the generic sterile injectables segment with the necessary regulatory approvals for its manufacturing plants, extensive regulatory filings for its products and ready capacity, largely unutilized. It has approvals for its plants from most regulatory bodies such as the US FDA, the UK-MHRA, TGA-Australia, and ANVISA-Brazil. In total, it has approvals for 1,228 dossiers in place with 357 pending approval. In regulated markets, it has made 329 product filings and has received approvals for 207 registrations, including 25 in the US. We believe that such an extensive product portfolio with strong products such as propofol and iron sucrose would enable it to monetize the large opportunity in the sterile injectables segment.

Fig 11 – Status of regulatory filings (no’s)

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Domestic market to regain focus Claris’ revenue in its home market declined over CY08-10, mainly due to its focus on international markets and shifting of capacities towards exports instead of concentrating on domestic sales. However, given the current increase in capacities and considering double-digit growth in the Indian healthcare sector, it has begun focusing on the home market and registered 10% growth in CY11. We believe that the growth rate would rise in the coming years, led by an increase in capacity utilization and introduction of products. We expect 12% CAGR in revenue from the home market.

Its sales team of over 400 representatives markets products to hospitals all over India. Claris’ marketing network comprises over 50 C&F agents, 12 distributors, particularly for the critical-care segment, and tie-ups with over 1,000 stockists. Through this extensive sales team and marketing network, it caters to more than 22,000 hospitals and nursing homes.

Sufficient product filings in place to capture the future growth

opportunities



Fig 12 – Domestic revenue trend

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Exports to grow faster We expect revenue from international markets to grow faster on the back of the continuous launch of products after approvals have been obtained, on an expansion into new geographical areas and on an increase in market share to the target of 20% after launch of the products, aided by less competition.

We estimate 12.8% CAGR in revenue from exports over CY11-14, led by equally strong growth in regulated and emerging markets. We have not factored in any upside from US sales, which is currently halted due to the import alert. Sales would begin if the US FDA clears the manufacturing facility that has recently been re-inspected.

Fig 13 – Export revenue growth trend

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Financials We estimate 12.4% CAGR in revenue over CY11-14 (and 13.6% in adjusted net profit). We have not considered the business in the US due to the US FDA’s import alert. A resolution of the issue would offer some upside to our estimates. We expect the EBITDA margin over CY11-14 to be sustained at ~32%. Return ratios have been hit by the recent IPO. We expect gradual improvement in returns from the commercial utilization of IPO funds and possible supplies to the US on the resolution of the US FDA’s concerns.

Steady revenue growth expected Claris is likely to register steady revenue growth momentum led by product launches and increased capacity utilization. We estimate 12.4% CAGR in revenue over CY11-14 driven by 13.8% CAGR in exports and 12% in its domestic business. However, approval for supplies to the US (in the event the US FDA’s concerns are resolved) could offer a significant upside to our estimates. The US business brought in ~`600m in CY10, almost 8% of revenue. The launch of propofol and iron sucrose in all the EU markets would be key growth drivers for the international business.

Fig 14 – Revenue break-up (`m) CY10 CY11 CY12e CY13e CY14e

Domestic 3,151 3,460 3,876 4,341 4,862

% of sales 41.9 46.8 46.6 46.3 46.3

% growth (6.4) 9.8 12.0 12.0 12.0

Exports 4,373 3,928 4,443 5,027 5,631

% of sales 58.1 53.2 53.4 53.7 53.7

% growth 7.5 (10.2) 13.1 13.1 12.0

Regulated markets 1,536 1,478 1,699 1,954 2,189

% of exports 35.1 37.6 38.2 38.9 38.9

% growth 8.9 (3.8) 15.0 15.0 12.0

Semi-regulated markets 2,837 2,450 2,744 3,073 3,442

% of exports 64.9 62.4 61.8 61.1 61.1

% growth 6.7 (13.6) 12.0 12.0 12.0

Total revenue 7,523 7,388 8,319 9,368 10,492

Source: Company, Anand Rathi Research.

Net profit CAGR of 13.6% over FY11-14e We expect Claris to register 13.6% CAGR in net profit over CY11-14, to amount to `1.9bn, as a result of 12.4% CAGR in revenue and flat interest expenses. We expect the EBITDA margin to be ~32% of revenue because of the company’s operations in the high-margin niche business segment. Our estimates show a slight decline in the EBITDA margin due to our belief that additional expenses would be incurred to increase product registrations in international markets. This would drive benefits in future. We assume a tax rate of 20% over CY12-14, in line with the MAT rate, but higher than CY11’s effective 15.6%. We have not considered any meaningful increase in interest cost, as we believe that internal accruals would suffice to fund capex plans.



Fig 15 – EBITDA trend

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Fig 16 – Net profit trend

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Return ratios to be subdued in the near term We expect return ratios to be subdued in the near term because of the recent capacity expansion, funded by the IPO money raised at end-CY10. This additional capacity would drive benefits in the longer term, leading to a gradual expansion in return ratios. We expect RoE to improve slightly (from 13% in CY11 to 13.4% in CY14) and RoCE to improve from 11.1% in CY11 to 12% in CY14. However, if the issues with the US FDA are resolved, the company would be able to utilize the capacity built for the US market. This would drive revenue from the US, and offer some upside to our return ratio estimates.

EBITDA margin of ~32% much higher than the average EBITDA

margin of 20-22% for peers



Fig 17 – Return ratios trend

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Comfortable financial leverage The company’s financial leverage situation is comfortable, with a D/E of 0.4x and an interest coverage ratio of 5.4x in CY11. We expect the D/E to come down to 0.2x in CY14, and the interest-coverage ratio to improve to 8.7x in CY14, with EBITDA growth of ~12%.

Fig 18 – Leverage ratios

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Fig 19 – Income statement (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e

Revenues 7,523 7,388 8,319 9,368 10,492

Growth in revenues (%) 1.2 (1.8) 12.6 12.6 12.0

Raw materials 2,361 2,711 3,036 3,466 3,882

% of sales 31.4 36.7 36.5 37.0 37.0

Personnel expenses 516 452 541 656 734

% of sales 6.9 6.1 6.5 7.0 7.0

Selling and other expenses 2,362 1,823 2,038 2,279 2,539

% of sales 31.4 24.7 24.5 24.3 24.2

EBITDA 2,284 2,402 2,704 2,967 3,337

EBITDA margin 30.4 32.5 32.5 31.7 31.8

Depreciation 467 547 637 669 687

PBIT 1,817 1,855 2,067 2,298 2,650

Interest expenses 362 343 361 311 311

PBIT from operations 1,455 1,512 1,706 1,988 2,339

Other non operating income 149 3 3 3 3

PBT before extra-ordinary items 1,605 1,515 1,709 1,990 2,342

Extra-ordinary income/ (expenses) - - - - -

PBT 1,605 1,515 1,709 1,990 2,342

Provision for tax 240 236 342 398 468

Effective tax rate 15.0 15.6 20.0 20.0 20.0

PAT 1,365 1,279 1,367 1,592 1,874

Minority interest - - - - -

PAT after minority interest 1,365 1,279 1,367 1,592 1,874

Adjusted PAT 1,365 1,279 1,367 1,592 1,874

Growth in PAT (%) 9.1 (6.3) 6.9 16.5 17.7

PAT margin 18.1 17.3 16.4 17.0 17.9


Fig 20 – Balance sheet (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e

Equity share capital 638 638 638 638 638

Reserves 8,508 9,883 11,091 12,498 14,154

Shareholders' fund 9,146 10,521 11,729 13,136 14,792

Minority interest - - - - -

Debt 3,606 4,109 3,109 3,109 3,109

Deferred tax liability 521 601 601 601 601

Total capital employed 13,273 15,231 15,439 16,846 18,502

Gross block 7,150 8,998 10,248 10,998 11,998

Accumulated depreciation 1,844 2,365 3,002 3,671 4,358

Net block 5,306 6,633 7,246 7,327 7,640

Capital WIP 2,336 2,862 2,862 2,862 2,862

Total fixed assets 7,642 9,495 10,108 10,189 10,502

Investments 0 0 0 0 0

Inventories 1,528 1,690 1,815 2,069 2,313

Debtors 2,464 2,740 2,963 3,337 3,737

Cash and bank balances 3,956 1,593 867 1,637 2,383

Loans and advances 1,355 1,788 2,012 2,264 2,534

Total current assets 9,303 7,811 7,657 9,307 10,967

Current liabilities and provisions 3,672 2,075 2,326 2,650 2,968

Net current assets 5,631 5,736 5,331 6,657 8,000

Misc. expenditure - - - - -

Total assets 13,273 15,231 15,439 16,846 18,502




Fig 21 – Cash-flow statement (`m) Year-end: Dec CY10 CY11 CY12e CY13e CY14e Cash flow from operating activities Profit before tax 1,605 1,515 1,709 1,990 2,342 Depreciation 467 547 637 669 687 Interest expenses 362 343 361 311 311 Operating profit before working capital change 2,434 2,404 2,707 2,970 3,340 Working capital adjustment (1,438) (2,467) (322) (556) (597)Gross cash generated from operations 996 (63) 2,385 2,414 2,743 Direct taxes paid (203) (156) (342) (398) (468)Cash generated from operations 793 (219) 2,043 2,016 2,275 Cash flow from investing activities Capex (1,946) (2,374) (1,250) (750) (1,000)Investment - (0) - - -Cash generated from investment activities (1,946) (2,374) (1,250) (750) (1,000) Cash flow from financing activities Proceeds from share capital and premium 2,790 Borrowings/ (repayments) 466 502 (1,000) - -Interest paid (362) (343) (361) (311) (311)Dividend paid (149) (148) (159) (185) (218)Cash generated from financing activities 2,746 11 (1,520) (496) (529)Other adjustments (5) 246 Net cash increase/ (decrease) 1,587 (2,336) (727) 770 746


Fig 22 – Ratio @ `177 Year-end: Dec CY10 CY11 CY12e CY13e CY14e Margin ratios (%) EBITDA margin 30.4 32.5 32.5 31.7 31.8 PBIT margin 24.2 25.1 24.8 24.5 25.3 PBT margin 21.3 20.5 20.5 21.2 22.3 PAT margin 18.1 17.3 16.4 17.0 17.9 Growth ratios (%) Revenues 1.2 (1.8) 12.6 12.6 12.0 EBITDA 3.4 5.1 12.6 9.7 12.5 Net profit 9.1 (6.3) 6.9 16.5 17.7 Return ratios (%) ROCE 15.6 11.1 10.8 11.7 12.0 ROIC 17.9 11.5 11.4 12.1 13.2 ROE 19.2 13.0 12.3 12.8 13.4 Turnover ratios (x) Asset turnover ratio (x) 1.1 0.9 0.9 0.9 0.9 Working capital cycle (days) (48) 61 119 114 114 Average collection period (days) 124 129 125 123 123 Average payment period (days) 273 185 120 119 121 Inventory holding (days) 100 118 114 111 112 Per share (`) EPS 21.4 20.0 21.4 25.0 29.4 CEPS 28.7 28.6 31.4 35.4 40.1 Book value 143.3 164.9 183.8 205.8 231.8 Solvency ratios Debt/ equity 0.4 0.4 0.3 0.2 0.2 Interest coverage 5.0 5.4 5.7 7.4 8.5 Net debt/ EBITDA (0.2) 1.0 0.8 0.5 0.2 Valuation parameters (x) P/E 8.3 8.8 8.3 7.1 6.0 P/BV 1.2 1.1 1.0 0.9 0.8 EV/ EBITDA 4.8 5.8 5.0 4.3 3.6 EV/ sales 1.5 1.9 1.6 1.4 1.1 M-cap/ sales 1.5 1.5 1.4 1.2 1.1




Company Background & Management Claris Life Sciences began operations in 1999, with the inauguration of its first international office in Brazil and the setting up of Clarion I, the first manufacturing plant with three production lines. By 2002 it achieved a sales turnover of `1bn and received the WHO GMP certificate for Clarion I. Today, it is one of the leading Indian sterile injectables pharmaceuticals, operating in 91 countries. Its revenue mix is: domestic 47%; international 53%.

Claris has five manufacturing facilities on a 78-acre spread in Ahmedabad, India. It has developed 128 products, of which 48 have been commercialized in international markets. Product segments are anaesthesia, nutrition, plasma volume expanders, blood products, anti-infectives, renal & transplant, oncology, and infusion therapy. It has filed 329 product registrations in regulated markets, including 39 in the US, and received 207 product registrations in regulated markets, including 25 in the US.

Fig 23 – Shareholding pattern

Promoter69.0%

FII8.4%

DFI0.5%

Others11.0%

FVCI11.1%

Source: BSE

Fig 24 – Key management Name Position Profile

Arjun S. Handa Managing Director and CEO

Managing director & CEO since Sep ’08. Was appointed director in Feb ’01; was chief operating officer from Jan to Sep ’08. Post-graduate in management from Northeastern University, Boston, USA, and B.Com. from Gujarat University, Ahmedabad..

Aditya S. Handa Non-Executive and Non-Independent Director

Appointed director in Jun’06; had served as CFO from Jan to Mar ’09, his first employment. B.Com. from Gujarat University, Ahmedabad..

Chetan S. Majumdar Executive Director Oversees technical aspects. B.Sc. from Saurashtra University, Rajkot. Joined Apr’99; around 34 years of pharmaceutical industry experience. Involved in obtaining various regulatory approvals from authorities such as the US FDA, the MHRA & the TGA for the manufacturing plants.

Source: Company



[email protected]


[email protected]


Sales (`m) 70,277 74,693 87,531 100,800 112,255

Net profit (`m) 9,214 10,763 12,556 14,994 16,721

EPS (`) 54.6 63.6 74.2 88.6 98.8

Growth (%) 4.1 16.8 16.7 19.4 11.5

PE (x) 33.1 28.3 24.4 20.4 18.3

EV/EBITDA (x) 20.7 20.6 16.6 13.6 11.8

P/B (x) 7.1 6.6 5.5 4.6 3.8

RoE (%) 21.7 24.2 24.7 24.4 22.8

RoCE (%) 15.8 17.4 17.8 20.0 20.3

Dividend yield (%) 0.6 0.7 0.8 1.0 1.1

Net gearing (%) 10.5 38.6 20.4 5.4 -7.6



Update

20 April 2012

Dr Reddy’s Labs

Strong product pipeline, fairly valued; we downgrade to a Hold

Dr Reddy’s Labs is poised to benefit significantly from generic opportunities, due to its strong business model and its robust product pipeline that has limited competition. Despite our positive stance on Dr Reddy’s, we downgrade it from a Buy to a Hold, due to the limited upside to our price target from current levels. We raise our price target from `1,800 to `1,910.

Base business to maintain growth momentum. We estimate 14.5% CAGR in revenue and 15.8% in adjusted net profit in DRL’s base (core) business, driven by its strong growth in the US and Russia. Its domestic formulations revenue is estimated to register 10-12% CAGR. Management guidance, however, falls in line with that for the industry and could provide an upside to our estimates.

Strong product pipeline. With 187 ANDA filings, the company has built up a strong product pipeline. Of these, 79 approvals are pending, including 40 Para IVs and 10 FTFs. These Para IVs and FTFs are likely to provide sustainable cash flows over the next two years. We value these Para IV opportunities at `36 a share.

Revising estimates. We revise our estimates marginally to factor in the favourable currency movement and higher tax rate. For FY12, FY13 and FY14, we raise our revenue estimates 1%, 2.3% and 3.6%, respectively, and lower our EPS estimates 1.8%, 0.5% and 0.4%.

Valuation. At our target price, the stock trades at 21.6x FY13e and 19.3x FY14e earnings. We maintain our base business P/E multiple of 20x one-year-forward earnings, and assign a value of `36 a share for Para IVs. Risks: Currency fluctuations and regulatory hurdles.

Rating: Hold Target Price: `1,910 Share Price: `1,807


DRRD

Sensex1,250

1,400

1,550

1,700

1,850

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data DRRD IN / REDY.BO52-week high / low `1814 / `1387Sensex / Nifty 17503 / 53323-m average volume US$12.9m Market cap `305bn / US$6bnShares outstanding 169m

Shareholding pattern (%) Sep ’11 Jun ’11 Mar ’11Promoters 25.61 25.61 25.62 - of which, pledged 0 0 4.84Free float 74.39 74.39 74.38 - Foreign institutions 27.15 26.32 24.81 - Domestic institutions 13.77 14.42 14.7 - Public 33.47 33.65 34.87


Sales 1.0 2.3 3.6EBITDA 1.1 3.3 5.3EPS (1.8) (0.5) (0.4)Target multiple (x) - - -


20 April 2012 Dr Reddy’s Labs – Strong product pipeline, fairly valued; we downgrade to a Hold




Net revenues 70,277 74,693 87,531 100,800 112,255Revenue growth (%) 1.2 6.3 17.2 15.2 11.4 - Op. expenses 55,170 59,032 68,467 78,131 86,801EBIDTA 15,107 15,661 19,063 22,669 25,455EBITDA margin (%) 21.5 21.0 21.8 22.5 22.7- Interest expenses 372 362 85 65 65- Depreciation 4,160 4,147 5,107 5,353 5,678+ Other income 986 926 900 1,035 1,190- Tax 985 1,403 2,216 3,291 4,180Effective tax rate (%) 48 11 15 18 20Reported PAT 1,068 11,040 12,556 14,994 16,721+/- Extraordinary items -9,508 365 0 0 0+/- Minority interest 0 0 0 0 0Adjusted PAT 9,214 10,763 12,556 14,994 16,721Adj. FDEPS (`/share) 54.6 63.6 74.2 88.6 0.0Adj. FDEPS growth (%) 4.1 16.8 16.7 19.4 11.5Source: Company, Anand Rathi Research


PAT 1,068 11,040 12,556 14,994 16,721 + Non-cash items 12,683 2,744 2,891 2,061 1,497 Cash profit 13,751 13,784 15,446 17,056 18,219 - Incr./(decr.) in WC (3,407) 6,534 (519) 2,644 2,315 Operating cash-flow 17,158 7,250 15,965 14,411 15,903 - Capex 4,456 9,000 8,800 6,500 6,500 Free cash-flow 12,702 (1,750) 7,165 7,911 9,403 - Dividend 2,217 2,583 2,938 3,509 3,913 + Equity raised 0 0 0 0 0 + Debt raised (4,827) 8,847 (7,000) (5,000) (5,000)- Investments 3,118 (3,564) 0 0 0 - Misc. items 1,552 8,933 (2,113) (3,067) (3,985)Net cash-flow 988 (855) (557) 2,695 4,671 + Op. cash & bank bal. 5,596 6,584 5,729 5,172 7,866 Cl. cash & bank bal. 6,584 5,729 5,173 7,867 12,537 Source: Company, Anand Rathi Research


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Fig 2 – Balance Sheet (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Share capital 844 846 846 846 846Reserves & surplus 42,071 45,144 54,762 66,247 79,056Net worth 42,915 45,990 55,608 67,093 79,902Minority interest 0 0 0 0 0Total debt 14,656 23,503 16,503 11,503 6,503Def. tax liab. (net) 2720 2022 2022 2022 2022Capital employed 60,291 71,515 74,133 80,618 88,427Net fixed assets 36,432 44,888 48,581 49,729 50,551Investments 3,600 33 33 33 33 - of which, liquid 3,574 0 0 0 0Net working capital 13,675 20,865 20,346 22,990 25,306Cash and bank balance 6,584 5,729 5,172 7,866 12,537Capital deployed 60,291 71,515 74,133 80,618 88,427Net debt 4498.0 17774.0 11331.0 3636.8 -6034.2WC days 50.9 49.8 62.3 57.5 58.5Book value (`/sh) 254 272 329 397 472Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `1,807 Year-end: Mar FY10 FY11 FY12e FY13e FY14e

P/E (x) 33.1 28.3 24.4 20.4 18.3P/B (x) 7.1 6.6 5.5 4.6 3.8EV/EBITDA (x) 20.7 20.6 16.6 13.6 11.8RoE (%) 21.7 24.2 24.7 24.4 22.8RoCE (%) 15.8 17.4 17.8 20.0 20.3Dividend yield (%) 0.6 0.7 0.8 1.0 1.1Dividend payout (%) 178.0 20.0 21.2 19.6 0.0Asset turnover (x) 1.9 1.7 1.8 2.0 2.2Net debt/equity (x) 0.1 0.4 0.2 0.1 -0.1Net debt/EBITDA (x) 0.3 1.1 0.6 0.2 -0.2Net debt/op. CF (x) 0.3 2.5 0.7 0.3 -0.4Interest coverage (x) 29.4 31.8 163.4 264.7 302.3P/CEPS (x) 22.8 20.5 17.3 15.0 13.6EV/ sales (x) 4.5 4.3 3.6 3.1 2.7M-cap/sales (x) 4.3 4.1 3.5 3.0 2.7Source: Company, Anand Rathi Research


Global Generics73%

PSAI25%

Proprietary products and

others2%




[email protected]


[email protected]


Sales (`m) 7,216 9,595 12,939 15,036 17,087

Net profit (`m) 531 671 837 1,154 1,514

EPS (`) 28.1 32.7 40.8 56.2 73.7

Growth (%) 9.1 16.2 24.7 37.9 31.1

PE (x) 11.7 10.1 8.1 5.9 4.5

EV/EBITDA (x) 9.1 7.7 6.4 5.4 4.5

P/B (x) 1.3 1.1 1.0 0.9 0.7

RoE (%) 12.3 12.3 13.0 15.7 17.8

RoCE (%) 9.2 8.6 8.9 11.7 12.9

Dividend yield (%) 0.8 0.8 1.2 1.7 2.2

Net gearing (%) 99.6 102.7 104.1 91.6 75.3



Update

20 April 2012

Elder Pharma

Strong brand growth, compelling valuations; Buy

Elder Pharmaceuticals has built up a strong range of brands, which include Shelcal, Eldervit and Chymoral. We expect robust growth over FY11-14 (a 21.2% CAGR in revenue), driven by branded products in its home market, better performance of in-licensed brands and integration of two subsidiaries, Biomeda and Neutra Health. We maintain a Buy, with a revised price target of `450 (earlier `471).

Product range focusing on niche therapeutic segments. Elder has created strong brands in key therapeutic areas: women’s healthcare, nutraceuticals, pain management and anti-infectives. It has also begun focusing on lifestyle diseases. Its key strategy to drive growth is brand building. We expect domestic formulations to register 15.3% CAGR in revenue over FY11-14, to `10.5bn.

Expansion in international markets to diversify revenue stream. Elder has acquired majority stakes in two foreign companies, Biomeda in Bulgaria and Neutra Health in the UK, in order to expand into the EU. The strategy is to leverage its product range and that of its subsidiaries to grow at home as well as in EU markets.

Lower margin estimates. We lower our EPS estimates for FY13 and FY14 to 4.4% and 5.9%, respectively, to factor in ~50bps lower margins. The lower margin would be on account of the slower-than-expected turnaround of its Biomeda and Neutra Health subsidiaries.

Valuation. At our target price, the stock trades at 8x FY13e and 6.1x FY14e earnings. We maintain a Buy, with a revised price target of `450 (from `471 earlier). Risks: High dependence on a single product (Shelcal) and delay in the turnaround of international subsidiaries.



ELDP

Sensex280

315

350

385

420

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data ELDP IN / ELDP.BO52-week high / low `420 / `296Sensex / Nifty 17503 / 53323-m average volume US$0.4m Market cap `6.6bn / US$0.13bnShares outstanding 20.5m




Sales - - -EBITDA - (1.1) (2.3)EPS - (4.4) (5.9)Target multiple (x) - - -


20 April 2012 Elder Pharmaceuticals – Strong brand growth, compelling valuations; Buy




Net revenues 7,216 9,595 12,939 15,036 17,087Revenue growth (%) 16.3 33.0 34.8 16.2 13.6- Op. expenses 5,992 7,890 10,746 12,456 14,056EBIDTA 1,224 1,705 2,193 2,581 3,031EBITDA margin (%) 17.0 17.8 16.9 17.2 17.7- Interest expenses 530 655 856 811 811- Depreciation 172 287 355 381 387+ Other income 86 87 92 92 108- Tax 93 177 236 326 427Effective tax rate (%) 16.4 21.8 22.0 22.0 22.0Reported PAT 495 642 837 1,154 1,514+/- Extraordinary items -43 -37 0 0 0+/- Minority interest -23 -7 0 0 0Adjusted PAT 531 671 837 1,154 1,514Adj. FDEPS (`/share) 28.1 32.7 40.8 56.2 73.7Adj. FDEPS growth (%) 9.1 16.2 24.7 37.9 31.1Source: Company, Anand Rathi Research


PAT 472 635 837 1,154 1,514 + Non-cash items 160 284 355 381 387 Cash profit 632 919 1,192 1,535 1,901 - Incr./(decr.) in WC 912 1,292 1,143 976 950 Operating cash-flow (280) (372) 49 559 951 - Capex 1,497 2,867 800 500 500 Free cash-flow (1,777) (3,239) (751) 59 451 - Dividend 66 72 98 135 177 + Equity raised 0 0 0 0 1 + Debt raised 745 3,272 (900) 0 0 - Investments 283 (557) 0 0 0 - Misc. items (703) (1,366) Net cash-flow (678) 1,884 (1,749) (76) 275 + Op. cash & bank bal. 1,464 786 2,671 922 846 Cl. cash & bank bal. 786 2,671 922 846 1,120 Source: Company, Anand Rathi Research


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Share capital 189 206 206 206 206Reserves & surplus 4,616 5,886 6,625 7,645 8,981Net worth 4,805 6,092 6,831 7,850 9,187Minority interest 104 31 31 31 31Total debt 5,777 9,045 8,145 8,145 8,145Def. tax liab. (net) 38 35 35 35 35Capital employed 10,685 15,168 15,007 16,026 17,363Net fixed assets 5,562 7,425 7,870 7,989 8,102Investments 660 102 102 102 102 - of which, liquid 168 80 80 80 81Net working capital 3,678 4,970 6,113 7,089 8,039Cash and bank balance 786 2,671 922 846 1,120Capital deployed 10,685 15,168 15,007 16,026 17,363Net debt 4,823 6,295 7,144 7,220 6,945WC days 108 114 106 107 108Book value (`/sh) 254.8 296.6 332.6 382.3 447.3Source: Company, Anand Rathi Research


P/E (x) 11.7 10.1 8.1 5.9 4.5P/B (x) 1.3 1.1 1.0 0.9 0.7EV/EBITDA (x) 9.1 7.7 6.4 5.4 4.5RoE (%) 12.3 12.3 13.0 15.7 17.8RoCE (%) 9.2 8.6 8.9 11.7 12.9Dividend yield (%) 0.8 0.8 1.2 1.7 2.2Dividend payout (%) 10.7 9.2 10.0 10.0 10.0Asset turnover (x) 1.8 1.4 1.5 1.6 1.7Net debt/equity (x) 1.0 1.0 1.0 0.9 0.8Net debt/EBITDA (x) 3.9 3.7 3.3 2.8 2.3Net debt/op. CF (x) -17.2 -16.9 146.9 12.9 7.3Interest coverage (x) 2.0 2.2 2.1 2.7 3.3P/CEPS (x) 8.9 7.1 5.7 4.4 3.6EV/ sales (x) 1.5 1.4 1.1 0.9 0.8M-cap/sales (x) 0.9 0.7 0.5 0.5 0.4Source: Company, Anand Rathi Research



61%Domestic APIs9%

Exports2%

Insternational subsidiaries

25%

Others3%




[email protected]


[email protected]


Sales (`m) 9,379 14,830 23,382 29,496 35,658

Net profit (`m) 695 1,067 532 1,345 2,017

EPS (`) 2.2 2.6 1.3 3.3 4.9

Growth (%) 350.5 53.5 -50.2 152.9 50.0

PE (x) 48.6 40.3 80.8 32.0 21.3

EV/EBITDA (x) 53.3 25.1 15.3 11.1 8.8

P/B (x) 1.8 1.3 1.3 1.2 1.2

RoE (%) 4.7 4.1 1.6 3.9 5.6

RoCE (%) 2.8 2.9 2.9 4.6 5.7

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

Net gearing (%) 289.9 33.1 39.6 33.8 31.9


India I Equities Hospitals

Update

20 April 2012

Fortis Healthcare

Overhang continues on FHIL merger; we retain a Hold

Affected by uncertainty following the Fortis Healthcare International (FHI) acquisition and the resulting stretched balance sheet, Fortis Healthcare is faced with possible equity dilution to reduce debt. In addition, 3QFY12 results were below our estimates on a setback in the margins of its subsidiary Super Religare Laboratories (SRL). We maintain our estimates and a Hold rating till more clarity emerges regarding FHI’s financials. Domestic hospitals continue to do well. Fortis continues to do well in

its core hospitals business in India and saw 30% yoy growth in 3QFY12. Its EBITDA margin in its hospitals business improved 80bps. It is likely to continue on its strong growth trajectory in its home market, with annual growth of 25-30%.

SRL integration affected margins. The SRL integration has affected consolidated margins, as the SRL EBITDA margin was lower than that in the hospitals business. Further, a turnaround in SRL’s operations would take time, in our view, and is likely to continue to impact consolidated financials over FY11-14.

FHI integration an overhang. On the integration, there is no clarity regarding FHI’s outlook and financials. Besides, the stretched balance sheet shows debt of over US$1bn. This is likely to cast a shadow on FHL’s outlook in the near to mid-term.

Valuation. At our target price, the stock would trade at 12.1x FY13e and 9.6x FY14e EV/EBITDA. We maintain a Hold, with a price target of `120. Risks: Consolidation of FHI and turnaround of SRL.

Rating: Hold Target Price: `120 Share Price: `111


FORH

Sensex

80

105

130

155

180

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data FORH IN / FOHE.BO52-week high / low `172 / `81Sensex / Nifty 17503 / 53323-m average volume US$1.4m Market cap `45bn / US$0.9bnShares outstanding 405.2m

Shareholding pattern (%) Dec ’11 Sep ’11 Jun ’11Promoters 81.48 81.48 81.49 - of which, pledged 66.16 53.81 45.45Free float 18.52 18.52 18.51 - Foreign institutions 5.29 8.47 8.25 - Domestic institutions 0.84 0.82 1.64 - Public 12.39 9.23 8.62


14 April 2012 Fortis Healthcare – Overhang continues on FHIL merger; we retain a Hold




Net revenues 9,379 14,830 23,382 29,496 35,658Revenue growth (%) 48.7 58.1 57.7 26.1 20.9 - Op. expenses 7,966 12,750 20,176 25,095 30,230EBIDTA 1,413 2,079 3,206 4,401 5,428EBITDA margin (%) 15.1 14.0 13.7 14.9 15.2- Interest expenses 573 696 912 963 873- Depreciation 599 1,045 2,050 2,091 2,271+ Other income 493 925 360 280 320- Tax 34 152 73 244 521Effective tax rate (%) 4.6 10.1 12.0 15.0 20.0Reported PAT 695 1,244 532 1,345 2,017+/- Extraordinary items 0 252 0 0 0+/- Minority interest 21 44 0 38 66Adjusted PAT 695 1,067 532 1,345 2,017Adj. FDEPS (`/share) 2.2 2.6 1.3 3.3 4.9Adj. FDEPS growth (%) 350.5 53.5 -50.2 152.9 50.0Source: Company, Anand Rathi Research


PAT 588 1,425 532 1,383 2,083 + Non-cash items 599 1,045 2,050 2,091 2,271 Cash profit 1,188 2,470 2,582 3,474 4,354 - Incr./(decr.) in WC (324) 13,212 (12,727) 440 370 Operating cash-flow 1,511 (10,742) 15,308 3,033 3,984 - Capex 11,931 3,583 12,030 3,000 3,000 Free cash-flow (10,420) (14,325) 3,278 33 984 - Dividend 0 0 0 0 0 + Equity raised 7,485 12,949 0 0 0 + Debt raised 49,916 (43,823) 2,352 (1,500) 0 - Investments 33,944 (33,583) 0 0 0 - Misc. items 504 (138) 0 0 0 Net cash-flow 12,534 (11,477) 5,630 (1,467) 984 + Op. cash & bank bal. 579 13,113 1,636 7,266 5,800 Cl. cash & bank bal. 13,114 1,636 7,266 5,800 6,784 Source: Company, Anand Rathi Research

Fig 5 – Valuation chart (EV/EBITDA)

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(`m)



Share capital 3,217 4,094 4,094 4,094 4,094 Reserves & surplus 15,653 28,759 29,291 30,636 32,653 Net worth 18,870 32,854 33,386 34,731 36,748 Minority interest 345 304 303 341 407 Total debt 54,706 10,883 13,235 11,735 11,735 Def. tax liab. (net) (120) (58) (58) (58) (58)Capital employed 73,801 43,983 46,866 46,749 48,832 Net fixed assets 25,495 27,946 37,926 38,835 39,564 Investments 34,485 902 902 902 902 - of which, Lliquid 1,056 625 Net working capital 263 13,474 748 1,188 1,558 Cash and bank balance 13,113 1,636 7,266 5,800 6,784 Capital deployed 73,801 43,983 46,866 46,749 48,832 Net debt 40,537 8,622 5,969 5,935 4,951 WC days 10.2 331.6 11.7 14.7 15.9Book value (`/sh) 59 80 82 85 90Source: Company, Anand Rathi Research


P/E (x) 48.6 40.3 80.8 32.0 21.3P/B (x) 1.8 1.3 1.3 1.2 1.2EV/EBITDA (x) 53.3 25.1 15.3 11.1 8.8RoE (%) 4.7 4.1 1.6 3.9 5.6RoCE (%) 2.8 2.9 2.9 4.6 5.7Dividend yield (%) 0.0 0.0 0.0 0.0 0.0Dividend payout (%) 0.0 0.0 0.0 0.0 0.0Asset turnover (x) 0.7 0.8 0.9 0.8 0.9Net debt/equity (x) 2.9 0.3 0.4 0.3 0.3Net debt/EBITDA (x) 28.7 4.1 1.9 1.3 0.9Net debt/op. CF (x) 26.8 -0.8 0.4 2.0 1.2Interest coverage (x) 1.4 1.5 1.3 2.4 3.6P/CEPS (x) 26.1 20.4 16.7 12.5 10.0EV/ sales (x) 8.0 3.5 2.1 1.7 1.3M-cap/sales (x) 3.6 2.9 1.8 1.5 1.2Source: Company, Anand Rathi Research

Fig 6 – Average length of stay (ALOS)

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4.4

FY08

FY09

FY10

FY11

3QFY

12

(Days)

Source: Company



[email protected]


[email protected]


Sales (`m) 24,124 29,491 40,336 43,108 47,543

Net profit (`m) 3,242 4,578 7,252 5,788 6,576

EPS (`) 12.0 16.9 26.8 21.4 24.3

Growth (%) 80.7 41.0 58.4 -20.2 13.6

PE (x) 25.4 18.0 11.4 14.2 12.5

EV/EBITDA (x) 15.9 17.2 9.4 10.3 9.0

P/B (x) 3.5 4.0 3.3 2.7 2.3

RoE (%) 16.4 19.5 31.9 21.1 19.7

RoCE (%) 11.6 13.7 15.1 11.1 11.3

Dividend yield (%) 0.1 0.3 0.3 0.4 0.4

Net gearing (%) 126.6 94.0 89.7 69.5 50.1



Update

20 April 2012

Glenmark Pharma

Growth momentum continues, reasonable valuations; Buy

The strong growth expected in key markets such as the US and India, further revenue likely from the Oxycodone and Malarone opportunities, possible upside from its NCE (new chemical entity) pipeline and reasonable valuation of 14.2x FY13e earnings, are strong positives for Glenmark. We maintain a Buy rating, with a revised price target of `398 (earlier `376).

Strong growth in the US and India to continue. The US and India have been Glenmark’s key focus areas and bring in ~57% of revenue. We expect the base US business to see 21% CAGR in revenue over FY11-14, and 15.3% in Indian formulations. Further, opportunities such as Oxycodone and Malarone, where there is little competition, are likely to provide an upside.

Successfully monetizing NCE pipeline. Glenmark is the only Indian company to have successfully monetized NCEs through out-licensing the molecules at different stages. For our target price, we have not considered any value from the NCE pipeline and, hence, any development on NCEs would provide a further upside to our price target.

Revising estimates. We marginally raise our revenue and EPS estimates for Glenmark to factor in favourable currency movements. We raise our FY12, FY13 and FY14 revenue estimates, by 2.8%, 3.8% and 3.1%, respectively, and our EPS estimates 3.9%, 2.6% and 1.5%.

Valuation. At our target price, the stock would trade at 17.5x FY13e and 15.4x FY14e earnings. We maintain a Buy rating, with a revised price target of `398, based on 17x one-year-forward earnings, and `9 for the Zetia (Para IV) opportunity. Risks: Regulatory delays and currency fluctuations.



GNP

Sensex200

230

260

290

320

350

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data GNP IN / GLEN.BO52-week high / low `351 / `263Sensex / Nifty 17503 / 53323-m average volume US$3.2m Market cap `86.6bn / US$1.7bnShares outstanding 270m

Shareholding pattern (%) Mar ’12 Dec ’11 Sep ’11

Promoters 48.27 48.29 48.29 - of which, pledged 0 0 0Free float 51.73 51.71 51.71 - Foreign institutions 34.91 34.2 32.58 - Domestic institutions 4.6 5.09 6.44 - Public 12.22 12.42 12.69


Sales 2.8 3.8 3.1EBITDA 4.1 1.9 1.2EPS 3.9 2.6 1.5Target multiple (x) - - -


20 April 2012 Glenmark – Growth momentum continues, reasonable valuations; Buy




Net revenues 24,124 29,491 40,336 43,108 47,543Revenue growth (%) 18.2 22.2 36.8 6.9 10.3 - Op. expenses 17,928 23,568 30,119 34,243 37,615EBIDTA 6,196 5,923 10,217 8,865 9,929EBITDA margin (%) 25.7 20.1 25.3 20.6 20.9- Interest expenses 1,655 1,566 1,387 1,417 1,267- Depreciation 1,206 947 1,036 1,161 1,244+ Other income 504 1,405 264 290 319- Tax 531 237 487 789 1,160Effective tax rate (%) 13.8 4.9 10.0 12.0 15.0Reported PAT 3,242 4,578 4,384 5,788 6,576+/- Extraordinary items 0 0 -3,187 0 0+/- Minority interest 66 0 0 0 0Adjusted PAT 3,308 4,578 4,384 5,788 6,576Adj. FDEPS (`/share) 12.0 16.9 26.8 21.4 24.3Adj. FDEPS growth (%) 80.7 41.0 58.4 -20.2 13.6Source: Company, Anand Rathi Research


PAT 3,242 4,311 4,384 5,788 6,576 + Non-cash items 1,343 947 1,036 1,161 1,244 Cash profit 4,585 5,257 5,420 6,949 7,820 - Incr./(decr.) in WC 2,441 (2,325) 5,379 3,005 2,532 Operating cash-flow 2,144 7,583 41 3,944 5,288 - Capex 3,923 3,709 3,000 2,500 2,000 Free cash-flow (1,779) 3,874 (2,959) 1,444 3,288 - Dividend 126 268 256 339 385 + Equity raised 0 41 0 0 0 + Debt raised (2,250) (2,580) 4,000 (3,000) (2,000)- Investments 0 232 0 0 0 - Misc. items (4,510) (53) (10) (10) (10)Net cash-flow 355 888 794 (1,884) 913 + Op. cash & bank bal. 715 1,070 1,949 3,117 1,281 Cl. cash & bank bal. 1,070 1,958 2,743 1,233 2,194 Source: Company, Anand Rathi Research


50

150

250

350

450

550

650

750

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

(`)

10x

15x

20x

25x



Share capital 251 270 270 270 270Reserves & surplus 15,731 20,102 24,229 29,679 35,870Net worth 15,982 20,372 24,500 29,949 36,140Minority interest 32 267 267 267 267Total debt 20,943 21,116 25,116 22,116 20,116Def. tax liab. (net) 569 -1081 -1081 -1081 -1081Capital employed 37,526 40,674 48,802 51,251 55,442Net fixed assets 21,117 22,123 24,087 25,426 26,182Investments 181 309 309 309 309 - of which, liquid 0 3 3 3 3Net working capital 15,513 16,284 21,663 24,667 27,199Cash and bank balance 715 1,958 3,127 1,291 2,019Capital deployed 37,526 40,674 49,186 51,693 55,709Net debt 20,229 19,155 21,987 20,823 18,095WC days 210.2 163.1 162.7 172.2 172.7Book value (`/sh) 86.2 76.4 91.6 111.8 134.7Source: Company, Anand Rathi Research




US generic31%

Domestic specialty

27%

Other generics12%

Other specialty30%




[email protected]


[email protected]


Sales (`m) 3,983 4,785 5,576 6,642 7,929

Net profit (`m) 421 511 508 649 803

EPS (`) 34.3 41.6 41.4 52.8 65.3

Growth (%) 33.8 21.4 -0.5 27.7 23.7

PE (x) 13.4 11.1 11.1 8.7 7.0

EV/EBITDA (x) 11.0 9.9 8.9 7.0 5.7

P/B (x) 1.8 1.6 1.5 1.3 1.1

RoE (%) 14.3 15.5 13.8 15.7 17.1

RoCE (%) 12.6 12.3 10.1 11.7 13.1

Dividend yield (%) 1.8 1.8 1.8 2.3 2.8

Net gearing (%) 15.7 26.2 36.3 32.9 28.0



Update

20 April 2012

Indoco Remedies

Growth momentum to start, attractive valuations; Buy

Steady growth in domestic formulations driven by strategic initiatives, scaled-up export formulations led by alliances, higher revenue from the supply for AOK (a German health insurance fund) tenders and an attractive valuation of 8.7x FY13e earnings, are positive factors for Indoco Remedies. We maintain a Buy, with a revised price target of `591 (from `540 earlier).

Revival in domestic growth from FY13. For the past two quarters Indoco’s domestic formulations have witnessed slower growth due to stiff competition and its large exposure to anti-infectives, severely affected by seasonality. However, the company has taken measures such as growing its field force, increasing launches in lifestyle categories and expanding into newer regions. These should result in a growth rate in line with that of the sector. We expect 14% CAGR in domestic formulations revenue over FY11-14.

Partnership model to scale up export formulations. We expect formulations for export to register 27.3% CAGR over FY11-14, led by alliances with large players Watson and Aspen, and increased revenue from supplying metformin for AOK tenders. Further, the company has developed a product range for its own direct marketing in regulated and emerging markets.

Improving financials. We estimate 18.3% CAGR in revenue over FY11-14, and 16.2% in adjusted net profit, with a 170 bps improvement in the EBITDA margin, to 15.2%. We expect return ratios to rise ~150bps over the same period, to an RoE of 17% and an RoCE of 13%.

Valuation. At our target price, the stock trades at 11.2x FY13e and 9x FY14e earnings. We maintain a Buy. Risks: Regulatory delays and further pricing pressures in domestic formulations.



INDR

Sensex325

375

425

475

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data INDR IN / INRM.BO52-week high / low `477 / `325Sensex / Nifty 17503 / 53323-m average volume US$0.1m Market cap `5.7bn / US$0.1bnShares outstanding 12.3m

Shareholding pattern (%) Sep ’11 Jun ’11 Mar ’11



20 April 2012 Indoco Remedies – Growth momentum to start, attractive valuations; Buy




Net revenues 3,983 4,785 5,576 6,642 7,929Revenue growth (%) 13.6 20.1 16.5 19.1 19.4- Op. expenses 3,442 4,140 4,798 5,658 6,726EBIDTA 541 645 778 984 1,203EBITDA margin (%) 13.6 13.5 14.0 14.8 15.2- Interest expenses 29 24 58 64 64- Depreciation 121 135 187 223 245+ Other income 40 80 33 41 51- Tax 10 55 56 89 142Effective tax rate (%) 2 10 10 12 15Reported PAT 421 511 508 649 803+/- Extraordinary items 0 0 0 0 0+/- Minority interest 0 0 0 0 0Adjusted PAT 421 511 508 649 803Adj. FDEPS (`/share) 34.3 41.6 41.4 52.8 65.3Adj. FDEPS growth (%) 33.8 21.4 -0.5 27.7 23.7Source: Company, Anand Rathi Research


PAT 421 511 508 649 803 + Non-cash items 134 149 187 223 245 Cash profit 554 660 696 872 1,048 - Incr./(decr.) in WC (3) 187 198 342 408 Operating cash-flow 558 473 498 530 640 - Capex 475 799 900 400 400 Free cash-flow 83 (326) (402) 130 240 - Dividend 100 114 118 151 187 + Equity raised 0 0 0 0 1 + Debt raised 105 339 600 0 0 - Investments 0 (0) 0 0 0 - Misc. items 2 4 1 Net cash-flow 85 (105) 80 (21) 53 + Op. cash & bank bal. 290 375 270 350 329 Cl. cash & bank bal. 375 270 350 329 383 Source: Company, Anand Rathi Research


5x

10x

15x

50

250

450

650

850

Apr-0

5

Oct

-05

Apr-0

6

Oct

-06

Apr-0

7

Oct

-07

Apr-0

8

Oct

-08

Apr-0

9

Oct

-09

Apr-1

0

Oct

-10

Apr-1

1

Oct

-11

Apr-1

2

(`)



Share capital 123 123 123 123 123Reserves & surplus 2,982 3,379 3,769 4,268 4,884Net worth 3,105 3,502 3,892 4,390 5,007Minority interest 0 0 0 0 0Total debt 903 1,257 1,857 1,857 1,857Def. tax liab. (net) 243 257 257 257 257Capital employed 4,008 4,759 5,749 6,247 6,863Net fixed assets 2,279 2,948 3,661 3,837 3,992Investments 0 0 0 0 0 - of which, liquid 0 0 0 0 0Net working capital 1,353 1,540 1,738 2,080 2,488Cash and bank balance 375 270 350 329 383Capital deployed 4,008 4,759 5,749 6,247 6,863Net debt 527.2 985.9 1506.2 1526.9 1473.7WC days 90.5 76.2 73.5 73.7 74.1Book value (`/sh) 252.7 285.0 316.8 357.3 407.5Source: Company, Anand Rathi Research




Domestic formulations62%

Export formulations32%

Domestic APIs3%

Export APIs3%




[email protected]


[email protected]


Sales (`m) 15,666 18,989 23,328 27,085 30,887

Net profit (`m) 2,016 2,326 3,104 3,579 4,145

EPS (`) 16.4 18.5 24.7 28.5 33.0

Growth (%) 30.8 15.4 33.4 15.3 15.8

PE (x) 21.6 19.1 14.3 12.4 10.7

EV/EBITDA (x) 14.6 13.2 9.6 8.4 7.2

P/B (x) 5.1 4.2 3.5 2.9 2.4

RoE (%) 26.9 24.3 26.9 25.7 24.5

RoCE (%) 17.8 16.8 19.2 19.0 19.2

Dividend yield (%) 1.0 0.4 1.6 2.1 2.4

Net gearing (%) 51.3 49.5 44.6 35.9 26.2



Update

20 April 2012

Ipca Labs

Steady growth; compelling valuations; we maintain a Buy

Steady growth momentum, expected revival in domestic formulations, robust growth in export formulations led by higher artemether lumefantrine sales, a robust balance sheet and attractive valuations are strong positives for Ipca Labs. We maintain a Buy, with a revised price target of `430 (from`390 earlier).

Revival in domestic growth from FY13. In the last three quarters, Ipca Labs has registered slower growth in domestic formulations, mainly on account of the seasonality factor led by the prolonged monsoon, since anti-malarials bring in a significant portion of its domestic formulations revenue. We expect a slight recovery from 4Q FY12, followed by steady 16% growth in the next two years. We estimate 13.3% CAGR in domestic revenue over FY11-14.

Exports – key growth driver. With continuing geographical forays and additions to its product range, Ipca is poised to register 25.2% revenue CAGR in export formulations. We expect sales of artemether lumefantrine to contribute `3bn in FY12 to exports, and `3.5bn in FY13. Timely approval of the Indore plant may provide some upside to our estimates. We assume US$12m revenue in FY13 from the Indore plant.

Revising estimates. We marginally raise our estimates to factor in the favourable currency impact on the company. We raise revenue estimates for FY12-14 by 1-2%, and net profit estimates by 1-3%, led by a 50-100bps improvement in the EBITDA margin.

Valuation. At our target price, the stock trades at 15.1x FY13e and 13x FY14e earnings. We maintain a Buy rating, with a revised price target of `430, based on 14x one-year-forward earnings (from `390 earlier). Risks: Currency fluctuations and regulatory hurdles.



IPCA

Sensex

200

240

280

320

360

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data IPCA IN / IPCA.BO52-week high / low `352 / `230Sensex / Nifty 17503 / 53323-m average volume US$1.2m Market cap `44.5bn / US$0.9bnShares outstanding 125.7m




Sales 1.0 1.8 1.7EBITDA 1.4 3.6 3.5EPS 1.7 2.3 2.1Target multiple (x) - - -


20 April 2012 Ipca Labs – Steady growth; compelling valuations; we maintain a Buy




Net revenues 15,666 18,989 23,328 27,085 30,887Revenue growth (%) 21.2 21.2 22.9 16.1 14.0 - Op. expenses 12,331 15,215 18,113 21,109 24,047EBIDTA 3,335 3,774 5,215 5,976 6,840EBITDA margin (%) 21.3 19.9 22.4 22.1 22.1- Interest expenses 329 314 423 393 375- Depreciation 467 558 697 818 943+ Other income 62 71 100 71 79- Tax 617 747 940 1,258 1,456Effective tax rate (%) 23.2 21.9 26.0 26.0 26.0Reported PAT 2,054 2,629 2,676 3,579 4,145+/- Extraordinary items 63 434 -579 0 0+/- Minority interest 2 1 Adjusted PAT 2,016 2,326 3,104 3,579 4,145Adj. FDEPS (`/share) 16.4 18.5 24.7 28.5 33.0Adj. FDEPS growth (%) 30.8 15.4 33.4 15.3 15.8Source: Company, Anand Rathi Research


PAT 2,016 2,326 3,104 3,579 4,145 + Non-cash items 609 572 697 818 943 Cash profit 2,625 2,899 3,802 4,397 5,087 - Incr./(decr.) in WC 1,664 1,203 944 1,453 1,457 Operating cash-flow 962 1,696 2,857 2,944 3,630 - Capex 1,261 1,821 2,200 2,000 2,000 Free cash-flow (299) (125) 657 944 1,630 - Dividend 409 468 626 838 970 + Equity raised 0 0 0 0 0 + Debt raised (54) 763 300 0 (500)- Investments (86) 83 0 0 0 - Misc. items (633) 0 0 0 0 Net cash-flow (43) 87 331 106 160 + Op. cash & bank bal. 113 108 104 6 112 Cl. cash & bank bal. 108 104 6 112 273 Source: Company, Anand Rathi Research


0

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400

500

Mar

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Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

(`)

4x

8x

16x

12x



Share capital 251 251 251 251 251Reserves & surplus 8,398 10,265 12,314 15,056 18,231Net worth 8,649 10,516 12,565 15,307 18,482Minority interest -6 -7 -7 -7 -7Total debt 4,545 5,308 5,608 5,608 5,108Def. tax liab. (net) 793 807 807 807 807Capital employed 13,981 16,625 18,974 21,716 24,391Net fixed assets 6,761 8,124 9,626 10,808 11,866Investments 325 408 408 408 408 - of which, Liquid 2 2 2 2 2Net working capital 6,787 7,989 8,934 10,387 11,844Cash and bank balance 108 104 6 112 273Capital deployed 13,981 16,625 18,974 21,716 24,391Net debt 4,436 5,203 5,601 5,494 4,834WC days 148.6 152.0 139.9 139.9 139.9Book value (`/sh) 69.1 83.7 100.0 121.8 147.0Source: Company, Anand Rathi Research




Export formulations

45%

Domestic formulations'

33%Domestic APIs6%

Export APIs16%




[email protected]


[email protected]


Sales (`m) 48,318 58,056 70,340 81,632 92,371

Net profit (`m) 6,641 8,626 9,746 11,209 13,197

EPS (`) 14.9 19.3 21.8 25.1 29.6

Growth (%) 19.7 29.4 13.0 15.0 17.7

PE (x) 37.0 28.6 25.3 22.0 18.7

EV/EBITDA (x) 26.7 21.6 17.3 15.1 12.7

P/B (x) 9.6 7.5 6.1 5.0 4.2

RoE (%) 33.3 29.5 26.7 25.1 24.5

RoCE (%) 20.9 20.9 20.5 20.9 21.5

Dividend yield (%) 0.5 0.6 0.8 0.9 1.1

Net gearing (%) 36.5 26.9 24.7 13.6 1.8



Update

20 April 2012

Lupin

Strong business model but fairly valued; we downgrade to a Sell

For the regulated markets, Lupin has a strong product pipeline including its branded and oral contraceptive range. We are positive on its business model, but see no upside to our price target from current levels due to the recent rally in the stock. We downgrade the stock from a Buy to a Sell, and revise our price target from `510 to `547.

Strong and distinct business model. Lupin’s unique business model boasts of thriving operations in its branded business in the US, where peers have not yet been successful. It is one of the early and successful entrants into Japan. Further, it has built up an extensive range of oral contraceptives, an area in which competition is likely to be comparatively limited and where greater profitability is expected.

Strong growth trajectory, but threat from generic Suprax. Lupin is on a strong growth trajectory (a 16.7% CAGR in revenue over FY11-14), driven by 19.1% CAGR in advanced markets (the US, the EU, Japan), 16% in emerging markets, 19.1% in the home market and 3% in APIs. However, the generic launch of Suprax, expected in FY13-14, may impact growth estimates.

Revising estimates. We raise FY12-15 revenue estimates 3-5% to factor in increased revenue from India and Japan. However, we reduce net profit estimates 3-5% on account of the lower EBITDA margin (~50bps) and higher tax rate (to 20%). We expect 19-19.5% EBITDA margin in FY13 and FY14.

Valuation. At our target price, the stock trades at 21.8x FY13e and 18.5x FY14e earnings. We downgrade it from a Buy to a Sell, with a revised price target of `547, as the CMP does not offer any upside to our target price. Risks: Currency fluctuations and regulatory hurdles.

Rating: Sell Target Price: `547 Share Price: `552


LPC

Sensex300

350

400

450

500

550

600

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data LPC IN / LUPN.BO52-week high / low `575 / `405Sensex / Nifty 17503 / 53323-m average volume US$8.2m Market cap `246bn / US$4.8bnShares outstanding 446m

Shareholding pattern (%) Mar ’12 Dec ’11 Sep ’11



Sales 3.8 5.7 5.0EBITDA 2.0 1.0 1.8EPS (3.6) (5.1) (3.1)Target multiple (x) - - -


20 April 2012 Lupin – Strong business model but fairly valued; we downgrade to a Sell




Net revenues 48,318 58,056 70,340 81,632 92,371Revenue growth (%) 25.5 20.2 21.2 16.1 13.2 - Op. expenses 38,783 46,319 55,640 64,922 73,044EBIDTA 9,535 11,737 14,699 16,710 19,326EBITDA margin (%) 19.7 20.2 20.9 20.5 20.9- Interest expenses 385 325 306 233 173- Depreciation 1,239 1,712 2,096 2,436 2,726+ Other income 237 262 121 241 381- Tax 1,360 1,169 2,484 2,856 3,362Effective tax rate (%) 16.3 11.7 20.0 20.0 20.0Reported PAT 6,816 8,626 9,746 11,209 13,197+/- Extraordinary items 209 0 0 0 0+/- Minority interest 112 148 189 217 249Adjusted PAT 6,641 8,626 9,746 11,209 13,197Adj. FDEPS (`/share) 14.9 19.3 21.8 25.1 29.6Adj. FDEPS growth (%) 19.7 29.4 13.0 15.0 17.7Source: Company, Anand Rathi Research


PAT 6,816 8,626 9,746 11,209 13,197 + Non-cash items 1,490 1,685 2,096 2,436 2,726 Cash profit 8,306 10,311 11,842 13,645 15,923 - Incr./(decr.) in WC 4,478 2,401 3,910 3,433 3,004 Operating cash-flow 3,828 7,909 7,932 10,212 12,919 - Capex 6,099 5,243 6,950 4,500 4,500 Free cash-flow (2,271) 2,666 982 5,712 8,419 - Dividend 1,483 1,658 2,273 2,615 3,078 + Equity raised 0 0 0 0 0 + Debt raised 2,529 226 (2,866) (2,000) (2,000)- Investments 49 (233) 0 0 0 - Misc. items (2,511) (719) (189) (226) (272)Net cash-flow 1,237 2,186 (3,969) 1,323 3,612 + Op. cash & bank bal. 778 2,015 4,201 232 1,546 Cl. cash & bank bal. 2,015 4,201 232 1,546 5,136 Source: Company, Anand Rathi Research


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600

Mar

-06

Mar

-07

Mar

-08

Mar

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Mar

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Mar

-11

Mar

-12

(`)

20x

15x

10x



Share capital 889 892 892 892 892Reserves & surplus 24,789 31,918 39,391 47,985 58,104Net worth 25,678 32,811 40,283 48,878 58,996Minority interest 255 515 704 921 1,170Total debt 11,399 13,035 10,169 8,169 6,169Def. tax liab. (net) 1435 1411.3 1411.3 1411.3 1411.3Capital employed 38,767 46,361 51,156 57,967 66,335Net fixed assets 22,640 25,881 30,735 32,799 34,573Investments 264 32 32 32 32 - of which, liquid 0 0 0 0 0Net working capital 13,847 16,248 20,158 23,591 26,596Cash and bank balance 2,015 4,201 232 1,546 5,136Capital deployed 38,767 46,361 51,156 57,967 66,335Net debt 9,383 8,834 9,938 6,623 1,034WC days 43.4 30.8 28.6 36.5 37.1Book value (`/sh) 58 74 90 110 132Source: Company, Anand Rathi Research




US35%

EU3%

Japan12%

India29%

Emerging markets

9%

APIs12%




[email protected]


[email protected]


Sales (`m) 4,567 4,559 5,411 6,305 7,098

Net profit (`m) 499 519 630 819 1,006

EPS (`) 17.7 18.4 20.2 26.3 32.3

Growth (%) 11.1 4.0 9.7 29.9 22.9

PE (x) 20.9 20.1 18.3 14.1 11.5

EV/EBITDA (x) 12.4 14.2 11.7 9.5 7.9

P/B (x) 3.4 3.0 2.4 2.1 1.8

RoE (%) 17.7 15.8 15.2 15.9 16.8

RoCE (%) 14.2 12.0 10.8 13.1 14.6

Dividend yield (%) 1.5 0.7 0.5 0.5 0.6

Net gearing (%) 41.5 56.1 45.6 32.1 18.1


Pharmaceuticals


20 April 2012

Natco Pharma

Differentiated play, scaling up well; Buy

Natco Pharma is differentiated from its peers in terms of a strong presence in the domestic oncology segment and niche product opportunities for the US market. Further, the company would see steady growth in its base formulations & API business and also margin expansion along with better return ratios. We initiate coverage with a Buy rating and a price target of `468.

Steady growth to continue in base business. Natco’s base business of formulations and APIs is likely to continue its current steady 14-15% CAGR over FY11-14. The company has built up a strong position in the domestic oncology market and is ranked first in terms of revenue among domestic generic oncology companies. The US pharmacy business is likely to see flat revenues, and its divestment would be a strong positive.

Interesting product filings to provide huge cash-flows. Natco has made several interesting Para IV filings that may provide huge cash-flows. These include lenalidomide, lanthanum carbonate, oseltamavir phosphate, copaxone and lansaprazole. We value these opportunities at an NPV of `117 a share.

Improving financials. We expect Natco to register 15.9% CAGR in revenue over FY11-14 (and 24.7% in net profit), along with EBITDA margin improvement of 330bps. RoCE is likely to improve from 10.8% in FY12 to 14.6% in FY14 and D/E to drop from 0.6x in FY12 to 0.3x in FY14.

Valuation. Natco trades at 14.1x FY13e and 11.5x FY14e earnings. We value the stock at `468 based on 12x one-year-forward earnings and `117 for the Para IV filings. Risks: Delay in regulatory approvals and currency fluctuation.



NTCPH

Sensex

200

250

300

350

400

Apr-1

1

Jun-

11

Aug-

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Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data NTCPH IN / NATP.BO52-week high / low `399 / `194Sensex / Nifty 17503 / 53323-m average volume US$0.57m Market cap `11.5bn / US$0.2bnShares outstanding 31m


Promoters 57.02 63.11 62.88 - of which, pledged 0 5.91 5.93Free float 42.98 36.89 37.12 - Foreign institutions 5.93 6.36 6.5 - Domestic institutions 11.83 8.86 8.12 - Public 25.22 21.67 22.5

20 April 2012 Natco Pharma – Differentiated play, scaling up well; Buy




Net revenues 4,567 4,559 5,411 6,305 7,098Revenue growth (%) 3.0 -0.2 18.7 16.5 12.6- Op. expenses 3,637 3,691 4,248 4,918 5,519EBIDTA 930 868 1,163 1,387 1,579EBITDA margin (%) 20.4 19.0 21.5 22.0 22.3- Interest expenses 147 142 233 210 169- Depreciation 197 159 173 209 214+ Other income 46 64 50 55 61- Tax 137 132 178 205 251Effective tax rate (%) 22.2 20.3 22.0 20.0 20.0Reported PAT 487 535 630 819 1,006+/- Extraordinary items -15 20 0 0 0+/- Minority interest -8 -16 0 0 0Adjusted PAT 499 519 630 819 1,006Adj. FDEPS (`/share) 17.7 18.4 20.2 26.3 32.3Adj. FDEPS growth (%) 11.1 4.0 9.7 29.9 22.9Source: Company, Anand Rathi Research


PAT 507 502 630 819 1,006 + Non-cash items 225 141 173 209 214 Cash profit 732 643 803 1,027 1,219 - Incr./(decr.) in WC 152 469 81 229 204 Operating cash-flow 580 174 722 799 1,015 - Capex 389 766 1,500 300 300 Free cash-flow 191 (592) (778) 499 715 - Dividend 66 66 66 66 75 + Equity raised 0 0 675 0 0 + Debt raised (67) 1,005 505 (985) 125 - Investments 264 20 0 0 0 - Misc. items 4 75 17 17 17 Net cash-flow (210) 252 319 (569) 748 + Op. cash & bank bal. 291 81 333 669 118 Cl. cash & bank bal. 81 333 669 118 883 Source: Company, Anand Rathi Research


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Share capital 281 281 311 311 311Reserves & surplus 2,776 3,243 4,452 5,205 6,136Net worth 3,057 3,524 4,764 5,517 6,447Minority interest 49 11 11 11 11Total debt 1,463 2,451 2,955 1,971 2,096Def. tax liab. (net) 268 251 251 251 251Capital employed 4,570 5,986 7,730 7,498 8,553Net fixed assets 3,014 3,689 5,016 5,107 5,194Investments 606 626 626 626 626 - of which, liquid 3 0 Net working capital 869 1,337 1,418 1,647 1,851Cash and bank balance 81 333 669 118 883Capital deployed 4,570 5,986 7,730 7,498 8,553Net debt 1,379 2,117 2,286 1,853 1,213WC days 33.0 47.8 49.8 45.1 45.8Book value (`/sh) 108.6 125.2 152.9 177.1 207.0Source: Company, Anand Rathi Research



Fig 6 – Share of revenue, segment-wise (FY12e)


39%

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12%

APIs31%

US Pharmacy16%

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Investment Argument and Valuation We initiate coverage on Natco Pharma with a Buy rating and a price target of `468. We are positive on the company due to its differentiation from peers in terms of its strong operations in the domestic oncology segment and niche products for the US market, steady growth in its base formulations and API business, and expanded margins along with improving return ratios.

Steady growth to continue in base business We expect the base business of formulations and APIs to sustain the revenue growth momentum with steady 14-15% CAGR over FY11-14. The base business includes formulations and APIs in the home market and in exports. The company has built up a strong position in the home oncology market and is ranked first among domestic generic oncology companies in terms of revenue. In addition, it has a pharmacy business in the US, which is likely to register flat revenues. Its divestment would be a key positive.

In terms of annual revenue from the oncology segment, Natco is the top generic company in India. It has successfully launched oncology products for breast cancer, brain, lung, bone, ovarian and prostate cancer and has a few other products in the pipeline, which would be launched gradually. Further, it recently secured a compulsory license to manufacture a generic version of Bayer’s Nexavar. We expect it to generate revenue of `250-300m annually from this product alone, as only Bayer and Cipla currently offer such a product. However, Natco’s product would be at a significant discount to the price of both the others.

Interesting filings to generate large cash flows Natco has made several interesting Para IV filings, which may offer huge cash-flows. These include filings for lenalidomide, lanthanum carbonate, oseltamavir phosphate, copaxone, lapatinib ditosylate and lansaprazole. We value these opportunities at an NPV of `117 a share after assuming a 50% probability of launch. The company has partnered with generic companies to launch these products. As Natco is small, this strategy should help alleviate regulatory and litigation risks along with costs involved.

According to the company, it has first-to-file (FTF) status for lenalidomide, lanthanum carbonate and oseltamavir phosphate, and expects little competition in the prescription drug lansaprazole and in glatiramer acetate. These are interesting product pipelines for the US, with annual sales of these three products estimated at more than US$2bn. Natco is poised to leverage this opportunity through partnerships with companies that would bear the legal and regulatory risks.

Improving financials We expect Natco to register 15.9% CAGR in revenue from its base business over FY11-14 (and 24.7% in net profit) along with an EBITDA margin rise of 330bps to 22.3%. We estimate an increase in the RoCE from 10.8% in FY12 to 14.6% in FY14 and a dip in the D/E from 0.6x in FY12 to 0.3x in FY14, led by strong net profit growth. The working capital cycle is a comfortable 45-50 days. Our estimates do not include any upside from the Para IV launches.



Valuations Natco trades at 14.1x FY13e and 11.5x FY14e its base business earnings. We value the stock at `468 based on 12x one-year-forward base business EPS and `117 a share for the Para IV pipeline. We initiate coverage with a Buy.

Risks Delay in regulatory approvals/registrations

Currency fluctuations.



Steady growth in base business We expect Natco’s base business of formulations and APIs to continue to register a steady 14-15% CAGR over FY11-14. The base business includes formulations and APIs for both the home market and exports. The company has built up a strong position in the home oncology market and is ranked first among domestic generic oncology companies. In addition, it has a pharmacy business in the US, which is likely to register flat revenues. Divestment of this would be a key positive.

Business model Natco has two main business segments, formulations and APIs, in both the domestic market and exports. It also has a pharmacy business in the US and small contract-manufacturing operations in India. Formulations are estimated to bring in ~51% of revenue in FY12 and APIs, ~31%. The rest of the revenue is likely to come from pharmacy and contract manufacturing. The company has about 1,900 marketing representatives to promote brand-named formulations in India. For international markets, it ties up with generic players or distributors in different geographical areas.

Fig 7 – Share of revenue contribution, by segment (FY12e)

APIs31%

Formulations51%

Pharmacy16%

Contract Mfg & others

2%


Formulations – key driver for base business More than half of the revenue in Natco’s base business arises from formulations. Within formulations, 75% of revenue comes from the home market, 25% from exports. We expect 22% CAGR in revenue in its formulations business, including additional revenue from Nexavar (Bayer’s oncology product) in India. The company’s strategy has been to launch niche products and difficult-to-make complex products. This has worked in its favour in terms of gaining a majority market share in the oncology market. Within domestic formulations, nearly 70% of the revenue is generated in the oncology segment, the company’s forte.



Fig 8 – Share of formulations revenue, by category (FY12e)

Oncology domestic

51%

Other domestic24%

Exports25%


In oncology, in terms of annual revenue, Natco is the top generic company in India. It has successfully launched oncology products for breast cancer, brain, lung, bone, ovarian and prostate cancers and has a few more products in the pipeline, which would be launched gradually. Further, it recently received a license to manufacture a generic version of Bayer’s Nexavar. From this product alone, we expect Natco to generate revenue of `250m-300m annually, as only Bayer and Cipla currently offer it. However, Natco’s product is at a significant discount to the prices of both the others. We expect 16% CAGR in revenue from the oncology segment over FY11-14 and additional revenue of `250m-300m from Nexavar annually from FY13.

Fig 9 – Revenue growth trend in Natco’s oncology segment

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In the non-oncology segment, Natco operates in several therapeutic categories. This segment has been growing very fast, with revenue doubling to `600m in the past three years. However, due to the sharper focus and launches expected in the oncology segment, we expect a modest 15% CAGR in revenue in the non-oncology domestic business over FY11-14. This is in line with the industry growth rate.

Formulations for export have registered over 50% CAGR in revenue over FY08-11, mainly due to the low base and gradual ANDA approvals. We expect this segment to see 23% CAGR over FY11-14, again on a low base and further launches in international markets. The US is the largest contributor to exports formulations, in which the company has already filed 21 ANDAs. An additional 15 ANDAs are in the filing stage. The company does not directly operate in any international market and functions through a partnership model. This is a good strategy, in our view, for a small company such as Natco.



Fig 10 – Revenue trend in non-oncology domestic and export formulations

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APIs – steady growth expected APIs bring in ~30% of Natco’s revenue. Almost 80% of API revenue arises from exports. The company focuses on the high-value low-volume category of APIs. We estimate API revenue at a very high 60% in FY12, due to a substantial increase in exhibit batches for the home market and an increase in API exports, which would be sustainable according to the company. On this high base, we expect 12% CAGR in API revenue over FY12-14. Key APIs developed are citalopram, imatinib mesylate, geftinib, erlotonib, sumatriptan, seratraline and letrazole.

Fig 11 – Revenue growth trend in APIs

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Pharmacy segment– potential divestment candidate Natco’s initial strategy was to build its US generic business through the US pharmacy business. However, this did not succeed. It spent ~US$10m to acquire a majority stake in three pharmacy stores in US. Subsequently, because of the US economic slowdown, one store was sold off. In its pharmacy business, Natco generated revenue of `1.1bn in FY11, with the bottom line running at a net loss. We expect revenue from the pharmacy business to be `900m a year in FY12, FY13 and FY14. The company has now realized that the strategy is not working. Hence, we believe Natco may divest this business. Divestment would be positive as the pharmacy business has a very low EBITDA margin and has been running at a net loss. This impacts the company’s overall performance. In addition, divestment would offer immediate cash-flows.



Cash-Flows Through Para IV Filings Natco has made several interesting Para IV filings that have potential for large cash-flows. These are lenalidomide, lanthanum carbonate, oseltamavir phosphate, copaxone, lapatinib ditosylate and lansaprazole. We value these opportunities at an NPV of `117 a share after assuming a 50% probability of launch. Natco has partnered with generic companies to launch these products. As it is a small company, this strategy helps alleviate regulatory and litigation risks as well as high costs.

Well thought-out strategy to scale up the US business The company has tied up with several generic players to scale up its business in the US market. This strategy mitigates the risk involved in regulatory concerns, litigation regarding patent challenges and the huge costs involved. The strategy also helps the smaller Natco effectively participate in opportunities from patent expiries in regulated markets, as the partners are well-known large generics companies such as Mylan, Lupin and Dr Reddy’s. The company has strong R&D capabilities as is evident from the Para IV filings for large products. The R&D team has 200 employees.

Value Para IV pipeline at `117 a share According to the company, it has first-to-file (FTF) status on lenalidomide, lanthanum carbonate and oseltamavir phosphate, and expects little competition in lansaprazole and glatiramer acetate. We believe that these make up an interesting product pipeline for the US, with annual sales of these three products coming at more than US$2bn. Natco is well-placed to leverage this opportunity through partners who would bear the legal and regulatory risks.

Lenalidomide: This seems to be the largest upside opportunity for Natco. The patent for the product belongs to the innovator, Celgene, which markets it under the brand name, Revlimid. Revlimid is indicated in treatment of patients with multiple myeloma. Its annual market size in CY11 was more than US$3bn. Natco has selected Watson Pharmaceuticals of US to market this product for which it has FTF status. We expect Natco to launch this product in CY16, and value this opportunity at an NPV of `37 a share, assuming 50% price erosion, 40% market share and 50% probability of a successful launch.

Lanthanum Carbonate: The patent for this belongs to Shire, which markets it under the brand name, Fosrenol. The product is indicated in the treatment of pre-dialysis chronic kidney disease. The brand commands ~US$110m in annual revenue in the US, and ~US$180m globally. Natco has partnered with Lupin for this product. We expect a near-term upside from this product as the 30-month stay would be over in Apr ’12. We value this opportunity at `2 a share for Natco, assuming 60% price erosion, 40% market share and 50% launch probability.

Oseltamivir phosphate: The patent for this belongs to Roche, which markets it under the brand name, Tamiflu. Tamiflu is indicated in treatment of swine flu and has an annual branded market size of US$241m. We expect this product to be launched by Natco’s partner, Alvogen, only after Aug ’15 this year, when the first patent expires.



Natco has FTF status on it. We value this opportunity at `5 a share for Natco, assuming 50% price erosion, 40% market share and 50% probability of monetizing this opportunity.

Glatiramer Acetate: The brand name of the product is Copaxone. Owned by Teva, it is indicated in treating multiple sclerosis. It has an annual market size of ~US$2.5bn. Natco has selected Mylan for regulatory filings and marketing in various countries, including the US, the EU and Japan. Natco does not have FTF status but is the second to file. The product’s patent is to expire in May ’14. We value this opportunity at `41 a share, assuming 90% price erosion, post-patent-expiry, and 15% market share for Natco’s partner.

Lansoprazole: The brand name of the product is Prevacid and the innovator of the product is Takeda. The annual size of the product was ~US$3bn at the brand price. A few generic players – DRL, Teva, Mylan, Sandoz – have already entered the market. We value this opportunity at `29 a share, assuming 95% price erosion and 5% market share. There is no litigation involved in this product and Natco’s filing is Para III.

Fig 12 – Details and NPV value of product filings Product Brand name Innovator Opportunity NPV value (`)

Lenalidomide Revlimid Celgene FTF 37

Lanthanum Carbonate Fosrenol Shire FTF 2

Oseltamavir Phosphate Tamiflu Roche FTF 5

Glatiramer Acetate Copaxone Teva Limited competition 41

Lapatinib ditosylate Tykerb Glaxo FTF 3

Lansoprazole Prevacid Takeda Limited competition 29

Total 117




Financials We estimate 15.9% CAGR in revenue in Natco’s base business over FY11-14 (and 24.7% in net profit), along with EBITDA margin improvement of 330bps, to 22.3% in FY14. We expect RoCE to improve from 10.8% in FY12 to 14.6% in FY14 and D/E to drop from 0.6x in FY12 to 0.3x in FY14, led by Natco’s strong net profit growth. The working capital cycle is a comfortable 45-50 days. Our estimates do not include any upside from its Para IV launches, as we value them separately on an NPV basis.

15.9% CAGR in revenue over FY11-14e Over FY11-14, we expect Natco to register 15.9% CAGR in revenue from its base business, to `7.1bn. The growth is likely to be mainly driven by its formulation and API business divisions (which bring in more than 80% of revenue), since we estimate flat revenue from the pharmacy and contract-manufacturing divisions. We expect the formulations segment to register 21.8% CAGR over FY11-14, led by 23% CAGR in exports, 16% CAGR in oncology and 15% CAGR in non-oncology domestic sales.

Further, we expect additional revenue of `250m-300m from FY13 on the launch of Nexavar in India. APIs are expected to grow faster, at 26% CAGR, primarily on account of the strong 60% growth in FY12, led by increasing supply of exhibit batches for home consumption and exports. However, we expect the growth rate in APIs to taper off to 12% in FY13 and FY14.

Fig 13 – Revenue break-up (`m) FY10 FY11 FY12e FY13e FY14e

APIs 889 1,060 1,696 1,899 2,127

% growth (16.6) 19.2 60.0 12.0 12.0

Formulations 1,967 2,239 2,777 3,476 4,049

% growth 31.7 13.8 24.0 25.2 16.5

Oncology domestic 1,238 1,212 1,430 1,895 2,191

Non-oncology domestic 492 600 690 794 913

Exports 237 505 657 788 945

Pharmacy (US) 1,493 1,113 900 900 900

% growth (17) (25) - - -

Job work and others 260 201 93 93 93

% growth 105.1 (22.7) (53.5) - -

Gross sales 4,609 4,613 5,466 6,369 7,170


Net profit CAGR of 24.7% over FY11-14e We expect Natco to register 24.7% CAGR in net profit over FY11-14, to `1bn, as a result of 15.9% CAGR in revenue and a 330bp increase in EBITDA margin to 22.3%. The EBITDA margin expansion is likely to come from the increasing proportion of the high-margin formulations business and a drop in proportion of the very low-margin pharmacy and contract-manufacturing business, where we anticipate flat sales with no revenue growth. We estimate 22.1% CAGR in EBITDA over FY11-14. Further, we estimate a net profit margin of 14.2% in FY14, from 11.7% in FY11, led by strong net profit growth.



Improving return ratios and Comfortable leverage We estimate low return ratios in FY12 due to the recent equity dilution (through a QIP) on the need for funds. The issue of shares has led to an equity dilution of 11%. We expect the financial gains from these funds to accrue from the launch of Para IV products in the US. We expect the RoE to slip from 15.8% in FY11 to 15.2% in FY12 and then to gradually improve to 16.8% in FY14 without allowing for any upside from the Para IV opportunities.

Similarly, we estimate a decline in the RoCE, from 12% in FY11 to 10.8% in FY12, followed by an improvement to 14.6% in FY14, due to debt repayment and strong net profit growth. Return ratios are likely to improve from FY14, with the accrual of benefits from Para IV opportunities.

The company’s leverage position is comfortable, with net debt to equity in FY12 of 0.5x, and net debt to EBITDA of 2x. We expect the D/E to slide to 0.2x in FY14 on debt repayment and strong net profit growth. Followed by the better EBITDA margin, net debt to EBITDA would also go down to 0.8x in FY14.


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Fig 18 – Income statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Revenues 4,567 4,559 5,411 6,305 7,098

Growth in revenues (%) 3.0 (0.2) 18.7 16.5 12.6

Raw materials 2,101 1,778 1,975 2,301 2,591

% of Sales 46.0 39.0 36.5 36.5 36.5

Personnel expenses 574 643 758 883 994

% of Sales 12.6 14.1 14.0 14.0 14.0

Selling and other expenses 963 1,270 1,515 1,734 1,934

% of Sales 21.1 27.9 28.0 27.5 27.3

EBITDA 930 868 1,163 1,387 1,579

EBITDA Margin 20.4 19.0 21.5 22.0 22.3

Depreciation 197 159 173 209 214

PBIT 732 709 991 1,178 1,366

Interest expenses 147 142 233 210 169

PBIT from operations 585 567 758 968 1,197

Other non operating income 46 64 50 55 61

PBT before extra-ordinary items 632 631 808 1,023 1,257

Extra-ordinary income/ (expenses) (15) 20 - - -

PBT 616 651 808 1,023 1,257



PAT 479 519 630 819 1,006

Minority Interest (8) (16) - - -

PAT after minority interest 487 535 630 819 1,006

Adjusted PAT 499 519 630 819 1,006

Growth in PAT (%) 11.5 4.0 21.4 29.9 22.9

PAT margin 10.9 11.4 11.6 13.0 14.2



Equity Share Capital 281 281 311 311 311

Reserves 2,776 3,243 4,452 5,205 6,136


Minority Interest 49 11 11 11 11

Debt 1,195 2,200 2,704 1,720 1,845

Deferred Tax Liability 268 251 251 251 251

Total Capital Employed 4,570 5,986 7,730 7,498 8,553

Gross Block 3,569 3,744 5,244 5,544 5,844

Accumulated depreciation 951 1,042 1,215 1,424 1,637

Net Block 2,618 2,702 4,029 4,120 4,207

Capital WIP 396 987 987 987 987

Total Fixed Assets 3,014 3,689 5,016 5,107 5,194

Investments 606 626 626 626 626

Inventories 774 1,022 1,047 1,213 1,361

Debtors 572 710 815 950 1,070

Cash and bank balances 81 333 669 118 883

Loans and Advances 461 693 797 923 1,036


Current liabilities and provisions 939 1,088 1,242 1,439 1,615

Net current assets 950 1,671 2,088 1,765 2,734

Misc. Expenditure - - - - -

Total Assets 4,570 5,986 7,730 7,498 8,553




Fig 20 – Cash-flow statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e Cash flow from operating activities Profit before tax 616 651 808 1,023 1,257 Depreciation 197 159 173 209 214 Interest expenses 147 142 233 210 169 Operating profit before working capital change 960 952 1,214 1,442 1,640 Working capital adjustment (152) (469) (81) (229) (204)Gross cash generated from operations 809 484 1,133 1,214 1,436 Direct taxes paid (109) (150) (178) (205) (251)Cash generated from operations 700 334 955 1,009 1,185 Cash flow from investing activities Capex (389) (766) (1,500) (300) (300)Investment (264) (20) - - -Cash generated from investment activities (653) (786) (1,500) (300) (300) Cash flow from financing activities Proceeds from share capital and premium Borrowings/ (Repayments) (67) 1,005 505 (985) 125 Interest paid (147) (142) (233) (210) (169)Dividend paid (66) (66) (66) (66) (75)Cash generated from financing activities (280) 797 206 (1,260) (120) Net cash increase/ (decrease) (233) 345 (339) (552) 765


Fig 21 – Ratio @ `370 Year-end: Mar FY10 FY11 FY12e FY13e FY14e Margin Ratios (%) EBITDA Margin 20.4 19.0 21.5 22.0 22.3 PBIT Margin 16.0 15.6 18.3 18.7 19.2 PBT Margin 13.5 14.3 14.9 16.2 17.7 PAT Margin 10.9 11.4 11.6 13.0 14.2 Growth Ratios (%) Revenues 3.0 (0.2) 18.7 16.5 12.6 EBITDA 13.6 (6.6) 34.1 19.2 13.9 Net Profit 11.5 4.0 21.4 29.9 22.9 Return Ratios (%) ROCE 14.2 12.0 10.8 13.1 14.6 ROIC 13.7 11.2 11.5 13.4 14.9 ROE 17.7 15.8 15.2 15.9 16.8 Turnover Ratios (x) Asset turnover ratio (x) 1.4 1.2 1.2 1.2 1.2 Working capital cycle (days) 33 48 50 45 46 Average collection period (days) 48 51 51 51 52 Average payment period (days) 94 92 91 90 91 Inventory holding (days) 79 89 89 84 85 Per share (`) EPS 17.7 18.4 20.2 26.3 32.3 CEPS 24.7 24.1 25.8 33.0 39.1 Book Value 108.6 125.2 152.9 177.1 207.0 Solvency ratios Debt/ Equity 0.4 0.6 0.6 0.3 0.3 Interest coverage 5.0 5.0 4.3 5.6 8.1 Net Debt/ EBITDA 1.2 2.2 1.7 1.2 0.6 Valuation parameters (x) P/E 20.9 20.1 18.3 14.1 11.5 P/BV 3.4 3.0 2.4 2.1 1.8 EV/ EBITDA 12.4 14.2 11.7 9.5 7.9 EV/ Sales 2.5 2.7 2.5 2.1 1.8 M-Cap/ Sales 2.3 2.3 2.1 1.8 1.6




Company background & Management An integrated pharmaceuticals company engaged in manufacturing APIs and FDFs, Natco Pharma was incorporated in Hyderabad in 1981. Today, it is one of the leaders in the oncology segment. It offers over 200 formulations in various categories in the oncology and non-oncology segments.

It has one API unit and six FDF units in Andhra Pradesh and Uttarakhand. Two of its plants have been approved by the US FDA. It has partnered with leading global pharmaceutical and generic companies such as Mylan, Dr Reddy’s Labs, Actavis, Breckinridge Pharma and Lupin for business in regulated markets. It has filed 888 DMFs; another 37 are being prepared. It has filed 21 ANDAs in the USA, with another 15 in the filing stage.


Others, 25.6%

DFI, 11.6%

FII, 5.8%

Promoter, 57.1%

Source: BSE


V. C. Nannapaneni Chairman and managing director

About 42 years’ experience in pharmaceuticals. Earlier associated with Time Cap Labs, USA. Master’s degree from Andhra University.

Rajeev Nannapaneni Director and chief operating officer

About 15 years’ experience in various companies in the USA, of which the last 11 years were in pharmaceuticals. Earlier associated with the Merrill Lynch Group, USA as accounts executive. Bachelor’s degree in Quantitative Economics and History from Tufts University, USA.

P. Bhaskaranarayana Director and chief financial officer

Experience of over three decades in the finance, secretarial & legal domains. Joined Natco in 1999 and elevated to present position in 2005. Doctor of Philosophy in Business Management and Master’s degree in Commerce and Business Administration. Bachelor’s degree in Law. Fellow Member of the ICSI and the ICWAI. Also certified management accountant of the ICMA, USA.

Source: Company



[email protected]


[email protected]

Key financials (YE Dec) CY09 CY10 CY11 CY12e CY13e

Sales (`m) 75,970 87,105 101,614 114,371 111,029

Net profit (`m) 4,016 13,198 15,044 12,684 10,915

EPS (`) 9.6 31.3 35.6 30.1 25.9

Growth (%) 38.1 228.1 13.7 -15.7 -13.9

PE (x) 54.1 16.5 14.5 17.2 20.0

EV/EBITDA (x) 33.9 14.1 13.7 12.8 14.4

P/B (x) 3.9 3.0 5.9 4.1 3.3

RoE (%) 9.3 26.5 35.5 36.2 23.6

RoCE (%) 5.6 15.6 15.7 16.8 13.0

Dividend yield (%) 0.0 0.5 0.0 0.0 0.6

Net gearing (%) 50.5 11.6 34.5 4.6 -12.1



Update

20 April 2012

Ranbaxy Laboratories

Improving fundamentals but priced in; we downgrade it to a Hold

With the removal of uncertainty regarding the US FDA issues, strong net profit growth in its base business led by expanded EBITDA margins, and sustainable cash flows from Para IV opportunities, we expect improvement in business fundamentals of Ranbaxy in terms of clarity on US business and better profitability. The recent ~20% rally in the stock, however, leaves limited upside. We downgrade the stock from a Buy to a Hold, with a revised price target of `536 (from `505).

Improving fundamentals. Post signing a consent decree with the US FDA to resolve issues regarding the Paonta Sahib and Dewas plants, and its disclosure of potential penalties to the US Dept. of Justice of US$500m, we expect continuously improved growth and margins for Ranbaxy’s base business. We do not factor in an upside from these plants.

Sustainable cash flows from Para IVs. Ranbaxy has a rich pipeline of Para-IV filings. We expect sustainable cash-flows from these products till CY14. The company has secured over 40% market share in Lipitor, ahead of our estimates. We expect Provigil, Actos, Valcyte and Nexium to be launched in the next three years and value these drugs at `57 a share.

Revised estimates. We marginally raise our EPS estimates by 0.5% and 2% for CY12 and CY13, respectively, to factor in the higher interest income on the cash flows generated from Para IV opportunities. We reduce CY12 revenue estimates 5.6% and raise CY13 estimates 0.4%.

Valuation. We downgrade the stock from a Buy to a Hold on the limited upside from present levels. We also revise our price target to `536, based on 20x CY13e base business earnings, `57 for the Para IV pipeline, `21 for CIP-Isotretinoin and a negative `60 for the penalty laid down by the US Justice Department. Risks: Regulatory delays and currency fluctuations.



RBXY

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11

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12

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Source: Bloomberg

Key data RBXY IN / RANB.BO52-week high / low `570 / `367Sensex / Nifty 17503 / 53323-m average volume US$7.7m Market cap `218bn / US$4.2bnShares outstanding 421m



Estimates revision (%) CY11e CY12e CY13e

Sales - (5.6) 0.4EBITDA - (2.2) (0.8)EPS - 0.5 2.0Target multiple (x) - - 20


20 April 2011 Ranbaxy Labs – Improving fundamentals but priced in; we downgrade it to a Hold



Year-end: Dec CY09 CY10 CY11 CY12e CY13e

Net revenues 75,970 87,105 101,614 114,371 111,029Revenue growth (%) 2.5 14.7 16.7 12.6 (2.9)- Op. expenses 68,846 70,955 84,686 96,875 95,955EBIDTA 7,124 16,150 16,928 17,496 15,074EBITDA margin (%) 9.4 18.5 16.7 15.3 13.6- Interest expenses 710 614 768 1,010 977- Depreciation 2,676 2,963 3,156 3,387 3,567+ Other income 2,370 5,238 4,274 3,163 3,463- Tax 6,991 5,830 2,137 3,578 3,078Effective tax rate (%) 73 25 281 22 22Reported PAT 2,965 14,968 -28,997 12,684 10,915+/- Extraordinary items 3,958 5,347 -44,209 0 0+/- Minority interest 109 126 97 0 0Adjusted PAT 4,016 13,198 15,044 12,684 10,915Adj. FDEPS (`/share) 9.6 31.3 35.6 30.1 25.9Adj. FDEPS growth (%) 38.1 228.1 13.7 -15.7 -13.9Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Dec CY09 CY10 CY11 CY12e CY13e

PAT 3,107 17,387 (29,002) 12,684 10,915 + Non-cash items 2,876 1,852 19,749 3,387 3,567 Cash profit 5,983 19,239 (9,253) 16,071 14,482 - Incr./(decr.) in WC 11,296 6,332 (21,745) 4,084 1,116 Operating cash-flow (5,314) 12,908 12,492 11,987 13,366 - Capex 2,367 1,852 5,040 4,000 4,000 Free cash-flow (7,681) 11,056 7,452 7,987 9,366 - Dividend 0 982 (3) 0 1,277 + Equity raised 0 0 0 0 0 + Debt raised (6,553) 7,053 1,559 0 (3,000)- Investments (25) (422) (4,002) 0 0 - Misc. items (2,670) (2,678) 5,299 Net cash-flow (11,540) 20,228 7,717 7,987 5,089 + Op. cash & bank bal. 23,956 12,416 32,644 30,681 38,668 Cl. cash & bank bal. 12,416 32,644 30,681 38,668 43,757 Source: Company, Anand Rathi Research


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Fig 2 – Balance sheet (`m) Year-end: Dec CY09 CY10 CY11 CY12e CY13e

Share capital 2,102 2,105 2,110 2,110 2,110Reserves & surplus 41,332 53,942 26,584 39,268 48,905Net worth 43,434 56,047 28,694 41,378 51,015Minority interest 533 647 810 810 810Total debt 36,295 43,121 44,532 44,532 41,532Def. tax liab. (net) -4,746 -227 -375 -375 -375Capital employed 75,517 99,815 74,036 86,720 93,357Net fixed assets 51,136 49,297 51,228 51,841 52,274Investments 5,407 4,985 982 982 982 - of which, Liquid 1,958 3,962 3,962 3,962 3,962Net working capital 6,558 12,889 -8,856 -4,771 -3,655Cash and bank balance 12,416 32,644 30,681 38,668 43,757Capital deployed 75,517 99,815 74,036 86,720 93,357Net debt 21,921 6,514 9,889 1,902 -6,187WC days 118.0 104.5 105.7 100.0 93.8Book value (`/sh) 103 133 68 98 121Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `517 Year-end: Dec CY09 CY10 CY11 CY12e CY13e

P/E (x) 54.1 16.5 14.5 17.2 20.0P/B (x) 3.9 3.0 5.9 4.1 3.3EV/EBITDA (x) 33.9 14.1 13.7 12.8 14.4RoE (%) 9.3 26.5 35.5 36.2 23.6RoCE (%) 5.6 15.6 15.7 16.8 13.0Dividend yield (%) 0.0 0.5 0.0 0.0 0.6Dividend payout (%) 0.0 5.6 10.0 0.0 10.0Asset turnover (x) 1.5 1.7 2.0 2.2 2.1Net debt/equity (x) 0.5 0.1 0.3 0.0 -0.1Net debt/EBITDA (x) 3.1 0.4 0.6 0.1 -0.4Net debt/op. CF (x) -4.1 0.5 0.8 0.2 -0.5Interest coverage (x) 6.3 21.5 17.9 14.0 11.8P/CEPS (x) 25.1 10.4 9.3 10.5 11.7EV/ sales (x) 3.2 2.6 2.3 2.0 1.9M-cap/sales (x) 2.9 2.5 2.1 1.9 2.0Source: Company, Anand Rathi Research


India19%

North America18%

EU14%

Africa9%

ROW13%

APIs7%

Para IV20%




[email protected]


[email protected]

Key financials (YE Dec) CY10 CY11e CY12e CY13e CY14e

Sales (`m) 17,655 25,769 20,498 26,795 31,703

Net profit (`m) 1,220 1,820 2,040 2,995 3,737

EPS (`) 21.1 31.2 34.9 51.3 64.0

Growth (%) 39.1 47.6 12.1 46.8 24.8

PE (x) 31.0 21.0 18.7 12.7 10.2

EV/EBITDA (x) 13.7 11.8 10.2 8.0 6.6

P/B (x) 2.9 2.8 1.5 1.4 1.2

RoE (%) 11.8 13.8 10.5 11.2 12.5

RoCE (%) 7.6 9.2 8.0 9.8 11.1

Dividend yield (%) 0.2 0.5 0.4 0.6 0.8

Net gearing (%) 131.2 171.3 39.9 29.7 17.4


Pharmaceuticals


20 April 2012

Strides Arcolab

Niche play, improving balance sheet; we initiate with a Hold

Its strong presence in the niche segment of sterile injectables and oncology, robust growth trajectory (led by global partnerships) and improving balance sheet are key positives for Strides. However, because of a recent rally in its stock price, we initiate coverage with a Hold and a price target of `718 based on 14x CY13e earnings.

Niche and specialty play. Strides has developed a strong product range, with expertise in the less competitive sterile injectables segment. It has made cumulative ANDA filings for 183 products, including 144 in sterile injectables (specialty) with an addressable local market of US$8bn. We expect the share of this specialty business segment (to total revenue) to increase from 40% in CY10 to 71% in CY14, led by 29% CAGR in revenue over CY11-14.

Global partnerships to drive sustainable growth. Strides’ product licensing deals with global pharma majors, including Pfizer and GSK, should generate a sustainable revenue growth stream in the longer term. The deals also provide upfront licensing income, which we estimate at `1.6bn, `1.1bn and `600m in CY12, CY13 and CY14, respectively.

Ascent sale to substantially improve balance sheet. Strides recently announced its 94% stake sale of Ascent Pharma to Watson for AU$375m, as it was a non-core business. This should contribute towards redeeming FCCBs due in Oct ’12 and repaying most other debt, thereby bringing down net D/E to 0.4x, from 1.5x currently.

Valuation. The stock trades at 18.7x CY12e and 12.7x CY13e earnings. We value it at `718, implying 14x CY13e EPS. Risks: Delay in regulatory approvals and currency fluctuation.



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Key data STR IN / STAR.BO52-week high / low `682 / `276Sensex / Nifty 17503 / 53323-m average volume US$3.8m Market cap `38.1bn / US$0.74bnShares outstanding 58.41m



20 April 2012 Strides Arcolab – Niche play, improving balance sheet; we initiate with a Hold



Year-end: Dec CY10 CY11e CY12e CY13e CY14e

Net revenues 17,655 25,769 20,498 26,795 31,703Revenue growth (%) 33 46 -20 31 18- Op. expenses 13,693 20,594 15,783 20,967 25,124EBIDTA 3,963 5,176 4,714 5,828 6,578EBITDA margin (%) 22.4 20.1 23.0 21.8 20.8- Interest expenses 1,466 1,903 1,301 1,036 811- Depreciation 639 1,043 1,168 1,218 1,283+ Other income 0 2 154 169 186- Tax 452 387 360 749 934Effective tax rate (%) 24.2 14.2 15.0 20.0 20.0Reported PAT 1,224 2,245 2,040 2,995 3,737+/- Extraordinary items 6 495 0 0 0+/- Minority interest 187 95 0 0 0Adjusted PAT 1,220 1,820 2,040 2,995 3,737Adj. FDEPS (`/share) 21.1 31.2 34.9 51.3 64.0Adj. FDEPS growth (%) 39.1 47.6 12.1 46.8 24.8Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Dec CY10 CY11e CY12e CY13e CY14e

PAT 1,412 2,340 2,040 2,995 3,737 + Non-cash items 639 1,043 1,168 1,218 1,283 Cash profit 2,050 3,383 3,208 4,213 5,020 - Incr./(decr.) in WC 5,224 (5,354) 2,576 1,133 828 Operating cash-flow (3,173) 8,737 632 3,080 4,192 - Capex 1,865 6,177 550 1,000 1,000 Free cash-flow (5,039) 2,560 82 2,080 3,192 - Dividend 107 209 190 279 348 + Equity raised 0 0 0 0 1 + Debt raised 5,038 5,570 (12,661) (3,000) (2,000)- Investments (3,396) (18) 0 0 0 - Misc. items 806 8,736 (13,071) (1) 1 Net cash-flow 2,483 (797) 301 (1,198) 844 + Op. cash & bank bal. 912 3,395 2,597 2,898 1,700 Cl. cash & bank bal. 3,395 2,598 2,899 1,700 2,544 Source: Company, Anand Rathi Research


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Fig 2 – Balance sheet (`m) Year-end: Dec CY10 CY11e CY12e CY13e CY14e

Share capital 577 584 584 584 584Reserves & surplus 12,250 12,971 24,891 27,607 30,996Net worth 12,828 13,555 25,475 28,191 31,580Minority interest 2,725 465 465 465 465Total debt 20,129 25,699 13,038 10,038 8,038Def. tax liab. (net) 31 31 31 31 31Capital employed 35,682 39,718 38,978 38,694 40,083Net fixed assets 25,197 35,401 31,784 31,566 31,283Investments 18 0 0 0 0 - of which, liquid 0 0 0 0 0Net working capital 7,072 1,720 4,296 5,429 6,257Cash and bank balance 3,395 2,597 2,898 1,700 2,544Capital deployed 35,682 39,718 38,978 38,694 40,083Net debt 16,734 23,102 10,140 8,338 5,495WC days -8.6 -35.1 -31.0 7.2 6.3Book value (`/sh) 222.1 232.2 436.4 482.9 540.9Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `654 Year-end: Dec CY10 CY11e CY12e CY13e CY14e

P/E (x) 31.0 21.0 18.7 12.7 10.2P/B (x) 2.9 2.8 1.5 1.4 1.2EV/EBITDA (x) 13.7 11.8 10.2 8.0 6.6RoE (%) 11.8 13.8 10.5 11.2 12.5RoCE (%) 7.6 9.2 8.0 9.8 11.1Dividend yield (%) 0.2 0.5 0.4 0.6 0.8Dividend payout (%) 7.5 9.9 8.0 8.0 8.0Asset turnover (x) 1.6 1.8 1.1 1.4 1.6Net debt/equity (x) 1.3 1.7 0.4 0.3 0.2Net debt/EBITDA (x) 4.2 4.5 2.2 1.4 0.8Net debt/op. CF (x) -5.3 2.6 16.1 2.7 1.3Interest coverage (x) 2.3 2.2 2.7 4.5 6.5P/CEPS (x) 20.3 13.3 11.9 9.1 7.6EV/ sales (x) 3.1 2.4 2.4 1.7 1.4M-cap/sales (x) 2.1 1.5 1.9 1.4 1.2Source: Company, Anand Rathi Research

Fig 6 – Share of revenue, segment-wise (CY12e)

Specialty injectables

65%

Pharma branded35%




Investment Argument and Valuation We initiate coverage on Strides Arcolab with a Hold and a price target of `718, based on 14x CY13e earnings. We favour the stock due to the company’s strong operations in the niche segment of sterile injectables and oncology, its strong growth trajectory (led by global partnerships), and improving financials. However, the recent rally in the stock caps the upside potential.

Niche and specialty play Strides has developed a strong product range, with expertise in the less-competitive sterile injectables segment. It has cumulative ANDA filings for 183 products, including 144 in sterile injectables with an addressable local market of ~US$8bn. We expect the share of this specialty business segment (to total revenue) to increase from 39% in CY10 to 71% in CY14 led by a 29% CAGR in revenue over CY10-13.

Strides is one of the few companies to build up a strong presence in the niche sterile injectable space, majorly focusing on the oncology therapeutic segment. Of 183 ANDA filings, 84 have been approved by the US FDA. Only 36 have been commercialized; the other approved products are to be commercialized in 1HCY12, which would ensure further growth. We expect revenue from the specialty segment to register a 29% CAGR over CY11-14, to `22bn. We have assumed a gradual decline in licensing income from both segments to `600m in CY14, from `5.2bn in CY11.

Global partnerships to drive sustainable growth Strides’ product licensing deals with global pharma majors, including Pfizer and GSK, should result in a sustainable revenue growth stream in the long term and lead to better capacity utilization of the large assets it created. Such deals also provide upfront licensing income, which we estimate at `1.6bn, `1.1bn and `600m in CY12, CY13 and CY14e, respectively. The decline in licensing income would chiefly be because a significant portion of these fees is received initially, later adjusted for by revenue from the supply of products. The company has already received ~US$200m in licensing fees in CY10-11.

Strides has partnerships with Pfizer, GSK Pharma, Sandoz, Teva, Novartis, Aspen and Apotex. We expect it to benefit from these deals for a longer duration as it is one of the few successful players to have built up a strong product range, with the necessary regulatory filings and approvals along with regulatory-compliant manufacturing plants.

Successful divestment of non-core business As a part of its strategy to divest its non-core businesses and focus on sterile injectables, Strides recently announced its 94% stake sale of Ascent Pharma to Watson for AU$375m, as this was a non-core business. We believe this would help redeem FCCBs due in Oct’12 and repay most other debt, thereby bringing down the net D/E to 0.4x, from 1.5x currently. The company also has other non-core branded pharma businesses with revenue of `7bn in CY11. If Strides sells these as well, its balance sheet would be further strengthened.

One of the few Indian companies present in niche and high value

sterile injectables space



Valuations We expect Strides to register a 24.4% CAGR in revenue over CY12-14 (and 35.3% in adjusted net profit), led by strong growth in its high-margin sterile injectables business. The stock trades at 18.7x CY12e and 12.4x CY13e earnings. We value it at `718, based on 14x CY13e EPS. The sale of the branded pharma business could lead to a further re-rating.

Risks Delay in regulatory approvals/registrations

Currency fluctuation

Any issue in executing partnership contracts.



Niche and Specialty Play Strides has developed a strong product range, along with expertise in the less competitive sterile injectables segment. It has made cumulative ANDA filings for 183 products, including 144 in sterile injectables with an addressable local market value of ~US$8bn.We expect the contribution of the specialty business segment (to total revenue) to increase from 40% in CY11 to 72% in CY13 led by a 30.7% CAGR in revenue over CY11-14.

Business model Strides has broadly two business verticals – specialties, including sterile injectables, and pharma brand-named generics. The specialty segment includes sterile products developed for global markets with a major focus on regulated markets. The specialty business vertical is its key focus segment and most future growth is expected here. The pharma business segment constitutes oral dosage generics in regulated markets and brand-named generics in semi-regulated markets such as India, Australia and Africa.

The company has the requisite plant approvals from most global regulatory bodies, such as the US FDA, the MHRA, the MCC and the TGA. Strides recently sold subsidiary Ascent Pharma to Watson as part of its strategy to divest its non-core business verticals; it is considering divesting its other pharma and branded businesses in order to focus on its core specialty segment.

Fig 7 – Share of revenue, by segment (CY11)

Specialty40%

Pharma and branded generics

60%

Source: Company

Specialty formulations – key growth driver Strides is one of the few companies to build strong operations in the niche sterile injectables space (specialty formulations), majorly focusing on the oncology therapeutic segment. Of 183 ANDA filings, 84 have already been approved by the US FDA, with only 36 being commercialized. Of these 183 filings, 144 pertain to sterile injectables including 62 approvals already in place. The other approved products would be commercialized in 1HCY12, ensuring the company’s future growth. We expect revenue from the specialty segment to register a 30.7% CAGR over CY11-14 to `22.9bn. We have assumed a gradual decline in licensing income from both the segments at `600m in CY14, from `5.2bn in CY11.



Fig 8 – Revenue and licensing income trend in the specialty segment

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Strong product basket The company has built a rich pipeline of products across geographical areas, with a major focus on the specialty segment. By Dec’11, it had filed 183 ANDAs. Of these, approvals for 99 are still pending. 84 ANDAs have been approved and only 36 products have been launched; the rest will be commercialized in H1CY12, which should ensure future growth momentum. Over the years, the company has sharpened its focus on the specialty sterile products filing; nearly 80% of its filings are now in the steriles space. The change in focus towards sterile products arose mainly due to the complexity of the manufacturing process, high entry barriers, little competition and an acute shortage of such products in regulated markets.

Fig 9 – Consistent increase in ANDA filings and approvals

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Apart from the US, the company has also made decent regulatory filings for its products in other geographical areas. By Dec’11, it had made 314 product filings in regulated markets other than the US and received final approvals for 160 filings. Further, 1,541 product filings have been made in emerging markets, along with 1,084 approvals.

The company markets most of its products through partners in different countries, who have been able to capture decent double-digit market shares. Launches of products (Vancomycin, Rifampicin and Azithromycin) through partnering with Pfizer and Sagent have been successful. Stride’s present market shares (through its partners) for Vancomycin, Rifampicin and Azithromycin) are 11%, 59% and 18%, respectively.

More focus on specialty segment to result in substantial increase in revenue contribution to 72% in

CY14e from current 40%



Revenue mix to change favourably Led by the company’s sharp focus on growth in the specialty segment and the sale of a part of the pharma brand-named generics business, we expect the revenue mix to change significantly in the next 2-3 years towards the high-margin specialty business. We expect the share of revenue from the specialty segment to increase from 39.7% in CY11 to 72.1% in CY14 and the proportion of the brand-named generics pharma business to decline from 60.3% in CY11 to 27.9% in CY14.

Fig 10 – Change in revenue mix

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The EBITDA margin in the specialty business in CY11 was significantly higher than in the branded generics business— 26% to 16%. However, the margin in the specialty segment is likely to decline with the drop in licensing income. We expect a sustainable EBITBA margin in the specialty segment to come at 25-27% over CY12-13 vs 32% in CY10 and 26.4% in CY11.

Fig 11 – Segmental EBITDA margin

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Licensing model offers growth assurance Strides’ product licensing deals with global pharma majors Pfizer and GSK would aid its sustainable revenue growth stream in the longer term. They would also help capacity utilization of the large assets it has built up. Further, such deals also offer upfront licensing income. (Strides received ~US$200m in licensing income in the past two years.) However, we expect licensing income to gradually come down to `1.6bn, `1.1bn and `600m in CY12, CY13 and CY14, respectively. The decline in licensing income would be mainly because a significant portion of such fees are received initially; and later compensated for by revenue from the supply of products.

Fig 12 – Trend in licensing income

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De-risked partnership model The company has selected a partnership licensing model to market its products mainly in the specialty segment, thereby de-risking itself from marketing issues, which are then taken care of by the partners. Further, it receives upfront licensing income from its partners for marketing rights; this offers growth assurance through such product-supply agreements over a longer duration. Such a model helps companies that do not have a strong front-end presence in international markets and are unable to compete with larger pharmaceuticals.

Overall, Strides has partnerships with Pfizer, GSK Pharma, Sandoz, Teva, Novartis, Aspen, Apotex, etc. We expect it to benefit from these deals for a longer duration as it is one of the few successful players to have built a strong product basket with the necessary regulatory filings and approvals along with compliant-manufacturing plants. The licensing deals with Pfizer and GSK are the most important and most future growth would arise from supplies to them.

Strides entered into collaboration with Pfizer initially in Jan’10 to license 40 products, primarily injectable oncology products, to be commercialized in the US. Gradually, it increased the scope of this agreement by extending the contract to more products and areas. At present, the agreement has been increased to more than 65 products and to areas such as the EU, Australia, Canada, Japan and Korea.

De-risked business model of partnering with MNCs to avoid

legal and regulatory risk and to get significant upfront cash inflow in

terms of licensing income



The company also entered into a licensing agreement with GSK for products to be commercialized in 95 emerging countries. The GSK deal involves licensing fees for the products and profit-sharing in such product commercialization. The prime driver for such licensing deal to Strides is the clear and faster approvals of its manufacturing plants by the US FDA.

Fig 13 – Details of manufacturing plants Location Capacity (m units) US FDA approval status

Existing plants

Steriles Bangalore, India 64 Approved

Penicillins Bangalore, India 33 Approved

Cephalosporins Bangalore, India 44 Approved

New Plants

Steriles Bangalore, India 140 Approved

Penicillins & Penems Campos, Brazil 66 Approved

Oncology Bangalore, India 25 Approved

Source: Company



Value unlocking by divesting non-core businesses As a part of its strategy to divest non-core businesses and focus on sterile injectables, Strides recently announced the sale of its 94% stake in Ascent Pharma to Watson for AU$375m as it was a non-core business. We believe that this strategy would lead to value unlocking. Funds from the Ascent sale would help in redeeming FCCBs due in Oct’12 and repay most other debt, thereby reducing the net D/E to 0.3x, from 1.5x currently. The company also has another brand-name pharmaceutical business (CY11 revenue of `7bn), which is also a part of its non-core business. It may seek to sell this business as well, further strengthening its balance sheet.

Divestment of Ascent Pharma On 24th Jan’12, the company announced selling its 94% subsidiary Ascent Pharmahealth to Watson Pharmaceuticals, valuing Ascent at AU$375m (US$393m). (Ascent was involved in the generic pharmaceutical operations of Strides in Australia and South-East Asia. In CY11, it brought in net profit of `1.1bn to the consolidated financials, on revenue of `8.3bn.) On the books Strides received ~US$300m from this transaction after providing for payment to minority shareholders, other transaction-related expenses and taxes. It would utilise this to pay off debt of US$250m including redeeming FCCBs due in Oct’12; the balance ~US$50m would be used for business expansion.

We view this transaction as positive for Strides as it would lead to a better consolidated margin (since Ascent was a low-margin business), help in bringing down the D/E (by repaying debt) and enable management to focus better on the high-margin specialty segment. Its reported EBITDA margin was 20.1% in CY11; excluding Ascent Pharma, the margin was 24.3%, more than 400bps higher.

We believe that the strategy of divesting the non-core generics business and the sharper focus on the specialty segment would strengthen Strides’ balance sheet. It would also improve its margin profile as the specialty business segment commands higher margins. We expect the D/E to come down from 1.7x in CY11 to 0.2x in CY14. We expect the company to look to divest its other pharma generics business (`7bn in revenue in CY11) as this is also a part of its non-core business. If this happens, its balance sheet would be further strengthened and possibly lead to the company being debt free. This would drive re-rating in valuations.



Financials We expect Strides to register a 7.2% CAGR in revenue over CY11-14 (and 27.1% in net profit) with a 70-bp EBITDA margin improvement. We expect the EBITDA margin to improve 290bps in CY12 but then gradually decline in CY13 and CY14 due to less licensing income. The lower growth in revenue would come from the selling off of Ascent Pharma, which was its Australian and South-East Asias business. Over CY12-14, we expect a CAGR of 24.4% and 35.3% in revenue and adjusted net profit, respectively. We expect the D/E to fall to 0.2x in CY14 (from 1.7x in CY11) following the recent divestment of its Ascent subsidiary.

We expect a 24.4% CAGR in revenue over CY12-14 Strides is on a strong growth trajectory and we expect it to register a 24.4% CAGR in revenue over CY12-14, following 33.6% over CY08-11. Growth is likely to be driven by its strong operations in specialty sterile injectables, though revenue growth would be just 7.2% over CY11-14 due to its recent divestment of the Australia and South-East Asia businesses. In the specialty segment, we estimate a 30.7% CAGR in revenue over CY11-14, led by greater capacity utilization, now at ~30%, and commercialization of 29 products already approved but not yet launched.

However, licensing income from this segment would gradually decline as most of the milestone payments were received in the early partnership years to be later balanced by revenue from the supply of products. Further, we expect a steady 12% CAGR over CY11-14 in the pharma segment of brand-name generics excluding the Australian and South-East Asian business, now sold off. Overall, we expect licensing income to come at `1.6bn, `1.1bn and `600m in CY12, CY13 and CY14, respectively.

Fig 14 – Revenue break-up (`m) CY10 CY11 CY12e CY13e CY14e

Specialty 6,904 10,240 13,420 18,880 22,850

% growth 84.5 48.3 31.1 40.7 21.0

% of total sales 39.1 39.7 65.5 70.5 72.1

Pharma branded generics 10,751 15,530 7,078 7,915 8,853

% growth 12.7 44.5 (54.4) 11.8 11.8

% of total sales 60.9 60.3 34.5 29.5 27.9

Total Revenue 17,655 25,770 20,498 26,795 31,703

Source: Company, Anand Rathi Research.

Slight improvement in EBITDA margin We expect a 70-bp improvement in the EBITDA margin over CY11-14, to 20.8%, led by the larger proportion of specialty revenue to total revenue. The increase in the margin appears lower due to the drop in licensing income, which offers high margins. Licensing income would fall from `5.3bn in CY11 to `600m in CY14, indicating substantially better base business EBITDA margin. We have assumed a flat margin of 14% in the pharma brand-named generics segment and a gradual decline in the margin in the specialty segment due to the falling licensing income.




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Net profit CAGR of 35.3% over CY12-14e We expect Strides to register a 35.3% CAGR in net profit over CY12-14, (27.1% over CY11-14), to `3.7bn, as a result of a 24.4% CAGR in revenue and a fall in interest cost on debt repayment. We estimate the net profit margin in CY14 at 11.8%, from 8.7% in CY11, led by strong net profit growth.


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Return ratios to improve Strides has low return ratios due to low capacity utilization and high cost of the capacities built up in the past 3-4 years. We expect returns to rise gradually, led by strong profit growth and higher capacity utilization. We expect the RoE and RoCE to improve from 9.9% and 7.8% in CY12, respectively, to 12.5% and 11.1% in CY14.



Fig 17 – Return ratios

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Comfortable financial leverage Strides had very high leverage, a debt-equity of 1.7x in CY11. However, its recent divestment of Ascent Pharma and strong profit growth over CY11-14 would help ease this. We expect the D/E to come down to 0.4x in CY12 and further to 0.2x in CY14. The interest coverage ratio is estimated to improve from the present 2.2x to 6.5x in CY14, led by the strong net profit growth and debt repayment.


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Fig 19 – Income statement (`m) Year-end: Dec CY10 CY11e CY12e CY13e CY14e

Revenues 17,655 25,769 20,498 26,795 31,703

Growth in revenues (%) 32.9 46.0 (20.5) 30.7 18.3

Raw materials 8,055 12,638 9,531 12,728 15,217

% of Sales 45.6 49.0 46.5 47.5 48.0

Personnel expenses 2,249 3,027 2,460 3,215 3,884

% of Sales 12.7 11.7 12.0 12.0 12.3

Selling and other expenses 3,388 4,929 3,792 5,024 6,024

% of Sales 19.2 19.1 18.5 18.8 19.0

EBITDA 3,963 5,176 4,714 5,828 6,578

EBITDA Margin 22.4 20.1 23.0 21.8 20.8

Depreciation 639 1,043 1,168 1,218 1,283

PBIT 3,324 4,133 3,547 4,610 5,295

Interest expenses 1,466 1,903 1,301 1,036 811

PBIT from operations 1,858 2,230 2,246 3,574 4,485

Other non operating income - 2 154 169 186

PBT before extra-ordinary items 1,858 2,232 2,400 3,744 4,671

Extra-ordinary income/ (expenses) 6 495 - - -

PBT 1,864 2,727 2,400 3,744 4,671



PAT 1,412 2,340 2,040 2,995 3,737

Minority Interest 187 95 - - -

PAT after minority interest 1,224 2,245 2,040 2,995 3,737

Adjusted PAT 1,220 1,820 2,040 2,995 3,737

Growth in PAT (%) 99.8 49.2 12.1 46.8 24.8

PAT margin 6.9 7.1 10.0 11.2 11.8


Fig 20 – Balance sheet (`m) Year-end: Dec CY10 CY11e CY12e CY13e CY14e

Equity Share Capital 577 584 584 584 584

Reserves 12,250 12,971 24,891 27,607 30,996


Minority Interest 2,725 465 465 465 465

Debt 20,098 25,668 13,007 10,007 8,007

Deferred Tax Liability 31 31 31 31 31

Total Capital Employed 35,682 39,718 38,978 38,694 40,083

Gross Block 11,511 17,688 18,238 19,238 20,238

Accumulated depreciation 2,984 4,027 5,195 6,413 7,696

Net Block 8,526 13,661 13,043 12,825 12,542

Capital WIP 1,915 1,915 1,915 1,915 1,915

Total Fixed Assets 10,441 15,575 14,958 14,740 14,457

Goodwill on consolidation 14,756 19,826 16,826 16,826 16,826

Investments 18 - - - -

Inventories 3,120 4,799 4,043 5,286 6,254

Debtors 3,838 5,384 4,773 6,240 7,383

Cash and bank balances 3,395 2,597 2,898 1,700 2,544

Loans and Advances 9,252 6,140 4,884 6,385 7,554


Current liabilities and provisions 9,236 14,705 9,506 12,583 15,035

Net current assets 10,368 4,216 7,093 7,027 8,699

Misc. Expenditure 99 101 101 101 101

Total Assets 35,682 39,718 38,978 38,694 40,083




Fig 21 – Cash-flow statement (`m) Year-end: Dec CY10 CY11e CY12e CY13e CY14e Cash flow from operating activities Profit before tax 1,864 2,727 2,400 3,744 4,671 Depreciation 639 1,043 1,168 1,218 1,283 Interest expenses 1,466 1,903 1,301 1,036 811 Operating profit before working capital change 3,969 5,673 4,868 5,997 6,765 Working capital adjustment (5,224) 5,354 (2,576) (1,133) (828)Gross cash generated from operations (1,255) 11,027 2,292 4,865 5,936 Direct taxes paid (452) (387) (360) (749) (934)Cash generated from operations (1,707) 10,640 1,932 4,116 5,002 Cash flow from investing activities Capex (1,865) (6,177) (550) (1,000) (1,000)Investment 3,396 18 - - -Cash generated from investment activities 1,531 (6,160) (550) (1,000) (1,000) Cash flow from financing activities Proceeds from share capital and premium 4,698 6 - - -Borrowings/ (Repayments) 5,038 5,570 (12,661) (3,000) (2,000)Interest paid (1,466) (1,903) (1,301) (1,036) (811)Dividend paid (107) (209) (190) (279) (348)Cash generated from financing activities 8,162 3,465 (14,151) (4,314) (3,158)Other adjustments (5,504) (8,743) 13,070 - -Net cash increase/ (decrease) 2,483 (797) 301 (1,199) 844


Fig 22 – Ratio @ `654 Year-end: Dec CY10 CY11e CY12e CY13e CY14e Margin Ratios (%) EBITDA Margin 22.4 20.1 23.0 21.8 20.8 PBIT Margin 18.8 16.0 17.3 17.2 16.7 PBT Margin 10.6 10.6 11.7 14.0 14.7 PAT Margin 6.9 7.1 10.0 11.2 11.8 Growth Ratios (%) Revenues 32.9 46.0 (20.5) 30.7 18.3 EBITDA 88.3 30.6 (8.9) 23.6 12.9 Net Profit 99.8 49.2 12.1 46.8 24.8 Return Ratios (%) ROCE 7.6 9.2 8.0 9.8 11.1 ROIC 7.2 9.3 8.7 10.3 11.7 ROE 11.8 13.8 10.5 11.2 12.5 Turnover Ratios (x) Asset turnover ratio (x) 1.6 1.8 1.1 1.4 1.6 Working capital cycle (days) (9) (35) (31) 7 6 Average collection period (days) 83 65 90 75 78 Average payment period (days) 164 171 224 149 156 Inventory holding (days) 73 70 102 81 84 Per share (`) EPS 21.1 31.2 34.9 51.3 64.0 CEPS 32.2 49.0 54.9 72.2 86.0 Book Value 222.1 232.2 436.4 482.9 540.9 Solvency ratios Debt/ Equity 1.6 1.9 0.5 0.4 0.3 Interest coverage 2.3 2.2 2.7 4.5 6.5 Net Debt/ EBITDA 4.2 4.5 2.1 1.4 0.8 Valuation parameters (x) P/E 31.0 21.0 18.7 12.7 10.2 P/BV 2.9 2.8 1.5 1.4 1.2 EV/ EBITDA 13.7 11.8 10.2 8.0 6.6 EV/ Sales 3.1 2.4 2.4 1.7 1.4 M-Cap/ Sales 2.1 1.5 1.9 1.4 1.2




Company Background & Management Established in 1990 by first-generation Bangalore-based entrepreneurs Arun Kumar and K R Ravishankar, Strides Arcolab was listed on the NSE in 2000. Today, the group is one the leading pharmaceutical entities in India, focusing on developing and manufacturing IP-led niche products, particularly sterile injectables. It is one of the world's largest manufacturers of soft gelatin capsules.

With 14 world-class manufacturing plants (including the largest steriles capacity on the Indian sub-continent and one of the largest lyophilisation capacities in the world), an innovative R&D hub and a marketing network in 70 countries, Strides has partnered with several of the world’s leading pharmaceutical companies.


Others, 16.3%

DFI, 16.3%

FII, 39.1%

Promoter, 28.3%

Source: BSE


Deepak Vaidya Chairman Board member since Jan’98; appointed chairman in Dec’05. Good experience in corporate financial services. Was country head of Schroder Capital Partners (Asia) Pte. Ltd. for over 12 years.

Arun Kumar Executive vice- chairman and group CEO

Founder and promoter director of Strides; managing director since inception. Earlier general manager of British Pharmaceuticals.

Venkat S. Iyer CEO - Agila Specialties Pvt. Ltd.

With Strides since 1999. Over 28 years’ experience in formulations. Tenures with Ranbaxy, Kancor Flavors and Extracts, GlaxoSmithKline India and Searle India.

Source: Company



[email protected]


[email protected]


Sales (`m) 40,075 57,214 76,320 90,697 105,012Net profit (`m) 14,243 18,161 23,654 24,413 28,604EPS (`) 13.8 17.5 22.8 23.6 27.6Growth (%) -21.6 27.5 30.2 3.2 17.2PE (x) 43.6 34.2 25.6 24.8 21.2EV/EBITDA (x) 42.8 30.6 19.2 17.3 14.2P/B (x) 7.9 6.6 5.4 4.6 3.9RoE (%) 19.2 21.0 22.8 20.0 20.1RoCE (%) 18.5 19.6 20.9 18.2 18.2Dividend yield (%) 0.5 0.6 0.8 0.8 1.0Net gearing (%) -34.3 -38.0 -45.6 -51.6 -57.6



Update

20 April 2012

Sun Pharma

Solid performance continues, but fully priced; we maintain a Hold

Based on 24x one-year-forward earnings, we maintain a Hold on Sun Pharma, with a revised price target of `614 (from `520 earlier). We are positive on its business model, profitability expansion and the solid turnaround of its Taro subsidiary. However, due to the limited upside to our target price, we maintain our Hold rating on the stock.

Outperforms the home market. Sun continues to outstrip the domestic industry growth rate, driven by its operations in high-margin chronic categories, which are growing faster than the sector as a whole. We estimate 17% CAGR in revenue in the home market over FY11-14.

Taro makes up for exports. Sun saw a sturdy 62% yoy growth in export revenue in 9MFY12, led by Taro’s strong performance. We expect Taro to bring in 33% of FY12 revenue. We expect export revenue growth to be driven by 48% CAGR in Taro (US), 15.3% CAGR in the US and 31% CAGR in other than US markets. FY12 is likely to see considerably higher growth due to favourable market conditions in the US for Taro.

Healthy financials. With net cash of ~US$1bn on its books and a working capital cycle of ~50 days, Sun has built up a healthy balance sheet. Despite its huge cash balance, its RoE and RoCE, at over 22% and 20%, respectively, are amongst the best of its peers.

Valuation. At our target price, the stock trades at 25.9x FY13e and 22.4x FY14e earnings. We maintain a Hold, with a revised price target of `614 based on 24x one-year-forward earnings. Risks: Currency fluctuations and regulatory hurdles.



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Source: Bloomberg

Key data SUNP IN / SUN.BO52-week high / low `607 / `423Sensex / Nifty 17503 / 53323-m average volume US$11.2m Market cap `606bn / US$12bnShares outstanding 1036m




Sales 2.5 5.7 5.2EBITDA 4.3 5.9 6.2EPS 2.9 (1.0) (2.0)Target multiple (x) - - -


20 April 2012 Sun Pharmaceuticals – Solid performance continues, but fully priced; we maintain a Hold




Net revenues 40,075 57,214 76,320 90,697 105,012Revenue growth (%) (4.2) 42.8 33.4 18.8 15.8 - Op. expenses 25,675 37,514 46,435 58,540 67,370EBIDTA 14,400 19,700 29,885 32,156 37,642EBITDA margin (%) 35.9 34.4 39.2 35.5 35.8- Interest expenses 62 0 126 82 82- Depreciation 1,533 2,041 2,866 3,076 3,226+ Other income 2,110 2,699 3,007 3,493 4,587- Tax 679 1,284 2,691 5,199 7,006Effective tax rate (%) 4.5 6.3 9.0 16.0 18.0Reported PAT 13,511 18,161 23,654 24,413 28,604+/- Extraordinary items -767 0 0 0 0+/- Minority interest -41 913 3,555 2,879 3,311Adjusted PAT 14,243 18,161 23,654 24,413 28,604Adj. FDEPS (`/share) 13.8 17.5 22.8 23.6 27.6Adj. FDEPS growth (%) -21.6 27.5 30.2 3.2 17.2Source: Company, Anand Rathi Research


PAT 13,470 19,074 27,208 27,293 31,916 + Non-cash items 1,105 2,474 2,866 3,076 3,226 Cash profit 14,575 21,548 30,075 30,369 35,142 - Incr./(decr.) in WC 4,675 533 4,537 5,790 5,368 Operating cash-flow 9,901 21,014 25,537 24,578 29,774 - Capex 2,548 2,650 4,500 2,500 2,500 Free cash-flow 7,352 18,364 21,037 22,078 27,274 - Dividend 3,321 4,213 5,523 5,701 6,679 + Equity raised 0 0 0 0 0 + Debt raised (77) 0 (2,207) 0 0 - Investments 12,069 (8,354) 0 0 0 - Misc. items 2,502 6,643 0 0 0 Net cash-flow (10,617) 15,863 13,307 16,378 20,595 + Op. cash & bank bal. 16,690 6,073 21,936 35,243 51,621 Cl. cash & bank bal. 6,073 21,936 35,243 51,621 72,215 Source: Company, Anand Rathi Research


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Share capital 1,036 1,036 1,036 1,036 1,036Reserves & surplus 77,254 93,798 111,928 130,640 152,565Net worth 78,289 94,833 112,964 131,676 153,601Minority interest 1,932 8,472 12,026 14,906 18,217Total debt 1,712 4,256 2,049 2,049 2,049Def. tax liab. (net) -890 -3,652 -3,652 -3,652 -3,652Capital employed 81,042 103,908 123,386 144,978 170,214Net fixed assets 20,836 35,660 37,294 36,718 35,991Investments 30,664 22,310 22,310 22,310 22,310 - of which, liquid 22,527 18,324 18,324 18,324 18,324Net working capital 23,469 24,002 28,540 34,330 39,698Cash and bank balance 6,073 21,936 35,243 51,621 72,215Capital deployed 81,042 103,908 123,386 144,978 170,214Net debt -26,888 -36,005 -51,519 -67,896 -88,491WC days 167.9 118.2 46.3 5.4 5.7Book value (`/sh) 76 92 109 127 148Source: Company, Anand Rathi Research


P/E (x) 43.6 34.2 25.6 24.8 21.2P/B (x) 7.9 6.6 5.4 4.6 3.9EV/EBITDA (x) 42.8 30.6 19.2 17.3 14.2RoE (%) 19.2 21.0 22.8 20.0 20.1RoCE (%) 18.5 19.6 20.9 18.2 18.2Dividend yield (%) 0.5 0.6 0.8 0.8 1.0Dividend payout (%) 20.0 20.0 20.0 20.0 20.0Asset turnover (x) 2.7 2.8 2.9 3.4 4.1Net debt/equity (x) -0.3 -0.4 -0.5 -0.5 -0.6Net debt/EBITDA (x) -1.9 -1.8 -1.7 -2.1 -2.4Net debt/op. CF (x) -2.7 -1.7 -2.0 -2.8 -3.0Interest coverage (x) 209.2 - 214.3 354.9 420.0P/CEPS (x) 38.9 28.9 22.5 21.7 18.8EV/ sales (x) 15.4 10.6 7.7 6.3 5.2M-cap/sales (x) 15.5 10.9 8.1 6.9 5.9Source: Company, Anand Rathi Research



36%

APIs8%

Exports formulations

56%




[email protected]


[email protected]


Sales (`m) 7,406 8,171 8,754 9,638 10,908

Net profit (`m) 1,232 916 767 987 1,165

EPS (`) 13.7 10.2 8.5 10.9 12.9

Growth (%) 19.4 (25.7) (16.3) 28.7 18.0

PE (x) 11.1 14.9 17.8 13.8 11.7

EV/EBITDA (x) 8.2 9.8 11.2 8.8 7.5

P/B (x) 2.4 2.2 2.0 1.9 1.7

RoE (%) 23.5 15.5 11.9 14.1 15.1

RoCE (%) 21.1 14.0 10.7 12.8 13.8

Dividend yield (%) 2.3 2.1 1.7 2.2 2.6

Net gearing (%) (2.1) 7.8 9.4 4.5 (0.1)



Update

20 March 2012

Unichem Labs

Growth and profitability under pressure; we maintain a Sell

In its domestic formulations business (a 5% CAGR in domestic revenue over FY11-14) and subdued EBITDA margins (a 310-bp decline in FY12), Unichem Labs is likely to see short- to mid-term pain. However, we expect exports (~20% of revenue) to register a 21.9% CAGR in revenue over FY11-14. We maintain a Sell, with a revised price target of `143 (from `110 earlier).

Near-term pain in domestic formulations. In the past four quarters, Unichem registered a drop in domestic formulations revenue due to the considerable attrition in its domestic field force and inventory reduction with distributors. It has taken corrective measures to improve its domestic market performance. We believe meaningful growth is likely only after 2Q FY13. We estimate a 4% drop in revenue in FY12 and 8% growth in FY13 on the low base.

Exports to help achieve positive revenue growth. We expect a 21.9% CAGR in consolidated export revenue over FY11-14, led by the US, the EU and emerging markets. Excluding the UK subsidiary Niche Generics, we estimate a 28.7% CAGR in export revenue over FY11-14, with a mere 3% for Niche Generics.

Margins to continue under pressure. We expect a 310-bp decline in the EBITDA margin in FY12, to 14.4%, due to business pressures at home, the cost of a new field force and losses in Niche Generics, which is expected to break even by FY13. We believe margins will grow gradually from FY13, led by the expected improvement in domestic formulations.

Valuation. At our target price, the stock would trade at 13.1x FY13e and 11.1x FY14e earnings. We maintain a Sell on it with a price target of `143 based on 12x one year forward earnings. Risks: Currency fluctuations and regulatory hurdles.

Rating: Sell Target Price: `143 Share Price: `151


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Key data UL IN / UNLB.BO52-week high / low `204 / `101Sensex / Nifty 17503 / 53323-m average volume US$0.1m Market cap `13.6bn / US$0.26bnShares outstanding 90.2m


Promoters 49.2 49.3 48.6 - of which, Pledged 0.0 0.0 0.0Free float 50.8 50.8 51.4 - Foreign institutions 5.0 6.3 6.6 - Domestic institutions 9.5 10.0 10.0 - Public 36.3 34.5 34.8


20 April 2012 Unichem Labs – Growth and profitability under pressure; we maintain a Sell




Net revenues 7,406 8,171 8,754 9,638 10,908Revenue growth (%) 1.8 10.3 7.1 10.1 13.2- Op. expenses 5,723 6,745 7,496 8,062 9,125EBIDTA 1,683 1,426 1,258 1,576 1,783EBITDA margin (%) 22.7 17.5 14.4 16.4 16.3- Interest expenses 24 24 28 28 28- Depreciation 232 292 328 367 377+ Other income 110 111 120 135 176- Tax 304 316 256 329 388Effective tax rate (%) 20 25 25 25 25Reported PAT 1,231 950 767 987 1,165+/- Extraordinary items -5 47 0 0 0+/- Minority interest 0 0 0 0 0Adjusted PAT 1,232 916 767 987 1,165Adj. FDEPS (`/share) 13.7 10.2 8.5 10.9 12.9Adj. FDEPS growth (%) 19.4 -25.7 -16.3 28.7 18.0Source: Company, Anand Rathi Research


PAT 1,228 952 767 987 1,165 + Non-cash items 255 323 328 367 377 Cash profit 1,483 1,275 1,095 1,354 1,542 - Incr./(decr.) in WC 91 591 (227) 194 276 Operating cash-flow 1,392 685 1,322 1,160 1,267 - Capex 382 879 1,200 500 500 Free cash-flow 1,010 (195) 122 660 767 - Dividend 421 420 269 346 409 + Equity raised 0 0 0 0 1 + Debt raised (40) 142 0 0 0 - Investments 582 (379) 0 0 0 - Misc. items Net cash-flow (32) (93) (147) 313 359 + Op. cash & bank bal. 344 236 152 4 318 Cl. cash & bank bal. 236 152 4 318 675 Source: Company, Anand Rathi Research


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2

(`)



Share capital 180 180 180 180 180Reserves & surplus 5,449 5,997 6,494 7,135 7,891Net worth 5,629 6,177 6,675 7,315 8,072Minority interest 0 0 0 0 0Total debt 705 878 878 878 878Def. tax liab. (net) 347 378 378 378 378Capital employed 6,334 7,055 7,553 8,194 8,950Net fixed assets 3,970 4,564 5,436 5,569 5,692Investments 592 213 213 213 213 - of which, Liquid 592 213 213 213 214Net working capital 1,535 2,126 1,899 2,094 2,370Cash and bank balance 236 152 4 318 675Capital deployed 6,334 7,055 7,553 8,194 8,950Net debt -123.6 513.9 661.2 347.8 -10.8WC days 67.1 75.8 77.9 69.6 68.8Book value (`/sh) 62.4 68.5 74.0 81.1 89.4Source: Company, Anand Rathi Research


P/E (x) 11.1 14.9 17.8 13.8 11.7P/B (x) 2.4 2.2 2.0 1.9 1.7EV/EBITDA (x) 8.2 9.8 11.2 8.8 7.5RoE (%) 23.5 15.5 11.9 14.1 15.1RoCE (%) 21.1 14.0 10.7 12.8 13.8Dividend yield (%) 2.3 2.1 1.7 2.2 2.6Dividend payout (%) 29.3 39.4 30.0 30.0 30.0Asset turnover (x) 1.7 1.6 1.5 1.4 1.5Net debt/equity (x) 0.0 0.1 0.1 0.0 0.0Net debt/EBITDA (x) -0.1 0.4 0.5 0.2 0.0Net debt/op. CF (x) -0.1 0.8 0.5 0.3 0.0Interest coverage (x) 60.9 47.4 33.4 43.3 50.4P/CEPS (x) 9.3 11.3 12.4 10.1 8.8EV/ sales (x) 1.9 1.7 1.6 1.4 1.2M-cap/sales (x) 1.8 1.7 1.6 1.4 1.2Source: Company, Anand Rathi Research



63%Domestic APIs2%

Export formulations

26%

Export APIs9%


Appendix 1 Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below.

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >20% 5-20% <5% Mid/Small Caps (<US$1bn) >30% 10-30% <10%

Anand Rathi Research Ratings Distribution (as of 10 April 2012) Buy Hold Sell Anand Rathi Research stock coverage (146) 75% 13% 12% % who are investment banking clients 6% 5% 0% Other Disclosures This report has been issued by Anand Rathi Share & Stock Brokers Limited (ARSSBL), which is regulated by SEBI.

The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARSSBL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARSSBL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report.

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634759591944218750_India Healthcare - New Booster Doses on the Anvil

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