India Healthcare - Sector Report

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst certifications are present in the Appendix. Anand Rathi Research India Equities

Sriram RathiResearch Analyst

+9122 6626 6737 [email protected]

Healthcare

Sector ReportIndia I Equities

Key Data PE (x) EV / EBITDA (x) RoE (%)

Reco M cap (` bn) Price (`) TP (`) FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e

Aarti Buy 15 616 815 17.9 13.6 10.6 10.0 8.2 6.9 24.8 27.1 28.6Ajanta Buy 132 1,490 1,765 33.6 25.6 21.1 22.2 17.4 14.1 39.0 37.0 33.4Alembic Sell 137 728 734 28.7 24.4 21.8 21.7 18.3 16.0 44.7 38.3 32.7Dishman Buy 28 342 492 16.5 12.1 9.7 7.8 6.3 5.3 12.8 15.4 16.7Fortis Buy 79 170 230 72.5 23.9 16.3 31.3 15.4 11.1 2.7 7.7 10.3Granules Buy 33 160 183 28.0 20.9 15.7 13.2 10.3 8.0 25.2 22.9 22.7Indoco Buy 30 327 423 22.8 17.5 13.9 14.2 11.4 9.1 23.3 25.2 26.0IPCA Hold 91 724 834 28.4 19.3 15.6 16.2 11.9 9.7 13.7 17.8 18.8Natco Buy 82 2,477 2,912 36.2 21.3 19.6 23.4 15.0 13.3 21.4 25.9 22.9Neuland Buy 7 827 1,241 22.7 14.8 10.8 11.0 8.5 6.8 18.8 23.6 25.9Suven Buy 36 280 370 30.8 21.2 16.9 21.3 14.7 11.7 19.7 25.6 27.2Torrent Hold 258 1,526 1,698 18.2 20.7 18.0 12.9 15.7 13.6 47.6 31.8 29.6Unichem Buy 28 307 373 23.1 16.2 13.2 15.3 10.9 9.0 13.4 17.3 19.2Vivimed Buy 6 337 654 6.9 5.0 4.1 5.4 4.6 4.0 13.3 16.1 16.7

Source: Bloomberg, Anand Rathi Research All share prices as on 9th October, 2015

13 October 2015

India Healthcare

Growth opportunities; premium valuations to persist

We are optimistic about the Indian healthcare sector, considering the abundant growth opportunities, greater profitability and return ratios, and strong free-cash-flow generation. We expect the companies we cover to report a 37% earnings CAGR over FY15-18, fuelled by strong (18%) revenue growth and an expansion of 400bps in the EBITDA margin.

Domestic formulations to grow steadily. We expect the domestic brand-named formulations business to grow at a steady 13-14% over FY15-18, in line with the past average. This would be driven by the higher share of chronic categories in lifestyle disorders, mounting per-capita income, rising share of medical spending in overall consumer spending, and volume growth.

US generics, a vast export opportunity. US generics is the largest opportunity for most pharma companies, considering its size and patent expiries worth $72bn in the next three years. Companies such as Alembic, Natco, Indoco, etc., have successfully filed for complex/differentiated generics as well as para-IV filings aimed at this opportunity.

APIs and CRAMS gaining traction. We believe that the companies focused on niche APIs and with strong DMF pipelines would report strong revenue growth. This would primarily be due to larger companies focusing more on formulations and marketing, and out-sourcing APIs. CRAMS would pick up, considering the strong DMF pipelines and existing MNC relationships.

Valuation. Considering the strong, 37%, CAGR in net profit over FY15-18, strengthening balance sheets with strong free-cash-flow generation and better return ratios (20%+), we expect the premium valuations in the sector to persist. We recommend Suven Life, Indoco Remedies and Neuland Labs as top picks. Risks: Regulatory hurdles and currency fluctuations.

Sensex: 27080

Nifty: 8190

13 October 2015 India Healthcare - Growth opportunities; premium valuations to persist

Anand Rathi Research 2

India Healthcare

Growth opportunities; premium valuations to persist

India formulations .............................................................................................. 3

International business ....................................................................................... 7

Valuation ......................................................................................................... 11

Company Section ............................................................................................ 15

Aarti ............................................................................................................ 16

Ajanta .......................................................................................................... 30

Alembic ........................................................................................................ 32

Dishman ...................................................................................................... 34

Fortis ............................................................................................................ 51

Granules ...................................................................................................... 53

Indoco .......................................................................................................... 55

IPCA ............................................................................................................ 57

Natco ........................................................................................................... 59

Neuland ....................................................................................................... 61

Suven .......................................................................................................... 76

Torrent ......................................................................................................... 78

Unichem ...................................................................................................... 80

Vivimed ........................................................................................................ 82



India formulations The branded formulations business in India has a structurally

strong business model, a sustainable revenue stream from established brands, a growing population base, strong R&D capabilities and a high degree of profitability.

We expect the mid-teen revenue growth to continue, considering increasing urbanization leading to chronic diseases, greater awareness and rising healthcare spending.

Structurally strong business model

Expect mid-teen growth to continue

We expect the steady growth momentum in the Indian pharmaceutical market (domestic formulations) to continue, pushed up by the rising share of chronic categories in lifestyle disorders, mounting per-capita income, rising share of medical expenditure in consumer spending and volume growth. Overall, we expect revenue of the Indian pharmaceutical sector to register a 14% CAGR over CY14-18, to `1,178bn, in line with its past average (except CY13 which was hit by the implementation of the new drug-pricing policy). The key growth driver would be the increasing incidence of chronic diseases.

Fig 1 – Growth in the Indian pharmaceutical sector

Source: Industry data, Anand Rathi Research

We believe that qualitative factors such as the increasing healthcare awareness, urbanisation spread, population size, better access to essential medicines, deeper healthcare penetration in mofussil areas, etc., would play crucial roles in sustaining the strong growth in the domestic healthcare market.

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Domestic formulations has a structurally strong business model, offering sustainable revenue growth

with a high margin



Fig 2 – Key growth drivers

Source: Anand Rathi Research.

Fig 3 – Indian healthcare - segment-wise contribution


Increasing contribution of the chronic segment, the key driver

The contribution from chronic categories has been rising over the years due to the increasing incidence of lifestyle disorders and greater urbanisation. The past few years have seen a spiralling up of lifestyle-related disorders such as diabetes, asthma, obesity, a few types of cancer, and cardiovascular and gastro-intestinal diseases. Changing lifestyles have also led to a significant rise in cases of high blood pressure and elevated cholesterol levels. The share of chronic categories in the Indian pharma market revenue has stepped up from 27% in CY10 to 31% in CY14, and would continue upward, driven by the high growth.

Key growth drivers

Rising healthcare awareness

Increasing urbanisation

Rising per capita income

Huge population

Growing incidence of

chronic diseases

Higher healthcare

spend

Inaccessibility to essential medicines

Increase in healthcare

penetration in rural areas

Hospitals (Healthcare

delivery)50%

Pharmaceuticals25%

Diagnostics10%

Insurance & medical

equipment15%



Fig 4 – Increasing contribution of chronic segments


Fig 5 – Therapeutic break-up of the domestic pharma market


The anti-diabetes market in India rose by a 22%+ CAGR over FY05-14, while the cardiac market increased at a 21% CAGR. We expect ~18% growth in both segments over the next 4-5 years, fuelled by a consistent rise in the number of patients because of increasing urbanisation, industrialisation and awareness.

Fig 6 – Details of chronic diseases

Source: Industry, Anand Rathi Research

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Acute Chronic

Anti-infectives15%

Cardiac12%

Others12%

Gastro12%

Vitamins/minerals9%

Anti-diabetic8%

Respiratory8%

Pain/Analgesics7%

Neuro/CNS6%

Derma6%

Gynaec5%

Chronic diseases

Diabetes Cardiovascular diseases Others

Type I

Type II

Coronary heart diseases

Rheumatic heart diseases

Congenital heart diseases

Stroke

Obesity

Some cancers

Depression

Liver diseases



Fig 7 – Probability of factors resulting in chronic diseases Factors Cardio-vascular diseases Diabetes Smoking High Low Obesity High High Sedentary lifestyle High High Unhealthy diet High High Stress High High Alcohol consumption Low Low High blood pressure Los Low

Source: Industry

The incidence of chronic diseases is rising alarmingly because of sedentary lifestyles and unhealthy eating habits in India. For pharmaceutical companies, chronic diseases provide a sustainable revenue stream and better operating margins than the acute categories. Apart from MNCs, Indian pharma companies such as Sun, Lupin, Torrent, Unichem and Ajanta obtain a significant portion of their sales from these segments. Further, companies like Indoco and Ipca are focusing largely on the chronic sub-segments to increase the proportion of revenue from these categories.

Lifestyle patterns in India are undergoing a sea change, leading to increased lifestyle-related issues such as obesity and stress, which in turn lead to cardiovascular disorders and diabetes. The anti-diabetic and cardiovascular markets are expected to grow at a significantly higher rate (+18%) than the average industry growth rate of ~14%.

Rising per-capita spend on pharmaceuticals

Per-capita expenditure on pharmaceutical products has more than doubled from $8 in CY08 to $19 in CY14, pushed up by increasing healthcare awareness, greater affordability and rising per-capita income in India. Industry estimates peg per-capita expenditure on drugs in India to increase to $27 by CY16.

Fig 8 – Mounting per-capita expenditure on pharmaceuticals


Chronic categories offer greater profitability

Lifestyle diseases imply sustainable sales and better profit margins than the acute segments. Further, drugs for lifestyle diseases are priced higher than those within the acute segments. The EBITDA margin of drugs for lifestyle disorders is 35-40%, against 15-20% in the acute segments. The major difference is in the gross margins; other cost items are relatively similar.

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Fig 9 – Margin comparison in the chronic and acute segments (%)

Acute

diseases Lifestyle diseases

Cost of goods sold 65-70 40-45

SG&A expenses 7-8 10-12

R&D 5-8 5-8

EBITDA 15-20 35-40




International business We believe that the international business would grow faster, as

in the past. Also, the companies have built the requisite infrastructure such as manufacturing plants with regulatory approvals, product pipelines and distribution networks.

The high growth would largely be driven by US generics (the largest growth opportunity); the EU and emerging markets would boost the growth momentum.

Exports growing faster

Expect a 16% revenue CAGR in exports

Industry data show exports of pharmaceutical products from India have registered a 19% CAGR over CY08-14 and are expected at a 16% CAGR over CY14-18. The growth would be powered largely by the US generics business on account of that country’s vast market. Also, patent expiries would drive exports from emerging markets, increase generics penetration and outsourcing opportunities. Over CY15-17, drugs worth ~$72bn are expected to go off-patent in the US, thus providing growth opportunities for generics players.

Fig 10 – Export-growth trend

Source: Industry data, Anand Rathi Research.

US generics, a vast opportunity

Industry reports pegged the US pharmaceutical market in CY14 at ~$368bn, with a 6% CAGR over CY14-17, aided by an ageing population, healthcare reforms and the focus on specialty drugs for complex ailments. In addition, the US was the top destination for pharma exports in FY14 with a 26.7% share of pharma exports from India, amounting to $4.02bn. The US generics market was ~$43.5bn in CY13, expected to see an 11% CAGR over CY13-18 according to industry reports. Generics growth would be largely driven by a huge number of patent expiries and increasing generics penetration.

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The US would remain a key growth driver for the international business

as it is the largest generics market and because of huge patent expiries



Fig 11 – Size of drugs going off-patent


Indian generics companies are set to harvest this opportunity considering the strong ANDA pipeline already in place, the focus on complex and differentiated product filings and the past successes in garnering a meaningful market share.

Fig 12 – Strong ANDA pipeline in place

Source: Company, Anand Rathi Research

The ANDA approval-process time has considerably lengthened in the past few years due to the huge backlog at the US FDA and increasing regulatory non-compliances. The average length for an ANDA approval has increased to more than four years now. However, with the introduction of GDUFA fees, the duration is expected to decline to 24-30 months. We believe that filing for differentiated products and complex generics would be the main growth and profitability driver in future due to less competition.

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chem

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Fig 13 – ANDA approval process

Source: Industry, Anand Rathi Research

APIs and CRAMS gaining traction

Low cost and high quality to drive the API business

The world API market is expected to see a 6.5% CAGR over CY14-20, to $186bn, driven by patent expiries, a rise in outsourcing and demand for potent and bio-generic APIs. Intense competition in the global API business has led to most APIs being out-sourced to India and China, considering the low cost of manufacturing there. This clearly provides Indian API manufacturers a significant opportunity for growth.

India stands a better chance, considering the quality norms followed, visible from its having the second-highest number of US FDA-approved plants outside the US. Due to keen competition in generic APIs, companies with larger capacities, process efficiencies and a strong DMF (drug master file) pipeline with niche products (Granules, Neuland and Aarti) would be able to effectively compete.

The World Health Organization states that cancer has now become the prime cause of morbidity and mortality globally, with a rising number of newly diagnosed cases and cancer-related deaths. Hence, oncology would be the fastest-growing category in the global API market. In addition, most of the oncology drugs contain highly-potent APIs, itself one of the fastest-growing sub-segments in APIs. Therefore, companies such as Natco and Dishman, which supply oncology APIs, would be better positioned to capture such an opportunity.

CRAMS business to grow well

The Indian CRAMS segment (valued at ~$9.3bn in CY14) is estimated to grow in the high teens (a 19-20% CAGR) over CY14-18, to $19bn, assisted by more outsourcing from developed countries in the West, the cost advantage and large capacities. Within CRAMS, we expect contract

APPLICANT

ANDA

ACCEPTABLE &

COMPLETE?

REFUSE-TO-FILE LETTER ISSUES

REQUEST FOR PLANTINSPECTION

CHEMISTRY / MICRO REVIEW LABELING REVIEW

BIO-EQUIVALENCEREVIEW

PRE- APPROVAL INSPECTION

RESULTS OK?

CHEMISTRY / MICROBIO

OK?

LABELING OK? BIO OK?

APPROVAL WITHHELD UNTIL RESULTS SATISFACTORY

APPROVED ANDA

NOT APPROVAL LETTER BIO-DEFICIENCY LETTER

Y Y Y Y

Y

N N N N

N



manufacturing services (CMS) to see a 19% CAGR and contract research services (CRS) a 20% CAGR. CMS, at ~60%, would be a large proportion of CRAMS. The present share of Indian manufacturers in the global CRAMS segment is ~5% and is expected to rise to 7-8%, driven by higher growth.

Fig 14 – Growth trend in contract manufacturing services


Fig 15 – Growth trend in contract research services


India is one of the world’s best low-cost manufacturing centres, with the second-highest number of US FDA-approved plants outside the US. In addition, patented drugs worth $72bn in the US going off-patent and supportive government policies have aided in creating brand-recognition for the Indian pharma sector across the world. This would boost the business prospects of Indian CRAMS companies.

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Valuation Premium valuations to sustain

Improved earnings visibility

The Indian pharmaceutical sector has been significantly re-rated in the past couple of years because of greater earnings assurance, consistently healthy growth, traction in the US product pipeline, strengthening balance sheets and a substantial rise in RoEs and RoCEs. We believe that the re-rated valuations would persist or may improve further as earnings assurance has improved, currency movements have been favourable for the sector and on our expectation of further improvements in balance sheets. The average PE (x) of the mid-cap pharma companies (our coverage universe) now stands at 24.1x FY16e and 20.4x FY17e earnings.

Fig 16 – Revenue and earnings growth expectations (FY15-18, CAGR %)


21.820.3

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AlembicAjanta

FortisGranules

IndocoIpca

NatcoSuven

TorrentUnichemVivimed

Aarti DrugsNeulandDishman

(%)

PAT CAGR (FY15-18) Revenue CAGR (FY15-18)

We expect a strong, 37% earnings CAGR over FY15-18, powered by

high revenue growth and substantially improved margins

Fig 17 – Expected RoE improvement for pharma mid-caps


Fig 18 – Expected RoCE improvement for pharma mid-caps


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Ajanta

Fortis

Granules

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Natco

Suven

Torrent

Unichem

Vivimed

Aarti Drugs

Neuland

Dishman

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RoE (FY18) RoE (FY15)

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(0.4)14.615.3

24.714.1

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Ipca

Natco

Suven

Torrent

Unichem

Vivimed

Aarti Drugs

Neuland

Dishman

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RoCE (FY18) RoCE (FY15)



Fig 19 – Computation of forward PE (x) of mid-cap pharma companies PAT (` m) PE (x)

Company M cap (` bn) FY16e FY17e FY18e FY16e FY17e FY18e

Aarti Drugs 15 835 1,096 1,410 17.9 13.6 10.6

Ajanta 132 3,921 5,143 6,241 33.6 25.6 21.1

Alembic 137 4,778 5,616 6,287 28.7 24.4 21.8

Dishman 28 1,675 2,276 2,837 16.5 12.1 9.7

Granules 33 1,299 1,741 2,318 28.0 20.9 15.7

Indoco 30 1,324 1,724 2,164 22.8 17.5 13.9

Ipca 91 3,217 4,744 5,850 28.4 19.3 15.6

Natco 82 2,394 4,060 4,428 36.2 21.3 19.6

Neuland 8 332 506 695 22.7 14.9 10.8

Suven 36 1,157 1,679 2,103 30.8 21.2 16.9

Torrent 258 14,208 12,470 14,373 18.2 20.7 18.0

Unichem 28 1,206 1,716 2,116 23.1 16.2 13.2

Vivimed 5 792 1,100 1,325 6.9 5.0 4.1

Total 882 37,139 43,871 52,146

Pharma mid-caps’ PE (x) 24.1 20.4 17.1

Source: Anand Rathi Research

Fig 20 – Premium/discount to target PE(x) from sector PE(x)

Company FY15-18e Revenue

CAGR (%)FY15-18e EPS

CAGR (%) RoE FY18e (%)Target PE /

EV/EBITDA (x) % Prem/(Disc) to Sector

PE (FY17e) Aarti drugs 18.2 22.2 28.6 14 (30)Ajanta 18.5 25.5 33.4 25 25 Alembic 20.9 30.5 32.7 22 10 Dishman 12.5 33.3 16.7 14 (30)Fortis 14.2 63.7 10.3 16 NA Granules 18.5 36.6 22.7 18 (10)Indoco 21.0 36.3 26.0 18 (10)IPCA 14.9 32.5 18.8 18 (10)Natco 31.5 55.1 22.9 20 -Neuland 21.2 63.3 25.9 16 (20)Suven 17.2 24.6 27.2 16 (20)Torrent 15.9 24.2 29.6 20 -Unichem 14.1 41.1 19.2 16 (20)Vivimed 13.0 22.5 16.7 8 (60)

Source: Company, Anand Rathi Research Note: *- for EV/EBITDA (x)

PE(x) re-rating for mid-cap companies in the past two years

The valuation of most mid-cap companies has increased substantially in the last two years because of:

Greater earnings assurance

Bridging the difference with large-cap companies’ valuations after the latters’ re-ratings

Continuous favourable currency movements

Strengthening balance sheets with free-cash-flow generation.



Fig 21 – Movement of mid-cap pharma companies’ forward PE (x) in the past two years Aarti Drugs

Ajanta

Alembic

Dishman Granules Indoco

IPCA Natco Neuland

Source: Bloomberg, Anand Rathi Research

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Fig 21 – Movement of mid-cap pharma companies’ forward PE (x) in the past two years (contd.) Suven

Torrent

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Vivimed


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Company Section




Key financials (YE Mar) FY14 FY15 FY16e FY17e FY18e

Sales (` m) 9,717 10,969 12,571 15,112 18,113

Net profit (` m) 611 773 835 1,096 1,410

EPS (`) 25.2 31.9 34.5 45.2 58.2

Growth (%) 34.1 26.5 8.1 31.2 28.7

PE (x) 24.4 19.3 17.9 13.6 10.6

PBV (x) 3.0 4.8 4.1 3.4 2.8

RoE (%) 26.6 27.6 24.8 27.1 28.6

RoCE (%) 15.1 15.0 14.8 16.1 17.2

Dividend yield (%) 2.2 1.4 1.5 1.9 2.5

Net debt/equity (x) 1.3 1.3 1.2 1.1 1.0


Healthcare

Initiating CoverageIndia I Equities

13 October 2015

Aarti Drugs

High growth-momentum visibility; initiating, with a Buy

We initiate coverage on Aarti Drugs, with a Buy rating and a target price of `815, based on 14x FY18e earnings. We believe that the company is poised to accelerate its growth momentum over the next two years, driven by product launches, expanded capacity and market-share gains in existing products. We expect a strong, 22.2%, PAT CAGR over FY15-18, powered by steady revenue growth (high-teens) and an expansion of 85bps in the EBITDA margin.

API business, the key growth driver. APIs bring 85% to the company’s revenue and we expect this business to register a 17.3% CAGR over FY15-18 through market-share gains in existing products (metformin, metronidazole, fluoroquinolones, etc), the recently-added capacity and the launch of products. Segment-wise, anti-diabetics, antibiotics and anti-protozoals would drive most of the growth; together they contribute ~74% of API sales.

Formulations to pick up. The company now generates ~7% of revenue from formulations, that too, primarily from contract manufacturing. In order to boost this business, it recently acquired Pinnacle Life Sciences (with a formulations plant). We expect this business to register a 35% revenue CAGR over FY15-18, thereby bringing ~11% to revenue by FY18.

Better financials. We expect a strong 18.2% CAGR in revenue over FY15-18, with an expansion of 85bps in the EBITDA margin, aided by a better product-mix. This would lead to strong, 22.2%, profit CAGR, which would help strengthen the balance sheet by reducing leverage to 1x by FY18 (from 1.3x net debt-equity now) and by the better interest-coverage ratio, to 4.5x by FY18 (from 3.5x now).

Valuation. The stock trades at 13.6x FY17e and 10.6x FY18e earnings. We value it at `815, based on 14x FY18e earnings, in line with peer API companies. Risks: Delay in the ramp-up of the recently-added capacity and more-than-expected competition in generic APIs.

Rating: Buy Target Price: `815 Share Price: `616

Relative price performance

Source: Bloomberg

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Key data ARTD IN IN / ADRG.BO52-week high / low `874 / `334Sensex / Nifty 27080 / 81903-m average volume $0.6m Market cap `14.9bn / $228mShares outstanding 24.2m

Shareholding pattern (%) Jun ’15 Mar ’15 Dec’14

Promoters 60.0 60.1 60.6 - of which, Pledged - - -Free Float 40.0 39.9 39.4 - Foreign Institutions 0.2 0.3 0.3 - Domestic Institutions 2.1 1.8 0.1 - Public 37.8 37.8 39.1

13 October 2015 Aarti Drugs - High growth-momentum visibility; initiating, with a Buy


Quick Glance – Financials and ValuationsFig 1 – Income statement (` m) Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Net revenues 9,717 10,969 12,571 15,112 18,113Revenue growth (%) 17.7 12.9 14.6 20.2 19.9- Oper. expenses 8,254 9,279 10,623 12,694 15,170EBIDTA 1,464 1,690 1,949 2,418 2,943EBITDA margins (%) 15.1 15.4 15.5 16.0 16.3- Interest 335 389 443 506 551- Depreciation 281 310 368 418 468+ Other income 0 6 6 6 6- Tax 240 225 309 405 521Effective tax rate (%) 28.0 22.5 27.0 27.0 27.0+ Associates/(minorities) - - - - -Adjusted PAT 611 773 835 1,096 1,410+ Extraordinary items 7 - - - -Reported PAT 617 773 835 1,096 1,410Adj. FDEPS (`/sh) 25.2 31.9 34.5 45.2 58.2Adj. FDEPS growth (%) 34.1 26.5 8.1 31.2 28.7Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (` m) Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Adjusted PAT 611 773 835 1,096 1,410+ Non-cash items 316 350 368 418 468Cash profit 927 1,123 1,203 1,513 1,878- Incr./(decr.) in WC 153 520 396 610 729Operating cash-flow 774 602 807 903 1,148- Capex 978 1,118 1,000 1,000 1,000Free-cash-flow (205) (516) (193) (97) 148- Dividend 184 233 251 329 423+ Equity raised - 121 - - -+ Debt raised 466 737 550 700 200- Investments (5) 0 - - -- Misc. items 67 117 - - -Net cash-flow 15 (8) 106 274 (75)+ Op. cash & bank bal. 29 44 36 142 416Cl. Cash & bank bal. 44 36 142 416 341Source: Company, Anand Rathi Research

Fig 5 – PE band


Fig 2 – Balance sheet (` m) Year-end: Mar FY14 FY15 FY16e FY17e FY18e

Share capital 121 242 242 242 242Reserves & surplus 2,388 2,839 3,424 4,190 5,177Net worth 2,509 3,082 3,666 4,432 5,419Total debt 3,422 4,159 4,709 5,409 5,609Minority interest - - - - -Def. tax liab. (net) 310 350 350 350 350Capital employed 6,242 7,591 8,725 10,192 11,378Net fixed assets 3,808 4,645 5,278 5,860 6,392Intangible assets - - - - -Investments 46 46 46 46 46- of which, Liquid - - - - -Working capital 2,343 2,863 3,259 3,869 4,598Cash 44 36 142 416 341Capital deployed 6,242 7,591 8,725 10,192 11,378Working capital (days) 88 95 95 93 93Book value (`/sh) 207.2 127.2 151.4 183.0 223.8Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `616 Year-end: Mar FY14 FY15 FY16e FY17e FY18e

P/E (x) 24.4 19.3 17.9 13.6 10.6Cash P/E (x) 16.7 13.8 12.4 9.9 7.9EV/EBITDA (x) 12.5 11.3 10.0 8.2 6.9EV/sales (x) 1.9 1.7 1.5 1.3 1.1P/B (x) 3.0 4.8 4.1 3.4 2.8RoE (%) 26.6 27.6 24.8 27.1 28.6RoCE (%) 15.1 15.0 14.8 16.1 17.2Dividend yield (%) 2.2 1.4 1.5 1.9 2.5Dividend payout (%) 0.7 0.8 0.8 0.7 0.6Net debt/equity (x) 1.3 1.3 1.2 1.1 1.0Interest coverage (x) 3.5 3.5 3.6 4.0 4.5Debtor (days) 104 105 105 105 105Inventory (days) 48 55 55 54 54Payables (days) 56 55 55 55 54Fixed Asset T/O (x) 2.8 2.6 2.5 2.7 3.0Source: Company, Anand Rathi Research

Fig 6 – FY16e revenue break-up


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(`)

APIs84%

Intermediates2%

Others1%

Formulation10%

Speciality Chemicals

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API business, the prime growth driver Aarti Drugs is a high-quality API supplier to formulations

companies, domestically and internationally.

APIs constitute 85% of its revenue and we expect this business to record a 17.3% CAGR over FY15-18.

Growth would be driven by market-share gains in existing products (metformin, metronidazole, fluoroquinolones, etc), the recently-added capacity and the launch of products.

Business model

Because of its high-quality API supplies to formulations companies in domestic and overseas markets, Aarti leads the market in most of its top-10 products, enabling economies of scale. Its domestic clients comprise all major formulations companies: Cipla, Dr Reddy's, Cadila, Ranbaxy, Glaxo, Alembic, etc. It exports to more than 97 countries (exports constitute 35% of its revenue).

Well-established API player

A high degree of processing efficiency, a high standard of quality and large capacity have given it a good brand name in antibiotics, anti-diabetics, antifungals, anti-diarrhoeals, anti-inflammatories and anti-hypertensive therapeutic segments. The company has incurred capital expenditure to construct facilities for three antibiotic products (fluoroquinolones) and intermediates, and doubled the capacity of one of its major anti-protozoal products. Both these projects would be commercially operational by Q3 FY16.

Properly diversified product profile

Of Aarti’s API sales, 74% comes from anti-diabetics, antibiotics and antiprotozoals; the balance from anti-inflammatories, anti-fungals, cardio, etc. Of its products, the most revenue comes from ciprofloxacin (18%). The top-10 products together account for 60% of revenue. In all these products, the company leads in production, domestically and globally. The huge scale of operations, along with high market shares in each of these products, give the company an impressive EBITDA margin of around 15% despite being a mere API operator.

Fig 7 – Segment-wise revenue mix in APIs (FY15)

Source: Company

Fig 8 – Geographical revenue mix (FY15)

Source: Company

Antibiotic47%

Antiprotozoals23%

Antiinflammatory12%

Antifungal8%

Antidiabetic4%

Cardiprotectant3%

Others3%

India65%

Latin America12%

Asia11%

Europe8%

Africa3%

North America1%



Fig 9 – Product Profile Therapeutic Segment APIs Anti-inflammatories Aceclofenac, Diclofenac Sodium, Diclofenac Potassium, Diclofenac

Diethylamine, Diclofenac Resinate, Diclofenac Epolamine, Nimesulide, Celecoxib

Cardio-protectants Clopidogrel Bisulphate, Ticlopidine HCL, Telmisartan Anti-diarrhoeals / anti-protozoals Metronidazole, Metronidazole Benzoate, Ornidazole, Secnidazole,

Tinidazole, Diloxanide Furoate Anti-fungals Ketoconazole, Tolnaftate Anti-arthritis/ osteoporosis Raloxifene HCL Antibiotics Ciprofloxacin HCL, Enrofloxacin base, Ofloxacin, Levofloxacin Anti-diabetics Metformin HCL, Pioglitazone HCL Alzheimer’s treatment Rivastigmine Hydrogen Tartrate Anti-BPH Tamsulosin HCL Sedatives Zolpidem Tartrate Vitamins Niacin Source: Company

Fig 10 – Products being developed Therapeutic Segment Products Alcoholism treatment Acamprosate Anti-coagulants Dabigatran Anti-hyperphosphatemia Sevelamer Anti-cholesterols Colsevelam Cardiovasculars Drondarone Cardiovasculars Olmesartan Cardio-protectants Valasartan Anti-diabetics Sitagliptin

Source: Company

Fig 11 – Products in the pipeline for future development Therapeutic segment Products Anti-inflammatories Mesalamine / Mesalazine Anti-inflammatories Loxoprofen Sodium Cardiovasculars Dronedarone Cardiovasculars Olmesartan Anti-coagulants Dabigatran Anti-depressants Duloxetine Anti-diabetics Sitagliptin Anti-cholesterols Colesevelam Anti-hyperphosphatemia Sevelamer

Source: Company

Diversified clientele

Aarti’s top-10 local clients contribute just 28% of its domestic revenues and the top-10 export clients contribute only 24.8% of export sales. Therefore, none of the customers contribute a significant portion of revenue, indicating a diversified customer base. There is no concentration risk.

Fig 12 – Key local clients Client % Contribution to domestic revenue J.B. Chemicals & Pharmaceuticals 4.48 Cipla 4.43 Alkem Laboratories 3.66 Abbot Healthcare 3.33 Zydus Healthcare 2.43 Hetero Labs 2.28 Zoetis India (Pfizer) 2.12 Micro Labs 1.89 Acme Formulation 1.60 Medley Pharmaceuticals 1.57




The company has a diversified clientele: Cipla, J.B. Chemicals and Abbot are some of its major clients, contributing around 4% each to revenues. Others are MNCs: Abbott, Sanofi-Aventis, Merck, Teva, Searle, Pfizer, Bayer and Clariant.

API to see a 17.3% revenue CAGR over FY15-18

We expect the API business to register a 17.3% revenue CAGR over FY15-18, driven by market-share gains in existing products (metformin, metronidazole, fluoroquinolones, etc), the recently-added capacity and the launch of products. Segment-wise, anti-diabetics, antibiotics and antiprotozoals, which together bring in ~74% of API sales, would drive most of the growth.

Fig 13 – API growth momentum


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Formulations to pick up Formulations currently contribute 7% of revenue, mainly from

contract manufacturing.

From formulations, we estimate a 35% revenue CAGR over FY15-18 to `2bn. Formulations would then (by FY18) make up ~11% of revenue. The company’s recently-acquired Pinnacle Life Sciences (together with a formulations plant) would boost this business.

Business currently at a nascent stage

The formulations business currently contributes very little revenue (~7%) to Aarti (consolidated), and such revenue has been flattish in the past three years due to lack of focus and capacity constraints. It has come down from 10% three years ago. Aarti has largely been conducting contract manufacturing of formulations for generics customers. In the absence of adequate capacity, this was difficult to scale up, and margins were lower because it had only a contract-manufacturing business.

Fig 14 – Flattish revenue in the past few years from the formulations business

Source: Company

Acquisition to boost the formulations business

Aarti recently acquired a small company (Pinnacle Life Sciences) for an insignificant amount along with a manufacturing unit. Prior to the acquisition, Aarti was largely engaged in contract manufacturing of formulations, which command very low margins. However, with this acquisition, it would be able to make formulations in-house in large quantities. This would boost revenue from the formulations business and offer better margins. We expect revenue from the formulations business to pick up from FY16 and to register a 35% CAGR over FY15-18 to `2bn.

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Fig 15 – Formulations-business revenue to rise


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Financials We expect Aarti Drugs to register an 18.2% revenue CAGR over

FY15-18, fuelled by healthy growth in its API business and a scaling up of its formulations business. Within API, anti-diabetics, antibiotics and anti-protozoals would drive most of the growth.

We estimate its adjusted PAT to record a strong 22.2% CAGR, driven by strong revenue growth and better margins over FY15-18.

Its balance sheet would also be strengthened by reducing leverage to 1x by FY18, from 1.3x debt-equity now, in our view.

18.2% revenue CAGR over FY15-18

Strong growth across segments (driven by the recently-added capacity and the launch of new products) lead us to estimate an 18.2% CAGR in consolidated revenue over FY15-18, to `18.1bn. This growth would be fuelled by a 17% CAGR in API revenue, 35% in formulations, 15% in intermediates and 10% in specialty chemicals.

Fig 16 – Revenue growth trend


Fig 17 – Revenue break-up (`m) FY14 FY15 FY16e FY17e FY18e

APIs 8,185 9,325 10,444 12,533 15,040 % of sales 84.4 85.2 83.3 83.1 83.2 yoy % 23.8 13.9 12.0 20.0 20.0 Formulation 731 807 1,211 1,574 1,967 % of sales 7.5 7.4 9.7 10.4 10.9 yoy % (14.3) 10.3 50.0 30.0 25.0 Specialty chemicals 353 358 394 433 476 % of sales 3.6 3.3 3.1 2.9 2.6 yoy % 23.4 1.4 10.0 10.0 10.0 Intermediates 135 272 313 360 414 % of sales 1.4 2.5 2.5 2.4 2.3 yoy % (35.6) 102.1 15.0 15.0 15.0 Others 295 181 181 181 181 % of sales 3.0 1.6 1.4 1.2 1.0 yoy % 3.3 (38.8) - - -Total 9,699 10,943 12,542 15,081 18,078


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EBITDA margin to be steady

We expect the EBITDA margin to be steady, in the range of 15.5% to 16.5% over FY15-18, with an 85-bp improvement over the same period; in absolute terms we expect EBITDA to register a 20.3% CAGR over FY15-18, led by the better product mix and greater capacity utilisation.

Fig 18 – EBITDA and EBITDA margin trend


22.2% adjusted-net-profit CAGR

We expect a 22.2% CAGR in adjusted net profit over FY15-18, to `1.4bn, led by strong revenue growth and better EBITDA margins. The net profit margin is likely to improve 75bps over FY15-18, to 7.8%, fuelled by strong profit growth.

Fig 19 – Strong PAT growth


Improving return ratios

Considering the strong net-profit growth and stable margins in the next three years, we estimate the RoE and RoCE in FY18 to improve to 28.6% and 17.2%, respectively, from the current 27.6% and 15%.

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Fig 20 – Improving return ratios


Strengthening balance sheet

We expect Aarti’s balance sheet to be strengthened by shrunken leverage, to 1x by FY18, from the present 1.3x debt-equity, driven by strong bottom-line growth. We expect the interest-coverage ratio to improve to 4.5x in FY18, from 3.5x now.

Fig 21 – Leverage position


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Fig 22 – Income statement (` m) Y/E March FY14 FY15 FY16e FY17e FY18e

Revenues 9,717 10,969 12,571 15,112 18,113 Growth in revenues (%) 17.7 12.9 14.6 20.2 19.9 Raw materials 6,625 7,499 8,517 10,163 12,090 % of sales 68.2 68.4 67.8 67.3 66.8 Personnel expenses 324 379 471 604 770 % of sales 3.3 3.5 3.8 4.0 4.3 Selling and other expenses 1,305 1,401 1,634 1,927 2,309 % of sales 13.4 12.8 13.0 12.8 12.8 EBITDA 1,464 1,690 1,949 2,418 2,943 EBITDA margin (%) 15.1 15.4 15.5 16.0 16.3 Depreciation 281 310 368 418 468 PBIT 1,182 1,380 1,581 2,000 2,476 Interest expenses 335 389 443 506 551 PBIT from operations 847 991 1,138 1,494 1,925 Other non-operating income 0 6 6 6 6 PBT before extraordinary items 848 997 1,144 1,501 1,931 Extraordinary income / (expenses) 9 - - - - PBT 857 997 1,144 1,501 1,931 Provision for tax 240 225 309 405 521 Effective tax rate (%) 28.0 22.5 27.0 27.0 27.0 PAT 617 773 835 1,096 1,410 Minority Interest - - - - - PAT after minority interest 617 773 835 1,096 1,410 Adjusted PAT 611 773 835 1,096 1,410 Growth in PAT (%) 34.1 26.5 8.1 31.2 28.7 PAT margin (%) 6.3 7.0 6.6 7.3 7.8


Fig 23 – Balance sheet (` m) Y/E March FY14 FY15 FY16e FY17e FY18e

Equity share capital 121 242 242 242 242Reserves 2,388 2,839 3,424 4,190 5,177Shareholders' fund 2,509 3,082 3,666 4,432 5,419Minority interest - - - - -Debt 3,422 4,159 4,709 5,409 5,609Deferred tax liability 310 350 350 350 350Capital employed 6,242 7,591 8,725 10,192 11,378 Gross block 5,811 6,852 7,852 8,852 9,852Accumulated depreciation 2,086 2,367 2,735 3,153 3,620Net block 3,725 4,485 5,117 5,699 6,232Capital WIP 83 161 161 161 161Total fixed assets 3,808 4,645 5,278 5,860 6,392Investments 46 46 46 46 46Inventories 1,267 1,642 1,880 2,246 2,684Debtors 2,765 3,143 3,602 4,330 5,190Cash and bank balances 44 36 142 416 341Loans and advances 292 249 285 343 411Other current assets 274 258 258 258 258Total current assets 4,643 5,328 6,167 7,594 8,885Current liabilities and provisions 2,256 2,429 2,766 3,309 3,946Net current assets 2,387 2,899 3,401 4,285 4,939Misc. expenditure - - - - -Total assets 6,242 7,591 8,725 10,192 11,378




Fig 24 – Cash-flow statement (` m) Y/E March FY14 FY15 FY16e FY17e FY18e Cash flow from operating activities Profit before tax 857 997 1,144 1,501 1,931Depreciation 281 310 368 418 468Interest expenses 335 389 443 506 551Operating profit before working capital change 1,473 1,697 1,955 2,424 2,950Working capital adjustment (153) (520) (396) (610) (729)Gross cash generated from operations 1,320 1,176 1,559 1,814 2,221Direct taxes paid (205) (185) (309) (405) (521)Cash generated from operations 1,115 992 1,250 1,409 1,699 Cash flow from investing activities Capex (978) (1,118) (1,000) (1,000) (1,000)Investment 5 (0) - - -Cash generated from investment activities (973) (1,118) (1,000) (1,000) (1,000) Cash flow from financing activities Proceeds from share capital and premium - 121 - - -Borrowings/ (repayments) 466 737 550 700 200Interest paid (335) (389) (443) (506) (551)Dividend paid (184) (233) (251) (329) (423)Cash generated from financing activities (54) 236 (144) (135) (774)Other / misc (73) (117) - - -Net cash increase/ (decrease) 15 (8) 106 274 (75)

Source: Company, Anand Rathi research

Fig 24 – Ratio analysis @ `616 Y/E March FY14 FY15 FY16e FY17e FY18e Margin ratios (%) EBITDA margin 15.1 15.4 15.5 16.0 16.3PBIT margin 12.2 12.6 12.6 13.2 13.7PBT margin 8.8 9.1 9.1 9.9 10.7PAT margin 6.3 7.0 6.6 7.3 7.8Growth ratios (%) Revenues 17.7 12.9 14.6 20.2 19.9EBITDA 21.6 15.5 15.3 24.1 21.7Net profit 34.1 26.5 8.1 31.2 28.7Return ratios (%) RoCE 15.1 15.0 14.8 16.1 17.2RoIC 13.7 14.2 13.5 15.0 16.4RoE 26.6 27.6 24.8 27.1 28.6Turnover ratios (x) Asset turnover ratio (x) 2.8 2.6 2.5 2.7 3.0Working capital cycle (days) 95 104 104 104 105Average collection period (days) 104 105 105 105 105Average payment period (days) 56 55 55 55 54Inventory holding (days) 48 55 55 54 54Per share (`) EPS 25.2 31.9 34.5 45.2 58.2CEPS 73.6 44.7 49.7 62.5 77.5Book value 207.2 127.2 151.4 183.0 223.8Solvency ratios (x) Debt/ equity 1.3 1.3 1.2 1.1 1.0Interest coverage 3.5 3.5 3.6 4.0 4.5Net Debt/ EBITDA 2.3 2.4 2.3 2.1 1.8Valuation parameters (x) P/E 24.4 19.3 17.9 13.6 10.6P/BV 3.0 4.8 4.1 3.4 2.8EV/ EBITDA 12.5 11.3 10.0 8.2 6.9EV/ Sales 1.9 1.7 1.5 1.3 1.1M-Cap/ Sales 1.5 1.4 1.2 1.0 0.8




Valuations Considering Aarti’s continuing strong growth momentum (a 22% PAT CAGR over FY15-18, a sturdy business model [an established API operator]), and improving RoEs and RoCEs, we are sanguine about its mid- to long-term prospects. We believe that it is poised to accelerate its growth momentum over the next two years, driven by product launches, expanded capacity and market-share gains in existing products.

The stock has experienced significant valuation re-rating in the recent past as the company has been consistently delivering strong growth along with margin expansion. Further, its formulations business is expected to scale up from FY16, fuelled by the recent acquisition, adding to the growth momentum, in our view.

At present, the stock trades at 13.6x FY17e and 10.6x FY18e earnings. We initiate coverage on Aarti Drugs, with a price target of `815 based on 14x FY18e earnings. Our target PE multiple is in line with the valuations of peer pharmaceutical companies, considering our expectations of the high-growth momentum, strong balance sheet, free-cash-flows and healthy return ratios.

Fig 25 – One-year-forward mean PE and standard deviation


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Company Background & Management Company Overview

Established in 1984, Aarti Drugs manufactures APIs, pharma intermediates and specialty chemicals. It has a comprehensive product range, and is strong in therapeutic groups such as antibiotics, anti-protozoals, anti-inflammatories, anti-fungals, anti-diabetics, cardio-protectants, vitamins, anti-arthritis and sedatives.

It markets its products in more than 94 countries, with strong operations in regulated markets, including Brazil, Mexico, the Netherlands and Spain, and has a strong clientele, including MNCs such as Abbott, Sanofi-Aventis, Merck, Teva, Searle, Pfizer, Bayer and Clariant.

It has ten multi-ton, multi-location GMP-compliant plants. Eight are located in industrial MIDCs at Tarapur, Maharashtra, and two at the industrial GIDC at Sarigam, Gujarat.

Fig 26 – Key management personnel Name Position Profile

Mr Prakash M. Patil Chairman, MD & CEO Founder director, bachelor of chemical engineering; excelsin an array of promotional activities: product identification,project conceptualisation, planning, project engineering & implementation

Mr Harshit M. Savla Joint MD Commerce graduate, Mumbai University; excels in all areas of finance, accounts, exports\ & Internal control

Mr Harit P. Shah Whole-time director Commerce graduate, Mumbai University; over 25 years’experience in handling commercial functions encompassing sales, purchases & exports

Mr Rajendra V. Gogri Non-executive director Chemical engineer from UDCT, master of science(chemical engineering) from Iowa State University, USA;founder director of Aarti Industries

Mr Rashesh C. Gogri Whole-time director Production engineer, Mumbai University; over 16 years’ experience in production, marketing and projectimplementation

Source: Company


HealthcareCompany UpdateIndia I Equities


Sales (` m) 12,083 14,806 17,489 21,003 24,651

Net profit (` m) 2,339 3,156 3,921 5,143 6,241

EPS (`) 26.5 35.7 44.4 58.2 70.6

Growth (%) 108.6 34.9 24.2 31.1 21.4

PE (x) 56.3 41.7 33.6 25.6 21.1

PBV (x) 22.2 15.7 11.2 8.2 6.2

RoE (%) 47.4 44.0 39.0 37.0 33.4

RoCE (%) 40.6 44.9 42.0 39.7 36.7

Dividend yield (%) 0.3 0.4 0.4 0.6 0.7

Net debt/equity (x) 0.0 (0.1) (0.3) (0.5) (0.5)




`

Rating: Buy Target Price: `1,765 Share Price: `1,490


Source: Bloomberg

AJP

Sensex500

700

900

1,100

1,300

1,500

1,700

1,900

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data AJP IN / AJPH.BO52-week high / low `1,720 / `653Sensex / Nifty 27080 / 81903-m average volume $5.0m Market cap `132bn / $2.01bnShares outstanding 88.4m

Shareholding pattern (%) Jun ’15 Mar ’15 Dec ’14

Promoters 73.8 73.8 73.8 - of which, Pledged 1.1 1.2 3.2 Free Float 26.2 26.2 26.2 - Foreign Institutions 8.6 7.6 7.3 - Domestic Institutions 1.4 1.6 1.5 - Public 16.3 17.0 17.4

Change in Estimates Target Reco

13 October 2015

Ajanta Pharma

Scaling up exports to drive growth; Buy

We expect Ajanta’s strong revenue and profit growth to continue, driven by its focus on fast-growing therapeutic segments domestically and the scaling-up of its brand-named generics in emerging markets. We maintain our Buy call, with a revised target price of `1,765.

Focus on domestic formulations. We expect growth to be driven by the management’s focus on high-growth therapies such as dermatology, cardiology and ophthalmology. These are growing faster than the pharma sector domestically. Also, in order to boost its growth momentum, the company is building a platform in a new disease category: pain management, specifically musculo-skeletals. Management intends to launch 4-5 products every quarter. We expect Ajanta to register a 20% revenue CAGR over FY15-18.

Scaling up on the export front. As huge opportunities open up in the next few years because of patent expiries of block-buster products, the company has begun focusing on the US and European markets for further growth. By Jan’16, management expects to launch three products, which have recently received ANDA approval. Africa and Asia are the most-focused-on regions for Ajanta and it has moved out of Latin America because of currency devaluations and payment terms.

Strong ANDA filing rate continues. Ajanta has 25 ANDA filings (expected market size: $1.5bn), including five approved products. Of these, one has been commercialised through a marketing tie-up with Breckenridge Pharmaceuticals. Management plans to launch four products shortly and to file six ANDAs every year.

Valuation. We roll forward our target price to FY18, with a revised target of `1,765 (earlier `1,454) based on 25x FY18e EPS. Risks: Currency fluctuations and delay in regulatory approvals.

13 October 2015 Ajanta Pharma – Scaling up exports to drive growth; Buy



Net revenues 12,083 14,806 17,489 21,003 24,651Revenue growth (%) 29.8 22.5 18.1 20.1 17.4- Oper. expenses 8,396 9,753 11,718 13,862 16,147EBIDTA 3,688 5,052 5,771 7,141 8,505EBITDA margins (%) 30.5 34.1 33.0 34.0 34.5- Interest 87 59 35 35 35- Depreciation 439 516 456 549 613+ Other income 137 168 322 460 578- Tax 960 1,462 1,680 1,873 2,193Effective tax rate (%) 29.1 32.0 30.0 26.7 26.0+ Associates/(Minorities) - - - - -Adjusted PAT 2,339 3,156 3,921 5,143 6,241+ Extraordinary items - (57) - - -Reported PAT 2,339 3,099 3,921 5,143 6,241Adj. FDEPS (`/sh) 26.5 35.7 44.4 58.2 70.6Adj. FDEPS growth (%) 108.6 34.9 24.2 31.1 21.4Source: Company, Anand Rathi Research


Adjusted PAT 2,339 3,156 3,921 5,143 6,241+ Non-cash items 432 444 456 549 613Cash profit 2,771 3,600 4,378 5,692 6,854- Incr./(decr.) in WC 311 283 463 585 610Operating cash-flow 2,460 3,317 3,914 5,107 6,244- Capex 1,318 1,370 298 1,000 1,000Free cash-flow 1,142 1,947 3,616 4,107 5,244- Dividend 412 554 617 810 983+ Equity raised - 0 - - -+ Debt raised (117) (617) 191 (191) 191- Investments 550 (40) 0 0 0- Misc. items (78) 52 - - -Net cash-flow 142 764 3,189 3,107 4,452+ Op. cash & bank bal. 462 604 1,368 4,557 7,664Cl. Cash & bank bal. 604 1,368 4,557 7,664 12,116Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 177 177 177 177 177Reserves & surplus 5,756 8,234 11,538 15,871 21,130Net worth 5,933 8,411 11,715 16,048 21,306Total debt 1,305 724 702 512 702Minority interest - - - - -Def. tax liab. (net) 230 152 152 152 152Capital employed 7,468 9,286 12,568 16,711 22,160Net fixed assets 3,704 4,540 4,381 4,832 5,219Intangible assets 26 43 43 43 43Investments 635 595 595 595 595- of which, Liquid 550 195 195 195 195Working capital 2,500 2,741 2,992 3,577 4,187Cash 604 1,368 4,557 7,664 12,116Capital deployed 7,468 9,286 12,568 16,711 22,160Working capital (days) 70 76 76 76 76Book value (`/sh) 67.2 95.1 132.5 181.5 241.0Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `1,490 Year-end: Mar FY14 FY15 FY16e FY17e FY18e

P/E (x) 56.3 41.7 33.6 25.6 21.1Cash P/E (x) 47.4 35.9 30.1 23.1 19.2EV/EBITDA (x) 35.8 25.9 22.1 17.4 14.1EV/sales (x) 10.9 8.8 7.3 5.9 4.9P/B (x) 22.2 15.7 11.2 8.2 6.2RoE (%) 47.4 44.0 39.0 37.0 33.4RoCE (%) 40.6 44.9 42.0 39.7 36.7Dividend yield (%) 0.3 0.4 0.4 0.6 0.7Dividend payout (%) 15.0 16.7 15.0 15.0 15.0Net debt/equity (x) 0.0 (0.1) (0.3) (0.5) (0.5)Interest coverage (x) 37.2 76.6 150.1 186.1 222.9Debtor (days) 61 64 64 64 64Inventory (days) 47 39 40 39 39Payables (days) 38 27 27 27 27Fixed asset T/O (x) 3.7 3.6 3.9 4.5 4.9Source: Company, Anand Rathi Research

Fig 6 – Revenue break-up (FY16e)

Source: Company

10x

25x

35x

Ajanta

0

300

600

900

1,200

1,500

1,800

Sep-

07

Mar

-08

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08

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-09

Sep-

09

Mar

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10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

(`)US & EU

0.6%

Africa34.5%

India34.1%

Asia30.0%

Latam0.8%




Sales (` m) 18,632 20,561 29,595 32,498 36,311

Net profit (` m) 2,355 2,829 4,778 5,616 6,287

EPS (`) 12.5 15.0 25.3 29.8 33.4

Growth (%) 42.5 20.2 68.9 17.5 11.9

PE (x) 58.3 48.5 28.7 24.4 21.8

PBV (x) 20.3 15.5 11.0 8.2 6.3

RoE (%) 40.0 36.3 44.7 38.3 32.7

RoCE (%) 31.9 28.4 34.3 32.2 29.9

Dividend yield (%) 0.4 0.4 0.7 0.8 0.9

Net debt/equity (x) 0.1 0.3 0.1 (0.1) (0.2)




`

Rating: Sell Target Price: `734 Share Price: `728


Source: Bloomberg

ALPM

Sensex

300

400

500

600

700

800

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data ALPM IN / ALEM.BO52-week high / low `792/ `381Sensex / Nifty 27080 / 81903-m average volume $2.3m Market cap `137bn / $2.08bnShares outstanding 188.5m




13 October 2014

Alembic Pharmaceuticals

Strong US pipeline, but expensively valued; Sell

We believe that momentum would continue in Alembic’s US generics, driven by product approvals and restricted competition in generic Abilify in FY16. This would also continue in brand-named formulations domestically, powered by the specialty (chronic) categories. Current valuations, however, have already been factored in, we believe. Hence we maintain our Sell call, with a revised target price of `734.

Domestic brand-named business. Alembic Pharma has successfully transformed its domestic brand-named business (45% of sales) to the fast-growing specialty segments, which now bring in 63% of domestic branded formulations revenue (42% in FY11). This would help quicken the growth momentum and we expect a 15.8% revenue CAGR over FY15-18 in this segment, driven by the greater share from the specialty segments.

US generics to gain momentum. We believe that traction would continue in US generics, driven by product approvals and restricted competition in generic Abilify in FY16. The company’s cumulative ANDA filings numbered 68, of which 43 have been approved (incl. five tentatively), with 25 pending approval. The company expects to file 8-10 ANDAs yearly, two approvals every quarter and 6-8 product launches annually (two para-IVs).

Strong financials. We expect Alembic to register 21% revenue and 30.5% PAT CAGRs over FY15-18. Strong profitability growth would result in a high RoE and RoCE in FY18 at, respectively, 32.7% and 30%. The balance sheet would be net cash by FY18.

Valuation. The stock trades at expensive valuations of 24.4x FY17e and 21.8x FY18e earnings. The recent run-up in the price, capturing the potential from the Abilify launch in the US, has turned valuations expensive. Hence, we recommend a Sell, with a revised target of `734 (earlier `655) based on 22x FY18e earnings. Risks. Currency fluctuations and regulatory hurdles.

13 October 2015 Alembic Pharmaceuticals - Strong US pipeline, but expensively valued; Sell



Net revenues 18,632 20,561 29,595 32,498 36,311Revenue growth (%) 22.6 10.4 43.9 9.8 11.7- Oper. expenses 15,055 16,532 23,194 25,092 28,058EBIDTA 3,577 4,030 6,400 7,406 8,252EBITDA margins (%) 19.2 19.6 21.6 22.8 22.7- Interest 98 18 46 34 24- Depreciation 405 444 468 542 598+ Other income 32 23 86 190 228- Tax 751 764 1,194 1,404 1,572Effective tax rate (%) 24.2 21.3 20.0 20.0 20.0+ Associates/(Minorities) - (2) - - -Adjusted PAT 2,355 2,829 4,778 5,616 6,287+ Extraordinary items - - - - -Reported PAT 2,355 2,829 4,778 5,616 6,287Adj. FDEPS (`/sh) 12.5 15.0 25.3 29.8 33.4Adj. FDEPS growth (%) 42.5 20.2 68.9 17.5 11.9Source: Company, Anand Rathi Research


Adjusted PAT 2,355 2,829 4,778 5,616 6,287 + Non-cash items 472 518 468 542 598 Cash profit 2,826 3,347 5,246 6,158 6,885 - Incr./(decr.) in WC 551 1,567 1,412 520 704 Operating cash-flow 2,276 1,781 3,834 5,638 6,181 - Capex 816 2,215 2,200 750 1,500 Free cash-flow 1,459 (434) 1,634 4,888 4,681 - Dividend 681 659 1,113 1,308 1,464 + Equity raised - - - - -+ Debt raised (774) 1,541 (700) (500) (500)- Investments - - - - -- Misc. items (74) 419 - - -Net cash-flow 79 29 (179) 3,080 2,717 + Op. cash & bank bal. 161 240 268 89 3,169 Cl. Cash & bank bal. 240 268 89 3,169 5,886 Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 377 377 377 377 377Reserves & surplus 6,379 8,469 12,135 16,443 21,266Net worth 6,756 8,846 12,512 16,820 21,643Total debt 1,094 2,635 1,935 1,435 935Minority interest - - - - -Def. tax liab. (net) 227 314 314 314 314Capital employed 8,077 11,796 14,761 18,569 22,892Net fixed assets 4,176 5,947 7,679 7,888 8,790Intangible assets - 353 353 353 353Investments 34 23 23 23 23- of which, Liquid - - - - -Working capital 3,627 5,205 6,617 7,137 7,841Cash 240 268 89 3,169 5,886Capital deployed 8,077 11,796 14,761 18,569 22,892Working capital (days) 58 77 73 72 72Book value (`/sh) 35.8 46.9 66.4 89.2 114.8Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis@ `728 Year-end: Mar FY14 FY15 FY16e FY17e FY18e

P/E (x) 58.3 48.5 28.7 24.4 21.8Cash P/E (x) 49.7 41.9 26.2 22.3 19.9EV/EBITDA (x) 38.6 34.6 21.7 18.3 16.0EV/sales (x) 7.4 6.8 4.7 4.2 3.6P/B (x) 20.3 15.5 11.0 8.2 6.3RoE (%) 40.0 36.3 44.7 38.3 32.7RoCE (%) 31.9 28.4 34.3 32.2 29.9Dividend yield (%) 0.4 0.4 0.7 0.8 0.9Dividend payout (%) 24.8 20.0 20.0 20.0 20.0Net debt/equity (x) 0.1 0.3 0.1 (0.1) (0.2)Interest coverage (x) 32.3 201.4 129.8 203.7 323.0Debtor (days) 54 64 64 64 64Inventory (days) 61 68 63 62 62Payables (days) 57 55 55 54 54Fixed asset T/O (x) 4.7 3.9 4.1 4.0 4.2Source: Company, Anand Rathi Research



ALPM

10x

20x

30x

0

100

200

300

400

500

600

700

800

900

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

(`)

Domestic formulations

43%

International generics

41%

API13%

Branded exports3%

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst certifications are present in the Appendix. Anand Rathi Research India Equities


Sales (` m) 13,853 15,752 17,490 20,094 22,442

Net profit (` m) 1,093 1,198 1,675 2,276 2,837

EPS (`) 13.5 14.8 20.8 28.2 35.2

Growth (%) 9.0 9.7 39.8 35.8 24.7

PE (x) 25.5 23.2 16.5 12.1 9.7

PBV (x) 2.4 2.2 2.0 1.8 1.5

RoE (%) 9.9 9.9 12.8 15.4 16.7

RoCE (%) 10.1 9.2 11.5 13.4 14.6

Dividend yield (%) 0.4 0.6 0.8 1.1 1.3

Net debt/equity (x) 0.6 0.6 0.4 0.3 0.2


Healthcare




13 October 2015

Dishman Pharma

On the path to recovery; initiating, with a Buy

We initiate coverage on Dishman Pharma, with a Buy and a target of `492 based on 14x FY18e earnings. We believe that the company, with strong bottom-line growth and reduced leverage, is on the verge of recovery. We expect a strong, 34%, CAGR in PAT over FY15-18, led by steady mid-teen revenue growth and an expansion of 620bps in the EBITDA margin. Commercial supplies to innovators for new molecules now under trials would see further potential from our estimates.

CRAMS business ready to take off. We expect a 14% revenue CAGR in CRAMS (70% of revenue) over FY15-18, largely driven by a ramp-up in supplies of oncology products from the hi-po plant and commercial supplies for product launches by innovators. This would lead to a 27% revenue CAGR from its India business (22% of CRAMS). Revenue from the Swiss subsidiary Carbogen Amcis (70% of CRAMS) would continue at a steady 10% CAGR, driven by volume growth and a better product-mix.

Marketable molecules to grow steadily. We expect a steady 10% revenue CAGR from marketable molecules over FY15-18, in line with the past growth trend. The growth would be led by stable business growth in the vitamin-D business and a ramp-up in supplies from the China plant.

On the verge of recovery. Dishman has been struggling with a slowdown in bottom-line growth in the past two years due to pressure on EBITDA margins and a higher interest burden. We believe that it is on the verge of recovery and expect a 34% PAT CAGR over FY15-18, fuelled by better margins and lower interest cost. Also, its balance sheet would improve, with net debt-equity coming down from 0.6x in FY15 to 0.2x in FY18, in our view.

Valuation. The stock trades at attractive valuations of 12.1x FY17e and 9.7x FY18e earnings. We value it at `492, based on 14x FY18e earnings, in line with its peers. Risks: Delay in the ramp-up of the high-potency plant and the capital-intensive nature of its business.



Source: Bloomberg

DISH

Sensex

100

150

200

250

300

350

400

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data DISH IN / DISH.BO52-week high / low `389/ `103Sensex / Nifty 27080 / 81903-m average volume $9.6m Market cap `27.6bn / $421mShares outstanding 80.7m


Promoters 61.4 61.4 61.4 - of which, Pledged 10.6 18.6 21.9Free Float 38.6 38.6 38.6 - Foreign Institutions 14.5 14.7 12.7 - Domestic Institutions 3.9 3.5 3.7 - Public 20.2 20.3 22.1

13 October 2015 Dishman Pharma – On the path to recovery; initiating, with a Buy



Net revenues 13,853 15,752 17,490 20,094 22,442Revenue growth (%) 8.9 13.7 11.0 14.9 11.7- Oper. expenses 10,532 12,616 13,174 14,947 16,591EBIDTA 3,321 3,136 4,316 5,146 5,851EBITDA margins (%) 24.0 19.9 24.7 25.6 26.1- Interest 921 897 884 764 620- Depreciation 1,086 1,507 1,203 1,303 1,359+ Other income 249 860 165 173 182- Tax 471 394 718 975 1,216Effective tax rate (%) 30.1 24.8 30.0 30.0 30.0+ Associates/(minorities) - 0 - - -Adjusted PAT 1,093 1,198 1,675 2,276 2,837+ Extraordinary items - - - - -Reported PAT 1,093 1,198 1,675 2,276 2,837Adj. FDEPS (`/sh) 13.5 14.8 20.8 28.2 35.2Adj. FDEPS growth (%) 9.0 9.7 39.8 35.8 24.7Source: Company, Anand Rathi Research


Adjusted PAT 1,093 1,198 1,675 2,276 2,837+ Non-cash items 1,180 1,493 1,203 1,303 1,359Cash profit 2,273 2,691 2,878 3,579 4,196- Incr./(decr.) in WC 194 (149) 399 577 514Operating cash-flow 2,079 2,840 2,479 3,002 3,682- Capex 2,778 1,241 1,500 1,500 1,500Free-cash-flow (700) 1,599 979 1,502 2,182- Dividend 113 194 242 328 409+ Equity raised 0 - - - -+ Debt raised (89) (537) (1,000) (1,200) (1,500)- Investments 0 132 - - -- Misc. items (1,045) 726 - - -Net cash-flow 143 9 (263) (26) 273+ Op. cash & bank bal. 210 353 362 99 73Cl. cash & bank bal. 353 362 99 73 346Source: Company, Anand Rathi Research

Fig 5 – PE band



Share capital 161 161 161 161 161Reserves & surplus 11,651 12,216 13,650 15,598 18,025Net worth 11,813 12,378 13,812 15,759 18,187Total debt 7,907 7,370 6,370 5,170 3,670Minority interest - - - - -Def. tax liab. (net) 677 629 629 629 629Capital employed 20,397 20,377 20,810 21,558 22,486Net fixed assets 13,489 13,386 13,683 13,879 14,021Intangible assets 2,351 2,442 2,442 2,442 2,442Investments 249 381 381 381 381- of which, Liquid - 132 132 132 132Working capital 3,955 3,806 4,205 4,782 5,296Cash 353 362 99 73 346Capital deployed 20,397 20,377 20,810 21,558 22,486Working capital (days) 104 88 88 87 86Book value (`/sh) 145.9 153.4 171.2 195.3 225.4Source: Company, Anand Rathi Research





5x

10x

15x

20x

-

100

200

300

400

500

600

Oct

-07

Apr-0

8

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9

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-11

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Apr-1

5

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(`)

CRAMS70%

Marketable Molecules

30%



CRAMS business ready to take off Robust growth in supplies for contracts, off-take for new

contracts, and client additions would boost the company's CRAMS revenue, in our view.

We believe revenue from CRAMS, the key revenue driver and biggest contributor to revenue, would register a 14% CAGR over FY15-18, to `16bn. CRAMS revenue in FY18 is likely to account for 72% of consolidated revenue.

Within CRAMS, the business based in India would be the key driver, fuelled by a ramp-up in supplies of oncology products from the high-potency (hi-po) plant and by commercial supplies for product launches by innovators.

Business model

Dishman Pharmaceuticals and Chemicals is a leading CRAMS (contract research and manufacturing services) operator, catering to contract research and manufacturing services across the value chain, right from the development stage to commercial supplies on the successful launch of a product. The company has high earnings visibility from long-term contracts for supply of pharmaceutical ingredients and APIs.

Fig 7 – CRAMS business model


CRAMS

Solvay Other MNCs Carbogen Amcis

Supplying APIs and intermediates

Catering to Solvay since 2001 and consistently securing new long-term contracts

Brought ~11% to Dishman’s CRAMS revenue in FY15

Does contract research on a small scale

Contract manufacturing and custom synthesis for MNCs

Continuous focus on diversifying and strengthening the customer base

The hi-po plant to augment growth and profitability

Brought ~10% to CRAMS revenue in FY15

Acquired CA in Aug’06 for $75m, incl. one manufacturing unit and two R&D units

Strategic fit, strengthening operations in contract research and large-value contracts

Brought 71% to CRAMS revenue in FY15

Carbogen UK is in a nascent stage; brought 8% to CRAMS revenue

CRAMS growth to be driven by business based in India, led by an increase in the number of products and higher utilisation at the high-

potency plant



CRAMS India nearing revival; hi-po plant to augur well for margins

From Dishman’s India plants, we expect a 27% CAGR in revenue over FY15-18, to `4.7bn. This would be driven by greater off-take for existing contracts, new supplies for fresh contracts and efficient utilisation of its hi-po plant. Revenue from this segment has declined over FY10-15; however, a revival has begun in Q1 FY16 with 14.4% yoy revenue growth to `668m and a 47.9% EBITDA margin, driven by process efficiencies and the greater share of commercial-production orders.

Fig 8 – India CRAMS growth momentum


With its high-potency plant, Dishman would substantially expand operations in niche and high-end oncology APIs. We expect it to register a 46.2% revenue CAGR over FY15-18 and to generate `0.65bn, `1bn and `1.3bn in FY16, FY17 and FY18, respectively, driven by the ramp-up in supplies of oncology products and efficient utilisation at its hi-po plant. This plant is one of the largest manufacturing facilities for niche oncology APIs in Asia. We believe the contribution from this segment would result in a higher consolidated EBITDA margin.

Dishman has set up a large hi-po API manufacturing plant for niche oncology products at its export-oriented unit at Bavla, Ahmedabad. This demonstrates its unparalleled capability in scale-up, development and commercial manufacture of highly-potent compounds. The plant is being developed with full support from Carbogen Amcis, a Dishman group company, and is state-of-the-art in conceptual design and technological standards.

With the commissioning of the new plant, Dishman has four in this segment, three in Switzerland (under CA) and one at Bavla. All provide state-of-the-art containment services and operate to current good manufacturing practices (cGMP). They can produce material for pre-clinical testing, clinical trials and commercial use. These plants are designed based on a containment-concept, utilising the “split-butterfly valve” and barrier-isolation technology, as well as a strict-zone concept with pressure cascades, airlocks and access controls. This allows the safe handling of highly-potent compounds of all categories including cytostatics/cytotoxics. Dishman offers services starting from laboratory scale for process research and development purposes up to large-scale manufacturing on a 1,600-litre scale, including category-IV compounds (OEL <1μg/m³), the highest in the categorisation system.

-30

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(%)(`m)




Fig 9 – Details of the hi-po plant

Source: Company

The Bavla plant will complement the Bubendorf hi-po plant and enable customers to work with Carbogen Amcis from early-stage route development to market supply without volume limitations. The venture would enhance Dishman’s existing operations with one of the largest, most extensive and flexible custom-manufacture hi-po plants in the world. The plant will cater to both cytotoxic and non-cytotoxic highly-active substances in dedicated areas. The specifications include:

The Bavla site will operate as Carbogen Amcis category-3 (OEL <100 μg/m³) and category-4 (OEL <1 μg/m³) facilities

A standalone plant, with dedicated utilities

4,300 sq.m of operational floor space

Designed to hold four segregated cells each, with three reactors from 630 litres to 1,600 litres (glass-lined and hastelloy) and contained filter dryers

Expansion option for cells with reactors up to 6,300 litres

Contained development and analytical/quality control labs

Fig 10 – Hi-po plant growth momentum


Large-scalemanufacturing

facility

Bavla, IndiaUp to 1,600L

SwitzerlandUp to 630L

Pilot plantmanufacturing

facility


Kilo-scalemanufacturing

facility


Laboratories

Facilities

OEL < 1 μg/m3 OEL < 1 μg/m3 OEL < 1 μg/m3 OEL < 1 μg/m3

Categories I to IV Categories I to IV Categories I to IV Categories I to IV

Highly potent APIs for clinical and commercial use

Containment

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1,400

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Steady growth in Carbogen Amcis

The Dishman group offers unparalleled capability in scale-up development and commercial manufacture for highly-potent compounds. These highly-potent services are offered through the Carbogen Amcis business. Dishman had acquired Carbogen Amcis (CA), a Swiss research company, in August 2006 for $75m. This transformed its business model from a pure contract manufacturer to an integrated contract researcher and manufacturer. Carbogen Amcis manufactures highly-potent, high-value products.

Through this acquisition, Dishman obtained access to Carbogen’s contract research and contract manufacturing for innovative products. API contract research and contract manufacturing for innovative products is high-end CRO contracts and fetch higher revenue. Over FY10-15 the Carbogen Amcis unit registered a 16% revenue CAGR to `7.7bn; its contribution in Dishman’s overall CRAMS business has risen from 55.6% to 70.8% over the same period. In Q1 FY16 it reported 22.7% yoy revenue growth to `1.8bn and a 17.2% EBITDA margin, driven by greater profitability in the development orders (which accounted for 60% of order execution during the quarter).

Further, we expect a 10% revenue CAGR from Carbogen Amcis over FY15-18, driven by volume growth and a better product-mix. The growth rate looks lower than the past average growth due to the high base and the shift of commercial supplies to the hi-po plant in India.

Fig 11 – Carbogen Amcis’ growth momentum


Carbogen UK – nascent stage

This plant is engaged in research and customised synthesis for early-phase APIs and intermediates. The unit brought 7.8% to revenue in FY15. We expect it to register a 5% revenue CAGR over FY15-18.

Overall CRAMS business to see a 14% revenue CAGR

We estimate a 14% revenue CAGR from CRAMS to `16bn over FY15-18. The growth would be boosted by a 27% revenue CAGR from the India-based business (22% of CRAMS), aided by an increase in the number of products, more revenue from the hi-po plant (powered by efficient utilisation) and a 10% revenue CAGR in Carbogen Amcis (driven by volume growth and a better product-mix), in our view.

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Fig 12 – CRAMS growth momentum


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Marketable molecules The marketable molecules (MM) division includes quats

(quaternary compounds), specialty chemicals, intermediates & APIs and the vitamin-D business (acquired from Solvay).

We estimate a 10% revenue CAGR over FY15-18 from the MM division, to `6.3bn. Growth would be aided by stable business growth in its vitamin-D business and the supply ramp-up from its China plant.

Fig 13 – Marketable molecules – revenue break-up


MM include quats, specialty chemicals, intermediates & APIs, and the vitamin-D business. Quats are used as catalysts to transfer a reactant from one phase to another. Dishman develops and produces niche quats, which have specialised applications and command a high price; hence, they are not commodities. Such quats are applied as PTCs (chemical substances that improve process time and yield of chemical reactions) and are used in manufacturing pharmaceuticals, dyes, agrochemicals, paints, perfumery aldehydes and flavours, polymers, paper, etc.

Vitamin-D (Netherlands)

In 2007, Dishman acquired vitamin-D and the cholesterol and lanolin alcohols production plants in the Netherlands. The vitamin-D analogue is a high-value, high-potency product. This is a stable business and we expect it to clock a 10% revenue CAGR over FY15-18, driven by forward integration of the vitamin-D plant in India and China.

Fig 14 – Revenue growth momentum in the vitamin-D business


Vitamin D48%Others

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China plant turning profitable

Dishman has a manufacturing plant in the Shanghai Chemical Industrial Park, focusing on manufacturing pharmaceutical intermediates and APIs. From Q1 FY16 the China plant has turned profitable, contributing to EBITDA, bringing `116m in revenue with a nominal `3.3m profit. We expect revenue from the China plant to register a 25% CAGR over FY15-18 on the low base, driven by the ramp-up in capacity utilisation.

Expect a 10% revenue CAGR in overall MM

We estimate a 10% revenue CAGR in the MM division, to `6.3bn, driven by an increase in revenue from the vitamin-D business (`2.5bn, `2.7bn and `3bn in FY16, FY17 and FY18, respectively) and a 10% CAGR over FY15-18 from its other MM business (driven by the ramp-up in supplies from its China plant).

Fig 15 – MM growth momentum


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Financials We expect Dishman’s revenue to register at a steady 13% CAGR

over FY15-18, fuelled by its CRAMS and MM businesses. Within CRAMS, the business based in India would be the key growth driver, fuelled by a ramp-up in supplies of oncology products from its hi-po plant and by commercial supplies for (new) product launches by innovators.

We estimate adjusted PAT to record a strong, 34%, CAGR, driven by steady revenue growth, better margins and reduced interest cost over FY15-18.

Also, the balance sheet would improve, with debt-equity coming down from 0.6x in FY15 to 0.2x in FY18, in our view.

13% revenue CAGR over FY15-18

We expect a steady 13% CAGR in revenue, to `22.5bn, over FY15-18. The growth would be aided by a 14% revenue CAGR in CRAMS, and 10% in MMs. Within CRAMS, the business outside India would be the key driver; in MM, growth would be helped by stable growth in its vitamin-D business and by the ramp-up in supplies from the China plant.



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Fig 17 – Revenue break-up (` m) FY14 FY15 FY16e FY17e FY18e

CRAMS 9,276 10,894 12,154 14,232 16,002

% of sales 67.6 69.8 70.1 71.4 71.9

% yoy 14.1 17.4 11.6 17.1 12.4

India 2,660 2,328 2,774 3,959 4,748

% of CRAMS 28.7 21.4 22.8 27.8 29.7

% yoy -20.9 -12.5 19.1 42.7 19.9

Carbogen Amcis 6,114 7,713 8,484 9,332 10,265

% of CRAMS 65.9 70.8 69.8 65.6 64.2

% yoy 28.1 26.2 10.0 10.0 10.0

UK 503 854 896 941 988

% of CRAMS 5.4 7.8 7.4 6.6 6.2

% yoy 69.7 5.0 5.0 5.0

Marketable Molecules 4,456 4,709 5,180 5,698 6,268

% of sales 32.4 30.2 29.9 28.6 28.1

% yoy -1.9 5.7 10.0 10.0 10.0

Vitamin D 2,138 2,270 2,497 2,747 3,022

% of MM 32.4 30.2 29.9 28.6 28.1

% yoy 1.3 6.2 10.0 10.0 10.0

Others 2,318 2,439 2,683 2,951 3,246

% of MM 52.0 51.8 51.8 51.8 51.8

% yoy -4.7 5.2 10.0 10.0 10.0

Total 13,732 15,604 17,334 19,930 22,270


Strong expansion in EBITDA margins

We expect the EBITDA margin to improve 620bps over FY15-18, to 26.1% by FY18. In absolute terms, we expect consolidated EBITDA to register a 23% CAGR over FY15-18, driven by higher growth in the high-margin CRAMS division and a better product-mix.

Fig 18 – EBITDA and margin trend


34% adjusted-net-profit CAGR

We expect a 34% CAGR in adjusted net profit over FY15-18, to `2.8bn, led by steady revenue growth, EBITDA-margin expansion and lower interest cost. The growth in net profit, we estimate, would be considerably more than that in revenue, largely because of lower interest costs.

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Improving return ratios

We expect Dishman’s RoE and RoCE to strongly recover by FY18 to 16.7% and 14.6%, respectively (from the current 9.9% and 9.2%) as a result of the margin expansion and greater operating cash-flows used to retire debt, thereby improving profitability.

Fig 20 – Recovery in return ratios


Reduction in leverage

We expect Dishman’s balance sheet to improve, with its debt-to-equity ratio coming down from 0.6x in FY15 to 0.2x in FY18, driven by the greater profitability and no major capex plans for the next two years. Interest coverage would also improve from the current level of 1.8x to 7.2x by FY18.

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Revenues 13,853 15,752 17,490 20,094 22,442 Growth in revenues (%) 8.9 13.7 11.0 14.9 11.7 Raw materials 3,733 5,350 4,940 5,580 6,236 % of sales 27.2 34.3 28.5 28.0 28.0 Personnel expenses 4,123 4,232 4,767 5,431 6,013 % of sales 30.0 27.1 27.5 27.3 27.0 Selling and other expenses 2,675 3,034 3,467 3,936 4,343 % of sales 19.5 19.4 20.0 19.8 19.5 EBITDA 3,321 3,136 4,316 5,146 5,851 EBITDA margin (%) 24.0 19.9 24.7 25.6 26.1 Depreciation 1,086 1,507 1,203 1,303 1,359 PBIT 2,235 1,629 3,113 3,843 4,492 Interest expenses 921 897 884 764 620 PBIT from operations 1,315 732 2,229 3,078 3,871 Other non-operating income 249 860 165 173 182 PBT before extraordinary items 1,564 1,592 2,393 3,251 4,053 Extraordinary income/ (expenses) - - - - - PBT 1,564 1,592 2,393 3,251 4,053 Provision for tax 471 394 718 975 1,216 Effective tax rate (%) 30.1 24.8 30.0 30.0 30.0 PAT 1,093 1,198 1,675 2,276 2,837 Minority Interest - - - - - PAT after minority interest 1,093 1,198 1,675 2,276 2,837 Adjusted PAT 1,093 1,198 1,675 2,276 2,837 Growth in PAT (%) 9.0 9.7 39.8 35.8 24.7 PAT margin (%) 7.9 7.6 9.6 11.3 12.6


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Fig 23 – Balance sheet (` m) Y/E March FY14 FY15 FY16e FY17e FY18e

Equity share capital 161 161 161 161 161Reserves 11,651 12,216 13,650 15,598 18,025Shareholders' fund 11,813 12,378 13,812 15,759 18,187Minority interest - - - - -Debt 7,907 7,370 6,370 5,170 3,670Deferred tax liability 677 629 629 629 629Capital employed 20,397 20,377 20,811 21,558 22,486 Gross block 21,932 22,543 24,043 25,543 27,043Accumulated depreciation 6,880 8,134 9,337 10,641 12,000Net block 15,052 14,409 14,706 14,902 15,043Capital WIP 789 1,418 1,418 1,418 1,418Total fixed assets 15,840 15,827 16,124 16,320 16,462Investments 249 381 381 381 381Inventories 4,233 4,483 4,681 5,311 5,895Debtors 1,440 2,171 2,412 2,773 3,099Cash and bank balances 353 362 99 73 346Loans and advances 4,162 4,866 5,395 6,188 6,903Total current assets 10,188 11,881 12,587 14,345 16,242Current liabilities and provisions 5,242 6,980 7,467 8,552 9,553Net current assets 4,946 4,902 5,120 5,793 6,689Other long-term liabilities 1 - - - -Long-term provisions 637 733 814 936 1,046Misc. expenditure - - - - -Assets 20,397 20,377 20,811 21,558 22,486


Fig 24 – Cash-flow statement (` m) Y/E March FY14 FY15 FY16e FY17e FY18e Cash flow from operating activities Profit before tax 1,564 1,592 2,393 3,251 4,053Depreciation 1,086 1,507 1,203 1,303 1,359Interest expenses 921 897 884 764 620Operating profit before working capital change 3,570 3,996 4,481 5,319 6,032Working capital adjustment (194) 149 (399) (577) (514)Gross cash generated from operations 3,376 4,145 4,081 4,742 5,518Direct taxes paid (377) (409) (718) (975) (1,216)Cash generated from operations 2,999 3,736 3,363 3,766 4,302 Cash flow from investing activities Capex (2,778) (1,241) (1,500) (1,500) (1,500)Investment (0) (132) - - -Cash generated from investment activities (2,778) (1,373) (1,500) (1,500) (1,500) Cash flow from financing activities Proceeds from share capital and premium 0 - - - -Borrowings / (repayments) (89) (537) (1,000) (1,200) (1,500)Interest paid (921) (897) (884) (764) (620)Dividend paid (113) (194) (242) (328) (409)Cash generated from financing activities (1,123) (1,628) (2,126) (2,293) (2,530)Other / misc 1,045 (726) - - -Net cash increase/ (decrease) 143 9 (263) (26) 273




Fig 25 – Ratio analysis @ `342 Y/E March FY14 FY15 FY16e FY17e FY18e Margin ratios (%) EBITDA margin 24.0 19.9 24.7 25.6 26.1PBIT margin 16.1 10.3 17.8 19.1 20.0PBT margin 11.3 10.1 13.7 16.2 18.1PAT margin 7.9 7.6 9.6 11.3 12.6Growth ratios (%) Revenues 8.9 13.7 11.0 14.9 11.7EBITDA 14.5 (5.6) 37.6 19.2 13.7Net profit 9.0 9.7 39.8 35.8 24.7Return ratios (%) RoCE 10.1 9.2 11.5 13.4 14.6RoIC 10.6 11.2 13.4 15.5 16.6RoE 9.9 9.9 12.8 15.4 16.7Turnover ratios Asset turnover ratio (x) 0.9 1.0 1.1 1.2 1.4Working capital cycle (days) 104 88 88 87 86Average collection period (days) 38 50 50 50 50Average payment period (days) 22 35 29 29 29Inventory holding (days) 112 104 98 96 96Per share (`) EPS 13.5 14.8 20.8 28.2 35.2CEPS 27.0 33.5 35.7 44.4 52.0Book value 145.9 153.4 171.2 195.3 225.4Solvency ratios (x) Debt/ equity 0.6 0.6 0.4 0.3 0.2Interest coverage 2.4 1.8 3.5 5.0 7.2Net Debt/ EBITDA 2.3 2.2 1.5 1.0 0.6Valuation parameters (x) P/E 25.5 23.2 16.6 12.2 9.8P/BV 2.4 2.2 2.0 1.8 1.5EV/ EBITDA 10.7 11.1 7.9 6.4 5.3EV/ sales 2.6 2.2 1.9 1.6 1.4M-Cap/ sales 2.0 1.8 1.6 1.4 1.2




Valuation Considering the company’s persistent strong growth momentum (a 34% PAT CAGR over FY15-18, substantial improvement in free-cash-flow generation to `2.2bn in FY18), revival in business potential and improving RoEs and RoCEs, we are sanguine about its mid- to long-term prospects. The stock has experienced significant valuation re-rating in the recent past as the company has been delivering strong PAT growth and announced new API supply contracts. Further, visibility has increased about a sustainable revenue stream from FY16 driven by a ramp-up in supplies of oncology products from its high-potency plant and in commercial supplies for product launches by innovators.

At present, the stock trades at 12.2x FY17e and 9.8x FY18e earnings. We initiate coverage on Dishman Pharma, with a target price of `492, based on 14x FY18e earnings. Our target PE multiple is in line with the valuations of peer pharmaceuticals companies, considering the expectation of a high-growth momentum, a strong balance sheet, free-cash-flows and one of the best return ratios.

Fig 26 – One-year-forward mean PE and standard deviation


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Company Background & Management Company Overview

Incorporated in 1983 as a quaternary-compound (quat) manufacturer. Dishman Pharma operates under two divisions, CRAMS and MMs. Under CRAMS it manufactures high quality APIs and other drug intermediates and provides end-to-end integrated high-value low-cost CRAMS offerings right from process research & development to late-stage clinical and commercial manufacturing. The MM division comprises quats, APIs and the vitamin-D business.

With manufacturing sites in Europe, India, China and Saudi Arabia, Dishman has global operations. All manufacturing plants are approved by recognised health authorities. It has 12 multi-purpose and dedicated facilities for APIs and intermediates. In India, its facilities are located in Gujarat, at Bavla and Naroda.

Fig 27 – Key management personnel Name Position Profile

Janmejay R. Vyas CMD Promoted the company in 1983, along with others. Has headedresearch and development for 28 years; has been engaged in acquiringseveral research-oriented companies, including Carbogen Amcis and the vitamin-D business in the Netherlands

Arpit Vyas MD Chemical engineering degree from the University of Aston, Birmingham; rich experience in marketing; in charge of the disinfectants division (Dishman Care) and the Naroda plant at Gujarat and looks after day-to-day affairs at the Bavla plant

Mark Griffiths Director Master of Science in engineering from Bristol University, UK; has over 31 years’ relevant industrial experience; was co-founder and joint owner of COSAM Developments, a multi-discipline pharmaceutical firm

Source: Company


Healthcare

Company UpdateIndia I Equities


Sales (` m) 47,593 41,401 45,579 52,969 61,675

Net profit (` m) (2,308) (1,441) 1,097 3,330 4,877

EPS (`) (5.0) (3.1) 2.4 7.2 10.5

Growth (%) LTL LTL LTP 203.5 46.4

PE (x) NA NA 72.5 23.9 16.3

PBV (x) 1.9 2.0 1.9 1.8 1.6

RoE (%) (5.8) (3.5) 2.7 7.7 10.3

RoCE (%) 1.0 (0.4) 1.9 5.2 7.2

Dividend yield (%) - - - - -

Net debt/equity (x) 0.1 0.1 0.1 (0.0) (0.1)




`



Source: Bloomberg

FORH

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Key data FORH IN / FOHE.BO52-week high / low `199/ `100Sensex / Nifty 27080 / 81903-m average volume $3.0mMarket cap `78.7bn / $1.2bnShares outstanding 462.8m




13 October 2014

Fortis Healthcare

India focus to drive growth; Buy

We expect Fortis’ withdrawal from its international business and focus on its home market (India) to improve its profitability and cash flows. Hence, we maintain a Buy, with a revised target price of `230.

The hospitals business, the key driver. At present, Fortis has 54 healthcare facilities with 4,600 operational beds, and the potential to raise that to ~10,000. During FY15 both the Fortis start-up facilities (FMRI Gurgaon and Fortis Ludhiana) experienced robust growth and better operating profitability. The hospitals business would be the key growth driver, and we expect a 16.5% revenue CAGR over FY15-18, driven by an increase in the number of beds (~400 annually) and a steady (~10%) rise in average revenue per operating bed (ARPOB).

The diagnostics business. Fortis has 12 reference labs, 266 network labs and more than 6,500 collection points. We expect its diagnostics business to continue to grow steadily and report a 15% revenue CAGR over FY15-18 to `10.9bn, fuelled by the greater capacity utilisation and the rising number of collection centres and reference labs.

Better financials. We expect strong improvement in the EBITDA margin and cash flows considering the company’s re-focus on India (a high-margin business) and no major capex planned in the near to mid-term. No project planned for the next three years would result in increasing maturing of beds, thereby expanding margins and return ratios.

Valuation. Considering the better profitability and no major capex over the next three years, we recommend a Buy, with a target of `230 based on 16x one-year-forward EBITDA. Further value unlocking in the SRL subsidiary (its diagnostics business) through an IPO or other means could provide the added potential. Risks: Keener competition in the cities where Fortis is present and the capital-intensive nature of the business.

13 October 2015 Fortis Healthcare - India focus to drive growth; Buy



Net revenues 47,593 41,401 45,579 52,969 61,675Revenue growth (%) (21.4) (13.0) 10.1 16.2 16.4- Oper. expenses 45,759 40,064 42,956 47,940 55,105EBIDTA 1,834 1,338 2,623 5,029 6,570EBITDA margins (%) 3.9 3.2 5.8 9.5 10.7- Interest 3,163 1,533 807 493 308- Depreciation 2,479 2,628 2,591 2,730 2,765+ Other income 1,706 987 1,403 1,613 1,855- Tax 265 63 126 684 1,071Effective tax rate (%) 18.5 (3.4) 20.0 20.0 20.0+ Associates/(Minorities) 458 595 595 595 -Adjusted PAT (2,308) (1,441) 1,097 3,330 4,877+ Extraordinary items 3,533 3 - - -Reported PAT 1,225 (1,438) 1,097 3,330 4,877Adj. FDEPS (`/sh) (5.0) (3.1) 2.4 7.2 10.5Adj. FDEPS growth (%) NA NA NA 203.5 46.4Source: Company, Anand Rathi Research


Adjusted PAT (2,308) (1,441) 1,097 3,330 4,877+ Non-cash items 2,479 2,628 2,591 2,730 2,765Cash profit 171 1,187 3,688 6,061 7,642- Incr./(decr.) in WC (1,262) (6,694) (330) (568) (818)Operating cash-flow 1,433 7,880 4,018 6,629 8,461- Capex (49,761) 4,148 2,000 2,000 4,000Free cash-flow 51,194 3,733 2,018 4,629 4,461- Dividend - - - - -+ Equity raised 5,298 0 - - -+ Debt raised (46,719) (6,726) (3,500) (5,000) -- Investments 6,299 (3,539) - - -- Misc. items 6,005 1,191 - - -Net cash-flow (2,532) (645) (1,482) (371) 4,461+ Op. cash & bank bal. 5,117 2,585 1,940 458 87Cl. Cash & bank bal. 2,585 1,940 458 87 4,548Source: Company, Anand Rathi Research

Fig 5 – EV/EBITDA band



Share capital 4,628 4,628 4,628 4,628 4,628Reserves & surplus 38,196 35,848 36,945 40,276 45,153Net worth 42,824 40,476 41,574 44,904 49,781Total debt 19,383 12,657 9,157 4,157 4,157Minority interest 8,093 8,229 8,229 8,229 8,229Def. tax liab. (net) 350 (71) (71) (71) (71)Capital employed 70,649 61,292 58,889 57,219 62,096Net fixed assets 19,367 20,592 20,001 19,271 20,506Intangible assets 23,572 23,867 23,867 23,867 23,867Investments 18,174 14,635 14,635 14,635 14,635- of which, Liquid 9,934 6,158 6,158 6,158 6,158Working capital 6,951 258 (72) (640) (1,459)Cash 2,585 1,940 458 87 4,548Capital deployed 70,649 61,292 58,889 57,219 62,096Working capital (days) 2 (3) (2) (0) 0Book value (`/sh) 92.5 87.5 89.8 97.0 107.6Source: Company, Anand Rathi Research


P/E (x) NA NA 72.5 23.9 16.3Cash P/E (x) 466.6 67.1 21.6 13.1 10.4EV/EBITDA (x) 47.1 62.9 31.3 15.4 11.1EV/sales (x) 1.8 2.0 1.8 1.5 1.2P/B (x) 1.9 2.0 1.9 1.8 1.6RoE (%) (5.8) (3.5) 2.7 7.7 10.3RoCE (%) 1.0 (0.4) 1.9 5.2 7.2Dividend yield (%) - - - - -Dividend payout (%) - - - - -Net debt/equity (x) 0.1 0.1 0.1 (0.0) (0.1)Interest coverage (x) (0.2) (0.8) 0.0 4.7 12.4Debtor (days) 34 38 38 38 38Inventory (days) 5 6 5 5 5Payables (days) 37 46 45 43 43Fixed asset T/O (x) 0.7 1.0 1.0 1.2 1.4Source: Company, Anand Rathi Research



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(`m)

India Hospitals82%

SRL18%




Sales (` m) 10,959 12,929 15,349 18,072 21,503

Net profit (` m) 752 909 1,299 1,741 2,318

EPS (`) 3.3 4.0 5.7 7.7 10.2

Growth (%) 131.0 20.8 42.9 34.0 33.1

PE (x) 48.4 40.0 28.0 20.9 15.7

PBV (x) 9.1 7.6 5.4 4.0 3.2

RoE (%) 23.9 23.1 25.2 22.9 22.7

RoCE (%) 15.9 14.6 16.8 17.8 19.3

Dividend yield (%) 0.1 0.3 0.4 0.4 0.6

Net debt/equity (x) 1.0 0.9 0.5 0.2 0.1




`



Source: Bloomberg

GRAN

Sensex

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Key data GRAN IN / GRAN.BO52-week high / low `157 / `71Sensex / Nifty 27080 / 81903-m average volume $7.1m Market cap `32.7bn / $499mShares outstanding 204.3m




13 October 2015

Granules India

Margin improvement to continue; Buy

We have a positive outlook on Granules India, considering its robust revenue growth and improving margin. It has successfully transformed its business model towards a high-margin business-mix by ramping up its formulations business. Hence, we maintain our Buy call, with a revised target price of `183.

Finished dosages, the key driver. Greater emphasis on finished dosages would add to the good growth momentum. Management plans to file 3-4 ANDAs in FY16 and ten more in the next two years, chiefly in the OTC segment (coughs & colds, and analgesics), hepatitis and anti-diabetics. We expect the finished-dosage sub-segment to register a 23.3% revenue CAGR over FY15-18.

Greater profitability. We believe a significant turnaround in the business model (toward a higher value chain), capacity expansion, greater capacity utilisation, a favourable product-mix, revenue growth of the Auctus division and contribution from the Omnichem JV would raise profitability. This, coupled with the greater emphasis on finished dosages, would add to the good growth momentum.

Strong financials. We expect Granules to register 18.5% revenue and 36.6% PAT CAGRs over FY15-18. Strong profitability growth would result in a high RoE and RoCE in FY18 at, respectively, 22.7% and 19.3%. With the debt-equity ratio coming down from 0.9x in FY15 to 0.1x in FY18, the balance sheet would also improve.

Valuation. The stock quotes at 20.9x FY17e and 15.7x FY18e earnings. Considering the robust revenue growth and better margin, we recommend a Buy, with a target price of `183 based on 18x FY18e earnings (earlier `130 based on 16x FY17e earnings) as we roll forward our target price to FY18. Risks: Currency fluctuations and regulatory hurdles.

13 October 2015 Granules - Margin improvement to continue; Buy



Net revenues 10,959 12,929 15,349 18,072 21,503Revenue growth (%) 43.4 18.0 18.7 17.7 19.0- Oper. expenses 9,376 10,843 12,625 14,684 17,310EBIDTA 1,583 2,086 2,724 3,389 4,193EBITDA margins (%) 14.4 16.1 17.8 18.8 19.5- Interest 204 323 314 284 227- Depreciation 298 527 603 706 805+ Other income 43 43 48 53 58- Tax 371 371 557 711 901Effective tax rate (%) 33.0 29.0 30.0 29.0 28.0+ Associates/(Minorities) - - - - -Adjusted PAT 752 909 1,299 1,741 2,318+ Extraordinary items - - - - -Reported PAT 752 909 1,299 1,741 2,318Adj. FDEPS (`/sh) 3.3 4.0 5.7 7.7 10.2Adj. FDEPS growth (%) 131.0 20.8 42.9 34.0 33.1Source: Company, Anand Rathi Research


Adjusted PAT 752 909 1,299 1,741 2,318 + Non-cash items 365 610 603 706 805 Cash profit 1,117 1,519 1,902 2,446 3,122 - Incr./(decr.) in WC 108 220 339 317 409 Operating cash-flow 1,009 1,299 1,563 2,130 2,714 - Capex 2,646 1,242 1,500 2,500 1,000 Free cash-flow (1,637) 57 63 (370) 1,714 - Dividend 83 123 137 183 244 + Equity raised 11 14 - 2,161 -+ Debt raised 1,492 230 (300) (500) (1,000)- Investments (95) - - - -- Misc. items (123) (59) (534) 534 -Net cash-flow - 236 161 573 470 + Op. cash & bank bal. 417 417 653 814 1,387 Cl. Cash & bank bal. 417 653 814 1,387 1,857 Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 203 204 204 227 227Reserves & surplus 3,357 4,107 5,804 8,965 11,038Net worth 3,560 4,312 6,008 9,192 11,265Total debt 4,102 4,331 4,031 3,531 2,531Minority interest - - - - -Def. tax liab. (net) 303 493 493 493 493Capital employed 7,964 9,136 10,532 13,216 14,290Net fixed assets 4,992 5,901 6,798 8,592 8,787Intangible assets 1,078 885 885 885 885Investments 2 2 2 2 2- of which, Liquid - - - - -Working capital 1,474 1,695 2,034 2,350 2,758Cash 417 653 814 1,387 1,857Capital deployed 7,964 9,136 10,532 13,216 14,290Working capital (days) 50 48 49 49 49Book value (`/sh) 17.6 21.1 29.4 40.4 49.5Source: Company, Anand Rathi Research


P/E (x) 48.4 40.0 28.0 20.9 15.7Cash P/E (x) 34.6 25.3 19.1 14.9 11.7EV/EBITDA (x) 23.0 17.4 13.2 10.3 8.0EV/sales (x) 3.3 2.8 2.3 1.9 1.6P/B (x) 9.1 7.6 5.4 4.0 3.2RoE (%) 23.9 23.1 25.2 22.9 22.7RoCE (%) 15.9 14.6 16.8 17.8 19.3Dividend yield (%) 0.1 0.3 0.4 0.4 0.6Dividend payout (%) 9.4 11.3 9.0 9.0 9.0Net debt/equity (x) 1.0 0.9 0.5 0.2 0.1Interest coverage (x) 6.3 4.8 6.8 9.5 14.9Debtor (days) 37 37 37 37 37Inventory (days) 58 63 62 61 61Payables (days) 45 53 50 50 49Fixed asset T/O (x) 2.2 2.0 2.1 2.1 2.2Source: Company, Anand Rathi Research



9x

14x

19x

0

30

60

90

120

150

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

(`)

PFI24%

Omnichem3%

Finished Dosage32%

API31%

Auctus10%




Sales (` m) 7,326 8,569 10,462 12,755 15,196

Net profit (` m) 687 854 1,324 1,724 2,164

EPS (`) 7.5 9.3 14.4 18.7 23.5

Growth (%) 26.7 24.3 55.1 30.2 25.5

PE (x) 43.9 35.3 22.8 17.5 13.9

PBV (x) 6.6 5.8 4.9 4.0 3.3

RoE (%) 15.8 17.5 23.3 25.2 26.0

RoCE (%) 12.8 15.3 19.0 20.7 21.9

Dividend yield (%) 0.4 0.5 0.9 1.1 1.4

Net debt/equity (x) 0.1 0.1 0.1 0.0 (0.1)




`



Source: Bloomberg

INDR

Sensex250

280

310

340

370

400

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data INDR IN / INRM.BO52-week high / low `413 / `262Sensex / Nifty 27080 / 81903-m average volume $0.2m Market cap `30.1bn / $460mShares outstanding 92.2m



Estimates revision (%) FY16e FY17e

Sales (3.6) (4.2)EBITDA (3.5) (4.8)EPS (4.5) (6.5)


13 October 2014

Indoco Remedies

Momentum to continue; Buy

We expect Indoco to report strong revenue and greater profitability, driven by recovery in its domestic formulations business together with commencement of supplies to Watson. We maintain a Buy on the stock, with a revised target price of `423.

Recovery in domestic formulations. Management believes that domestic-formulations growth would recover from Q2 FY16, and expects to launch 20 products annually in the home market. This would maintain the growth momentum in domestic formulations, which command higher margins. We expect this business to register a 15% revenue CAGR over FY15-18, fuelled by product launches, brand-building and the focus on the chronics segment.

Watson deal. Commencement of supplies to Watson for two approved products for the US market would rise gradually and we expect two more significant approvals by Dec’15. The company has received repeat orders and management expects `30m-`40m dispatch value every quarter. Teva has taken the entire generics portfolio of Watson and this should have a positive impact as Teva is a much stronger operator in the US market.

Regulatory filings. ANDA filings would be the key mid-term focus area; the company expects to file about 20 ANDAs in the next two years mainly in anti-diabetics, CVS and neurology. Also, it expects to file six ANDAs from Watson’s portfolio in the next two quarters. Further, to ensure future growth momentum, it is working on injectable products for regulated markets in partnership with local operators.

Valuation. The stock trades at attractive valuations of 17.5x FY17e and 13.9x FY18e earnings. We recommend a Buy, and roll forward our target of `423 to FY18 (earlier `416) based on 18x FY18e earnings considering the company’s strong revenue growth and better margin. Risks: Currency fluctuations, delay in supplies to Watson due to delay in product approvals.

13 October 2015 Indoco Remedies - Momentum to continue; Buy



Net revenues 7,326 8,569 10,462 12,755 15,196Revenue growth (%) 16.1 17.0 22.1 21.9 19.1- Oper. expenses 6,122 6,914 8,270 10,085 11,939EBIDTA 1,204 1,655 2,192 2,670 3,257EBITDA margins (%) 16.4 19.3 20.9 20.9 21.4- Interest 104 106 97 90 70- Depreciation 309 471 489 497 578+ Other income 18 17 49 72 96- Tax 109 242 331 431 541Effective tax rate (%) 15.1 22.1 20.0 20.0 20.0+ Associates/(Minorities) 1 - - - -Adjusted PAT 687 854 1,324 1,724 2,164+ Extraordinary items (73) - - - -Reported PAT 614 854 1,324 1,724 2,164Adj. FDEPS (`/sh) 7.5 9.3 14.4 18.7 23.5Adj. FDEPS growth (%) 26.7 24.3 55.1 30.2 25.5Source: Company, Anand Rathi Research


Adjusted PAT 687 854 1,324 1,724 2,164+ Non-cash items 266 436 489 497 578Cash profit 953 1,290 1,813 2,221 2,742- Incr./(decr.) in WC 83 394 457 599 630Operating cash-flow 870 896 1,356 1,622 2,112- Capex 411 799 1,200 650 750Free cash-flow 458 98 156 972 1,362- Dividend 151 177 319 415 521+ Equity raised - - - - -+ Debt raised (205) 165 100 (200) (200)- Investments 0 (0) 0 0 0- Misc. items 108 65Net cash-flow (6) 20 (63) 357 641+ Op. cash & bank bal. 140 134 154 91 448Cl. Cash & bank bal. 134 154 91 448 1,089Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 184 184 184 184 184Reserves & surplus 4,387 5,004 6,009 7,318 8,961Net worth 4,572 5,188 6,194 7,503 9,146Total debt 718 882 982 782 582Minority interest 3 - - - -Def. tax liab. (net) 305 271 271 271 271Capital employed 5,597 6,341 7,447 8,556 9,999Net fixed assets 3,205 3,221 3,932 4,085 4,257Intangible assets 491 804 801 801 801Investments 2 2 2 2 2- of which, Liquid - - - - -Working capital 1,766 2,160 2,620 3,219 3,849Cash 134 154 91 448 1,089Capital deployed 5,597 6,341 7,447 8,556 9,999Working capital (days) 88 92 91 92 92Book value (`/sh) 49.6 56.3 67.2 81.4 99.2Source: Company, Anand Rathi Research


P/E (x) 43.9 35.3 22.8 17.5 13.9Cash P/E (x) 30.3 22.7 16.6 13.6 11.0EV/EBITDA (x) 25.5 18.6 14.2 11.4 9.1EV/sales (x) 4.2 3.6 3.0 2.4 1.9P/B (x) 6.6 5.8 4.9 4.0 3.3RoE (%) 15.8 17.5 23.3 25.2 26.0RoCE (%) 12.8 15.3 19.0 20.7 21.9Dividend yield (%) 0.4 0.5 0.9 1.1 1.4Dividend payout (%) 18.8 17.3 20.0 20.0 20.0Net debt/equity (x) 0.1 0.1 0.1 0.0 -0.1Interest coverage (x) 8.6 11.2 17.6 24.1 38.2Debtor (days) 69 66 66 66 66Inventory (days) 55 64 62 62 62Payables (days) 35 51 50 50 49Fixed asset T/O (x) 2.0 3.5 2.9 2.4 2.0Source: Company, Anand Rathi Research



12x

19x

26x

0

90

180

270

360

450

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

(`)

Domestic APIs3%


56%

Exports formulations

38%

Export APIs3%


Healthcare



Sales (` m) 32,818 31,418 35,488 41,484 47,597

Net profit (` m) 5,332 2,512 3,217 4,744 5,850

EPS (`) 42.3 19.9 25.5 37.6 46.4

Growth (%) 41.5 (52.9) 28.1 47.5 23.3

PE (x) 17.1 36.4 28.4 19.3 15.6

PBV (x) 4.7 4.1 3.7 3.2 2.7

RoE (%) 30.2 12.1 13.7 17.8 18.8

RoCE (%) 24.7 11.0 11.9 16.1 17.9

Dividend yield (%) 0.3 0.1 0.5 0.8 1.0

Net debt/equity (x) 0.2 0.3 0.3 0.2 0.0




`

Rating: Hold Target Price: `834 Share Price: `724


Source: Bloomberg

IPCA

Sensex

600

650

700

750

800

850

900

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data IPCA IN / IPCA.BO52-week high / low `888 / `591Sensex / Nifty 27080 / 81903-m average volume $2.7m Market cap `91.3bn / $1.4bnShares outstanding 126.2m




13 October 2015

IPCA Laboratories

US FDA woes persist; Hold

We expect IPCA to report strong CAGRs over FY15-18, of 14.9% in revenue and 32.5% in PAT, driven by formulations both domestically and for export. The “import alert”, however, would strike at growth. Hence, we maintain our Hold call, with a revised target price of `834.

Domestic formulations. Ipca’s domestic formulations bring 37% to its revenue. During FY10-15, this segment ran at a 13.6% CAGR. We expect domestic formulations to register a 13.3% CAGR over FY15-18, driven by product launches and strong brand building with the company’s focus on promotional activity.

Export formulations, the key growth catalyst. With an 18.8% revenue CAGR over FY15-18, export formulations would be the key growth driver. It would be driven by anti-malarial tenders in Africa, geographical expansion in countries covered, thrust on brand building in the pain, CVS, CNS, anti-infective and anti-malarial segments, and product launches.

Healthy financials. We expect Ipca to register 14.9% revenue and 32.5% PAT CAGRs over FY15-18. Strong profit growth would result in high RoE and RoCE in FY18 at, respectively, 18.8% and 17.9%, in our view. The return ratios have fallen in the past year due to the impact of the import alerts from the US FDA on Ipca’s plants.

Valuation. Concerns regarding Form 483 issued against the company’s API plant (at Ratlam), the subsequent halt to its US sales and the recent import alert (on the Ratlam facility) have cut into its growth. The stock trades at 19.3x FY17e and 15.6x FY18e earnings. We retain our Hold call, and roll forward our target price to FY18, with a revised target of `834 based on 18x FY18e earnings (earlier `737). Risks: Currency fluctuations, delay in resolution of the US FDA import alerts.

13 October 2015 IPCA Laboratories - US FDA woes persist; Hold



Net revenues 32,818 31,418 35,488 41,484 47,597Revenue growth (%) 18.4 (4.3) 13.0 16.9 14.7- Oper. expenses 24,712 26,127 29,465 33,422 38,119EBIDTA 8,106 5,291 6,023 8,062 9,478EBITDA margins (%) 24.7 16.8 17.0 19.4 19.9- Interest 269 284 291 220 150- Depreciation 1,032 1,796 1,796 1,863 1,876+ Other income 223 358 411 432 453- Tax 1,524 1,019 1,130 1,667 2,055Effective tax rate (%) 24.2 28.2 26.0 26.0 26.0+ Associates/(Minorities) 3 (49) - - -Adjusted PAT 5,332 2,512 3,217 4,744 5,850+ Extraordinary items (548) 30 - - -Reported PAT 4,785 2,542 3,217 4,744 5,850Adj. FDEPS (`/sh) 42.3 19.9 25.5 37.6 46.4Adj. FDEPS growth (%) 41.5 (52.9) 28.1 47.5 23.3Source: Company, Anand Rathi Research


Adjusted PAT 5,332 2,512 3,217 4,744 5,850+ Non-cash items 1,199 2,068 1,796 1,863 1,876Cash profit 6,532 4,580 5,014 6,607 7,726- Incr./(decr.) in WC (14) 616 1,096 1,438 1,606Operating cash-flow 6,546 3,964 3,918 5,169 6,120- Capex 3,887 7,166 2,500 2,500 1,500Free cash-flow 2,659 (3,202) 1,418 2,669 4,620- Dividend 423 152 565 833 1,027+ Equity raised - - - - -+ Debt raised (854) 3,906 (2,044) (1,500) (2,000)- Investments (128) 70 - - -- Misc. items 1,296 (6) - - -Net cash-flow 214 488 (1,191) 337 1,593+ Op. cash & bank bal. 547 760 1,248 57 394Cl. Cash & bank bal. 760 1,248 57 394 1,987Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 252 252 252 252 252Reserves & surplus 19,344 21,832 24,484 28,396 33,219Net worth 19,597 22,084 24,737 28,648 33,471Total debt 4,379 8,286 6,242 4,742 2,742Minority interest - - - - -Def. tax liab. (net) 1,471 1,743 1,743 1,743 1,743Capital employed 25,447 32,113 32,722 35,133 37,956Net fixed assets 14,466 19,557 20,261 20,897 20,521Intangible assets 719 1,119 1,119 1,119 1,119Investments 92 162 162 162 162- of which, Liquid 2 - - - -Working capital 9,411 10,027 11,123 12,560 14,166Cash 760 1,248 57 394 1,987Capital deployed 25,447 32,113 32,722 35,133 37,956Working capital (days) 105 116 114 111 109Book value (`/sh) 155.3 175.0 196.0 227.0 265.2Source: Company, Anand Rathi Research


P/E (x) 17.1 36.4 28.4 19.3 15.6Cash P/E (x) 14.4 21.2 18.2 13.8 11.8EV/EBITDA (x) 11.7 18.6 16.2 11.9 9.7EV/sales (x) 2.9 3.1 2.7 2.3 1.9P/B (x) 4.7 4.1 3.7 3.2 2.7RoE (%) 30.2 12.1 13.7 17.8 18.8RoCE (%) 24.7 11.0 11.9 16.1 17.9Dividend yield (%) 0.3 0.1 0.5 0.8 1.0Dividend payout (%) 5.9 5.0 15.0 15.0 15.0Net debt/equity (x) 0.2 0.3 0.3 0.2 0.0Interest coverage (x) 26.3 12.3 14.5 28.2 50.8Debtor (days) 51 41 41 41 41Inventory (days) 125 129 129 129 104Payables (days) 50 43 43 44 35Fixed asset T/O (x) 2.4 1.8 1.7 1.9 2.2Source: Company, Anand Rathi Research



10x

15x

20x

25x

0

200

400

600

800

1,000

1,200

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

(`)

Export Form42%

Domestic Form35%

Export APIs17%

Domestic APIs6%


Healthcare



Sales (` m) 7,389 8,253 12,302 17,311 18,768

Net profit (` m) 1,027 1,186 2,394 4,060 4,428

EPS (`) 29.5 34.0 68.7 116.6 127.1

Growth (%) 29.6 15.4 101.9 69.6 9.1

PE (x) 84.3 73.0 36.2 21.3 19.6

PBV (x) 11.3 9.8 6.2 5.0 4.1

RoE (%) 16.3 15.0 21.4 25.9 22.9

RoCE (%) 14.6 14.1 19.9 24.6 22.2

Dividend yield (%) 0.2 0.2 0.3 0.6 0.6

Net debt/equity (x) 0.3 0.4 (0.1) (0.0) (0.1)




`

Rating: Buy Target Price: `2,912 Share Price: `2,477


Source: Bloomberg

NTCPH

Sensex1,200

1,600

2,000

2,400

2,800

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data NTCPH IN / NATP.BO52-week high / low `2,709 / `1,245Sensex / Nifty 27080 / 81903-m average volume $2.8m Market cap `81.9bn / $1.3bnShares outstanding 34.8m




13 October 2015

Natco Pharma

US generics to drive high growth; Buy

We maintain a Buy on Natco Pharma, with a target price of `2,912. We expect its niche product opportunities to take off in FY16-17, including in Copaxone, Sovaldi, Tracleer, Tamiflu, Vidaza, etc. This would lead to strong revenue and earnings.

US generics to be ramped up. We believe launches of complex products such as generic versions of Copaxone, Tracleer, Vizada, Entocort, etc., would boost its US generics business. With the successful launch of Tamiflu (FTF) providing it the further fillip, we expect $97m revenue by FY18 (from $17m in FY15). The company has built up a strong pipeline for the US market, chiefly comprising FTFs (first-to-file), para-IVs, complex para-III filings and the less-competitive oncology products.

Sovaldi launch to give a fillip to RoW formulations. The Sovaldi launch could be the catalyst to Natco’s RoW business. Natco has already secured approval to launch the drug in Nepal (among the first approvals in the RoW market) and it expects to secure approvals across multiple major RoW markets over the next few quarters. We expect RoW formulations to register a 62% CAGR over FY15-18, to `1bn.

Sovaldi, an interesting opportunity for domestic formulations. Natco is one of the companies to obtain a license from Gilead (the innovator) to launch Sovaldi in India. We believe that this is a significant opportunity for the company, considering its early-mover advantage. We expect its domestic formulations revenue to register a 21% CAGR over FY15-18.

Valuation. We maintain Buy on the stock with a revised target price of `2,912 (earlier `3,054) based on 20x FY18e base business earnings and `369 per share for Para IV pipeline (Revlimid, Tamiflu, Tykerb and Fosrenol). Risks: Currency fluctuations, delay in approval of para-IV products.

Estimates revision (%) FY16e FY17e

Sales (4.0) (3.7)EBITDA (5.0) (4.8)EPS (6.5) (5.8)

13 October 2015 Natco Pharma - US generics to drive high growth; Buy



Net revenues 7,389 8,253 12,302 17,311 18,768Revenue growth (%) 11.2 11.7 49.1 40.7 8.4- Oper. expenses 5,596 6,119 8,640 11,542 12,445EBIDTA 1,793 2,134 3,662 5,769 6,323EBITDA margins (%) 24.3 25.9 29.8 33.3 33.7- Interest 366 317 251 161 131- Depreciation 305 473 517 656 803+ Other income 167 149 176 253 288- Tax 309 351 675 1,145 1,249Effective tax rate (%) 23.9 23.5 22.0 22.0 22.0+ Associates/(Minorities) (46) (44) - - -Adjusted PAT 1,027 1,186 2,394 4,060 4,428+ Extraordinary items - 160 - - -Reported PAT 1,027 1,346 2,394 4,060 4,428Adj. FDEPS (`/sh) 29.5 34.0 68.7 116.6 127.1Adj. FDEPS growth (%) 29.6 15.4 101.9 69.6 9.1Source: Company, Anand Rathi Research


Adjusted PAT 1,027 1,186 2,394 4,060 4,428+ Non-cash items 291 161 517 656 803Cash profit 1,318 1,347 2,911 4,716 5,231- Incr./(decr.) in WC 640 858 654 1,426 466Operating cash-flow 678 488 2,258 3,290 4,765- Capex 300 1,100 1,500 3,500 2,000Free cash-flow 378 (612) 758 (210) 2,765- Dividend 193 189 336 570 622+ Equity raised 1,085 - 3,409 - -+ Debt raised (451) 651 (1,463) (500) -- Investments (0) (305) - - -- Misc. items 835 195 - - -Net cash-flow (16) (39) 2,368 (1,280) 2,143+ Op. cash & bank bal. 127 111 71 2,438 1,158Cl. Cash & bank bal. 111 71 2,438 1,158 3,301Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 331 332 348 348 348Reserves & surplus 6,928 8,128 13,579 17,069 20,875Net worth 7,259 8,461 13,927 17,417 21,223Total debt 2,404 3,055 1,593 1,093 1,093Minority interest 69 50 50 50 50Def. tax liab. (net) 431 119 119 119 119Capital employed 10,163 11,686 15,689 18,679 22,485Net fixed assets 7,365 7,930 8,913 11,756 12,954Intangible assets 320 460 460 460 460Investments 19 17 17 17 17- of which, Liquid 3 1 1 1 1Working capital 2,348 3,208 3,862 5,288 5,754Cash 111 71 2,438 1,158 3,301Capital deployed 10,163 11,686 15,689 18,679 22,485Working capital (days) 94 127 121 118 118Book value (`/sh) 219.5 254.6 399.9 500.1 609.3Source: Company, Anand Rathi Research


P/E (x) 84.3 73.0 36.2 21.3 19.6Cash P/E (x) 65.0 52.2 29.7 18.4 16.6EV/EBITDA (x) 49.6 42.0 23.4 15.0 13.3EV/sales (x) 12.0 10.9 7.0 5.0 4.5P/B (x) 11.3 9.8 6.2 5.0 4.1RoE (%) 16.3 15.0 21.4 25.9 22.9RoCE (%) 14.6 14.1 19.9 24.6 22.2Dividend yield (%) 0.2 0.2 0.3 0.6 0.6Dividend payout (%) 16.1 13.7 12.0 12.0 12.0Net debt/equity (x) 0.3 0.4 (0.1) (0.0) (0.1) Interest coverage (x) 4.1 5.2 12.5 31.7 42.1 Debtor (days) 59 85 85 85 85 Inventory (days) 89 97 92 87 87 Payables (days) 54 55 57 55 54Fixed asset T/O (x) 1.0 1.0 1.4 1.6 1.5Source: Company, Anand Rathi Research



15x

25x

35x

Natco0

500

1,000

1,500

2,000

2,500

3,000

3,500

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

(`)

Others6%

Sale of dossiers1%


30%

Exports formulations

19%

APIs31%

US Retail & Brazil13%





Sales (` m) 4,657 4,647 5,463 6,790 8,275

Net profit (` m) 268 159 332 506 695

EPS (`) 29.9 17.8 37.1 56.5 77.6

Growth (%) 94.6 (40.5) 108.3 52.4 37.2

PE (x) 27.9 46.9 22.7 14.9 10.8

PBV (x) 5.2 4.6 3.9 3.2 2.5

RoE (%) 24.0 11.2 18.8 23.6 25.9

RoCE (%) 13.0 10.5 14.0 16.6 18.0

Dividend yield (%) 0.4 0.2 0.4 0.5 0.7

Net debt/equity (x) 1.3 1.1 0.9 0.8 0.7


Healthcare


13 October 2015

Neuland Labs

Niche API play, with turnaround potential; initiating, with a Buy

We initiate coverage on Neuland Labs with a Buy rating and target price of `1,241, based on 16x FY18e earnings. We are positive about the company due to its pipeline of niche APIs, better revenue mix and the potential of a significant turnaround from the past four stagnant years. The ramp-up in its customised-manufacturing-solutions business for supplies to innovators would improve profitability.

Niche API play. Of Neuland’s revenue, 85% comes from its API business; the key APIs currently sold are ciprofloxacin, levofloxacin, mirtazapine, levetiracetam and entacapone. We expect revenue in this business to register a 14.7% CAGR over FY15-18 driven by the launch of products such as aripiprazole, propofol, salmeterol, etc., which may turn out to be huge revenue opportunities. Upon generic approval, the company has already entered into contracts with customers for supplies.

CMS business to ramp up, with greater profitability. The CMS business brings ~15% to revenue and includes supplies for molecules under clinical trials and commercial supplies to mid-size pharma companies in the US and EU. We expect this business to ramp up with a high 44% CAGR over FY15-18, fuelled by an increase in commercial supplies and additional revenue from the partnership with Mitsubishi API Corp.

Better financials. We expect Neuland to register 22% revenue and 63% PAT CAGRs over FY15-18, with margins improving 360bps to 17%. The high profitability would help reduce debt-equity to 0.7x by FY18 (from 1.1x now). We expect the RoE and RoCE to improve to 25.9% and 18%, respectively, by FY18 from 11.2% and 10.5% currently.

Valuation. The stock trades at compelling valuations of 14.8x FY17e and 10.8x FY18e earnings. We value it at `1,241, based on 16x FY18e earnings. Risks. Delay in launch of (new) products and keener-than-expected competition in niche APIs.

Rating: Buy Target Price: `1,241

Share Price: `827


Source: Bloomberg

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Key data NLL IN / NEUL.BO52-week high / low `923 / `310Sensex / Nifty 27080 / 81903-m average volume $0.5m Market cap `7.4bn / $113mShares outstanding 9m


Promoters 51.7 51.7 51.7 - of which, Pledged 2.3 2.3 2.3Free Float 48.3 48.3 48.3 - Foreign Institutions 1.5 1.5 1.5 - Domestic Institutions 2.2 1.0 1.1 - Public 44.6 45.8 45.7

13 October 2015 Neuland Labs - Niche API play, with turnaround potential; initiating, with a Buy



Net revenues 4,657 4,647 5,463 6,790 8,275 Revenue growth (%) 1.1 -0.2 17.6 24.3 21.9- Oper. expenses 3,951 4,025 4,616 5,670 6,868 EBIDTA 706 622 847 1,120 1,407 EBITDA margins (%) 15.2 13.4 15.5 16.5 17.0- Interest 246 274 254 268 282 - Depreciation 149 153 162 182 202 + Other income 34 52 58 63 70 - Tax 78 88 156 227 298 Effective tax rate (%) 22.6 35.6 32.0 31.0 30.0+ Associates/(minorities) (1) - - - -Adjusted PAT 268 159 332 506 695 + Extraordinary items - - - - -Reported PAT 268 159 332 506 695 Adj. FDEPS (`/sh) 29.9 17.8 37.1 56.5 77.6Adj. FDEPS growth (%) 94.6 (40.5) 108.3 52.4 37.2Source: Company, Anand Rathi Research


Adjusted PAT 268 159 332 506 695+ Non-cash items 226 173 162 182 202Cash profit 494 333 494 688 897- Incr./(decr.) in WC 214 459 190 469 525Operating cash-flow 280 (126) 304 219 372- Capex 87 103 350 350 350Free-cash-flow 193 (229) (46) (131) 22- Dividend 27 16 32 49 67+ Equity raised 0 241 0 0 0+ Debt raised (103) 55 50 150 50- Investments 0 0 0 0 0- Misc. items 5 52 0 0 0Net cash-flow 59 (1) (29) (30) 4+ Op. cash & bank bal. 12 71 70 41 11Cl. Cash & bank bal. 71 70 41 11 15Source: Company, Anand Rathi Research

Fig 5 – PE band



Share capital 77 90 90 90 90Reserves & surplus 1,163 1,524 1,824 2,281 2,909Net worth 1,240 1,614 1,914 2,371 2,998Total debt 1,735 1,790 1,840 1,990 2,040Minority interest 3 2 2 2 2Def. tax liab. (net) 104 124 124 124 124Capital employed 3,082 3,531 3,881 4,488 5,165Net fixed assets 1,648 1,638 1,826 1,994 2,142Intangible assets 6 8 8 8 8Investments 74 74 74 74 74 - of which, Liquid - - - - -Working capital 1,283 1,742 1,932 2,401 2,926Cash 71 70 41 11 15Capital deployed 3,082 3,531 3,881 4,488 5,165Working capital (days) 101 137 129 129 129Book value (`/sh) 160.5 180.2 213.7 264.8 334.8Source: Company, Anand Rathi Research





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APIs84%

Custom manufacturing

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Niche API play Neuland’s business and operational expertise for over 30 years

since inception has been the manufacturing of active pharmaceutical ingredients (APIs).

The company generates 85% of its revenue from its API business, with the key APIs currently sold being ciprofloxacin, levofloxacin, mirtazapine, levetiracetam, entacapone, etc.

We expect revenue from the API business to register a 14.7% CAGR over FY15-18, fuelled by the launch of products such as aripiprazole, propofol and salmeterol.

Business model

Neuland is strong in the API segment. For more than 30 years its core business and operational expertise has been the manufacturing and marketing of APIs. It caters to diverse therapeutic categories: ophthalmics, schizophrenia, vasodilators, fluoroquinolones, iron-chelators, chronic obstructive pulmonary diseases, cardiovasculars, the central nervous system, anti-infectives, anti-depressants, anti-asthmatics, anti-fungals, anti-ulcerants and anti-spasmodics. It has more than 75 products, with 650 DMFs globally, to meet customer needs in many therapeutic areas. In addition to APIs, it has a customised-manufacturing-solutions business where it supplies for innovative products during trials and commercialisation.

Established API player

Today Neuland has nearly 40 commercial products sold to around 450 generics and innovator companies in 70 countries, primarily in the highly regulated markets of Europe, North America and Japan. It has become a preferred and reliable source for leading pharmaceutical companies worldwide. This is primarily due to consistency in product quality, knowledge and ability to deal with niche chemistries, and on-time delivery performance. Its key molecules are ciprofloxacin, salmeterol, mirtazapine, enalapril maleate, sotalol hcl, levetiracetam, entacapone, levofloxacin, and several NCE molecules.

Its strong pipeline of niche APIs would ensure strong growth

momentum in mid- to long term

Fig 7 – Business mix, by revenue (FY15)

Source: Company

Fig 8 – Geographical mix (FY15)

Source: Company

APIs85%

Custom manufacturing

15%

Europe53%

North America31%

ROW11%

Japan 4%

India1%



Fig 9 – DMF pipeline Regulatory Agency No. Of DMFs registered

US FDA 48

Canada 23

EU 378

EDQM (COS) 19

Japan 5

Korea 9

RoW 84

Total 566

Source: Company

Diversified customer and product basket

The company has a diversified customer and product basket, with no major concentration risk. The share of revenue from ciprofloxacin (the largest) has been coming down over the years and now accounts for ~15% of revenue. We expect this to go down further to 12.7% by FY18. Further, the top-five products bring 47% to revenue and the top-five customers, 43%. Hence, concentration risk is insignificant.

Fig 10 – Key DMF filings Molecule Brand Date of filing Indication Market Size ($ m) No. of DMF filers

Ipratropium bromide Atrovent 06-Nov-00 Anti-arrhythmic 220 5

Moxifloxacin hydrochloride Vigamox 19-Sep-05 Anti-bacterial 200 13

Olanzapine Zyprexa 24-Mar-06 Anti-psychotic 2,000 23

Ropinirole hydrochloride Requip 10-Jul-06 Anti-Parkinson’s 300 13

Escitalopram oxalate Lexapro 07-Aug-06 Anti-depressant 1,800 18

Palonosetron hydrochloride Aloxi 11-Dec-07 Anti-emetic 478 15

Donepezil hydrochloride Aricept 11-Dec-07 Anti-Alzheimer’s 2,400 27

Entacapone Comtan 11-Apr-08 Anti-Parkinson’s 60 17

Tiotropium bromide Spiriva 06-Feb-09 Bronchodilator 3,027 5

Aripiprazole Abilify 24-Jun-09 Anti-psychotic 5,200 33

Salmeterol xinafoate Advair 22-Jul-09 Bronchodilator 5,500 12

Linezolid Zyvox 29-Dec-10 Anti-bacterial 430 17

Ezetimibe Zetia 01-Dec-11 Anti-lipemic 1,350 10

Pemetrexed disodium Alimta 22-Dec-11 Oncology 1,200 15

Deferasirox Exjade 26-Jan-12 Chelating agent 240 10

Bosentan monohydrate Tracleer 09-May-12 Pulmonary arterial hypertension (PAH) 1,650

Paliperidone palmitate Invega Sustenna 02-Jul-12 Anti-psychotic 525 5

Ropinirole base Requip 14-Sep-12 Anti-Parkinson’s 300 1

Brinzolamide Azopt 28-Feb-13 Opthalmic 160

Propofol Diprivan 13-Aug-13 Anesthetic 120 7

Ethacrynic Edecrin 03-Sep-13 Diuretic 40

Alcaftadine Lastacaft 08-May-14 Opthalmic 32

Source: Company, Anand Rathi Research.



Fig 11 – Customer and product diversification (FY15)

Source: Company

‘Low-value, high-volume’ mix to a ‘high-value’-product mix

One of Neuland’s key molecules, ciprofloxacin (high-volume, low-margin) brings 25% to its API revenue, the rest arises from the non-cipro category. Ahead, the company’s strategy is to tilt the business mix from ‘low-value, high-volume’ to ‘high-value’ products and aims to add 10-12 products every year. We expect APIs (excluding ciprofloxacin) to register an 18.3% revenue CAGR over FY15-18, powered by product launches. The ciprofloxacin business is expected to be flattish as the focus is largely on high-value, low-volume products.

Further, the company expects the number of products with an over-20% market share to triple from six in FY15 to 18 in FY18. The number of products with an over-40% market share would increase from three in FY15 to nine by FY18. This clearly indicates the vast potential of products in the pipeline, which would then accelerate the revenue growth momentum. The number of products with a revenue size of over `200m for Neuland is also expected to double from four currently to eight by FY18.

Fig 12 – Ciprofloxacin and non-ciprofloxacin revenue contribution to API business


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API business revenue to record a 14.7% CAGR

Overall, we expect revenue in the API business to record a 14.7% CAGR over FY15-18, driven by the launch of products, such as aripiprazole, propofol, salmeterol, etc., which may turn out to be enormous revenue opportunities. Upon generic approvals, the company has entered into contracts with customers for supplies, and is moving up the value scale in the APIs it manufactures.

Fig 14 – API growth momentum


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CMS business to ramp up The CMS business brings ~15% to revenue and includes

supplies for molecules in clinical trials and commercial supplies to mid-size pharma companies in the US and the EU.

We expect this business to ramp up, with a high (44%) CAGR over FY15-18, fuelled by an increase in commercial supplies and additional revenue from the partnership with Mitsubishi API Corp.

Scaling up the CMS business

Neuland provides customized manufacturing solutions (CMS) to develop and manufacture pharmaceutical ingredients and intermediates in line with customers’ expectations. This serves the pharmaceutical sector and provides clients with comprehensive services—from drug development to manufacturing. The CMS business includes:

Manufacturing APIs to customer specifications

Designing and developing manufacturing processes

Process optimisation for competitiveness

Filing of DMFs/CMCs for the APIs

Patent protection for the processes

Neuland’s customers are large MNCs, mid-sized pharmaceutical companies, standalone research organizations as well as large generics companies. At present, the company is working with more than 20 companies worldwide. It offers both small-scale clinical-trial quantities and commercial-scale requirements. It supports customers with commercially viable and scalable API processes for life-cycle management, involving second-generation processes. We expect revenue from the existing base CMS business to register a 15% CAGR over FY15-18, driven by the ramp-up in supplies of existing products and possible commercialisation of products in clinical trials.

Fig 15 – Growth momentum in the base CMS business


APIC contract to accelerate growth momentum

Neuland Labs has strengthened its CMS business and access to the Japanese market through a new manufacturing collaboration with

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The ramp-up in existing contracts and additional revenue from APIC contracts would increase the share of the high-margin CMS business—

from 15% in FY15 to 26% in FY18



Mitsubishi API Corp., which produces APIs, intermediates and investigational new drugs, along with fine chemicals and reagents. Neuland also intends to continue to independently expand its already-sizeable business in Japan, building on its significant customer base for both generic API manufacturing and customised manufacturing of APIs and intermediates. This collaboration with Mitsubishi API Corp. has already been valuable in increasing the understanding of the unique requirements of the Japanese market.

During FY15, the company successfully commissioned a new block to manufacture APIs in collaboration with APIC (a subsidiary of Mitsubishi Chemicals, Japan). Management foresees potential in Japan and this collaboration paves the way for a strong foothold there. We expect revenue from this partnership to come at `500m in FY17 and `1bn in FY18.

CMS business revenue to record a strong 44% CAGR

At present, the CMS (a margin-accretive) business brings ~15% (`697m) to revenue. Management expects to increase this to 30% of revenue in the next three years. The partnership with Mitsubishi API Corp. is a step in that direction. During Q1 FY16 the company filed an NDA of one of its products in the CMS portfolio, thus paving the way to the US markets.

We expect the contribution from the high-volume segment to be gradually replaced with the CMS segment and to register healthy revenue growth of 44% over FY15-18, fuelled by an increase in commercial supplies and additional revenue from the partnership with Mitsubishi API Corp.

Fig 16 – CMS growth momentum


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Financials We expect Neuland to register a 22% revenue CAGR over FY15-

18, fuelled by its pipeline of niche APIs, a better revenue mix and the potential of a significant turnaround from the past four years of stagnancy.

We estimate its adjusted PAT to record a strong 64% CAGR, driven by robust revenue and a healthy margin over FY15-18.

We expect that, with higher PAT growth, its balance sheet would improve, which could result in lower leverage and a better RoE and RoCE.

A 22% revenue CAGR over FY15-18

We expect Neuland to register a 22% CAGR in revenue, to `8.3bn, over FY15-18. The growth is likely to be driven by a margin-accretive portfolio, namely high-value APIs (through the launch of products, which would turn out to be vast revenue opportunities). Its CMS business would, similarly, register healthy revenue growth, driven by an increase in commercial supplies and additional revenue from its partnership with Mitsubishi API Corp, in our view.



Fig 18 – Revenue break-up (`m) FY14 FY15 FY16e FY17e FY18e

APIs 3,958 3,950 4,445 5,131 5,953

% of total sales 85.0 85.0 84.7 78.3 74.3

% yoy (8.6) (0.2) 12.5 15.4 16.0

Cipro 1,090 970 1,019 1,019 1,019

% of APIs 27.5 24.6 22.9 19.9 17.1

% yoy (25.3) (11.0) 5.0 - -

Non-cipro 2,868 2,980 3,427 4,112 4,935

% of APIs 72.5 75.4 77.1 80.1 82.9

% yoy (0.0) 3.9 15.0 20.0 20.0

Custom manufacturing 699 697 802 1,422 2,060

% of total sales 15.0 15.0 15.3 21.7 25.7

% yoy 152.8 (0.2) 15.0 77.4 44.9

Sales 4,657 4,647 5,247 6,553 8,013


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APIs and a ramp-up in the CMS business



EBITDA margin to be strong

We expect the EBITDA margin to improve 360bps over FY15-18 and come strong at 17%; in absolute terms we expect EBITDA to register a 31.3% CAGR over FY15-18, powered by strong revenue growth in both its APIs and CMS businesses.

Fig 19 – EBITDA and margin trend


A 64% adjusted-net-profit CAGR

We expect a 64% CAGR in adjusted net profit over FY15-18, to `695m, boosted by strong revenue growth and a healthy EBITDA margin. The growth in net profit, we estimate, would be considerably more than that in revenue, largely because of no major increase in the depreciation charge.



Healthy return ratios

We expect Neuland to deliver a healthy RoE and RoCE of, respectively, 25.9% and 18% in FY18 as a result of the margin expansion and strong profitability.

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Fig 21 – Healthy return ratios


Strong balance sheet

Net debt-to-equity has fallen from 2.7x in FY11 to 1.1x in FY15, and is likely to further slip to 0.7x by FY18, in our view, given the 64% PAT CAGR expected over FY15-17 and the generation of free-cash-flows, thus strengthening the balance sheet. We expect the interest-coverage ratio to improve to 4.3x in FY18, from 1.7x now.



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Revenues 4,657 4,647 5,463 6,790 8,275 Growth in revenues (%) 1.1 (0.2) 17.6 24.3 21.9 Raw materials 2,466 2,440 2,841 3,497 4,220 % of sales 52.9 52.5 52.0 51.5 51.0 Personnel expenses 417 516 574 713 869 % of sales 9.0 11.1 10.5 10.5 10.5 Selling and other expenses 1,068 1,069 1,202 1,460 1,779 % of sales 22.9 23.0 22.0 21.5 21.5 EBITDA 706 622 847 1,120 1,407 EBITDA margin (%) 15.2 13.4 15.5 16.5 17.0 Depreciation 149 153 162 182 202 PBIT 557 469 685 939 1,205 Interest expenses 246 274 254 268 282 PBIT from operations 311 195 431 670 923 Other non operating income 34 52 58 63 70 PBT before extraordinary items 346 247 489 734 992 Extraordinary income/ (expenses) - - - - - PBT 346 247 489 734 992 Provision for tax 78 88 156 227 298 Effective tax rate (%) 22.6 35.6 32.0 31.0 30.0 PAT 268 159 332 506 695 Minority interest (1) (0) - - - PAT after minority interest 268 159 332 506 695 Adjusted PAT 268 159 332 506 695 Growth in PAT (%) 94.6 (40.5) 108.3 52.4 37.2 PAT margin (%) 5.8 3.4 6.1 7.5 8.4


Fig 24 – Balance sheet (` m) Y/E March FY14 FY15 FY16e FY17e FY18e Equity share capital 77 90 90 90 90Reserves 1,163 1,524 1,824 2,281 2,909Shareholders' fund 1,240 1,614 1,914 2,371 2,998Minority interest 3 2 2 2 2Debt 1,735 1,790 1,840 1,990 2,040Deferred tax liability 104 124 124 124 124Capital employed 3,082 3,531 3,881 4,488 5,165 Gross block 2,602 2,637 2,987 3,337 3,687Accumulated depreciation 1,294 1,406 1,567 1,749 1,951Net block 1,309 1,231 1,419 1,587 1,735Capital WIP 346 415 415 415 415Total fixed assets 1,654 1,645 1,834 2,002 2,150Investments 74 74 74 74 74Inventories 934 1,134 1,123 1,395 1,700Debtors 1,186 1,288 1,392 1,730 2,108Cash and bank balances 71 70 41 11 15Loans and advances 682 728 856 1,064 1,297Other current assets 235 175 206 256 312Total current assets 3,107 3,396 3,618 4,457 5,433Current liabilities and provisions 1,673 1,493 1,538 1,911 2,329Net current assets 1,434 1,903 2,080 2,545 3,103Other long-term liabilities 29 27 32 40 49Long-term provisions 51 64 75 93 114Misc. expenditure Assets 3,082 3,531 3,881 4,488 5,165




Fig 25 – Cash-flow statement (` m) Y/E March FY14 FY15 FY16e FY17e FY18e Cash flow from operating activities Profit before tax 346 247 489 734 992Depreciation 149 153 162 182 202Interest expenses 246 274 254 268 282Operating profit before working capital change 741 674 904 1,184 1,476Working-capital adjustment (214) (459) (190) (469) (525)Gross cash generated from operations 526 215 714 714 951Direct taxes paid (1) (68) (156) (227) (298)Cash generated from operations 525 148 558 487 654 Cash-flow from investing activities Capex (87) (103) (350) (350) (350)Investment (0) (0) - - -Cash generated from investment activities (87) (104) (350) (350) (350) Cash-flow from financing activities Proceeds from share capital and premium Borrowings/ (repayments) (103) 55 50 150 50Interest paid (246) (274) (254) (268) (282)Dividend paid (27) (16) (32) (49) (67)Cash generated from financing activities (375) (234) (236) (167) (300)Other / misc. (4) 189 Net cash increase / (decrease) 59 (1) (29) (30) 4


Fig 26 – Ratios Y/E March FY14 FY15 FY16e FY17e FY18e Margin ratios (%) EBITDA margin 15.2 13.4 15.5 16.5 17.0PBIT margin 12.0 10.1 12.5 13.8 14.6PBT margin 7.4 5.3 8.9 10.8 12.0PAT margin 5.8 3.4 6.1 7.5 8.4Growth ratios (%) Revenues 1.1 (0.2) 17.6 24.3 21.9EBITDA 22.4 (12.0) 36.2 32.3 25.6Net profit 94.6 (40.5) 108.3 52.4 37.2Return ratios (%) RoCE 13.0 10.5 14.0 16.6 18.0RoIC 15.2 9.7 13.2 15.4 17.3RoE 24.0 11.2 18.8 23.6 25.9Turnover ratios Asset turnover ratio (x) 2.8 2.8 3.1 3.5 4.0Working capital cycle (days) 101 137 129 129 129Average collection period (days) 93 101 93 93 93Average payment period (days) 74 90 75 75 75Inventory holding (days) 73 89 75 75 75Per share (`) EPS 29.9 17.8 37.1 56.5 77.6CEPS 54.0 34.9 55.2 76.8 100.1Book value 160.5 180.2 213.7 264.8 334.8Solvency ratios Debt / equity 1.3 1.1 0.9 0.8 0.7Interest coverage 2.3 1.7 2.7 3.5 4.3Net Debt / EBITDA 2.4 2.8 2.1 1.8 1.4Valuation parameters (x) P/E 27.9 46.9 22.5 14.8 10.8P/BV 5.2 4.6 3.9 3.2 2.5EV/ EBITDA 12.9 14.8 11.0 8.4 6.8EV / sales 2.0 2.0 1.7 1.4 1.1M-cap / sales 1.6 1.6 1.4 1.1 0.9




Valuation Considering Neuland’s persistent strong growth momentum (a 64% PAT CAGR over FY15-18), a sturdy business model (healthy pipeline of niche APIs, better revenue mix and the potential of a significant turnaround from the past four stagnant years), and improving RoEs and RoCEs, we are sanguine about its mid- to long-term prospects.

The stock has experienced a significant re-rating in the recent past as the company has been consistently delivering strong growth along with margin expansion. Further, we expect revenue to scale up from FY16, adding to the growth momentum. The ramp-up in the CMS- (customised manufacturing solutions) business for supplies to innovators would improve profitability. At present, the stock trades at 14.8x FY17e and 10.8x FY18e earnings. We initiate coverage on Neuland Labs, with a price target of `1,241 based on 16x FY18e earnings. Our target PE multiple is in line with the valuations of peer pharmaceuticals companies considering the company’s high growth momentum, strong balance sheet and margin expansion.

Fig 27 – Mean PE and Standard deviation


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Company Background & Management Company overview

Established over 30 years ago, headquartered in Hyderabad, India, Neuland is a leading manufacturer of active pharmaceutical ingredients and an end-to-end solutions provider for the pharmaceutical industry for chemistry-related services. The bulk of its revenue arises from APIs (85%), the rest from CMS. The company operates in eight major therapeutic categories: cardio-vasculars, the central nervous system, anti-infectives, anti-asthmatics, anti-fungals, anti-ulcerants and anti-spasmodics.

Neuland has meaningful footprints in several countries, with more than 80% of its revenue arising from exports. The US and Europe are key markets, accounting for 70% of its exports.

The company has 650 DMFs with various health authorities the world over (including 48 DMFs with the US FDA).

Fig 28 – Manufacturing units Plant Location Product category Capacity p.a. Approvals Bonthapally APIs 175.47 kl US FDA, EDQM and PMDA

Pashamylaram APIs 300.10 kl US FDA and PMDA

Source: Company

Fig 29 – Management and Board of Directors Name Position Profile

Dr Davuluri Rama Mohan Rao

CMD Masters in science from Andhra University, post-graduate diploma in technology from IIT, Kharagpur; PhD in organic chemistry from The University of Notre Dame, USA. Senior positions in R&D, production and quality assurance at Glaxo India for about ten years; Director, R&D and quality assurance at Unique Chemicals, Mumbai

Mr Davuluri Sucheth Rao

Whole-time director, CEO

Mechanical engineer, MBA in corporate finance and operations management from the University of Notre Dame, USA. Production group leader in Cummins, USA; later went on to become a green belt in Six Sigma

Mr Davuluri Saharsh Rao

Whole-time director, President

Engineering graduate, Masters in MIS from The Weatherhead School of Management, Cleveland, Ohio, USA, and MBA from The University of North Carolina, USA. For nearly three years with Sify

Source: Company


Healthcare



Sales (` m) 5,103 5,209 5,321 7,095 8,395

Net profit (` m) 1,442 1,088 1,157 1,679 2,103

EPS (`) 11.3 8.5 9.1 13.2 16.5

Growth (%) 367.4 (24.6) 6.4 45.1 25.2

PE (x) 24.7 32.8 30.8 21.2 16.9

PBV (x) 12.4 6.4 5.8 5.1 4.2

RoE (%) 68.8 26.4 19.7 25.6 27.2

RoCE (%) 53.0 24.8 21.2 28.2 29.7

Dividend yield (%) 3.5 0.2 0.5 0.8 1.5

Net debt/equity (x) (0.0) (0.3) (0.3) (0.3) (0.3)




`



Source: Bloomberg

SVLS

Sensex170

200

230

260

290

320

350

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data SVLS IN / SUVP.BO52-week high / low `338 / `177Sensex / Nifty 27080 / 81903-m average volume $3.7m Market cap `35.6bn / $544mShares outstanding 127.3m




13 October 2014

Suven Life Sciences

Niche CRAMS and R&D play, Buy

We maintain a Buy on Suven Life Sciences, with a revised target price of `370. We expect its core CRAMS business to do well; besides, the successful completion of trials for SUVN 502 would lead to monetisation of this molecule, providing added potential.

Core CRAMS, a growth driver. Suven’s performance would be driven by its core CRAMS business: more projects, further supplies for molecules in phase II trials. At present, it has 57 in phase I, 53 in phase II and one in phase III. Another molecule, 302, is expected to enter phase II by FY17. We expect its core CRAMS business to register a 16.6% revenue CAGR over FY15-18.

SUVN 502, a lead molecule. For SUVN 502, patient trials with 537 patients will start this month (Oct). This would take 18-20 months to complete and management expects them to be over by FY17. The successful completion of the trials would lead to monetisation of this molecule, providing the further potential.

Specialty chemicals. The Vizag plant will start contributing to specialty chemicals revenue from Q2 FY16. This would enhance the growth momentum in this segment. We expect the specialty chemicals business to register a 12% revenue CAGR over FY15-18.

Financials. We expect revenue and PAT CAGRs over FY15-18 of 17.3% and 24.6%, respectively, along with an improvement of 300bps in the EBITDA margin, to 33.6%. Excluding innovative R&D, the margin could come at 42.5% in FY18.

Valuation. We value the lead molecule SUVN 502 at `47 a share. Our target price of `370 (earlier `336) is based on 16x FY18e base business earnings and the net value of `47 a share for the NCE pipeline. Risks: Delay in repeat orders for commercialised products, failure in innovative R&D.

13 October 2015 Suven Life Sciences - Niche CRMAS and R&D play, Buy



Net revenues 5,103 5,209 5,321 7,095 8,395Revenue growth (%) 97.9 2.1 2.2 33.3 18.3- Oper. expenses 2,913 3,614 3,728 4,792 5,572EBIDTA 2,191 1,595 1,593 2,303 2,823EBITDA margins (%) 42.9 30.6 29.9 32.5 33.6- Interest 105 47 39 24 24- Depreciation 88 118 122 138 158+ Other income 30 86 176 192 240- Tax 586 428 268 471 778Effective tax rate (%) 28.9 28.2 28.0 28.0 27.0+ Associates/(Minorities) - - - - -Adjusted PAT 1,442 1,088 1,157 1,679 2,103+ Extraordinary items - - (468) (468) -Reported PAT 1,442 1,088 689 1,211 2,103Adj. FDEPS (`/sh) 11.3 8.5 9.1 13.2 16.5Adj. FDEPS growth (%) 367.4 (24.6) 6.4 45.1 25.2Source: Company, Anand Rathi Research


Adjusted PAT 1,442 1,088 689 1,211 2,103+ Non-cash items 521 94 122 138 158Cash profit 1,963 1,181 811 1,350 2,261- Incr./(decr.) in WC 550 99 41 335 256Operating cash-flow 1,413 1,082 771 1,014 2,005- Capex 378 1,173 739 600 600Free cash-flow 1,035 (91) 32 414 1,405- Dividend 342 89 202 354 615+ Equity raised (0) 2,000 - - -+ Debt raised (254) 230 (500) - -- Investments (0) - - - -- Misc. items (22) (67) - - -Net cash-flow 462 2,118 (670) 60 790+ Op. cash & bank bal. 218 680 2,797 2,127 2,187Cl. Cash & bank bal. 680 2,797 2,127 2,187 2,977Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 117 127 127 127 127Reserves & surplus 2,528 5,466 6,003 6,860 8,348Net worth 2,644 5,593 6,130 6,987 8,475Total debt 663 897 397 397 397Minority interest - - - - -Def. tax liab. (net) 276 227 227 227 227Capital employed 3,583 6,717 6,754 7,611 9,100Net fixed assets 1,921 2,788 3,454 3,915 4,357Intangible assets - 2 2 2 2Investments 0 0 0 0 0- of which, Liquid 0 0 0 0 0Working capital 983 1,130 1,171 1,506 1,762Cash 680 2,797 2,127 2,187 2,978Capital deployed 3,583 6,717 6,754 7,611 9,100Working capital (days) 70 79 80 77 77Book value (`/sh) 22.6 43.9 48.2 54.9 66.6Source: Company, Anand Rathi Research


P/E (x) 24.7 32.8 30.8 21.2 16.9Cash P/E (x) 23.3 29.6 27.9 19.6 15.8EV/EBITDA (x) 16.3 21.2 21.3 14.7 11.7EV/sales (x) 7.0 6.5 6.4 4.8 3.9P/B (x) 12.4 6.4 5.8 5.1 4.2RoE (%) 68.8 26.4 19.7 25.6 27.2RoCE (%) 53.0 24.8 21.2 28.2 29.7Dividend yield (%) 3.5 0.2 0.5 0.8 1.5Dividend payout (%) 20.3 7.0 25.0 25.0 25.0Net debt/equity (x) (0.0) (0.3) (0.3) (0.3) (0.3)Interest coverage (x) 20.0 31.4 37.6 90.3 111.2Debtor (days) 47 28 28 28 28Inventory (days) 56 57 58 56 55Payables (days) 29 31 30 30 30Fixed asset T/O (x) 2.9 2.2 1.7 1.9 2.0Source: Company, Anand Rathi Research



14x

19x

24x

0

50

100

150

200

250

300

350

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

(`)

Regular CRAMS64%

Specialty Chemicals

36%


Healthcare



Sales (` m) 41,847 46,535 64,968 64,761 72,389

Net profit (` m) 6,639 7,509 14,208 12,470 14,373

EPS (`) 39.2 44.4 83.9 73.7 84.9

Growth (%) 44.1 13.1 89.2 (12.2) 15.3

PE (x) 38.9 34.4 18.2 20.7 18.0

PBV (x) 13.6 10.4 7.4 5.9 4.8

RoE (%) 39.9 34.2 47.6 31.8 29.6

RoCE (%) 20.4 17.2 25.1 19.0 19.6

Dividend yield (%) 0.7 0.7 1.4 1.2 1.4

Net debt/equity (x) 0.1 0.8 0.3 0.1 (0.1)




`

Rating: Hold Target Price: `1,698 Share Price: `1,526


Source: Bloomberg

TRP

Sensex

700

900

1,100

1,300

1,500

1,700

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data TRP IN / TORP.BO52-week high / low `1,720 / `810Sensex / Nifty 27080 / 81903-m average volume $5.2m Market cap `258bn / $3.9bnShares outstanding 169.2m


Promoters 71.3 71.3 71.5 - of which, Pledged - - -

Free Float 28.8 28.8 28.5 - Foreign Institutions 12.4 12.3 12.9 - Domestic Institutions 6.7 6.8 6.5

- Public 9.7 9.7 9.1


13 October 2015

Torrent Pharmaceuticals

Traction ahead; Hold

Considering the fair valuations, we retain our Hold rating on Torrent, with a revised target price of `1,698. We expect its strong revenue and profit growth to continue, driven by the Elder integration and product launches in the US.

Elder integration to drive growth. Integration of Elder’s product range in the domestic market would drive Torrent’s domestic formulations business. The focus on brand building (two brands at present, with more than `1bn revenue; management expects eight such brands by FY19) and portfolio realignment for synergies would boost growth ahead. We expect this segment to register a 16.8% revenue CAGR over FY15-18.

The US, the key growth driver. We believe that, ahead, the US would be the key growth driver, boosted by approvals of products in coming quarters, product launches in the US market and the contribution from Abilify. Torrent has 53 ANDA approvals, 19 pending approvals and 44 products being developed. Management expects 18-20 products a year. Acquisition of Zyg Pharma would boost its operations in dermatology, especially in the US, following the FDA-approved plant, though meaningful revenue contribution would start in the next 3‐4 years

Healthy financials. We expect Torrent to register 16% revenue and 24% PAT CAGRs over FY15-18. Strong profitability growth would result in high RoE and RoCE in FY18 at, respectively, 30% and 19.6%. Also, the balance sheet would be net cash by FY18.

Valuation. The stock trades at fair valuations of 20.7x FY17e and 18x FY18e earnings. We recommend a Hold rating, with a revised target price of `1,698 (earlier `1,474) based on 20x FY18e EPS, as we roll forward our target price to FY18. Risks: Keener-than-anticipated competition in generic Abilify, regulatory hurdles.

13 October 2015 Torrent Pharmaceuticals – Traction ahead; Hold



Net revenues 41,847 46,535 64,968 64,761 72,389Revenue growth (%) 30.3 11.2 39.6 (0.3) 11.8- Oper. expenses 32,332 36,333 44,074 48,010 53,675EBIDTA 9,515 10,202 20,894 16,751 18,714EBITDA margins (%) 22.7 21.9 32.2 25.9 25.9- Interest 586 1,752 1,698 981 556- Depreciation 870 1,907 2,263 2,393 2,513+ Other income 381 2,856 2,010 2,211 2,322- Tax 1,801 1,888 4,736 3,118 3,593Effective tax rate (%) 21.3 20.1 25.0 20.0 20.0+ Associates/(Minorities) 0 0 - - -Adjusted PAT 6,639 7,509 14,208 12,470 14,373+ Extraordinary items - - - - -Reported PAT 6,639 7,509 14,208 12,470 14,373Adj. FDEPS (`/sh) 39.2 44.4 83.9 73.7 84.9Adj. FDEPS growth (%) 44.1 13.1 89.2 (12.2) 15.3Source: Company, Anand Rathi Research


Adjusted PAT 6,639 7,509 14,208 12,470 14,373+ Non-cash items 457 3,084 2,263 2,393 2,513Cash profit 7,096 10,594 16,470 14,863 16,886- Incr./(decr.) in WC 3,035 3,081 606 647 981Operating cash-flow 4,061 7,512 15,864 14,216 15,905- Capex 3,741 22,512 4,000 4,000 4,000Free cash-flow 320 (15,000) 11,864 10,216 11,905- Dividend 1,980 2,284 4,262 3,741 4,311+ Equity raised - - - - -+ Debt raised 4,389 16,086 (12,361) (7,000) (3,000)- Investments 1,252 1,120 - - -- Misc. items 53 (298) - - -Net cash-flow 1,424 (2,021) (4,759) (525) 4,594+ Op. cash & bank bal. 6,270 7,694 5,674 915 390Cl. Cash & bank bal. 7,694 5,674 915 390 4,984Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 846 846 846 846 846Reserves & surplus 18,178 24,059 34,005 42,734 52,795Net worth 19,024 24,906 34,851 43,581 53,642Total debt 11,318 27,404 15,043 8,043 5,043Minority interest 4 4 4 4 4Def. tax liab. (net) (182) 1,047 1,047 1,047 1,047Capital employed 30,164 53,360 50,945 52,675 59,736Net fixed assets 13,808 15,999 17,737 19,344 20,830Intangible assets 286 19,111 19,111 19,111 19,111Investments 1,857 2,977 2,977 2,977 2,977- of which, Liquid 1,856 2,976 2,976 2,976 2,976Working capital 6,519 9,600 10,207 10,854 11,835Cash 7,694 5,674 915 390 4,984Capital deployed 30,164 53,360 50,945 52,675 59,736Working capital (days) 57 75 57 61 60Book value (`/sh) 112.4 147.2 205.9 257.5 317.0Source: Company, Anand Rathi Research


P/E (x) 38.9 34.4 18.2 20.7 18.0Cash P/E (x) 34.4 27.4 15.7 17.4 15.3EV/EBITDA (x) 27.3 27.2 12.9 15.7 13.6EV/sales (x) 6.2 6.0 4.1 4.1 3.5P/B (x) 13.6 10.4 7.4 5.9 4.8RoE (%) 39.9 34.2 47.6 31.8 29.6RoCE (%) 20.4 17.2 25.1 19.0 19.6Dividend yield (%) 0.7 0.7 1.4 1.2 1.4Dividend payout (%) 25.5 25.4 25.0 25.0 25.0Net debt/equity (x) 0.1 0.8 0.3 0.1 (0.1)Interest coverage (x) 14.7 4.7 11.0 14.6 29.1Debtor (days) 96 125 125 125 125Inventory (days) 88 84 73 79 79Payables (days) 125 143 132 129 129Fixed asset T/O (x) 3.3 1.9 1.8 1.7 1.8Source: Company, Anand Rathi Research



8x

12x

16x

20x

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

(`)

India30%

US35%

EU15%

Brazil9%

ROW7%

Contract Mfg4%


Healthcare



Sales (` m) 11,334 12,018 13,579 15,545 17,865

Net profit (` m) 1,365 754 1,206 1,716 2,116

EPS (`) 15.1 8.3 13.3 18.9 23.3

Growth (%) 20.7 (44.8) 60.0 42.3 23.3

PE (x) 20.4 37.0 23.1 16.2 13.2

PBV (x) 3.4 3.2 3.0 2.7 2.4

RoE (%) 17.7 9.0 13.4 17.3 19.2

RoCE (%) 15.7 7.0 13.0 16.7 18.6

Dividend yield (%) 2.6 0.7 1.5 2.2 2.7

Net debt/equity (x) (0.0) (0.0) 0.0 (0.0) (0.0)




`



Source: Bloomberg

UL

Sensex

170

210

250

290

330

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data UN IN / UNLB.BO52-week high / low `334 / `174Sensex / Nifty 27080 / 81903-m average volume $1.3m Market cap `27.9bn / $425mShares outstanding 90.8m




13 October 2015

Unichem Laboratories

Strong recovery now in place; Buy

We are sanguine about Unichem Laboratories’ long-term growth story, and retain our Buy on the stock, with a revised target of `373. With a strong recovery now in place, we believe its domestic formulations business would improve. The higher margins would be aided by the increasing share of domestic brand-named formulations and US generics. This should result in a 41% adj. PAT CAGR over FY15-18.

Domestic formulations recovering. The domestic formulations business has begun showing positive traction, driven by all three clusters: CVD, CND and acute. With the strong recovery now in place, we believe the company’s domestic-formulations business would improve. We expect a 14% revenue CAGR in its domestic-formulations business over FY15-18, driven by volume growth and product launches.

Brand-building. Unichem’s top-10 brands (Losar H, Ampoxin, Unienzyme, Losar, Vizylac, Trika, Serta, Telsar, Unistar and Telsar-H) give rise to ~48% of its domestic revenue. Four—Losar H, Ampoxin, Unienzyme and Losar—are in the top-300.

Strong US sales to boost revenue. Unichem is looking for traction in US generics. It has filed 34 ANDAs with the US FDA and received approval for 18. It has so far launched 12 products. We expect its export formulations to maintain the growth tempo, with a 21% revenue CAGR over FY15-18 consequent on further US filings and subsequent launches.

Valuation. The stock trades at 16.2x FY17e and 13.2x FY18e earnings. We roll forward our target price to FY18 and maintain a Buy with a long-term perspective, with a revised target price of `373 (earlier `280) based on 16x FY18e). Risks: Currency fluctuations and regulatory hurdles.

13 October 2015 Unichem Laboratories - Strong recovery now in place; Buy



Net revenues 11,334 12,018 13,579 15,545 17,865Revenue growth (%) 4.9 6.0 13.0 14.5 14.9- Oper. expenses 9,556 11,004 11,743 12,990 14,804EBIDTA 1,778 1,013 1,836 2,554 3,061EBITDA margins (%) 15.7 8.4 13.5 16.4 17.1- Interest 32 30 47 72 47- Depreciation 457 413 467 533 577+ Other income 423 204 224 251 276- Tax 430 21 340 484 597Effective tax rate (%) 20.3 2.8 22.0 22.0 22.0+ Associates/(Minorities) - -1 - - -Adjusted PAT 1,365 754 1,206 1,716 2,116+ Extraordinary items 328 - - - -Reported PAT 1,693 754 1,206 1,716 2,116Adj. FDEPS (`/sh) 15.1 8.3 13.3 18.9 23.3Adj. FDEPS growth (%) 20.7 (44.8) 60.0 42.3 23.3Source: Company, Anand Rathi Research


Adjusted PAT 1,365 754 1,206 1,716 2,116+ Non-cash items 509 251 467 533 577Cash profit 1,874 1,005 1,673 2,249 2,693- Incr./(decr.) in WC 1,610 (35) 355 495 639Operating cash-flow 265 1,040 1,318 1,754 2,054- Capex (244) 701 1,500 750 750Free cash-flow 509 339 (182) 1,004 1,304- Dividend 848 218 494 703 867+ Equity raised - - - - -+ Debt raised (14) (37) 500 (0) (500)- Investments (274) 295 - - -- Misc. items (355) 41 - - -Net cash-flow 275 (252) (176) 301 (62)+ Op. cash & bank bal. 246 522 270 94 395Cl. Cash & bank bal. 522 270 94 395 333Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 181 182 182 182 182Reserves & surplus 7,985 8,494 9,206 10,219 11,469Net worth 8,166 8,675 9,387 10,401 11,650Total debt 257 220 720 720 220Minority interest - - - - -Def. tax liab. (net) 418 241 241 241 241Capital employed 8,841 9,136 10,349 11,362 12,112Net fixed assets 5,067 5,356 6,389 6,606 6,779Intangible assets 31 30 30 30 30Investments 114 409 409 409 409- of which, Liquid 57 350 350 350 350Working capital 3,107 3,072 3,427 3,922 4,560Cash 522 270 94 395 333Capital deployed 8,841 9,136 10,349 11,362 12,112Working capital (days) 100 93 92 92 93Book value (`/sh) 90.1 95.6 103.4 114.6 128.4Source: Company, Anand Rathi Research


P/E (x) 20.4 37.0 23.1 16.2 13.2Cash P/E (x) 15.3 23.9 16.7 12.4 10.3EV/EBITDA (x) 15.5 27.1 15.3 10.9 9.0EV/sales (x) 2.4 2.3 2.1 1.8 1.5P/B (x) 3.4 3.2 3.0 2.7 2.4RoE (%) 17.7 9.0 13.4 17.3 19.2RoCE (%) 15.7 7.0 13.0 16.7 18.6Dividend yield (%) 2.6 0.7 1.5 2.2 2.7Dividend payout (%) 53.1 24.1 35.0 35.0 35.0Net debt/equity (x) (0.0) (0.0) 0.0 (0.0) (0.0)Interest coverage (x) 41.4 19.7 29.1 28.1 52.9Debtor (days) 63 58 58 58 58Inventory (days) 66 63 60 58 57Payables (days) 48 42 41 40 40Fixed asset T/O (x) 2.1 2.3 2.3 2.4 2.7Source: Company, Anand Rathi Research



10x

14x

18x

0

70

140

210

280

350

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

(`)


54%

Export formulations

28%

Niche Generics9%

Export APIs7%

Domestic APIs2%


Healthcare



Sales (` m) 13,508 13,801 15,773 17,911 19,919

Net profit (` m) 664 721 792 1,100 1,325

EPS (`) 41.0 44.5 48.9 67.9 81.8

Growth (%) (20.6) 8.5 10.0 38.8 20.5

PE (x) 8.2 7.6 6.9 5.0 4.1

PBV (x) 1.1 1.0 0.9 0.7 0.6

RoE (%) 12.4 12.9 13.3 16.1 16.7

RoCE (%) 8.6 8.4 9.6 10.9 11.4

Dividend yield (%) 0.9 - 1.0 1.4 1.7

Net debt/equity (x) 1.7 1.8 1.5 1.3 1.0




`



Source: Bloomberg

VILA

Sensex

150

220

290

360

430

500

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Key data VILA IN / VVMD.BO52-week high / low `435 / `175Sensex / Nifty 27080 / 81903-m average volume $1.0m Market cap `5.5bn / $83.7mShares outstanding 16.2m




13 October 2015

Vivimed Labs

Focus on improving profitability, balance sheet; Buy

In pharmaceuticals, Vivimed’s growth would be driven by its focus on tilting the product mix toward higher-margin products and the new product-development pipeline for APIs and FDFs. Further, the company has announced sale of part of its specialty chemicals business to Clariant Chemicals, for `3.8bn. This would provide the further potential by improving the balance sheet and lowering interest cost. We have not factored this sale into our estimates. We maintain a Buy on the stock, with a target of `654. US generics to drive formulations. Supplies of US generics would also drive the formulations business. The company has two product approvals from the US FDA already in place for losartan and donepezil. In addition, it expects to file 6-8 ANDAs every year on its own in order to broaden its product range. We expect the US generic-formulations business to generate revenue of $12m, $21m and $24m in FY16, FY17 and FY18, respectively.

Steady growth to continue in specialty chemicals. The company has built a strong franchise in specialty chemicals across the personal-care, home-care and industrial segments. Its customers are large multinationals such as Unilever, P&G and L’Oreal. We expect it to register an 11.5% revenue CAGR over FY15-18.

Improving financials. We expect Vivimed to register CAGRs over FY15-18 of 13% in revenue and 22.5% in PAT. Strong profitability growth could lead to better RoE and RoCE from the current 12.9% and 8.4%, respectively, to 16.7% and 11.4% by FY18, in our view. Leverage could also decrease, with debt-equity falling to 1x by FY18, from 1.8x now.

Valuation. We roll forward our target price to FY18, and maintain our Buy on the stock, with a target price of `654 based on 8x FY18e EPS (earlier `600). Risks: Delay in regulatory approvals, currency fluctuations.

13 October 2015 Vivimed Labs - Focus on improving profitability and balance sheet; Buy



Net revenues 13,508 13,801 15,773 17,911 19,919Revenue growth (%) 21.8 2.2 14.3 13.6 11.2- Oper. expenses 11,458 11,632 13,131 14,866 16,533EBIDTA 2,051 2,169 2,642 3,045 3,386EBITDA margins (%) 15.2 15.7 16.8 17.0 17.0- Interest 603 790 817 817 817- Depreciation 661 662 813 801 838+ Other income 82 59 59 59 59- Tax 205 55 278 386 465Effective tax rate (%) 23.6 7.1 26.0 26.0 26.0+ Associates/(Minorities) - - - - -Adjusted PAT 664 721 792 1,100 1,325+ Extraordinary items - - - - -Reported PAT 664 721 792 1,100 1,325Adj. FDEPS (`/sh) 41.0 44.5 48.9 67.9 81.8Adj. FDEPS growth (%) (20.6) 8.5 10.0 38.8 20.5Source: Company, Anand Rathi Research


Adjusted PAT 664 721 792 1,100 1,325+ Non-cash items 666 564 813 801 838Cash profit 1,330 1,284 1,606 1,900 2,163- Incr./(decr.) in WC 821 (115) 498 798 763Operating cash-flow 509 1,400 1,108 1,102 1,400- Capex 1,762 1,239 750 750 750Free-cash-flow (1,253) 161 358 352 650- Dividend 57 - 64 89 108+ Equity raised - - - - -+ Debt raised 2,140 556 - - -- Investments - 25 - - -- Misc. items 725 772 - - -Net cash-flow 106 (79) 294 263 542+ Op. cash & bank bal. 240 346 267 561 823Cl. Cash & bank bal. 346 267 561 823 1,366Source: Company, Anand Rathi Research

Fig 5 – PE Band



Share capital 162 162 162 162 162Reserves & surplus 4,802 4,791 5,519 6,529 7,746Net worth 4,964 4,953 5,681 6,691 7,908Total debt 8,760 9,317 9,317 9,317 9,317Minority interest - - - - -Def. tax liab. (net) 255 94 94 94 94Capital employed 13,979 14,363 15,091 16,102 17,319Net fixed assets 7,459 7,866 7,803 7,752 7,664Intangible assets 1,001 1,172 1,172 1,172 1,172Investments 2 27 27 27 27- of which, Liquid - - - - -Working capital 5,171 5,032 5,529 6,328 7,090Cash 346 267 561 823 1,366Capital deployed 13,979 14,363 15,091 16,102 17,319Working capital (days) 140 133 128 129 130Book value (`/sh) 306.4 345.1 390.1 452.4 527.5Source: Company, Anand Rathi Research


P/E (x) 8.2 7.6 6.9 5.0 4.1Cash P/E (x) 4.1 4.0 3.4 2.9 2.5EV/EBITDA (x) 6.8 6.7 5.4 4.6 4.0EV/sales (x) 1.0 1.1 0.9 0.8 0.7P/B (x) 1.1 1.0 0.9 0.7 0.6RoE (%) 12.4 12.9 13.3 16.1 16.7RoCE (%) 8.6 8.4 9.6 10.9 11.4Dividend yield (%) 0.9 - 1.0 1.4 1.7Dividend payout (%) 7.3 - 7.0 7.0 7.0Net debt/equity (x) 1.7 1.8 1.5 1.3 1.0 Interest coverage (x) 2.3 1.9 2.2 2.7 3.1 Debtor (days) 94 87 87 87 87 Inventory (days) 115 114 107 107 107 Payables (days) 55 50 50 50 50Fixed asset T/O (x) 1.7 1.6 1.8 2.0 2.2Source: Company, Anand Rathi Research



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Pharmaceuticals68%

Speciality Chemicals

32%

India Healthcare - Sector Report

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