Cipla Report.doc Gourav Cygnus Recovered

A REPORT ON CIPLA LTDValuations and financial projection report

Finanacial projection of cipla ltd.

Submitted by: GOURAV BANSALENR.NO. – 07BS1486

ContentsPHARMA SECTOR:..............................................................................................................................................................................................3

INVESTMENT RATIONAL................................................................................................................................................................................5

KEY RISKS:............................................................................................................................................................................................................. 7

FINANCIAL FORECAST AND ASSUMPTIONS:........................................................................................................................................8

VALUATION.......................................................................................................................................................................................................... 10

COMPANY BACKGROUND:............................................................................................................................................................................14

GROWTH DRIVERS.......................................................................................................................................................................................15

VALUE DRIVERS:........................................................................................................................................................................................... 15

SEGMENTAL ANALYSIS:...........................................................................................................................................................................16

PRODUCTS:.......................................................................................................................................................................................................... 20

INDUSTRY OVERVIEW:...................................................................................................................................................................................21

FINANCIAL AND PROJECTIONS:................................................................................................................................................................23

PHARMA SECTOR:Cipla ltd.

I am initiating the coverage of cipla ltd. I am anticipating the capacity expansion in year 2008 coupled with high boom in pharma sector will drive company’s revenue on a growth path. Company’s brand positioning, wide presence across the globe, wide distributional channel will help the company to sustain its market leader position in Indian pharmaceutical market.

Projections:

Cipla remains market leader in Indian pharmaceutical industry with a market share of 5.3% approximately. For the first time company’s revenue crossed 1 US billion $ mark in financial year 2008.

Company is providing technology consultancy services to nascent pharma industry which has earned app. 150 crore Rs. for the company in the last financial year.

Revenue of the company is expected to grow by 16% in the next financial year. It is expected to touch 49 billion rs mark in financial year 2009. Company’s new

Key Financials * FY 06 FY 07 FY08 FY09E FY10E

Net sales 28.91 34.38 42.27 49.03 57.37

%Growth32.55

%18.91

%22.94

%16.00

%17.00

%EBITDA 6.97 6.54 6.38 8.30 10.67EBITDA Margin %

24.11%

19.02%

15.10%

16.93%

18.60%

Adjusted PAT 6.92 6.34 4.89 6.52 8.91

%Growth

-52.64

% -8.31%

-22.87

%33.21

%36.72

%Net profit margin %

23.92%

18.45%

11.57%

13.29%

15.53%

EPS (based on Adj.Pat)* 5.77 4.08 3.15 4.19 5.73Book value per share * 16.54 2.08 2.42 2.69 3.26Return on equity

34.88%

19.60%

13.02%

15.59%

17.57%

Key ratios (%) FY 06 FY 07 FY08 FY09E FY10E

Market Price 661.95 235.70 219.75 219.75 219.75P/E 114.78 57.78 69.84 52.43 38.35P/BV 40.03 113.22 90.96 81.74 67.38EV/EBITDA 114.62 560.49 575.06 442.19 344.05EV/Sales 27.64 106.60 86.84 74.84 63.99

Key dataFace value (Rs.) 1 Rs. Shares outstanding (mn) 777.54Market cap (Rs. In bln)52 week high/low (Rs.) 243/160BSE Code 50087NSE CodeBloomberg CodeReuters Code

production unit in Sikkim become operational in this financial year and company has started commercial production in some of the facilities in this unit. Company’s revenue will grow at a CAGR of 16% up to financial year 2010.

Company’s EBDITA margin is expected to grow by 16% in the next financial year. It is expected to grow at a CAGR of 17% up to 2012. Raw material cost has shown a decreasing trend over few past years. Moreover expected increase in sales realization value per unit in tablet segment, which is the major contributor in the revenues of the company.

Share price as per DCF valuation comes out to be in range of 221 to 322 in the next 12 months. It is expected to touch a target price of 275 Rs. in next 12 months as per DCF sensitivity analysis. At present share is trading around 219 Rs. at Bombay stock exchange.

Cipla has not performed well as compared to NSE index but its share price has recovered in the last month of March.

Source: www.bseindia.com

Source: www.bseindia.com

INVESTMENT RATIONALCRAMS and Patent expiry drives Indian Pharma sector

The Indian pharmaceutical sector is witnessing tremendous growth with the contract research and clinical trials businesses taking wing, and the new patent regime opening new avenues for players in the country. The country's pharmaceutical market is a US$ 7.3 billion opportunity with the domestic retail market expected to cross the US$ 10 billion mark in 2010 and be worth an estimated US$ 12-13 billion in 2012. The Indian Pharmaceutical Industry today is in the front rank of India's science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. The sector is estimated to be worth US$ 6 billion, and growing at over 13 per cent annually. Indian pharmaceutical companies now supply almost all the country's demand for formulations and nearly 70 per cent of demand for bulk drugs. Several factors make the Indian pharma industry competitive which includes self-reliance--displayed by the production of 70 per cent of bulk drugs and almost the entire requirement of formulations within the country ,low cost of production , low R&D costs, Innovative Scientific manpower ,strength of National Laboratories As a result exports constitute nearly 40 per cent of the production, with formulations contributing 55 per cent and bulk drugs 45 per cent. The industry comprises large, medium and small-scale operators out of which some 300 companies' together account for nearly 90 per cent of the domestic market, while the rest is accounted for by a large number

of small companies which total about 9000 units. According to the Pharmaceutical Export Promotion Council (Pharmexcil), the pharmaceutical exports in 2007-08 stood at US$ 6.68 billion against US$ 5.73 billion in 2006-07, recording a growth rate of 16 per cent. The industry has been clocking export growth rate, recording 18 per cent, 23 per cent and 17 per cent growth rates during 2006-07, 2005-06, and 2004-05, respectively.

Bulk drug sales pushes company revenue in AMJ-08

CIPLA has grabbed the opportunity of robust growth in Indian pharmaceutical industry. The Company’s Rs. 250 crore project in Sikkim for manufacture of formulations including capsules, tablets, liquid orals, nasal spray, inhalers, injectables using form-fill-seal technology, etc. is nearing full completion. The company has already commenced commercial production in some of these facilities in the first quarter of the current financial year. Commercial production also commenced in January 2008 at the Rs. 100 crore new export oriented unit (EOU) for the manufacture of API’s and intermediates at Kurkumbh. The Company has just received an order dated 11th July 2008 from the State Government revoking the stop-work order consequent to a petition filed by the developer of the SEZ against this order. During the quarter, domestic sales source:www.cipla.com

grew by about 16% and export sales grew by 50%. This was mainly due to a 117% growth in bulk drugs & intermediates and chemicals exports as well as a 32% growth in formulations. Material cost (as a percent to income from operations) has decreased during the quarter mainly due to

improved export realizations on account of depreciation of the rupee and changes in product mix .

Increase in staff cost led to decrease in operating margin

In the qtr ended in june-08,company has witnessed a decrease in operating margindue to 31% increase in staff cost. Moreover company has posted a loss of 75 crores for the quarter on revaluation of forward contracts, outstanding debtors &

foreign currency loans consequent to the depreciation of the rupee against the US dollar. Cost of various raw materials increased during the quarter due to stop in production by various Chinese

manufacturers.

source:www.cipla.com

KEY RISKS:

PatentsIn a significant development, on 19th March 2008, the Delhi High Court rejected an injunction plea by Roche to prevent Cipla from manufacturing and selling generic versions of the anti-cancer drug erlotinib (Erlocip, Cipla) in India. According to The Economic Times, “the Indian drug maker’s generic version of Tarceva is priced at one-third the price of Tarceva and the HC rejected Roche appeal in public interest given the huge cost difference between the two drugs”. This ruling vindicates Cipla’s constant appeal to modify the patent laws of the country to safeguard the Indian consumer from monopolistic pricing by

patent holders. Such disputes in the interpretation of the new patent laws are likely to remain a major area of concern to millions of patients in India. We remain hopeful that the government would pay heed and take the right steps in order to ensure that monopolistic forces do not prevail in the Indian market and essential as well as vital drugs remain within the reach of masses.

Drug PricingAs always, the health of the domestic pharmaceutical industry is very much dependent on the government’s drug pricing policy. We appeal to the Group of Ministers, which is reportedly considering the policy, to let free and fair competition rather than arbitrary drug control measures decide prices of essential drugs. Cipla is at all times willing to extend all co-operation and support to the government to achieve this objective. The Company would like to reiterate that it is willing to share its pharmaceutical technology with the Government of India, free of charge, so that the public sector pharmaceutical undertakings can also manufacture and market all vital and life saving drugs at economical prices.

Rising Costs and Availability of MaterialsThe prices of many API’s and input materials have risen significantly due to restriction in production by chinese chemical manufacturers, rise in price of petroleum-based products, frequent shortages and general inflationary conditions. The Company is looking at alternative arrangements and has also increased its stock levels. However, the increased prices and shortages of materials will adversely affect production schedules and overall margins on all the Company’s products.

Litigation charges by USA FDA: Indian companies are facing litigation charges from FDA department of USA. Approval of USA FDA is necessary for Indian companies to sell their drugs in American markets.

FINANCIAL FORECAST AND ASSUMPTIONS:Cipla ltd. Is expected to grow by app. 16% in the coming financial year 2008-09 to touch a level of 49 billion Rs. and it is expected to grow at a CAGR of 15% for next three years up to 2012.EBDITA is expected to grow by app. 18% in the coming financial year to touch a level of 7 billion rs. .it is expected

to grow at a CAGR of 18% up to 2012 to touch 12 billion mark.PAT is expected to grow by 35% in the coming financial year and continue at a CAGR of app. 36% up to 2012 to touch 11 billion rs. mark.

KEY ASSUMPTIONS:

REVENUE: The projections of revenue from operations are based on the sales realized per unit in different segments and capacity increase in different segments. Revenue is expected to grow by 15% in the next financial year 2008-09. We have not considered other incomes in forecasted revenue as it contributes less than 2% in the total sales of the company. App. 56% of the revenue is given by tablet segments and company has started a new project in Sikkim for manufacturing of tablets and liquid segment. Net realization per unit in tablet segment is 1.46 rs. This is expected to grow at a rate of 4% in next financial year.

Capex: Cipla is investing heavily to increase its production capacity. The Company’s Rs. 250 crore projects in Sikkim for manufacture of formulations including capsules, tablets, and liquid orals, nasal spray, inhalers, injectables using form-fill-seal technology, etc. is nearing full completion. The company has already commenced commercial production in some of these facilities in the first quarter of the current financial year. Commercial production also commenced in January 2008 at the Rs. 100 crore new export oriented unit (EOU) for the manufacture of API’s and intermediates at Kurkumbh. The Company has just received an order dated 11th July 2008 from the State Government revoking the stop-work order consequent to a petition filed by the developer of the SEZ against this order.

Capex source: Capex amount has been assumed to be invested at a debt equity ratio of 0.15 to be spread over financial year 2009 and 2010.

Operational expenses:

Raw material cost: Raw material cost has been assumed to be 44.19%, which is 1% below than last financial year . Raw material cost has decreased significantly over past few years, so we have maintained the same trend for our assumption. Material cost has decreased significantly in the first quarter on the basis of which it is assumed that it will maintained the trend throughout the year.

Staff cost: staff cost has been assumed to be around 6.6% in the next fiscal year. Cipla has maintained its employee cost around 6% from past few years with a slight increase in growth rate.

Manufacturing expenses: manufacturing expenses are assumed to be 5% of the total revenue in the next financial year. Company has maintained its manufacturing expenses app. 5% to total turnover from last five to six years.

Other expenditures: Other expenditures has been assumed to be around 25% in the next years.company’s other expenditure are increasing from past three years at a rate of 5% app. This expenses are assumed to increase at a rate of 5% for next three years.

Depreciation: Depreciation has been assumed to be linked with the gross assets and depreciation is maintained at the same % level of gross assets.

Valuation

Cipla’s stock is valued at Rs. 235.90 based on DCF’s valuation, which is 7% above the current value of the stock trading on Bombay stock exchange.

Current valuation justified owing to the expected growth:

All parameters like sales, EBDITA and PAT is expected to grow by 16%, 17% and 33.21% in the next financial year .This would further grow by 17%,19% and 35% up to year 2012. The expected higher growth rate is due to following reasons:

1. The sale of the company is expected to grow by 17% in the next financial year. Company has started commercial production in its new production unit in Sikkim which will add to its top line.

2. Patents of 30 drugs are expected to expire by 2012 which will help the company to push up its sale.

3. Raw material cost is expected to decrease in coming financial year.

4. Company has started technology consultancy business which is growing very fast.

Table 1: DCF Sensitivity Rs.

Con

tin

uin

g G

row

th (

%) Weighted Average Cost of Capital (%)

11 11.5 12 12.5 13 15.44 14 15

7.5 546.80 474.10 417.50 372.20 335.20 221.10278.1

0236.2

0

8 637.30 541.30 469.30 413.30 368.40 235.90301.2

0253.0

08.5 763.91 630.89 535.84 464.53 409.05 252.84 328.3

1272.3

7

9 953.87 756.32 624.59 530.47 459.85 272.39360.9

4294.9

6

10 1903.65 1258.05 935.20 741.45 612.25 322.28450.6

9353.6

95. Indian pharma industry is growing at a CAGR of 17%. Patient base in India is very huge, which will

drive company’s sale.

Table 2. DCF valuation

DCF VALUATION (as on August 31, 2007)

Rs in m

FY06 FY07 FY08FY09(

E)FY10(

E)FY11(

E)FY12(E

)

Revenue 28913.60 34382.40 42268.1049031.

2057366.

2765971.

2175866.8

9

EBIT 6170.70 5505.60 5056.806651.3

48621.2

38556.3

0 9213.53

% of Revenues 21.34 16.01 11.96 13.57 15.03 12.97 12.14

Depreciation 801.80 1033.70 1326.301647.3

42047.9

72496.7

1 3043.20

% of Revenues 2.77 3.01 3.14 3.36 3.57 3.78 4.01

EBITDA 6972.50 6539.30 6383.108298.6

810669.

2011053.

0112256.7

3

% of Revenues 24.11 19.02 15.10 16.93 18.60 16.75 16.16

Less: Cash Tax 780.00 820.00 890.001217.5

01367.3

01425.8

7 1576.18

NOPLAT 6192.50 5719.30 5493.107081.1

89301.8

99627.1

310680.5

5

Capex -3610.50 -4192.20 -5620.10

-1632.1

0

-10194.

91

-3406.6

0-

7454.45

Changes in WC 6730.20 5754.40 12157.501352.4

76071.2

77350.4

812064.9

6

Post Tax Non-operating cash flows 1640.34 1888.72 989.071159.6

41664.8

42294.6

7 3139.81

Free Cash Flows 10952.54 9170.22 13019.577961.1

96843.1

015865.

6818430.8

7

PV of Estimated FC Flows 4443.

286097.

6815571

.7718377.

31

Horizontal Value 267539.

08

PV of Estimated Perpetuity Flows 170813

.37

Total Present Value (EV)215303.

4

Table 3. RELATIVE VALUATION

Peer set analysis (as on August 31, 2008)

Dr. Reddy Labs Ranbaxy Cipla

Market Capitalization ( Rs mn ) 106003.08 163478.59 1542048.89

Book Value 285.9 67.98 48.32

Debt / Equity 0.11 1.29 0.19

P/E (Trailing) * 38.45 26.55 31.53

EPS 25.09 16.45 6.29Return on Net Worth 5.36% 7.22% 0.11

Current Ratio 3.85 2.69 3.00Quick Ratio 3.02 2.52 2.10

*DRREDDY was trading at a trailing P/E of 38.45 on August 31 the base date of this valuation exercise

Table 4. RELATIVE VALUATION

Ranbaxy CiplaNicholous Piramal

Dr. Reddy Labs

P/E 26.63 31.53 21.2 25.09

P/BV 0.02 0.01 0.030 0.01

EV/EBIDTA 27.54 24.94 13.37 23.63

Table 5. SHARE PRICE OF CIPLA IN TIME HORIZON OF 12 MONTHS

P/E ratio for cipla is high as compared to other players because of a low earning per share, but its return on net worth is very high as cipla is having a very low debt equity ratio as compared to other companies in pharma industries. Company is having a huge reserve and surplus,which are not utilized and due to which company is not performing as compared to its competitors. This is reflected by company’s low EPS.

P/E Expected EPS (Rs)

Expected price

24.7 6.3 155.426.7 6.3 167.8

28.7 6.3 180.5

P/BV

Expected Book Value (Rs.)

3.5 48.3 169.14.0 48.3 194.24.5 48.3 217.4

EV/EBIDTA

Expected

EBIDTA (m)

19.0 6383.1 336.019.7 6383.1 323.920.5 6383.1 311.4

Company background:

In 1935, Khwaja Abdul Hamied, the founder of Cipla set up The Chemical, Industrial & Pharmaceutical Laboratories, which came to be popularly known as Cipla. He gave the company all his patent and proprietary formulas for several drugs and medicines, without charging any royalty. On August 17, 1935, Cipla was registered as a public limited company with an authorised capital of Rs 6 lakhs. The search for suitable premises ended at 289, Bellasis Road (the present corporate office) where a small bungalow with a few rooms was taken on lease for 20 years for Rs 350 a month. Cipla was officially opened on September 22, 1937 when the first products were ready for the market. The Sunday Standard wrote: "The birth of Cipla which was launched into the world by Dr K A Hamied will be a red letter day in the annals of Bombay Industries. The first city in India can now boast of a concern, which will supersede all existing firms in the magnitude of its operations. India has lagged behind in the march of science but she is now awakening from her lethargy. The new company has mapped out an ambitious programme and with intelligent direction and skillful production bids fair to establish a great reputation in the East. " In 1942, Dr Hamied's blueprint for a technical industrial research institute was accepted by the government and led to the birth of the Council of Scientific and Industrial Research (CSIR), which is today the apex research body in the country. In 1944, the company bought the premises at Bombay Central and decided to put up a "first class modern pharmaceutical works and laboratory." It was also decided to acquire land and buildings at Vikhroli. With severe import restrictions hampering production, the company decided to commence manufacturing the basic chemicals required for pharmaceuticals. In 1946, Cipla's product for hypertension, Serpinoid , was exported to the American Roland Corporation, to the tune of Rs 8 lakhs. Five years later, the company entered into an agreement with a Swiss firm for manufacturing foromycene. Dr Yusuf Hamied, the founder's son, returned with a doctorate in chemistry from Cambridge and joined Cipla as an officer in charge of research and development in 1960. In 1961, the Vikhroli factory started manufacturing diosgenin. This heralded the manufacture of several steroids and hormones derived from diosgenin.

BUSINESS MODEL:Cipla is in the business of drug manufacturing, research and development of drugs, and providing technological solution to diff. companies which are in nascent stage. Company develops drugs through R&D and then sells into domestic as well as foreign market. Cipla is having upgraded technology for drug manufacturing and R&D business. Company is having presence in 130 countries with large distribution channels. Company provides technological solutions to diff. companies.Company distributes its product through diff. medical stores, diff. hospitals in domestic markets. Company distributes its product to this distribution channels by team of medical representatives. Company distributes its technology services through its consultancy services. To distribute its chemical products, it has tie-ups with diff. chemical companies. Company exports its product through diff. retailers in the foreign market.The target customers are diff. hospitals, Diff. medical stores which retail their product to customers. Diff. NGO is also the target customers. Diff. companies which need technological assistance are target customers for their consultancy business. Diff. chemical industries are target customers for their chemical business. Diff. beverage companies are their target customers for their fragrance business.company handles their customer through a team of diff. medical representatives. Time to Time company organizes diff. events to interact with their distributors .

Business analysis:

Growth drivers

Company’s export leads increase in sale

Despite of Rs. Appreciation, company’s export rose by 18% in value term last year. Domestic sales increase by 13% which leads to overall increase in turnover by 18% over last financial year. Technology fees rise to a level of 150 crores showing a significant increase. Company has introduced new drugs including Adlube, Nova to the market.

Value drivers:

Decrease in material cost leads to increase in profits

Due to a 117% growth in bulk drugs & intermediates and chemicals exports as well as a 32% growth in formulations, profit increased by16.9%over last quarter. Material cost (as a percent to income from operations) has decreased during the quarter mainly due to improved export realizations on account of depreciation of the rupee and changes in product mix .

5.3 Segmental analysis:

Domestic sector contributes maximum to revenue

46% of the total revenue is generated from domestic segment with a growth of 13.4%.Second major contributor is formulations segment with contribution is 23% to the total revenue with a growth of 21.9%from last year.App. 50% of the business of the company comes from exports only.export of company is increasing at a CAGR of 18%.highest revenue is contributed by tablet segments in total revenue of the pharma industry.company is on expansion mode.company has started commercial production in its Sikkim unit,which will produce tablets segment.

Source:www.cipla.com

Cipla keeps a helthy 15% market share

Harpheindal index for pharma industry is 1305 which indicates a oligopoly kind of market. Cipla has approximately 15% of market share in domestic pharma industry.company is having highest market share according to ORG-IMS stasticis.


Tablet segment again contributes highest

Tablets segments contribute app. 56% of revenue in cipla. Bulk drugs segment contributes app. 14% to the total revenues.tablet and bulk drug segment both account for more than 705 of the total revenue of cipla in last financial year 2008. Company ha s registered a growth of 117% in the first quarter of financial year 2008-09. Company has also started commercial production in Sikkim unit which is for tablet segmen.This will further increase the revenue of company in next financial year.


Bulk drugs production on increase

Company has increased the production of bulk drugs from past three years.cipla has registered avery high growth in bulk drug segment. In recent quarter company has registered a growth of 117% in bilk drg segment over same quarter in last year. This trend is expected to maintain as pharma industry is booming robustly. This segment is expected to grow by 25% in the next year.


Tablet segment gives maximum contribution in the total revenue of cipla.it contributes app. 56% of the total revenue. To push up sales of this segment,company has started commercial production in Sikkim production plant.


R&D as a % of sales

R&D expenditure rises to 5.4 %

In year 2008 company raises its R&D expenses to a level of 5.4%. CIPLA has maintained its R&D expenditure close to the level of 5%.it is expected that company will maintain same research and expenditure ratio for coming year.


raw material cost shows a declining trend

Raw material cost has shown a declining trend.from the past four years.it is expected that same trend will be continued in coming financial year.


Products:

Cipla deals into seven diff. categories of products

Product Services BrandsPrescription Anesthetic agents, Antacids ISONID300,PYZID

400,RIFAPY 700OTC Child care, cough and cold, eye care, food

supplements, foot care, hair care, health drinks, skin care

Paracetamol, parafizz, no cold super rub

Bulk drugs Active pharmaceutical ingredients, Drug intermediates

Arthritic / Rheumatic Agents, Antibiotics / Antibacterial,

Anticancer Drugs , Anti-emetics

Animal products

Animal groups, herbal specialties, Therapeutic group

Aqua products, Bromocare, AQ BENJ

Agrochemicals Pesticides Fungicide, herbicide , insecticide

Flavor and fragrances

Personal care, laundry detergents, room fresheners

Technology Consulting, plant supply, engineering, project appraisal, training, operational management. know how transfer

preparation of product and material specifications, financial and economic evaluations

Industry overview:

The Indian pharmaceutical industry is projected to grow to US $ 25 billion by 2010 whereas the domestic market is likely to more than triple to US$ 20 billion by 2015 from the current US$ 6 billion to become one of the leading pharmaceutical markets in the next decade. India today has the distinction of producing high quality generic medicines that are sold around the world. Further, India is poised to be one of the fastest growing pharmaceutical markets in the world. The factors which have fuelled the growth for the drugs and pharmaceutical market includes huge patient base, increasing incomes,

improving healthcare infrastructure an increase in lifestyle-related diseases, penetration of health insurance, adoption of patented products,patent expiries and aging population in the US, Europe, and Japan. As a result, a number of multinationals have entered the Indian Pharmaceutical market. Already 15 of the 20 largest pharmaceutical companies in the world have a presence in India. In fact, during April 2000 to October 2007, drugs and pharmaceuticals are the tenth largest FDI-attracting sectors in India.

CRAMS

Contract research and manufacturing services (CRAMS) has become a promising medium for the Indian pharma industry, with India increasingly being viewed as global hub for CRAMS. Over the last 5 years the CRAMS industry has been contributing close to 8 percent of the total Indian pharmaceutical business. Developed countries are expected to further propel the CRAMS industry to grow at a CAGR of nearly 32 percent from 2006 to 2013 as India offers global pharma companies both quality and cost advantage. Contract research--including both drug discovery research and clinical research--has been growing at a phenomenal rate. While clinical trials represent 65 per cent of this market, new drug discovery makes up the remaining 35 per cent. Indian companies are playing an important role in early drug discovery processes due to their substantial experience in the field of generic drugs with India becoming an established venue for chemistry and drug discovery developments than China. Frost and Sullivan estimates outsourced contract research in India to reach US$ 2 billion by 2010. Similarly, according to a McKinsey report, the global clinical trial outsourcing to India in the pharmaceutical industry is estimated to be worth US$ 1.23 billion by 2010. Over 15 prominent contract research organizations (CROs) are now operating in the country which includes names such as Novartis, Johnson & Johnson, Pliva, Astra Zeneca, Bristol-Myers Squibb and GlaxoSmithKline among others. Contract manufacturing is another new opportunity for the Indian pharmaceutical industry. Already, India has the largest number of US Food and Drug Administration (US FDA)-

approved plants outside the US, with over 100 facilities. And now even small and medium scale pharmaceutical companies are setting up new and upgraded high-quality manufacturing plants to take part in this growing segment. The Boston Consulting Group estimates that the contract manufacturing market for global companies in India would touch US$ 900 million by 2010.

Generics

According to a report by global pharmaceutical market Intelligence Company, IMS Health the Indian generic manufacturers will grow to more than US$ 70 billion as drugs worth approximately US$ 20 billion in annual sales will face patent expiry in 2008. In fact, with nearly US$ 80 billion worth of patent-protected drugs to go off patent (including 30 of the best selling US patent-protected drugs) by 2012, Indian generic manufacturers are positioning themselves to offer generic versions of these drugs. Also, there is global shift towards use of generics as governments worldwide are under tremendous pressure to curtail steeply escalating healthcare budgets. Consequently, the generics industry in India after capturing the US markets is gradually making its foray into Japan, South Africa, Europe and the Commonwealth. Indian pharmaceutical companies with their reverse-engineering expertise, abundant investment in research facilities and availability of skilled manpower are favorably placed in the global generic market. Already, Indian drug companies account for over 25 per cent of the total generic drug applications made to the FDA of US, which accounts for over half of the US$ 60 billion market. The US FDA's latest generic initiative GIVE (Generic Initiative for Value and Efficiency)-aimed at increasing the number and variety of generic medicines available to consumers and healthcare providers -- is expected to further fuel the export plans of Indian pharmaceutical companies.

Drug Master Filings (DMFs)

DMFs are confidential, proprietary assets that present to the US FDA the formulae, processes, test methodology, and other data relevant to the manufacture of products used in the composition, packaging and processing of pharmaceuticals or biologics. Indian companies like Aurobindo Pharma, Wockhardt, Ranbaxy, Dr Reddy's Lab and Sun Pharma have been in the fore-front in this segment. out of the total 187 DMFs filed with the US FDA during October-December 2007, Indian companies alone accounted for 89 DMFs, accounting for a whopping 47.6 per cent of the total DMFs. While Ranbaxy filed the highest number filings with 13 DMFs, Dr Reddy’s and Aurobindo Pharma followed next with 10 DMFs each.

Financial and projections:

Income statement:

Particulars FY04 FY05 FY06 FY07 FY08(E) FY09(E) FY10(E)

Net Sales20600.1

021812.6

028913.6

034382.4

042268.1

049031.2

057366.2

7% Growth 0% 5.89% 32.55% 18.91% 22.94% 16.00% 17.00%

Total Revenue20945.2

023364.9

830796.3

036687.9

043520.4

050432.5

359292.1

9% Growth 0% 11.55% 31.81% 19.13% 18.62% 15.88% 17.57%EXPENDITURES Staff Costs 939.40 1169.30 1498.60 1845.90 2543.10 3279.64 3947.83% of Net Sales 5% 5.36% 5.18% 5.37% 6.02% 6.69% 6.88%

Other Manufacturing/Operating costs 1226.80 466.0014870.8

019327.2

022929.6

025407.7

628508.7

2% of Net Sales 6% 2.14% 51.43% 56.21% 54.25% 51.82% 49.70%

Miscellaneous Expenses 5648.10 5447.24 5571.70 6670.0010412.3

012045.1

214240.5

2% of Net Sales 27% 24.97% 19.27% 19.40% 24.63% 24.57% 24.82%

Total Expenditures 7814.30 7082.5421941.1

027843.1

035885.0

040732.5

246697.0

7% of Net Sales 38% 32.47% 75.89% 80.98% 84.90% 83.07% 81.40%

EBITDA12785.8

014730.0

6 6972.50 6539.30 6383.10 8298.6810669.2

0EBITDA Margin % 62% 67.53% 24.11% 19.02% 15.10% 16.93% 18.60%Growth % 15.21% -52.66% -6.21% -2.39% 30.01% 28.57%Depreciation & Amortisation 365.00 550.47 801.80 1033.70 1326.30 1647.34 2047.97

EBIT12420.8

014179.5

9 6170.70 5505.60 5056.80 6651.34 8621.23Financial Charges 102.40 76.33 114.20 69.50 115.90 178.71 241.25Other Income 345.10 1552.38 1882.70 2305.50 1252.30 1401.33 1925.92

PBT12663.5

015655.6

4 7939.20 7741.60 6193.20 7873.9610305.9

0Pre-tax Margin % 61.47% 71.77% 27.46% 22.52% 14.65% 16.06% 17.97%Tax 900.00 1050.00 1022.00 1399.50 1301.80 1358.01 1397.07Effective Tax Rate % 7% 6.71% 12.87% 18.08% 21.02% 17.25% 13.56%

Adjusted PAT11763.5

014605.6

4 6917.20 6342.10 4891.40 6515.95 8908.83Net Profit Margin % 57% 66.96% 23.92% 18.45% 11.57% 13.29% 15.53%Growth in Adjusted PAT % 0% 24.16% -52.64% -8.31% -22.87% 33.21% 36.72%Extrodinary Income 0 0 0.00 0.00 0.00 0.00 0.00

Reported PAT11763.5

014605.6

4 6917.20 6342.10 4891.40 6515.95 8908.83Shares In Issue 599.70 1199.40 1199.40 1554.60 1554.60 1554.60 1554.60Adjusted EPS 19.62 12.18 5.77 4.08 3.15 4.19 5.73Growth % 0% -37.92% -52.64% -29.26% -22.87% 33.21% 36.72% 1772.60 1818.80 1560.00 Dividend paid 900 1050 1773 1819 1560 2281 Dividend pay out ratio 0.08 0.07 0.26 0.29 0.32 0.35 Net profit transferred to Reserves Acccount

13555.64 5144.60 4523.30 3331.40 4235.37 8908.83

Balance sheet:

Balance Sheet - CIPLARs in million

Particulars FY05 FY06 FY07 FY08 FY09(E)

Gross Asset 9,866.70 13666.70 17997.10 22,017.9

025,981.

2036,176.1

1

Accumulated Depriciation 2,477.60 3100.60 4116.40 5,404.307,051.6

4 9,099.61

FY10(E)

Capital WIP 1,059.60 870.10 731.90 2,331.20 0.00 0.00

Net Fixed Asset8,448.7

011,436.2

014,612.6

018,944.

8018,929.

5627,076.

50

Investments & Deposits 183.00 224.30 1178.00 947.501,319.8

4 2,333.33

Current Asset17,490.4

0 22,922.90 28,346.8037,439.8

039,592.

2742,939.9

3

Cash 112.00 444.80 1314.90 792.80 961.66 713.26

Other Current Assets 135.10 133.50 248.30 344.90 458.71 610.09

Inventories 7,456.80 9570.00 9786.00 11,204.9

011,619.

9012,820.9

0

Trade Debtors 5,873.20 8759.60 10287.80 13,939.1

014,276.

0015,168.2

3

Loans and Advances 3,913.30 4015.00 6709.80 11,158.1

012,276.

0013,627.4

5

Current Liabilities & Provisions 7,784.40 9082.10 9412.60 12,477.1

011,677.

1014,400.7

1Net Current Asset Excluding Cash

9,594.00

13,396.00

17,619.30

24,169.90

26,953.51

27,825.96

Miscellaneous Items

Deffered Tax (Net)

Capital Deployed18,337.

7025,501.3

034,724.8

044,855.

0048,164.

5757,949.

05

Total Assets26,122.1

0 34,583.40 44,137.4057,332.1

059,841.

6772,349.7

6

Non-Current Liabilities

Secured Debt 412.40 512.70 72.50 169.80 95.98 54.75

Non-secured debt & Trade deposit 1,499.60 4176.40 1163.10 5,635.506,275.0

2 7,191.90Deferred Tax Liabilities 889.40 979.50 1126.50 1,491.50 0.00 0.00Deferred Paymaent Credit 0.00 0.00 0.00 0.00 0.00 0.00

Total Liabilities2,801.4

0 5,668.60 2,362.107,296.8

06,371.0

07,246.6

5

Contingent Liabilities

Share Capital 599.70 599.70 1554.60 1,554.601,554.6

0 1,554.60

Reserve and Surplus14,936.6

0 19233.00 30808.1036,003.6

040,238.

9749,147.8

0

Total Stock Holder's Equuity15,536.

3019,832.7

032,362.7

037,558.

2041,793.

5750,702.

40

18,337.7

0 25,501.30 34,724.8044,855.0

0

Capital Employed18,337.

7025,501.3

034,724.8

044,855.

0048,164.

5757,949.

05

DIFF 0.00 0.00 0.00 0.00 0.00 0.00

current ratio 2.25 2.52 3.01 3.00 3.39 2.98

D\E 0.18 0.29 0.07 0.19 0.15 0.14

cash from cash flow statement #REF! 444.80 1314.90 792.80 961.66 713.26difference between the two cash balance #REF! 0.00 0.00 0.00 0.00 0.00Closing Cash Balance from Cash Flow Stmt #REF! 444.80 1314.90 792.80 961.66 713.26

Cash flow statement:

Cash Flow Statement - CIPLARs in million

Cash Flow from Operating Activities

FY05 FY06 FY07 FY08

FY09(E) FY10(E)

PAT 6917.2

06342.1

04891.4

06515.9

5 8908.83Add: Depreciation 623.00

1015.80

1287.90

1647.34 2047.97

Add: Interest Expense 114.20 69.50 115.90 178.71 241.25Add: Other Non-Cash Charges 0.00 0.00 0.00 0.00 0.00Add: Direct taxes paid

1022.00

1399.50

1301.80

1358.01 1397.07

Operating Profit Before WC Changes

8676.40

8826.90

7597.00

9700.01

12595.12

Changes in Current Assets (excluding cash)

(5099.70)

(4553.80)

(9615.10)

(1983.61)

(3596.06)

Changes in Current Liabilities 1297.7

0 330.50 3064.5

0 (800.00

) 2723.61

Changes In WC (3802.0

0)(4223.3

0)(6550.6

0)(2783.6

1) (872.45)

Cash Generated From Operations 4874.4

04603.6

01046.4

06916.4

011722.6

7

Less Direct Taxes Paid 1022.0 1399.5 1301.8 1358.0 1397.07

: 0 0 0 1

Others (provision for deferred tax) 0.00 0.00 0.00 0.00 0.00Net Cash Generated From Operations

3852.40

3204.10

-255.40

5558.39

10325.60

Cash Flow from Investing Activities

Capital Expenditure (CAPEX) (3610.5

0)(4192.2

0)(5620.1

0)(1632.1

0)(10194.

91)

Investments (41.30)(953.70

) 230.50 (372.34

)(1013.4

9)

Others 0.00 0.00 0.00 0.00 0.00Net Cash Used In Investing Activities

(3651.80)

(5145.90)

(5389.60)

(2004.44)

(11208.40)

Cash Flow from Financing Activities

Change in Debt 2867.2

0 (3306.5

0)4934.7

0 (925.80

) 875.65

Change in Equity 0.00 954.90 0.00 0.00 0.00

Dividends Paid (1772.6

0)(1818.8

0)(1560.0

0)(2280.5

8) 0.00

Interest Paid (114.20

) (69.50)(115.90

)(178.71

) (241.25)Others (Securities premium on FCCB) (see note)

(848.20)

7051.80

1864.10 0.00 (0.00)

Net Cash used in Financing Activities 132.20

2811.90

5122.90

(3385.09) 634.40

Net Increase in Cash and Cash Equivalents 332.80 870.10

(522.10) 168.86

(248.40)

Cash and cash equivalents At the 112 444.8 1314.9 792.8 961.66

beginningNet Increase in Cash and Cash Equivalents 332.80 870.10

-522.10 168.86 -248.40

Cash and cash equivalents At the end 444.80

1314.90 792.80 961.66 713.26

cash balance as per balance sheet 444.8 1314.9 792.8 961.7 713.3

difference 0.00 0.00 0.00 0.00 0.00

.

Financial Ratios

FY05 FY06 FY07 FY08FY09(E)

FY10(E)

Profitability Ratios

Return on Assets (ROA)55.91

%20.00

%14.37

% 8.53%10.89

%12.31

%

Return on Equity (ROE)94.01

%34.88

%19.60

%13.02

%15.59

%17.57

%

Return on Capital Employed (ROCE)77.32

%24.20

%15.85

%11.27

%13.81

%14.88

%Dupont Analysis-ROE Decomposition

PAT/PBT (Tax Efficiency) 0.93 0.87 0.82 0.79 0.83 0.86

PBT/EBIT (Interest Burden) 1.10 1.29 1.41 1.22 1.18 1.20

EBIT/Sales (OPM) 0.65 0.21 0.16 0.12 0.14 0.15

Sales/Total Assets (Asset Turnover) 0.84 0.84 0.78 0.74 0.82 0.79

TA/NW (Financial Leverage) 1.68 1.74 1.36 1.53 1.43 1.43

ROE 94.01 34.88 19.60 13.02 15.59 17.57

Liquidity Ratios

Current Ratio 2.25 2.52 3.01 3.00 3.39 2.98

Acid Test Ratio 1.29 1.47 1.97 2.10 2.40 2.09

Debt-Equity Ratio 0.18 0.29 0.07 0.19 0.15 0.14

Efficiency Ratios

Assets Turnover Ratio 0.84 0.84 0.78 0.74 0.82 0.79

Working Capital Turnover Ratio 2.25 2.09 1.82 1.69 1.76 2.01

F.A. Turnover Ratio 2.58 2.53 2.35 2.23 2.59 2.12

C.A. Turnover Ratio 1.25 1.26 1.21 1.13 1.24 1.34

Debtors Velocity 98.28 110.58 109.21 120.37 106.27 96.51

Margin Ratios (%)

EBITDA Margin67.53

%24.11

%19.02

%15.10

%16.93

%18.60

%

Pre-Tax Margin71.77

%27.46

%22.52

%14.65

%16.06

%17.97

%

Net Profit Margin66.96

%23.92

%18.45

%11.57

%13.29

%15.53

%

Growth Ratios YoY (%)

Net Sales 5.89%32.55

%18.91

%22.94

%16.00

%17.00

%

EBITDA15.21

%

-52.66

% -6.21% -2.39%30.01

%28.57

%

Adj.PAT24.16

%

-52.64

% -8.31%

-22.87

%33.21

%36.72

%

Adj.EPS

-37.92

%

-52.64

%

-29.26

%

-22.87

%33.21

%36.72

%

Working Ratios (Days)

Inventory124.7

8 120.81 103.89 96.76 86.50 81.57

Debtors 98.28 110.58 109.21 120.37 106.27 96.51

Net Working Capital Excluding Cash9594.

0013396.

0017619.

3024169.

9026953.

5127825.

96

Other Ratios (%)

Other Income/PBT 9.92%23.71

%29.78

%20.22

%17.80

%18.69

%

Per Share (Rs.)

Adj.EPS 12.18 5.77 4.08 3.15 4.19 5.73

CEPS 12.64 6.44 0.47 0.40 0.53 0.70

DPS 0.88 1.48 0.12 0.10 0.15 0.00

BVPS 12.95 16.54 2.08 2.42 2.69 3.26

Cash Per Share 0.09 0.37 0.85 0.51 0.62 0.46

Valuation Parameters

P/E 51.71 114.78 577.76 698.42 524.29 383.47

P/CEPS 49.83 102.86 496.79 549.44 418.49 311.79

P/BV 48.61 40.03 113.22 90.96 81.74 67.38

EV/EBITDA 51.46 114.62 560.49 575.06 442.19 344.05

EV/SALES 34.75 27.64 106.60 86.84 74.84 63.99

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