Pharma Dolat Capital Report

Sector Note
DOLAT CAPITAL
Indian Pharma Sector
India Research
Global Generics: Patent cliff around?
Sr. Analyst: Milind Bhangale Tel : +9122 4096 9731 E-mail: milindb@dolatcapital.com
September 4, 2013
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Table Of Contents
Sr. No. 1 2 3 4 5 6 Content Executive Summary Generic market to remain buoyant So Far So Good Its Not A Smooth Ride All Way Valuation Matrix Company Snapshots Aurobindo Pharma Biocon Cadila Healthcare Cipla Divis Laboratories Dr Reddys Laboratories GlaxoSmithkline Pharma Glenmark Pharmaceuticals Ipca Laboratories Lupin Sun Pharmaceuticals Page 3 4 7 15 18 19-59 19 23 27 31 35 39 43 45 49 53 57
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Executive Summary
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Global Generics: Patent cliff around?

The Indian pharma players have been one of the biggest beneficiaries of the patent cliff over the last five years. Over time, some of these players have built up sizeable base in the US markets through their systemic approach to tap into the opportunities going off patent, while some have opted to take the direct route through acquisitions. How long can this go on? And how prepared are the Indian players and which ones, to tackle this opportunity as it tapers off next few years? And can there be there other geographies that can present as growth avenues for the companies? We attempt to take a macro view on these issues in this note. GLOBAL GENERICS The global generics market is estimated to grow to USD 430bn in 2016 from USD 242bn in 2011, implying a CAGR of 12%. This compared to the 8% CAGR over 2006-2011 is a marked acceleration. The near-term outlook for US generics remains intact with USD 100bn worth of drugs slated to go off patent over the next five years. While the upcoming patent cliff may throw up selective opportunities for Indian generic companies, we do believe that low lying fruits that created opportunity to reap significant rewards are done. Hence it would require a more selective approach on part of the Indian drug makers to scale up on capabilities towards complex molecules, as well as focus on new areas. We believe Indian generic companies are gearing up for this opportunity through a) Shifting focus towards differentiated platform technologies, b) Niche/complex filings, focusing more on profitability than market share, c) Aggressive Para IV filings, d) Building branded portfolio to tap specialty therapies, e) Orphan/Shortage drugs: future potential for Indian generics, f) M&A activity: tap the complex/ niche opportunity and g) Tie-up/In-licensing deals with innovators. However, challenges such as a) Growing ANDA approval backlog and increasing ANDA approval timelines, b) USFDAs increased focus on cGMP compliance, c) unfair use of restricted drug distribution program by innovators have impacted sentiment.
September 4, 2013
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Generic market to remain buoyant
The global generic market is expected to increase from US$242bn in 2011 to US$430bn by 2016. This growth would be largely driven by patent expiries in developed markets, expanded generic use for off-patent molecules and volume-driven growth in the pharmerging markets. Global Spending, 2011 and 2016
Source: IMS Institute for Healthcare Informatics, IMS Market Prognosis, May 2012
Specialty therapies to drive growth: Specialty medicines will experience continued growth driven by novel mechanisms, improved efficacy and relatively large patient populations leading to increased uptake. However, growth is decelerating in most therapy areas due to patent expiries and the lack of significant new treatment options. Of the 20 largest therapy areas, only classes with anti-epileptics, contraceptives and antivirals (excl.HIV products) will grow faster than in the past 5 years. Spending and Growth in Leading Therapy Areas
Source: IMS Institute for Healthcare Informatics, May 2012
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US share to decline, however continues to be the largest in absolute terms: The US share of global spending on generics is expected to decline from 34% in 2011 to 31% in 2016, while the share of top five European countries is expected to decline from 17% to 13%. The biggest gainer shall be the pharmerging markets going up from USD 194bn in 2011 to USD 359bn in 2016. However in absolute terms, US market will continue to be the biggest market expanding in generic spending from US$325bn in 2011 to US$364bn in 2016. Spending by Geography
Source: IMS Market Prognosis, May 2012
Contribution to Developed Maket Growth
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Pharmerging markets to grow at 13% CAGR over next five years: The Pharmerging markets are expected to nearly double their pharmaceutical spending from US$194bn in 2011 to US$359bn in 2016 and would reach 30% of global spending in 2016, as rising incomes, combined with continued low costs for medicines, will drive significant increase in affordability of basic medicines. Global Growh 2007-2016
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So Far So Good
Indian companies moving up the value chain in US Indian companies have tapped the US market by focusing on opportunities in plain-vanilla generics segment. However, many Indian companies continued to improve their product offerings and look at alternative avenues to generate higher revenues/margins and accelerated growth. These included: 1) Difficult-to-make products having technological barriers to entry either in terms of API manufacture or dosage formulations 2) Niche category products that require dedicated facilities/clinical trials and are not economically viable for more than few generic players. e.g., Cephalosporins, dermatology, controlled substances, hormonal products etc. 3) Paragraph IV opportunities (several generic companies are also settling litigation with innovators, thereby ensuring upside and removing litigation risks) and 4) Focus on specialty branded products, e.g. Suprax, Antara (Lupin); Promius pharma Branded specialty company of Dr Reddys, DUSA acquisition by Sun pharma for entry into branded dermatology segment. While the upcoming patent cliff may throw up selective opportunities for Indian generic companies, we do believe that low lying fruits that created opportunity to reap significant rewards are done. Hence it would require a more selective approach on part of the Indian drug makers to scale up on capabilities towards complex molecules, as well as focus on new areas. We believe Indian generic companies are gearing up for this opportunity through. A) Differentiated platform technologies B) Niche/complex filings for the US market C) Aggressive Para IV filings D) Building branded portfolio to tap specialty therapies E) Orphan Drugs: Future potential for Indian generics F) Adding differentiated products/technology through acquisitions G) Tie-up/In-licensing deals Firms such as Sun pharma, Dr Reddys and Lupin have created operating niches to derive sustainable growth. For example, Sun continues to operate primarily in the niche, high margin areas of CNS and CVS, and has now forayed into highly profitable dermatology segment through the acquisition of Dusa. DRL has entered into an alliance with Merck to co-develop a portfolio of biosimilar compounds in oncology, primarily focused on monoclonal antibodies (MAbs). This alliance offers a risk mitigation pathway for DRL to take its development capabilities through the clinical phase and then into commercialization.
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Similarly, Lupin has identified ophthalmology, dermatology and respiratory as its medium-term growth drivers. In addition to filing products on its own, the company is also exploring inorganic opportunities in this space to fill contraceptive segment, with eight products pending approval from USFDA. Key products/segments tapped
Company Dr Reddys Key Products launched gGeodon, gZyprexa, gPropecia, gArixtra, gAccolate, gImitrex, gPrilosec, gPrevacid, gPrograf, gAllegra D24, gReclast, gZenatane, gDacogen gTrileptal, gProtonix, gEthyol, gEloxatin, gExelon, gGemzar, gTaxotere, gLexapro, gGabitril, gStalevo, gImitrex inj Suprax, Antara, Ocs, gGeodon, gDiovon, gTricor, gSeasonale, gCombivir, gSeroquel, gGlumetza, gCymbalta, AG Femcon Fe, gKeppra XR, gLotrel gOvcon-35, gOrtho-Novum 1/35, 7/7/7, gDifferin, gCutivate, gLoprox, gAldara, gMircette, gLamictal, gSingulair, gMaxalt, gBactroban Focus areas Para IV products, injectables, CNS
Sun Pharma
Controlled substances, dermatology, OCs, Branded products, dermatology
Lupin
Glenmark
Dermatology, Controlled substance, OCs
Source: Dolat Research
US Sales of Indian Companies
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A. Shifting focus towards differentiated platform technologies Indian generic companies are moving from plain-simple oral generics to differentiated generics based on novel delivery systems including injectables, sprays, aerosols, topical. This strategy not only helps in keeping competition away for a longer period of time, but also provides better pricing environment. Sun Pharma has moved from simple dosage forms like tablets and capsules to differentiated/complex products. The company has developed different drug delivery platform technologies like novel device for inhaled drugs (dry powder inhalation device for uniform dose administration), gastro retentive device for controlled release products (allows longer retention of drugs in stomach and improves GI absorption), targeted drug delivery for nanoemulsions (selective delivery of cytotoxic drugs), bio-degradable injections/implants. B. Niche/complex filings As patent cliff looms, Indian generic companies are building a differentiated product pipeline not only in anti-infectives, CVS and CNS therapies but also niche therapies such as oral contraceptives, dermatology, ophthalmic and controlled substances. Additionally, most Indian companies are focusing on quality filings over quantity to mitigate the risk of volatility on account of sharp price erosions in plain vanilla generic drug market. Focus on niche/complex therapies
C. Aggressive Para IV filings Over the next five years, drugs worth USD 100 bn shall go off-patent. Based on our estimate, we believe that Indian generic companies are targeting USD 40-45bn of opportunity through Para IV filings. Among the Indian generic companies, Dr Reddys, and Lupin have been the most prolific filers for Para IVs due over the next five years, followed by Sun Pharma, Glenmark and Aurobindo respectively.
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Top 5 brands going off-patent in next five years
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D. Building branded portfolio to tap specialty therapies As the US generic market is moving away from plain vanilla generics to specialty/complex products, it is becoming imperative for Indian generics to build branded portfolio. Most Indian large-cap generics have small presence in branded products within the US with marginal contribution to bottom line except for Lupin. This is in contrast to Teva where the branded portfolio accounts for well over half of the companys profitability. However, branded business remains a risky proposition given the risk of generic entry and expensive acquisition multiples. Nonetheless, Indian pharma is seen investing more in building business in this segment given stability in revenues and pricing advantage. Branded portfolio of Indian companies in US
Company Lupin Dr Reddys Sun Pharma Cipla Ranbaxy Branded Product Suprax, Antara, Allernaze (pipeline) Promiseb, Cloderm, Scytera, Epiceram (Specialty dermatology business under Promiuspharma) Ovide, Topicort, Lustra (Taro), Levulan PDT (DUSA) Dymista (Partnership with Meda) Absorica (Isotretinoin), Ximino (Minocycline HCL)
E. Orphan Drugs: Future potential for Indian generics Orphan drug designation is given by the FDA to drugs, which are intended to treat rare diseases that affect less than 200,000 patients in the US. The FDA extends special incentives for companies developing orphan drugs such as seven-year marketing exclusivity, specific tax credits on R&D expenses and waiver of prescription drug user fees. Also, these drugs are approved though a fast track approval process by the FDA, which is to facilitate early commercial launch of the drug. The orphan drugs market grew at a CAGR of 25.8% from 2001 to 2010 versus a CAGR of 20.1% for non-orphan drugs. In another recent study by Evaluate Pharma, orphan drug market is set to grow to USD127bn, at a CAGR of 7.4% between 2012 and 2018, and increase its share in overall prescription market(excluding generics) to 15.9% by 2018 from 5.1% in 1998. Natco pharmas novel anti-cancer drug NRC-AN-019 has received Orphan Drug Designation from the USFDA for three indications namely Glioma (brain tumor), pancreatic cancer and chronic myelogenous leukemia. We expect these products present interesting opportunities for Indian generic companies like Dr Reddys, Sun Pharma, Strides Arcolab, Zydus Cadila and Biocon.
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Orphan drugs approved in 2012
Product Elelyso Kyprolis Bosulif Kalydeco Jakafi Erwinaze Onfi Voraxaze Ferriprox Source: FDA Company Pfizer Onyx Pharma Pfizer Vertex Pharma Incyte Corp EUSA Pharma Lundbeck Btg international, inc ApopharmaInc Molecule Taliglucerasealfa Carfilzomib Bosutinib Ivacaftor Ruxolitinib Asparaginase Erwinia Chrycanthemic Clobazam Glucarpidase Deferiprone Indication Gauchers disease Multiple Myleoma Chronic myelogenous leukaemia Cystic fibrosis Bone Marrow disease Acute lymphoblastic leukemia Seizures associated with Lennox-Gastaux syndrome Toxic methotrexate concentrations in plasma of patients receiving chemotherapy Iron overload
F. Adding differentiated products/technology through acquisition route: In 2012, Indian companies completed four global acquisitions (~USD1 bn) to add differentiated products to their portfolio. Sun Pharma acquired DUSA pharma for ~USD 230mn to gain entry into the drug-device dermatology market. DUSAs key flagship product is Levulan PDT (photodynamic therapy) for treatment of non-hyperkeratoticactinic keratoses or AKs of the face or scalp. Dr Reddys acquired OctoPlus NV for ~USD 36mn to get entry in longacting controlled release technology, which can be applied to various products. DrReddys would capitalize on OctoPluss expertise in injectable specialty generics such as liposomes and microspheres. OctoPluss key asset is Locteron, which is a controlled release interferon alpha2b based on proprietary PolyActive technology. We expect the acquisition route to be one of the most critical in the pursuit of Indian companies to graduate on capabilities.
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Indian pharma on the roll
Company Sun Pharma Target URL Pharma DUSA Pharma Taro Caraco Cipla Dr Reddys Cipla Medpro OctoPlus NV Betapharm BMS labs Roches API facility, Mexico Lupin Irom Kyowa Pharma Dynamics, South Africa Generic Health, Australia Hormosan Pharma, Germany Multicare Pharma, Philippines Acqusition value Details not disclosed USD 230mn USD 454mn NA USD 512mn ~USD 36mn USD 560mn USD 12mn USD 59mn NA Details Details Details Details Details not not not not not disclosed disclosed disclosed disclosed disclosed % stake 100% 100% 66% 100% 100% 98.6%* 100.0% 100.0% NA 100.0% 100.0% 60.0% 91.0% 100.0% 51.0% Rationale Non-Colcrys generic assets Adds Levulan PDT asset Dermatology & topical product portfolio Dosage form plant Provides front end operations in Africa Provides drug delivery technology Entry in German market Entry in UKs generic market Adds steroids manufacturing capabilities Entry in injectable market in Japan Entry in Japan market Entry in SA market Entry in Australian market Entry in German CNS market Entry in branded generics segment in womens health and child care segment in Philippines
G. Tie-up/In-licensing deals: An interesting fall-out of Big Pharmas new operating paradigm involving aggressive branded generics play in EMs, along with generics in regulated markets, has been the hitherto unthinkable partnering of Global Pharma players and Indian generics. These partnerships have been catalyzed by Big Pharmas need for low-cost, reliable and world class manufacturers with the ability to develop and register a large suite of products across multiple geographies. This is critical for them to operationalize their EM/ generic strategies without having to go through the lengthy process of developing these multiple products and then sinking in significant capex for manufacturing capabilities. Indian generics companies benefit by getting the formidable marketing resources of MNC pharma to sell their products and thereby improve the likelihood of garnering higher market share across products as well as enhance capacity utilization. Some of the key deals in this segment include:
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Tie-up/In-licensing deals
Innovator Pfizer Generic company Claris Strides Arcolabs Aurobindo Pharma Astra Zeneca GSK Pharma Torrent Pharma Aurobindo Pharma Strides and Onco Therapeutics Dr Reddys Target markets US, Canada, New Zealand US, Canada, New Zealand, Australia, Japan and Korea US, Canada, Rest of Europe, ROW, Australia, NZ ROW Emerging Markets EM outside India and Africa Africa, LATAM, Asia Pacific Products 15 sterile injectables 45 products (mainly oncology injectables) ~100 products (includes orals and injectables) 18 products for 9EMs Formulation and sterile products Injectables Co-marketing and revenue sharing To be no.1 in India, post this acquisition Initially for 24 products, to be extended to 40 products later Innovative branded generics (largely combination products) Develop and supply 22 OCs 50:50 JV India and Nepal Emerging Markets Promote Huminsulin (Lillys products) Develop and commercialise a pneumococcal conjugate vaccine (PCV) Eight APIs Sanofis anti-rabies vaccine Verorab; to be imported/supplied by Sanofi and marketed/distributed by Emcure Emcure will manufacture anticancer biologics drugs; Herceptin and MabThera. The agreement has potential to expand to other countries
Abbott Labs
Acquired domestic India formulation biz of Piramal Healthcare Cadila HC 15 markets Sun Pharma Famy Care Cadila HC Lupin Serum Institute Emerging Markets
MSD Mylan Bayer Eli Lilly Merck
DSM Pharma Sanofi Pasteur
Indoco Remedies Emcure
Austria and other international markets India
Roche
Emcure
India
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ITS NOT A SMOOTH RIDE ALL WAY!
A. Growing ANDA approval backlog and increasing ANDA approval timeline: The Office of Generic Drugs of US is facing an acute shortage of resources to review generic drugs. This has resulted in increased ANDA approval timelines, consequently leading to growing ANDA approval backlog. To address this issue, the Office of Compliance and OGD has established a prioritization scheme for inspections that are required to support ANDAs and ANDA supplements. A general description of this prioritization scheme follows:
Drug shortage situations are given the highest priority for inspection. The next priority tier involves ANDAs that contain a Para IV certification
for which a potential 180-day exclusivity entitlement exists.

The last priority tier involves applications for products that have been
impacted by unforeseen circumstances that have caused a firm to stop production (i.e., acts of nature that have caused damage or obliteration of a facility). Office of generic drugs backlog.
Source: FDA
Generic applications vs employees.
Source: FDA September 4, 2013 15
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Increasing ANDA approval timeline
Source: FDA
B. USFDAs increased focus on cGMP compliance: In 2013, the DOJ (Department of Justice) has announced that it would be taking a hard look at violations under current good manufacturing practices (cGMPs). The DOJ plans to actively step up enforcement for cGMP violations under the authority of False Claims Act (FCA), in addition to Federal Food, Drug, and Cosmetic Act (FFDCA). The USFDA found violations at 558 drug plants inspected in 2010, or 54% of all plants inspected in 2010, an increase of 20% from 2007. In addition, FDA center for Drug Evaluation and Research issued 95 drug related warning letters in 2012, down from a peak of 171 warning letters in 2010. FDA warning letter from 2008-2012
Source: FDA
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Warning letters to Indian companies
Companies Aurobindo Claris Lifesciences Dabur Dr Reddys Fresenius Lupin Ranbaxy Facility Unit III & VI Clarion II Bordon Cuernavaca Nadia Bhopal Paonta Sahib Dewas Ohm Labs Ankleshwar Navi Mumbai Detroit Cranbury Waluj Moraiya Location Hyderabad Ahmedabad UK Mexico West Bengal Madhya pradesh Himachal Pradesh Himachal Pradesh New York Gujarat Maharashtra Michigan New Jersey Maharashtra Gujarat Year 2011 2010 2009 2011 2013 2009 2008 2008 2009 2013 2013 2008 2010 2013 2011 Remarks Cleared Cleared Pending Cleared Pending Cleared Pending Pending Pending Pending Pending Partially cleared* Cleared Pending Cleared
RPG Lifesciences Sun pharma/ Caraco
Wockhardt Zydus Cadila

C. Unfair use of restricted drug distribution program by innovators: Certain brand drugs are subject to distribution restrictions that may used to prevent generic firms from accessing samples (for bioequivalence testing) of brand product. This is being implemented as part of FDA mandated risk management programs known as REMS (Risk Evaluation and Mitigation Strategies). However, the FTC (Federal Trade Commission) has found that branded name drug manufacturers are improperly using restricted drug distribution programs to impede generic competition. Nearly 40% of new drugs are currently subject to FDA-imposed safety restrictions, and innovators are taking advantage to block competition.
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Valuation Matrix
Companies FY13 Aurobindo Biocon Cadila Healthcare Cipla Divis Labs Dr. Reddys Labs Glenmark GSK Pharma* IPCA Labs Lupin Sun Pharma 57,701 24,853 63,581 82,025 21,448 118,745 50,123 26,303 28,131 96,413 112,389 Net Sales (` mn) FY14E FY15E 68,967 29,286 69,709 94,000 25,370 129,701 58,548 28,182 32,711 111,299 132,833 80,853 33,797 81,864 106,709 29,907 146,568 68,840 31,593 38,322 128,689 160,487 EBIDTA (` mn) FY13 FY14E FY15E 8,609 5,430 11,257 21,193 7,132 27,347 10,113 8,191 6,232 22,700 49,673 12,261 6,516 12,199 24,144 9,894 29,292 12,046 7,489 7,274 26,155 58,295 14,583 7,672 14,736 27,609 11,649 33,172 14,479 8,711 8,681 30,885 68,512 FY13 PAT (` mn) EPS (`) FY14E FY15E FY13 FY14E FY15E 4,378 3,885 7,302 16,797 7,453 17,304 7,201 6,385 4,582 15,572 44,696 7,514 4,693 9,299 19,212 8,912 20,227 8,944 7,311 5,515 17,990 49,978 10.1 19.7 15.3 19.4 32.0 35.7 18.8 20.9 37.7 56.1 102.8 101.9 22.7 26.6 79.9 75.4 30.6 36.3 30.0 34.8 34.7 21.6 25.8 23.5 45.4 23.9 67.1 119.1 33.0 86.3 43.7 40.2 24.1
1,304 5,088 6,553 15,073 5,000 16,090 6,147 6,772 3,867 13,404 35,916
* December year ending
Companies
Mcap (` bn)
CMP (` )
TP Upside P/E (x) ROE (%) EV/EBITDA(x) Mcap/Sales (x) (` ) (%) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E 41 18 13 18 19 8 9 (17) 15 15 18 18.1 22.1 20.0 21.6 25.4 21.5 22.7 28.5 21.1 28.1 14.7 9.3 17.5 18.0 19.4 17.0 21.7 19.3 30.3 17.8 24.2 23.7 7.1 14.5 14.1 17.0 14.2 18.6 15.6 26.4 14.8 20.9 21.2 5.3 12.4 23.5 18.1 22.1 24.9 29.7 34.5 27.3 29.3 29.7 15.3 13.8 22.5 17.3 28.1 21.6 33.1 31.0 26.0 26.8 33.1 21.8 15.1 24.4 17.1 27.8 20.7 31.3 33.5 25.3 24.9 31.3 9.9 11.7 13.3 15.8 17.9 14.3 15.4 21.1 14.2 16.8 9.9 6.7 10.0 12.1 13.4 12.8 13.0 12.6 23.1 12.1 14.0 17.4 5.6 8.6 10.0 11.5 10.9 11.0 10.1 19.7 10.1 11.7 14.1 0.9 2.7 2.1 4.1 5.9 3.2 2.8 7.4 3.0 4.0 4.7 0.8 2.3 1.9 3.5 5.0 2.9 2.4 6.9 2.5 3.4 8.0 0.7 2.0 1.6 3.1 4.3 2.5 2.0 6.2 2.2 3.0 6.6
Aurobindo 53 183 258 Biocon 68 339 399 Cadila Healthcare 131 642 727 Cipla 326 406 480 Divis Labs 127 956 1,141 Dr. Reddys Labs 375 2,210 2,382 Glenmark 139 514 561 GSK Pharma* 193 2,282 1,900 IPCA Labs 82 647 743 Lupin 376 840 965 Sun Pharma 1,057 510 603
* December year ending
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Aurobindo Pharma
CMP: ` 183
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 291mn ` 1/` 53bn USD 794mn ` 205 / 102 2785621 524804 AUROPHARMA ARBP IN ARBN.BO 18,235 5341
DOLAT CAPITAL
Target Price: ` 258

Multi-Year Play on Injectables...
Buy
Aurobindo Pharma (APL), in the last five years, has transformed itself from being a low-margin API player to a high-margin formulation manufacturer. APL has identified injectibles as a key focus area. It is investing upfront to build a strong pipeline of 100 ANDAs from current 30 ANDAs. Further, it has acquired assets (Celon plant) to accelerate growth in hormones/oncology and expects to file for 22 products from acquired site. These assets would render higher growth and margins. With an emerging new business model, we expect APL to have a robust performance on the back of strong US sales, new ARV tenders and growing traction in EU formulations.
Investment Rationale
Business Model - Realigned towards high margin formulations APL has re-aligned its business model successfully over the last five years with an increasing focus on lucrative formulations business from low margin API earlier. Contribution of formulations to business mix has increased from 39% in FY08 to 57% in FY13, and we expect this to reach to 64% by FY15E. US, EU (50% of formulation sales) would be the key growth drivers in formulations as Aurobindo leverages its strong regulatory pipeline and ramps up supplies to licensing partners globally. Aurobindos regulatory pipeline boasts of 281 ANDAs, 167 DMFs (drug master files), 1825 MAAs (marketing authorisation applicationEU, RoW filings) which is supported by strong backward integration, ensuring price competitiveness in growing generic markets. US Biz Focus on niche segments US generics segment contributed 30% of total sales in FY13. The company is focusing on high value niche segments such as injectables, controlled substances, penems, and hormones for future growth. The company has filed 281 ANDAs with the USFDA, of which 90 ANDAs are pending approval. We estimate US sales to register 26% CAGR over FY13-FY15E. Injectable Segment - APL has decided to spin off the injectable business to a wholly owned subsidiary to strengthen and increase its focus on high margin business. Currently, APL has filed 50 ANDAs (30 ANDAs from Unit IV and 20 ANDAs from Unit XII) with the USFDA and received approval for 25 ANDAs. The company has launched
Adj.PAT % Growth Adj.EPS (`) % Growth PER (x) ROANW(%) ROACE (%) 1,976 2,938 5,746 7,514 (63.8) 48.7 95.6 30.8 6.8 10.1 19.7 25.8 (63.8) 48.6 95.6 30.8 26.9 18.1 9.3 7.1 8.3 5.3 15.3 21.8 7.8 11.7 15.9 18.2
Shareholding Pattern as on June13(%)
Promoter FIIs MF/Banks/FIs Public / Others

APL relative to Sensex 160 150 140 130 120 110 100 90 80 Apr-13 Aug-12 Dec-12
54.84 17.87 13.78 13.51
APL
Sensex
Financials
Year Net Sales % Growth EBIDTA OPM % 45,647 57,701 68,967 80,853 mn 10.6 26.4 19.5 17.2 5,860 8,894 12,561 14,898 12.8 15.4 18.2 18.4 FY12 FY13 FY14E FY15E Figures in `
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Aug-13
Feb-13
Jun-13
Oct-12
Aurobindo Pharma
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eight injectables till date and is planning to launch four more in FY14E. Management expects the injectable business to contribute USD40 mn in FY14E and USD 60mn in FY15E. In addition, it plans to invest in an oncology injectable facility and split the injectable business into a strategic business unit. Valuations With new filings in Penems and high value injectables, we believe the companys pending approvals of 90 ANDAs auger well for quality of revenues from US generics and margin. While cost optimisation would boost margin, we are concerned on slow ramp-up in utilisation, strong outflow on capex and addition of new loan due to two new acquisitions. At CMP, the stock trades at 9.3x FY14E & 7.1x FY15E earnings. We initiate coverage on Aurobindo with BUY recommendation and a target price of ` 258 (10x FY15E EPS).
September 4, 2013
Aurobindo Pharma
20
DOLAT CAPITAL
INCOME STATEMENT Particulars Net Sales Other Operational income Income for Operations Total Expenditure Raw Material Employee Expenses Other Expenses EBIDTA (Excl. Other Income) Other Income EBIDTA (Incl. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Extra Ordinary Exps/(Income) Profit Before Tax Tax Net Profit Minority Interest Net Profit Adj.Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Other Reserves Net Worth Minority Interest Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 291 23,105 23,397 102 16,238 9,491 25,728 (19) 49,208 Mar13 291 25,766 26,058 110 24,276 9,568 33,844 680 60,691 Mar14E 291 30,863 31,155 110 21,376 9,568 30,944 680 62,888 Mar15E 291 37,567 37,858 110 19,876 9,568 29,444 680 68,092 Mar12 45,647 626 46,274 40,661 25,198 5,357 10,107 5,613 247 5,860 2,772 3,087 2,005 1,082 0 1,082 (888) 1,970 (6) 1,976 1,976 Mar13 57,701 853 58,553 49,944 29,908 6,633 13,403 8,609 285 8,894 2,666 6,228 2,487 3,741 1,634 2,107 827 1,279 (25) 1,304 2,938 Mar14E 68,967 900 69,867 57,606 34,584 7,694 15,328 12,261 300 12,561 2,487 10,074 2,739 7,334 1,368 5,966 1,614 4,353 (25) 4,378 5,746 ` mn Mar15E 80,853 1,000 81,853 67,269 40,926 9,002 17,341 14,583 315 14,898 2,347 12,551 2,949 9,602 0 9,602 2,112 7,489 (25) 7,514 7,514 CASH FLOW Particulars Mar12 Mar13 Profit before tax 1,082 3,741 Depreciation & w.o. 2,005 2,487 Net Interest Exp 2,772 2,666 Direct taxes paid 888 (827) Change in Working Capital 3,460 (10,094) (A) CF from Opt. Activities 10,208 (2,026) Capex (5,897) (2,507) Free Cash Flow 4,311 (4,533) Inc./ (Dec.) in Investments 0 (163) (B) CF from Inv. Activities (5,897) (2,669) Inc./(Dec.) in Debt 1,585 8,115 Interest exp net (2,772) (2,666) Dividend Paid (Incl. Tax) (415) (519) Other (bal fig.) (3,882) 1,141 (C) Cash Flow from Financing (5,485) 6,071 Net Change in Cash (1,174) 1,376 Opening Cash balances 1,882 709 Closing Cash balances 709 2,085 E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) 12.3 EBIDTA Margin (incl. O.I.) 12.8 Interest / Sales 6.1 Gross Profit Margin 6.8 Tax/PBT (82.1) Net Profit Margin 4.3 (B) As Percentage of Net Sales Excise Duty % of Gross Sales Raw Material Employee Expenses Other Expenses 1.6 55.2 11.7 22.1 Mar13 Mar14E Mar15E Mar14E 7,334 2,739 2,487 (1,614) (2,534) 8,413 (3,015) 5,399 0 (3,015) (2,900) (2,487) (649) 25 (6,011) (612) 2,085 1,472 Mar15E 9,602 2,949 2,347 (2,112) (5,360) 7,426 (3,000) 4,426 0 (3,000) (1,500) (2,347) (811) 25 (4,633) (207) 1,472 1,265
14.9 15.4 4.6 10.8 39.3 2.3 1.1 51.8 11.5 23.2 1.3 0.3 4.5 101 122 3.0 2.2 1.8 29,810 10.1 13.0 1.7 37.8 62.2 89.5 5.3 11.7 10.5 183 18.1 53,188 0.9 84,947 1.5 9.9 2.0 0.9
17.8 18.2 3.6 14.6 27.0 6.3 1.1 50.1 11.2 22.2 1.0 0.2 3.8 110 70 5.2 2.6 2.0 32,344 19.7 24.4 2.1 14.1 85.9 107.0 15.3 15.9 15.6 183 9.3 53,188 0.8 82,659 1.2 6.7 1.7 1.2
18.0 18.4 2.9 15.5 22.0 9.3 1.1 50.6 11.1 21.4 0.8 0.2 3.9 110 71 5.2 3.0 2.1 37,704 25.8 35.9 2.6 10.3 89.7 130.0 21.8 18.2 17.5 183 7.1 53,188 0.7 81,366 1.0 5.6 1.4 1.4
Applications of Funds Gross Block 30,863 Less: Accumulated Depreciation 8,916 Net Block 21,947 Capital Work in Progress 6,451 Investments 385 Current Assets, Loans & Advances Inventories 15,456 Sundry Debtors 12,400 Cash and Bank Balance 709 Loans and Advances 4,230 Other Current Assets 743 sub total 33,536 Less : Current Liabilities & Provisions Current Liabilities 12,405 Provisions 706 sub total 13,111 Net Current Assets 20,425 Total Assets E-estimates 49,208
37,635 11,246 26,389 2,185 223 19,236 15,970 2,085 5,749 943 43,982 11,196 891 12,087 31,895 60,691
40,635 13,985 26,649 2,200 223 13,265 20,785 1,472 6,324 943 42,789 7,992 980 8,972 33,816 62,888
43,635 16,935 26,700 2,200 223 15,698 24,367 1,265 6,956 943 49,228 9,181 1,078 10,259 38,969 68,092
(C) Measures of Financial Status Debt / Equity (x) 1.1 Interest Coverage (x) 0.5 Average Cost Of Debt (%) 5.6 Debtors Period (days) 99 Closing stock (days) 124 Inventory Turnover Ratio (x) 3.0 Fixed Assets Turnover (x) 2.1 Working Capital Turnover (x) 2.2 Non Cash Working Capital (` Mn) 19,717 (D) Measures of Investment EPS (`) (excl EO) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (E) Valuation Ratios CMP ( `) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 6.8 13.7 1.4 19.9 80.1 80.4 8.3 7.8 7.5 183 26.9 53,169 1.2 78,189 1.7 13.9 2.3 0.7
September 4, 2013
Aurobindo Pharma
21
DOLAT CAPITAL
September 4, 2013
Int en tio na lly Le ft B lan k

Aurobindo Pharma
22
Biocon
CMP: ` 339
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 1000mn ` 5/` 68bn USD 1013mn 18,235 5,341
DOLAT CAPITAL
Target Price: ` 399

Clinical Gains....
Accumulate
` 352 / 243
976682 532523 BIOCON BIOS IN BION.BO
Biocon has shifted its focus from statins to branded biotech formulations and contract research services. We estimate core Biopharma division to grow at 15% CAGR over FY13-15E with increasing contribution from domestic branded formulations and ramp up in fidaxomicin bulk supplies and Orlistat. The Mylan collaboration (products going off-patent 2015 onwards) is on track. We estimate 21% revenue CAGR in its CRO segment over FY13-15E with increased focus on integrated drug development services. Biocon has concluded second part of EU Phase III trial for biosimilar rh-Insulin and is currently compiling the data to be submitted to the European regulatory agencies. We have recently included Biocon in our preferred pick list.
Risk Adjusted Growth Strategy Biocon is the only company which has made remarkable progress in the Indian Biotech industry with oncology and diabetes as its focus areas. Over the years, the company has entered into strategic partnerships and acquired IPRs in the diabetic space. The company is making efforts to move up the value chain through selective 505 (b) 2 & ANDA filings. We have recently included Biocon in our preferred picks list. Biopharma Segment (76% of FY13 sales) To sustain growth momentum The branded formulations business is expected to grow by 18% CAGR during FY13-15E (FY13: `3.5bn) to `4.8bn. Ramp up in sales from Fidaxomicin supplies to Optimer will further add to the growth momentum. Moreover, product-development arrangement with Mylan (five biosimilar products, going off-patent 2015E onwards) is on track. We expect this division to grow at 15% CAGR over FY13-15E to `24.4bn. Contract Research segment (23% of FY13 sales) Gaining scale The BMS contract (seven-year contract), with 450 FTEs, contributes 20-30% of Syngene sales. The company intends to gain scale in this vertical and shall consequently work out the modalities of getting Syngene listed. We expect CRO division to grow at 21% CAGR over FY13-15E to `7.4bn.
52.15 14.85 12.50 20.50
Biocon relative to Sensex 150 140 130 120 110 100 90 80 Apr-13 Aug-12 Dec-12 Aug-13 Oct-12 Feb-13 Jun-13
Biocon
Sensex
Financials
Year FY12# FY13 FY14E FY15E Net Sales# % Growth EBIDTA OPM % Adj.PAT % Growth EPS (`) 20,865 24,853 29,286 33,797 (24.9) 19.1 17.8 15.4 5,173 5,430 6,516 7,672 24.8 21.8 22.3 22.7 3,384 3,069 3,885 4,693 (7.9) (9.3) 26.6 20.8 16.9 15.3 19.4 23.5 % Growth PER (x) ROANW(%) ROACE (%) (7.9) (9.3) 26.6 20.8 20.1 22.1 17.5 14.5 15.7 12.4 13.8 15.1 16.2 14.9 15.7 16.7
Figures in ` mn, # Figures are ex-Axicorp
September 4, 2013
Biocon
23
DOLAT CAPITAL
Commercialization of Rh-Insulin in regulated markets Biocon has concluded second part of EU Phase III trial for biosimilar rhInsulin aimed at establishing comparable immunogenicity and safety with the innovator products, over a 12 month evaluation period. The company is compiling the data and is in process of dossier submission with European regulatory authorities, thus paving the way for marketing authorization. Biocon is also contemplating harmonized filing for the insulin which could be used for both the US and EU markets. Valuation Revenue scale up in domestic branded business, Fidaxomicin bulk and Orlistat supplies, shall aid near-term revenue growth. Higher R&D costs (as the product pipeline advances) restricts margin expansion. At CMP, the stock trades at 17.5x FY14E and 14.5x FY15E earnings. We initiate with Accumulate recommendation with a target price of ` 399 (17x FY15E EPS). We have also included Biocon in our preferred picks list.
September 4, 2013
Biocon
24
DOLAT CAPITAL
INCOME STATEMENT Particulars Income from Operations Other income Total Income Total Expenditure Operating Profit (excl. OI) Operating Profit (incl. OI) Interest Gross Profit Depreciation Profit Before Tax & EO Items Extra Ordinary Exps/(Income) Profit Before Tax Tax Net Profit Minority Interest Mar12 20,865 618 21,483 15,692 5,173 5,791 122 5,669 1,744 3,925 0 3,925 541 3,384 0 Mar13 24,853 527 25,380 19,423 5,430 5,956 81 5,875 1,793 4,082 (2,019) 6,102 975 5,127 (38)
5,088 3,069
` mn Mar14E 29,286 500 29,786 22,770 6,516 7,016 110 6,906 1,900 5,006 0 5,006 1,101 3,905 (20)
3,885 3,885
CASH FLOW Particulars Profit before tax Depreciation & w.o. Net Interest Exp Direct taxes paid Chg. in Working Capital (A) CF from Opt. Activities Capex Free Cash Flow (Inc)/ Dec. in Investments Others (Bal Fig) (B) CF from Invt. Activities Inc./(Dec.) in Debt Interest exp net Dividend Paid (Incl. Tax) (C) CF from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Mar12 3,925 1,744 122 (541) 1,949 7,199 (3,655) 3,544 (959) (15) (4,629) (633) (122) (997) (1,752) 818 4,415 5,233 Mar13 4,082 1,793 81 (975) (2,006) 2,975 (3,067) (92) (303) 3,354 (16) (220) (81) (1,162) (1,463) 1,496 5,233 6,729 Mar14E 5,006 1,900 110 (1,101) (1,238) 4,677 (4,150) 527 0 (572) (4,722) 2,012 (110) (1,394) 508 463 6,729 7,192 Mar15E 6,042 2,000 130 (1,329) (1,437) 5,406 (4,600) 806 0 287 (4,313) 1,250 (130) (1,511) (391) 702 7,192 7,894
Mar15E 33,797 500 34,297 26,125 7,672 8,172 130 8,042 2,000 6,042 0 6,042 1,329 4,713 (20)
4,693 4,693
Net Profit After Minority Interest 3,384 Net Profit After Minority Interest (w/o EOI) 3,384
BALANCE SHEET Particulars Sources of Funds Equity Capital Reserves (excl Rev Res) Net Worth Revaluation reserve Minority Interest Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 1,000 21,715 22,715 9 38 904 1,804 2,708 (78) 25,392 Mar13 1,000 25,937 26,937 9 653 1,542 946 2,488 412 30,499 Mar14E 1,000 28,418 29,418 9 2,500 2,000 4,500 632 34,560 Mar15E 1,000 31,591 32,591 9 3,000 2,750 5,750 898 39,249
Particulars Mar12 (A) Measures of Performance (%) Operating Profit Margin (excl. O.I.) 24.8 Operating Profit Margin (incl. O.I.) 27.8 Interest / Sales 0.6 Gross Profit Margin 27.2 Tax/PBT 13.8 Net Profit Margin 16.2 (B) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost Of Debt (%) Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) (C) Measures of Investment Earnings Per Share (`) (excl EO) Earnings Per Share (`) Cash Earnings Per Share (`) Dividend Per Share (`) Dividend Payout (%) Profit Ploughback (%) Book Value (Rs.) Return on Avg. Net Worth (%) Return on Avg. Cap. Employed (%) Return on Cap. Employed (%) (D) Valuation Ratios CMP (`) PE (x) Market Cap (` Mn) Market Cap / Sales (x) EV (` Mn) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates
Mar13 21.8 24.0 0.3 23.6 16.0 12.3
Mar14E 22.3 24.0 0.4 23.6 22.0 13.3
Mar15E 22.7 24.2 0.4 23.8 22.0 13.9
Applications of Funds Gross Block 20,354 Less: Accumulated Depreciation 7,852 Net Block 12,502 Capital Work in Progress 3,189 Intangibles 1,235 Investments 5,563 Current Assets, Loans & Advances Inventories 3,783 Sundry Debtors 4,917 Cash and Bank Balance 5,233 Loans and Advances 2,950 Other Current Assets sub total 16,883 Less : Current Liabilities & Provisions Current Liabilities 11,865 Provisions 2,115 sub total 13,980 Net Current Assets 2,903 Total Assets E-estimates 25,392
24,556 9,672 14,884 2,054 1,290 5,866 3,984 5,097 6,729 3,297 20,067 11,157 2,505 13,662 6,405 30,499
28,610 11,572 17,038 2,150 1,400 5,866 4,814 6,900 7,192 3,397 22,303 11,698 2,500 14,198 8,106 34,560
33,260 13,572 19,688 2,100 1,350 5,866 5,556 8,056 7,894 3,497 25,002 12,258 2,500 14,758 10,245 39,249
0.1 47.4 4.0 86 66 5.5 1.7 7.2
0.1 73.5 3.1 75 59 6.2 1.7 3.9
0.2 63.8 3.1 86 60 6.1 1.7 3.6
0.2 62.9 2.5 87 60 6.1 1.7 3.3
16.9 16.9 25.6 5.0 29.6 70.4 113.6 15.7 16.2 27.7
15.3 25.4 34.4 5.5 21.6 78.4 134.7 12.4 14.9 23.3
19.4 19.4 28.9 6.0 30.9 69.1 147.1 13.8 15.7 23.8
23.5 23.5 33.5 6.5 27.7 72.3 163.0 15.1 16.7 24.2
339 20.1 67,870 3.3 65,345 3.1 12.6 3.0 1.5
339 22.1 67,870 2.7 63,629 2.6 11.7 2.5 1.6
339 17.5 67,870 2.3 65,178 2.2 10.0 2.3 1.8
339 14.5 67,870 2.0 65,726 1.9 8.6 2.1 1.9
September 4, 2013
Biocon
25
DOLAT CAPITAL

Biocon
September 4, 2013
26
Cadila Healthcare
CMP: ` 642
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 1024mn ` 5/` 131bn USD 1962mn ` 964 / 650 130,367 532321 CADILAHC CDH IN CADI.BO 18235 5341
DOLAT CAPITAL
Target Price: ` 727

On a recovery mode
Accumulate
Cadilas (CDH) thrust on export formulations and contract manufacturing is well complemented with a strong domestic franchise. However, domestic formulations growth has been impacted on account of implementation of new pharma pricing policy. Also, lack of new product approvals and launch of authorized generics in the older product basket, has impacted the performance. CDH entered into several joint ventures (Hospira, Nycomed/Takeda, Bayer, Abbott) which has in turn positioned itself as a preferred contract manufacturer for Big Pharma companies. The JV biz has been impacted due to lack of new product approvals.
Domestic biz Going through a rough patch CDH has a 3.9% share and has a leading position in key therapies of CVS, gastro, women health care and respiratory (52% of the portfolio). However, in the near term domestic formulations growth has been impacted on account of destocking by stockists. The implementation of new pharma pricing policy would have an impact of ` 900mn on domestic formulation sales in FY14E. We estimate domestic formulation sales to record 13% CAGR over FY13-15E aided by incremental revenue contribution from Biochem and new launches. Joint ventures corrective measures to ramp-up the biz The company has been proactive in identifying and capitalizing on partnership opportunities since FY07, signed the Nycomed JV - one of the most profitable JV by an Indian player (70%+ net margin) to manufacture pantoprazole intermediates. With increasing genericisation of Protonix, the company offset the loss in sales through Hospira JV (oncology injectables) and currently sells six products in EU & three in US under this arrangement. However, the JV biz has been impacted due to lack of new product approvals. Corrective measures taken by the company are: a) Hospira JV: The company has added a new line and expects sales to pick-up in FY15E b) Takeda/ Nycomed JV: The company is in advanced talks for adding new products and expects to finalize by end of FY14E and c) Bayer JV: Growth would be on account of launch of patented products in FY14E.

Cadila relative to Sensex 105 100 95 90 85 80 75 70 65 60 Aug-12 Apr-13 Dec-12
74.79 5.42 9.92 9.87
Cadila
Sensex
Financials
Year FY12 FY13 FY14E FY15E Net Sales# % Growth EBIDTA OPM % Adj.PAT % Growth EPS (`)* % Growth PER (x) ROANW(%) ROACE (%) 52,633 13.7% 10,839 20.6% 7,306 3.9% 35.7 3.9% 18.0 27.5 23.0 63,581 20.8% 11,257 17.7% 6,553 -10.3% 32.0 -10.3% 20.1 23.5 17.5 69,709 9.6% 12,199 17.5% 7,302 11.4% 35.7 11.4% 18.0 22.5 16.6 81,864 17.4% 14,736 18.0% 9,299 27.4% 45.4 27.4% 14.1 24.4 18.9
Figures in ` mn, # Includes Other Operating Income, * Adjusted for exceptional items
September 4, 2013
Aug-13
Oct-12
Feb-13
Jun-13
Cadila Healthcare
27
DOLAT CAPITAL
Export formulations The companys export formulations business has grown at 31% CAGR over last five years, through its distribution tie-ups, complex product filings and cost competencies (back-ended domestic manufacturing). In the near term, growth has been impacted on account of lack of new product approvals and launch of authorized generics in their older product basket (impacting the margins). The company expects 5-8 new product approvals in FY14 (compared to earlier guidance of 20+ approvals). The company expects to grow by 20% in FY15E led by 10-15 new product approvals. We estimate this division to grow by 15% CAGR over FY13-15E. Valuations We believe that FY14 will be a year of recovery for CDH. We estimate a strong 19% EPS CAGR for FY13 -15E with RoCE and RoE in the range of 19-20% and 24-25% in FY14E/15E respectively. The stock trades at 18.0x FY14E and 14.1x FY15E consolidated EPS. We remain positive on the long term prospects of the company and initiate coverage with Accumulate with a target price of ` 727 (16x FY15E EPS).
September 4, 2013
Cadila Healthcare
28
DOLAT CAPITAL
INCOME STATEMENT Particulars Net Sales Operating Income Net Sales/Income From Opet. Non Operating Income Total Income Total Expenditure Raw Material Employee Expenses Other Expenses EBIDTA (Excl. Other Income) EBIDTA (Incl. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Profit Before Tax Tax Reported Net Profit Adjustments on consolidation Net Profit Extraordinary & Forex Items Adjusted Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Other Reserves Net Worth Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Minority Interest Total Capital Employed Mar12 1,024 24,712 25,736 13,655 9,296 22,951 1,185 904 50,776 Mar13 1,024 29,062 30,086 18,600 9,950 28,550 1,424 1,268 61,328 Mar14E 1,024 33,885 34,909 17,600 9,600 27,200 1,695 1,643 65,447 Mar15E 1,024 40,155 41,178 16,600 8,600 25,200 2,039 2,093 70,511 Mar12 50,900 1,733 52,633 532 53,165 41,795 16,794 7,512 17,489 10,839 11,370 1,849 9,521 1,579 7,942 7,942 1,130 6,812 286 6,526 780 7,306 Mar13 61,554 2,027 63,581 370 63,951 52,324 23,204 9,032 20,088 11,257 11,627 1,686 9,941 1,828 8,112 8,112 1,195 6,917 364 6,553 0 6,553 Mar14E 67,609 2,100 69,709 500 70,209 57,510 25,095 10,108 22,307 12,199 12,699 1,518 11,181 2,150 9,031 9,031 1,355 7,677 375 7,302 0 7,302 ` mn Mar15E 79,764 2,100 81,864 500 82,364 67,129 29,062 11,870 26,197 14,736 15,236 1,366 13,870 2,400 11,470 11,470 1,720 9,749 450 9,299 0 9,299 CASH FLOW Particulars Profit before tax Depreciation & w.o. Net Interest Exp Direct taxes paid Chg. in Working Capital Other (A) CF from Opt. Activities Capex Free Cash Flow (Inc)/ Dec. in Investments Others (Bal Fig) (B) CF from Invt. Activities Issue of Equity/ Preference Inc./(Dec.) in Debt Interest exp net Dividend Paid (Incl. Tax) (C) CF from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) 20.6 EBIDTA Margin (incl. O.I.) 21.4 Interest / Sales 3.6 Gross Profit Margin 17.9 Tax/PBT 14.2 Net Profit Margin 13.7 (B) As Percentage of Net Sales Raw Material Employee Expenses Other Expenses (C) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost Of Debt (%) Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) Non Cash Working Capital (` Mn) (D) Measures of Investment Adj. EPS (`) (excl EO) EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (E) Valuation Ratios CMP ( `) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 31.9 14.3 33.2 0.9 6.1 10.9 64 78 4.7 1.3 3.0 12,335 35.7 31.9 43.4 7.5 23.5 76.5 125.7 27.5 23.0 25.2 Mar13 Mar14E Mar15E Mar12 7,942 1,579 1,849 (1,130) (3,930) (17) 6,292 (12,397) (6,105) (35) (123) (12,555) (116) 11,977 (1,849) (2,066) 7,946 1,683 2,952 4,635 Mar13 8,112 1,828 1,686 (1,195) (4,998) (17) 5,416 (6,500) (1,084) 0 256 (6,244) 0 5,599 (1,686) (2,203) 1,709 881 4,635 5,517 Mar14E 9,031 2,150 1,518 (1,355) (1,374) (17) 9,953 (6,500) 3,453 0 288 (6,212) 0 (1,350) (1,518) (2,479) (5,346) (1,606) 5,517 3,911 Mar15E 11,470 2,400 1,366 (1,720) (4,067) (17) 9,431 (4,500) 4,931 0 362 (4,138) 0 (2,000) (1,366) (3,029) (6,395) (1,103) 3,911 2,808
17.7 18.2 2.7 15.5 14.7 10.2 36.5 14.2 31.6 0.9 6.9 6.5 65 80 4.6 1.3 2.7 17,333 32.0 32.0 40.9 8.0 25.0 75.0 146.9 23.5 17.5 19.2
17.5 18.1 2.2 15.9 15.0 10.4 36.0 14.5 32.0 0.8 8.4 5.4 64 76 4.8 1.2 3.0 18,708 35.7 35.7 46.2 9.0 25.2 74.8 170.5 22.5 16.6 18.0
18.0 18.5 1.7 16.8 15.0 11.3 35.5 14.5 32.0 0.6 11.2 5.2 64 76 4.8 1.3 3.1 22,775 45.4 45.4 57.1 11.0 24.2 75.8 201.1 24.4 18.9 19.9
Applications of Funds Gross Block 40,229 Less: Accumulated Depreciation 11,750 Net Block 28,479 Capital Work in Progress 5,085 Investments 242 Current Assets, Loans & Advances Inventories 10,905 Sundry Debtors 8,863 Cash and Bank Balance 4,635 Loans and Advances 5,131 Other Current Assets 421 sub total 29,955 Less : Current Liabilities & Provisions Current Liabilities 9,948 Provisions 3,037 sub total 12,985 Net Current Assets 16,970 Total Assets E-estimates 50,776
48,314 13,578 34,736 3,500 242 13,491 10,962 5,517 6,631 505 37,106 10,552 3,703 14,256 22,850 61,328
54,814 15,728 39,086 3,500 242 14,078 11,855 3,911 7,631 606 38,081 11,483 3,979 15,462 22,619 65,447
60,814 18,128 42,686 2,000 242 16,608 13,986 2,808 8,631 727 42,761 12,649 4,529 17,178 25,583 70,511
642 642 642 642 18.0 20.1 18.0 14.1 131,449 131,449 131,449 131,449 2.5 2.1 1.9 1.6 149,765 154,482 153,737 151,841 2.8 2.4 2.2 1.9 13.8 13.7 12.6 10.3 5.1 4.4 3.8 3.2 1.2 1.2 1.4 1.7
September 4, 2013
Cadila Healthcare
29
DOLAT CAPITAL

Cadila Healthcare
September 4, 2013
30
Cipla
CMP: ` 406
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 1606mn ` 2/` 326bn USD 4862mn ` 435 / 350 1454719 500087 CIPLA CIPLA IN CIPL.BO 18,235 5,341
DOLAT CAPITAL
Target Price: ` 480

On a Transformation Path...
Accumulate
Cipla has outperformed market growth over the past five years (CAGR of 13.1% over FY08-13) and has consistently improved its market share. Ciplas large manufacturing infrastructure, strong chemistry skills and huge inhaler capacity make it a partner of choice for global MNCs that are ramping up their generics presence in emerging markets. This, along with its low-risk strategy and a strong capex (currently underutilized) should ensure good long-term potential. We believe Cipla has one of the strongest generic pipelines among Indian companies. After a long delay, we believe Ciplas CFCfree inhaler pipeline is likely to be gradually commercialized in Europe and upsides from high-margin opportunities like Seretide can potentially come through over the next two years.
Domestic formulations The top four therapeutic segments - respiratory, anti-infectives, CVS and gynecology segments, contribute ~70% of Ciplas domestic formulation revenue. Cipla is the market leader in two of the largest therapy segments, anti-infectives and respiratory segments, though dependence on antiinfectives has fallen over the years. Cipla derives 58% of its revenue from acute therapies and the rest from chronic therapeutic areas. Ciplas sizable presence in these segments makes it an attractive play in the domestic formulations business. We expect Ciplas domestic formulations business to post 14% CAGR over FY13-15E, led by one of the largest field forces and new launches but might get impacted by 2-3% on account of new pharma pricing policy. CFC-free inhalers a key long-term trigger Cipla is developing eight inhalers and has the third largest inhaler manufacturing capacity globally. It has commercialized some of its inhalers in the UK, Germany, Spain and Portugal. While the launch of these inhalers is a key long-term trigger, the visibility of launch timelines is poor. The management expects its range of eight inhalers to be commercialized in Europe over the next 2-3 years and it expects 3-6 players for each product in this category, implying that this will be a lowcompetition, high-margin opportunity.
36.80 23.11 10.81 29.28
Cipla relative to Sensex 115 110 105
100 95 90 Aug-12 Apr-13 Dec-12 Aug-13 Oct-12 Feb-13 Jun-13
Cipla
Sensex
Financials
Year FY12 FY13 FY14E FY15E Net Sales % Growth EBIDTA OPM % Adj.PAT % Growth EPS (`) % Growth PER (x) ROANW(%) ROACE (%) 68,477 12.0 17,262 25.2 10,769 11.1 13.4 11.1 30.3 16.0 19.4 80,154 17.1 21,193 26.4 15,073 40.0 18.8 40.0 21.6 18.1 22.5 92,240 15.1 24,144 26.2 16,797 11.4 20.9 11.4 19.4 17.3 20.6 104,949 13.8 27,609 26.3 19,212 14.4 23.9 14.4 17.0 17.1 20.7
Figures in ` mn
September 4, 2013
Cipla
31
DOLAT CAPITAL
Developed markets Moving away from partnership model In the developed markets, Cipla is building its own front-end operations for selling generic medicines through its own distribution network rather than supplying it through its partners. We believe this strategy to yield higher margins going ahead. Valuation We believe Cipla has one of the strongest generic pipelines among Indian companies. After a long delay, we believe Ciplas CFC-free inhaler pipeline is likely to be gradually commercialized in Europe and upsides from highmargin opportunities like Seretide can potentially come through over the next two years. We estimate EPS CAGR at 17% over FY13-15 with potential upsides from MNC supplies and CFC-free inhalers. The growth will be led by 13% CAGR for the international business, tempered by reducing technology licensing income. At CMP, the stock trades at 19.4x FY14E & 17.0x FY15E earnings. We initiate coverage on Cipla with Accumulate recommendation and a target price of ` 480 (20x FY15E EPS).
September 4, 2013
Cipla
32
DOLAT CAPITAL
INCOME STATEMENT Particulars Net Sales Other Operational income Income for Operations Total Expenditure Raw Material Employee Expenses Manufacturing & Other Expenses EBIDTA (Excl. Other Income) Other Income EBIDTA (Incl. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Profit Before Tax Tax Net Profit Minority Interest Net Profit Adj.Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Share Premium Other Reserves Net Worth Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 1,606 14,290 60,494 76,389 33 102 135 2,332 78,856 Mar13 1,606 14,290 74,291 90,187 6 9,664 9,669 2,805 102,662 Mar14E 1,606 14,290 88,278 104,173 6 9,664 9,669 2,805 116,648 Mar15E 1,606 14,290 104,212 120,107 6 9,664 9,669 2,805 132,582 Mar12 68,477 1,730 70,207 52,945 27,393 7,725 17,827 17,262 722 17,984 383 17,600 3,122 14,478 14,478 3,065 11,413 (29) 11,442 10,769 Mar13 81,154 1,871 82,025 60,832 30,629 9,693 20,510 21,193 2,291 23,484 334 23,150 3,030 20,120 20,120 5,048 15,073 0 15,073 15,073 Mar14E 92,240 1,760 94,000 69,762 35,664 10,783 23,315 24,144 2440 26,584 300 26,284 3,984 22,301 22,301 5,533 16,767 (30) 16,797 16,797 ` mn Mar15E 104,949 1,760 106,709 79,634 40,553 12,484 26,597 27,069 2,450 30,059 286 29,773 4,261 25,512 25,512 6,330 19,182 (30) 19,212 19,212 CASH FLOW Particulars Profit before tax Depreciation & w.o. Net Interest Exp Direct taxes paid Chg. in Working Capital (A) CF from Opt. Activities Capex Free Cash Flow Inc./ (Dec.) in Investments (B) CF from Invt. Activities Inc./(Dec.) in Debt Interest exp net Dividend Paid (Incl. Tax) Other (bal fig.) (C) CF from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) 24.6 EBIDTA Margin (incl. O.I.) 25.6 Interest / Sales 0.6 Gross Profit Margin 25.1 Tax/PBT 21.2 Net Profit Margin 16.3 (B) As Percentage of Net Sales Excise Duty % of Gross Sales Raw Material Employee Expenses Other Expenses (C) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost Of Debt (%) Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) Non Cash Working Capital (` Mn) (D) Measures of Investment EPS (`) (excl EO) EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (E) Valuation Ratios CMP ( `) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 1.6 40.0 11.3 26.0 0.0 46.9 13.1 83 99 3.7 1.5 2.3 29,394 13.4 14.3 18.1 2.0 14.0 86.0 95.1 16.0 19.4 19.6 Mar13 Mar14E Mar15E Mar12 14,478 3,122 383 (3,065) 4,455 19,374 (4,719) 14,655 (6,783) (11,502) (5,584) (383) (1,866) (92) (7,926) (55) 960 905 Mar13 24,469 3,380 384 (5,148) (6,636) 16,450 (6,975) 9,475 (12,633) (19,609) 9,535 (384) (2,342) (3,125) 3,684 526 905 1,430 Mar14E 21,854 3,984 200 (5,088) (3,500) 17,451 (5,000) 12,451 324 (4,676) 0 (200) (2,810) (345) (3,355) 9,420 1,430 10,850 Mar15E 25,004 4,261 210 (5,822) (5,690) 17,962 (5,000) 12,962 (1,000) (6,000) 0 (210) (3,279) (370) (3,859) 8,104 10,850 18,954
31.5 34.2 0.5 33.8 21.0 23.5 1.3 31.4 12.6 26.1 0.1 73.6 7.8 76 108 3.4 1.5 2.2 36,029 24.1 24.1 28.3 2.5 10.4 89.6 112.3 23.2 27.4 27.7
25.8 27.7 0.2 27.5 23.3 17.9 1.3 38.7 11.7 25.3 0.1 130.2 2.1 79 100 3.7 1.6 1.8 39,529 20.9 20.9 25.9 3.0 14.3 85.7 129.7 17.3 20.1 21.3
25.4 27.6 0.2 27.4 23.3 18.0 1.3 38.6 11.9 25.3 0.1 140.4 2.2 79 100 3.7 1.7 1.6 45,219 23.9 23.9 29.2 3.5 14.6 85.4 149.6 17.1 20.2 23.0
Applications of Funds Gross Block 46,266 Less: Accumulated Depreciation 14,111 Net Block 32,155 Capital Work in Progress 3,712 Investments 12,691 Current Assets, Loans & Advances Inventories 18,501 Sundry Debtors 15,536 Cash and Bank Balance 905 Loans and Advances 9,405 Other Current Assets 594 sub total 44,940 Less : Current Liabilities & Provisions Current Liabilities 12,117 Provisions 2,525 sub total 14,642 Net Current Assets 30,299 Total Assets E-estimates 78,856
53,279 17,076 36,203 3,674 25,324 23,871 16,688 1,430 9,313 74 51,376 11,093 2,824 13,916 37,460 102,662
57,279 20,684 36,595 4,674 25,000 25,271 19,967 10,850 10,313 74 66,474 12,989 3,106 16,095 50,379 116,648
61,279 24,545 36,734 5,674 26,000 28,753 22,718 18,954 11,313 74 81,811 14,222 3,417 17,638 64,173 132,582
406 406 406 406 28.5 21.6 19.4 17.0 325,777 325,777 325,777 325,777 4.8 4.1 3.5 3.1 325,007 334,016 324,613 316,512 4.7 4.2 3.5 3.0 18.8 15.8 13.4 11.5 4.3 3.6 3.1 2.7 0.5 0.6 0.7 0.9
September 4, 2013
Cipla
33
DOLAT CAPITAL

Cipla
September 4, 2013
34
Divis Laboratories
CMP: ` 956
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 265mn ` 2/` 127bn USD 1894mn ` 1233 / 905 194116 532488 DIVISLAB DIVI IN DIVI.BO 18235 5341
DOLAT CAPITAL
Target Price: ` 1141

The Art Of Synthesis...
Accumulate
Divis Laboratories (Divis) has positioned itself as Indias leading player in CRAMs segment. We like its focus on high value low competition products. Its key business segments viz. Custom synthesis (CS) & APIs (95% of sales) is expected to register 18% CAGR over FY13-15E. Divis is one of the few CRAMs players that have refrained from entering the formulation space, to demonstrate its strict adherence to IP policies. This is a reason in itself for its large MNC clientele (20 innovators) to grow their relationship with Divis. The CS division is expected to be the major growth driver led by ramp up in new Vizag SEZ operations and increased order inflows. The API segment is expected to sustain growth as it leverages on selective patent expirations in US. Gradual scale up in its carotenoids portfolio shall aid overall growth momentum. We estimate 19.1% CAGR in revenue over FY13-15E aided by turnaround in the CRAMs industry.

Divi's relative to Sensex 110 105 100 95 90 85 80 75 70 Aug-12 Apr-13 Dec-12
52.15 14.85 12.50 20.50
Strong chemistry skills to drive growth and check competition Divis has marked its presence in the CS business through effective demonstration of its inherent chemistry skill sets. This has consequently translated into strong relationships with major pharma MNCs. Further, the company has kept itself from entering the formulation business, adding comfort to its clients. Revenue contribution from this segment declined in FY10 in line with the overall slowdown in CRAM industry. But we anticipate this business to witness high growth in near future on account of increasing cost-pressure faced by innovator companies and low R&D productivity. We expect the CS division to grow by 20.5% CAGR over FY13-15E, led by increased capacity utilization at Vizag SEZ, post the USFDA inspection and increased order inflows. A lean portfolio of APIs to provide stable growth We believe Divis strategy to focus only on high-yielding API products positions it as the dominant supplier to the innovators. Notably, Divis maintains dominant market share of 70% in Naproxene and Dexthromethorphan. The company currently has 41 DMF filings and plans to add 3-4 filings every year going forward. Further aided by increased genericization of pharma markets of US and Europe, we believe revenue from APIs to grow by 18% CAGR over FY13-15E.
% Growth PER (x) ROANW(%) ROACE (%) 24.2 -6.2 49.1 19.6 24.7 26.3 17.6 14.8 27.1 22.1 28.1 27.8 33.2 28.7 35.3 35.2
Divi's
Sensex
Financials
Year FY12 FY13 FY14E FY15E 18,640 21,448 25,370 29,907 41.6 15.1 18.3 17.9
Net Sales# % Growth EBIDTA OPM % Adj.PAT % Growth EPS (`) 6,904 7,132 9,894 11,649 37.0 33.3 39.0 39.0 5,333 5,000 7,453 8,912 24.2 -6.2 49.1 19.6 40.2 37.7 56.1 67.1
Figures in `mn, # - includes other operating income
September 4, 2013
Aug-13
Oct-12
Feb-13
Jun-13
Divis Lab
35
DOLAT CAPITAL
Increasing contribution from carotenoids adding to growth momentum The global market for carotenoids is estimated at USD 1bn and is dominated by DSM and BASF with 60% combined share. Carotenoids contribute 4% of Divis total sales in FY13. The company has created an extensive portfolio of carotenoids like Astaxanthin, Canathaxanthin, Apocarotenal. We expect the segment sales to reach `1.3bn in FY15E and contribute 5% of the total sales, aided by gradual volume off-take. Valuation We expect 19% revenue growth over FY13-15E mainly led by increased order flows and ramp up in its new facility at Vizag SEZ (translates into higher operating leverage). Debt free balance sheet and controlled capex enables Divis to generate healthy cash flows which in turn reflects in its high return ratios. At CMP, the stock trades at 17.0x FY14E and 14.2x FY15E earnings. We initiate coverage on Divis Laboratories with a Accumulate recommendation and a target price of ` 1141 (17x FY15E EPS).
September 4, 2013
Divis Lab
36
DOLAT CAPITAL
INCOME STATEMENT Particulars Net Sales Other Operational income Income from Operations Other Income Total Income Total Expenditure EBIDTA (Excl. Other Income) EBIDTA (Incl. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Tax Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Share Premium Other Reserves Net Worth Secured Loans Unsecured Loans Loan Funds Net Deferred Tax Liability Total Capital Employed Mar12 265 1,041 20,009 21,315 527 27 554 609 22,479 Mar13 265 965 22,772 24,003 375 30 405 609 25,016 Mar14E 265 965 27,757 28,987 350 30 380 609 29,976 Mar15E 265 965 33,815 35,045 350 30 380 609 36,034 Mar12 18,586 54 18,640 561 19,201 11,736 6,904 7,465 37 7,427 621 6,806 1,474 5,333 Mar13 21,399 49 21,448 448 21,897 14,317 7,132 7,580 18 7,562 770 6,792 1,792 5,000 Mar14E 25,320 50 25,370 750 26,120 15,476 9,894 10,644 35 10,609 930 9,679 2,226 7,453 ` mn Mar15E 29,857 50 29,907 1,000 30,907 18,258 11,649 12,649 35 12,614 1,040 11,574 2,662 8,912 CASH FLOW Particulars Profit before tax and EOI Depreciation & w.o. Net Interest Exp Direct taxes paid Change in Working Capital (A) CF from Opt. Activities Capex Free Cash Flow Inc./ (Dec.) in Investments (B) CF from Inv. Activities Issue of Equity/ Preference Inc./(Dec.) in Debt Interest exp net Dividend Paid (Incl. Tax) (C) CF from Fin. Activities Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) 37.0 EBIDTA Margin (incl. O.I.) 40.0 Interest / Sales 0.2 Gross Profit Margin 40.0 Tax/PBT 21.7 Net Profit Margin 28.6 (B) As Percentage of Net Sales Raw Materials Consumed (Increase)/Decrease in Stocks Employees Cost Other Expenses 41.4 (0.5) 8.1 14.0 Mar13 Mar14E Mar15E Mar12 6,806 621 37 (1,474) (1,441) 4,550 (3,264) 1,286 486 (2,775) 76 324 (37) (2,005) (1,643) 133 177 309 Mar13 6,792 770 18 (1,792) (1,223) 4,564 (1,906) 2,658 (730) (2,641) (76) (149) (18) (2,237) (2,480) (557) 309 (242) Mar14E 9,679 930 35 (2,226) (2,782) 5,636 (500) 5,136 (1,500) (2,000) 0 (25) (35) (2,468) (2,528) 1,108 (242) 865 Mar15E 11,574 1,040 35 (2,662) (3,254) 6,733 (1,300) 5,433 (3,000) (4,300) 0 0 (35) (2,854) (2,889) (456) 865 410
Applications of Funds Goodwill On Consolidation Gross Block 10,921 Less: Accumulated Depreciation 3,536 Net Block 7,384 Capital WIP 1,816 Unallocated Exp. pending allocation 4 Advances for Capital Works 674 Investments 4,770 Current Assets, Loans & Advances Inventories 6,790 Sundry Debtors 4,980 Cash and Bank Balance 309 Loans and Advances 834 Other Current Assets 5 sub total 12,918 Less : Current Liabilities & Provisions Current Liabilities 2,989 Provisions 2,099 sub total 5,088 Net Current Assets 7,830 Total Assets E-estimates 22,479
33.3 35.3 0.1 35.3 26.4 23.3 42.0 0.0 9.2 15.5 425.8 3.7 98 134 133.0 2.7 1.7 2.5 8,744 37.7 43.5 14.5 38.5 61.5 180.8 22.1 28.7 28.7
39.0 42.0 0.1 41.9 23.0 29.4 38.3 0.0 8.7 14.0 304.1 8.9 100 140 130.0 2.6 1.7 2.0 11,526 56.1 63.2 16.0 28.5 71.5 218.4 28.1 35.3 35.7
39.0 42.3 0.1 42.2 23.0 29.8 38.3 0.0 9.0 13.8 361.4 9.2 105 145 125.0 2.5 1.8 2.0 14,780 67.1 75.0 18.5 27.6 72.4 264.0 27.8 35.2 35.9
12,921 4,306 8,615 2,400 0 0 5,500 7,856 5,745 (242) 1,000 5 14,364 3,535 2,327 5,862 8,502 25,016
15,121 5,236 9,885 700 0 0 7,000 9,712 6,937 865 1,200 5 18,719 3,764 2,563 6,327 12,392 29,976
16,621 6,276 10,345 500 0 0 10,000 11,861 8,589 410 1,500 5 22,364 4,226 2,949 7,175 15,189 36,034
(C) Measures of Financial Status Interest Coverage (x) 199.6 Average Cost Of Debt (%) 9.5 Debtors Period (days) 98 Closing stock (days) 133 Creditor (days) 135.5 Inventory Turnover Ratio (x) 2.7 Fixed Assets Turnover (x) 1.7 Working Capital Turnover (x) 2.4 Non Cash Working Capital (` Mn) 7,521 (D) Measures of Investment EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (E) Valuation Ratios CMP ( `) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 40.2 44.9 13.0 32.4 67.6 160.6 27.1 33.2 33.6
956 956 956 956 23.8 25.4 17.0 14.2 126,901 126,901 126,901 126,901 6.8 5.9 5.0 4.3 127,146 127,548 126,416 126,871 6.8 6.0 5.0 4.2 18.4 17.9 12.8 10.9 6.0 5.3 4.4 3.6 1.4 1.5 1.7 1.9
September 4, 2013
Divis Lab
37
DOLAT CAPITAL

Divis Lab
September 4, 2013
38
Dr. Reddys Laboratories

CMP: ` 2210
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 849mn ` 5/` 375bn USD 5602mn ` 2401 / 1617 453415 500124 DRREDDY DRRD IN REDY.BO 18235 5341
DOLAT CAPITAL

US Dose for Healthy Future...
Accumulate
Dr. Reddys Laboratories (DRL) continues to build upon its generics capability on selective niche products and biosimilars. The companys key strength lays in its complex chemistry skills supported by a captive mine of APIs, making it a dominant player in the global generics market. Recent launches (gPropecia, gDacogen, gReclast, gPropecia) with limited competition shall add fuel to the base business growth momentum. DRL has gained traction in biosimilars in emerging markets and is gearing itself for the next wave of opportunity in the regulated markets (2014E onwards)
US biz- focusing on niche and complex therapies We anticipate US generics segment (30% of sales) to be the key growth driver in the near future. The company is focusing on complex molecules and therapies including dermatology and injectables which offer strong visibility in the long term. In the near term, growth would be supported by recent launches such as gDacogen, gReclast, gToprol XL and niche opportunites such as gVidaza, gAccutane, gXeloda and gAvelox. The company has 65 ANDAs pending approval, of which 38 are Para IVs and 8 FTF opportunities. We estimate US sales to register USD 870mn in FY14E and USD 930mn in FY15E. Emerging markets - growth to driven by in-licensing/partnership arrangements We expect DRLs formulation exports to emerging markets to record 18% CAGR over FY13-15E led by a) Russian OTC market- addition of more products and in-licensing arrangements to expand its product portfolio, b) ramp-up in revenues from partnership arrangement in emerging markets. Domestic formulations multiple growth challenges persist DRLs domestic formulation business is impacted by low volume off take due to implementation of new pricing policy and trade strike in Maharashtra. As per company, new pricing policy would have an impact of ` 550mn on domestic sales. Going ahead, company expects to grow in-line with market growth rate (12-14%). However, we expect the revival process to be gradual and have estimated 10% CAGR over FY13-15E.
25.53 32.69 8.84 32.94
Dr.Reddy's relative to Sensex 140 130 120 110 100 90 80 Apr-13 Aug-12 Dec-12 Aug-13 Oct-12 Feb-13 Jun-13
Dr. Reddys
Sensex
Financials
Year FY12 FY13 FY14E FY15E Net Sales# % Growth EBIDTA OPM % Adj.PAT* % Growth Adj. EPS (`)% Growth PER (x) ROANW(%) ROACE (%) 97,502 28.6 24,506 25.1 12,533 12.9 74 12.9 29.9 24.2 24.4 118,745 21.8 27,347 23.0 16,090 28.4 95 28.4 23.3 24.9 23.0 129,701 9.2 29,292 22.6 17,304 7.5 102 7.5 21.7 21.6 21.9 146,568 13.0 33,172 22.6 20,227 16.9 119 16.9 18.6 20.7 21.9
Figures in ` mn, # Includes Other Operating Income * Adjusted for Forex & Exceptional Items
September 4, 2013
Dr. Reddys
39
DOLAT CAPITAL
Preparing for the next-big-thing: Biosimilars The much discussed patent-cliff will phase out after FY14 and will be succeeded by a wave of generic opportunity in the Biosimilars space. DRL has already launched three products Reditux, Cresp, and PeGrafeel in 12 countries and is constantly working towards expanding its product offerings. The company is well positioned to benefit from the opening up of the biosimilar entry in the US. Valuation DRL leverages on its chemistry skills to identify and capitalize on niche opportunities with limited competition. The company has built significant API capabilities that support its fast growing generic formulations business. Notably, dependence on Betapharm has reduced significantly (14% of sales), and is unlikely to be a further drag on overall financials. At CMP, the stock trades at 21.7x FY14E & 18.6x FY15E earnings. We initiate coverage on Dr. Reddys with Accumulate recommendation and a target price of ` 2382 (20x to FY15E EPS).
September 4, 2013
Dr. Reddys
40
DOLAT CAPITAL
INCOME STATEMENT Particulars Mar12 Net Sales 96,737 Other Operating Income/(Expense) 765 Income from Operations 97,502 Total Income 97,502 Total Expenditure 72,997 COGS 40,704 SGA 26,761 Other Expenses (R&D) 5,532 EBIDTA (excl. Other Income) 24,506 Core EBITDA# 24,506 EBIDTA (incl. Other Income) 24,506 Interest Expense 690 Interest Income (161) Net Interest Exp 529 Gross Profit 23,977 Depreciation & Amortization 5,213 Profit Before Tax & EO Items 18,764 Exceptional Items 1,040 Profit Before Tax 17,723 Tax 4,204 Profit After Tax 13,519 Forex Losses / (Gains) (689) Profit / (loss) from associates 54 Net Profit 14,262 Adj. PAT (Excl. Fx & EOI) 12,533 BALANCE SHEET Particulars Sources of Funds Equity Capital Share Premium / Allotment Other Reserves Net Worth Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 848 20,934 35,662 57,444 16,366 15,844 32,210 (833) 88,821 Mar13 849 20,934 50,060 71,844 11,335 18,312 29,647 (440) 101,050 Mar14E 849 20,934 66,301 88,085 4,283 18,085 22,368 (440) 110,012 Mar15E 849 20,934 85,381 107,164 3,783 20,424 24,207 (440) 130,931 Mar13 116,266 2,479 118,745 118,745 91,398 52,882 31,276 7,240 27,347 27,347 27,347 0 (460) (460) 27,807 5,546 22,261 688 21,573 4,900 16,673 0 104 16,777 16,090 Mar14E 130,401 (700) 129,701 129,701 100,409 56,072 33,904 10,432 29,292 31,444 29,292 578 0 578 28,714 6,195 22,519 0 22,519 5,275 17,244 0 60 17,304 17,304 ` mn Mar15E 147,268 (700) 146,568 146,568 113,396 63,325 38,290 11,781 33,172 34,572 33,172 121 0 121 33,051 6,784 26,267 0 26,267 6,100 20,167 0 60 20,227 20,227 CASH FLOW Particulars Profit before tax Depreciation & w.o. Net Interest Exp Direct taxes paid Chg. in Working Capital Impairment Charges (A) CF from Opt. Activities Capex Free Cash Flow Inc./ (Dec.) in Investments (B) CF from Inv. Activities Issue of Equity/ Preference Inc./(Dec.) in Debt Dividend Paid (Incl. Tax) Other (Bal.Fig) (C) CF from Fin. Activities Net Change in Cash Opening Cash balance Closing Cash balance E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (incl. O.I.) 25.1 Interest / Sales 0.7 Gross Profit Margin 24.6 Tax/PBT 23.7 Net Profit Margin 14.6 Core Net Profit Margin 14.6 (B) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost Of Debt (%) Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) Non Cash Working Capital (` Mn) (C) Measures of Investment Adj. EPS (`) (excl EO) EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (D) Valuation Ratios CMP ( `) P/E (x) P/Core EPS Market Cap. (` Mn) MCap/ Sales (x) EV (` Mn) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 0.6 35.5 2.5 96 73 5.0 2.6 3.1 23,526 86.0 84.1 114.8 13.7 16.3 83.7 338.7 24.2 24.4 26.6 Mar13 Mar14E Mar15E Mar12 17,723 5,213 529 (4,204) (4,909) 1,040 15,392 (7,959) 7,433 (10,795) (18,754) 253 8,707 (2,331) (1,617) 5,012 1,650 5,729 7,379 Mar13 21,573 5,546 (460) (4,900) (5,686) 688 16,761 (6,232) 10,529 (227) (6,459) 1 (2,563) (2,378) 269 (4,671) 5,631 7,379 13,010 Mar14E 22,519 6,195 578 (5,275) (3,809) 0 20,208 (7,280) 12,928 0 (7,280) 0 (7,279) (2,463) 882 (8,860) 4,068 13,010 17,077 Mar15E 26,267 6,784 121 (6,100) (3,730) 0 23,342 (7,800) 15,542 0 (7,800) 0 1,839 (2,548) 1,339 631 16,172 17,077 33,249
23.0 0.0 23.4 22.7 14.1 14.1 0.4 0.0 90 75 4.9 3.0 2.8 29,212 102.8 98.8 131.4 14.0 14.2 85.8 423.0 24.9 23.0 25.7
22.6 0.4 22.1 23.4 13.3 14.3 0.3 50.7 2.1 90 71 5.1 3.3 2.6 33,021 101.9 101.9 138.4 14.5 14.2 85.8 518.6 21.6 21.9 25.5
22.6 0.1 22.5 23.2 13.8 14.8 0.2 274.1 0.4 90 71 5.1 3.6 2.1 36,751 119.1 119.1 159.0 15.0 12.6 87.4 631.0 20.7 21.9 27.7
Applications of Funds Gross Block 76,649 Less: Accumulated Depreciation 39,350 Net Block 37,299 Capital Work in Progress 7,268 Investments 11,141 Goodwill 2,208 Current Assets, Loans & Advances Inventories 19,352 Sundry Debtors 25,339 Cash and Bank Balance 7,379 Loans and Advances & Other Current Assets 6,794 Other Current Assets 591 sub total 59,596 Less : Current Liabilities & Provisions Trade Payables 9,502 Provisions & Other Liabilities 1,973 Other Current Liabilities 17,216 sub total 28,691 Net Current Assets 30,905 Total Assets E-estimates 88,821
83,149 44,896 38,253 7,000 11,368 2,208 23,906 28,668 13,010 6,935 591 72,968 11,880 2,591 16,276 30,747 42,221 101,050
90,429 51,091 39,338 7,000 11,368 2,208 25,348 32,154 17,077 6,794 591 81,964 12,290 3,209 16,367 31,866 50,098 110,012
98,229 57,874 40,355 7,000 11,368 2,208 28,626 36,313 33,249 6,794 591 105,574 13,879 3,827 17,867 35,573 70,000 130,931
2,210 2,210 2,210 2,210 25.7 21.5 21.7 18.6 26.3 22.4 21.7 18.6 374,816 375,346 375,346 375,346 3.9 3.2 2.9 2.5 399,647 391,984 380,637 366,304 4.1 3.4 2.9 2.5 16.3 14.3 13.0 11.0 6.5 5.2 4.3 3.5 0.6 0.6 0.7 0.7
September 4, 2013
Dr. Reddys
39
DOLAT CAPITAL

Dr. Reddys
September 4, 2013
42
GlaxoSmithkline Pharma
CMP: ` 2282
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 847mn ` 10/` 193bn USD 2885mn ` 2899 / 1931 12245 500660 GLAXO GLXO IN GLAX.BO 18234 5341
DOLAT CAPITAL
Sell
GSK Pharma has access to its parents product pipeline which is focussed on vaccines and oncology products. GSK has launched two patented products namely Revolade and Votrient from its parent GSK Plcs portfolio. However, sales have been impacted on account of supply constraints and inventory rationalisation. Moreover, the new DPCO 2013 is expected to have 5% impact on revenues in CY13E.
GSK India beneficiary of its parents commitment GSK Plc has firm commitments towards launching patented products in India through the listed entity. The Companys recent launches of the parents shelf include Synflorix (paediatric pneumococcal vaccine), Votrient (pazopanib hydrochloride) for renal carcinoma and Revolade (eltrombopag) for platelet depletion. Its tiered pricing approach and significant domestic potential for these drugs facilitates gradual scalability. DPCO 2013 impact - Major risk The new DPCO 2013 policy poses a major risk for GSK. About 30% of the companys products are now under price control, compared to 25% earlier. Of its top five products, Augmentin, Calpol, Ceftum and Eltroxin together contribute ~ 20% of its domestic revenue. As per management, price control is expected to have an impact of 5% of revenues. Cash balances unutilised GSK has a cash/bank balance of ` 20.4bn i.e. ~` 241 per share. However, the lack of adequate opportunities to deploy these funds is a significant issue and given the current valuations, we are unlikely to see a share buy-back. Valuations GSK revenues have been impacted due to supply constraints and inventory rationalisation. In addition, the new DPCO 2013 is expected to have 5% impact on revenues in CY13E. Given the premium valuations (26.1x CY14E) and declining trend in margins, we recommend Sell with a target price of ` 1900 (22x CY14E earnings).

GSK relative to Sensex 120 115 110 105 100 95 90 85 80 Aug-12 Apr-13 Dec-12
50.67 23.66 10.59 15.08
GSK
Sensex
Financials
Year CY11 CY12 CY13E CY14E Net Sales# % Growth EBIDTA OPM % Adj.PAT* % Growth EPS (`) 23,759 10.8 7,824 32.9 6,314 8.6 74.5 26,303 10.7 8,191 31.1 6,772 7.3 79.9 28,182 7.1 7,489 26.6 6,385 -5.7 75.4 31,593 12.1 8,711 27.6 7,311 14.5 86.3 % Growth PER (x) ROANW(%) ROACE (%) 8.6 30.6 32.8 40.7 7.3 28.5 34.5 42.3 -5.7 30.3 31.0 36.6 14.5 26.4 33.5 40.1
Figures in ` mn, # Includes Operating Income, * Adjusted
September 4, 2013
Aug-13
Oct-12
Feb-13
Jun-13
GSK Pharma
43
DOLAT CAPITAL
INCOME STATEMENT Particulars Net Sales Operating Income Income From Operations Other income Total Income Total Expenditure Operating Profit (excl. OI) Operating Profit (incl. OI) Gross Profit Depreciation Profit Before Tax & EO Items Extra Ordinary Exps/(Income) Profit Before Tax Tax Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Reserves (excl Rev Res) Net Worth Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Dec11 847 18,352 19,199 49 49 -615 18,634 Dec12 847 19,253 20,100 41 41 -865 19,276 Dec13E 847 20,235 21,082 41 41 -865 20,258 Dec14E 847 21,652 22,499 41 41 -865 21,675 Dec11 23,380 379 23,759 1,596 25,355 15,935 7,824 9,420 9,420 204 9,216 2,008 7,208 2,902 4,306 Dec12 25,999 304 26,303 1,935 28,238 18,112 8,191 10,126 10,126 178 9,948 999 8,949 3,176 5,773 Dec13E 27,882 300 28,182 2,150 30,332 20,693 7,489 9,639 9,639 250 9,389 0 9,389 3,005 6,385 ` mn Dec14E 31,283 310 31,593 2,350 33,943 22,882 8,711 11,061 11,061 310 10,751 0 10,751 3,440 7,311 CASH FLOW Particulars Profit before tax Depreciation & w.o. Net Interest Exp Direct taxes paid Chg. in Working Capital Other (A) CF from Opt. Activities Capex Free Cash Flow (Inc)/ Dec. in Investments Others (Bal Fig) (B) CF from Invt. Activities Inc./(Dec.) in Debt Dividend Paid (Incl. Tax) (C) Cash Flow from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars Dec11 (A) Measures of Performance (%) Operating Profit Margin (excl. O.I.) 32.9 Operating Profit Margin (incl. O.I.) 39.6 Gross Profit Margin 39.6 Tax/PBT 40.3 Net Profit Margin 18.1 (B) Measures of Financial Status Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) (C) Measures of Investment EPS (`) (excl EO) EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) Return on Avg. Cap. Employed (%) Dec12 31.1 38.5 38.5 35.5 21.9 Dec13E Dec14E 26.6 34.2 34.2 32.0 22.7 27.6 35.0 35.0 32.0 23.1 Dec11 9,216 204 0 -2,902 608 0 7,126 301 7,427 5 -2,632 -2,326 -3 -4,415 -4,417 383 19,481 19,864 Dec12 9,948 178 0 -3,176 -454 0 6,496 -400 6,096 572 -1,217 -1,044 -8 -4,905 -4,913 539 19,864 20,403 Dec13E 9,389 250 0 -3,005 245 0 6,879 -1,300 5,579 -74 0 -1,374 0 -5,403 -5,403 102 20,403 20,505 Dec14E 10,751 310 0 -3,440 309 0 7,929 -650 7,279 0 0 -650 0 -5,893 -5,894 1,386 20,505 21,891
Applications of Funds Gross Block 2,717 Less: Accumulated Depreciation 1,725 Net Block 991 Capital Work in Progress 254 GOODWILL 0 Investments 1,598 Current Assets, Loans & Advances Inventories 3,301 Sundry Debtors 853 Cash and Bank Balance 19,864 Loans and Advances 2,251 Other Current Assets 690 sub total 26,959 Less : Current Liabilities & Provisions Current Liabilities 3,545 Provisions 7,623 sub total 11,168 Net Current Assets 15,790 Total Assets E-estimates 18,634
3,221 1,904 1,317 150 0 1,026 2,820 1,159 20,403 2,317 839 27,538 3,283 7,472 10,755 16,783 19,276
4,171 2,154 2,017 500 0 1,100 3,208 1,069 20,505 2,417 881 28,081 3,544 7,896 11,440 16,641 20,258
5,171 2,464 2,707 150 0 1,100 3,600 1,114 21,891 2,517 925 30,047 3,943 8,386 12,329 17,718 21,675
13.3 42.3 7.1 23.6 1.5
16.3 31.7 9.2 19.7 1.5
14.0 33.6 8.7 13.8 1.7
13.0 33.6 8.7 11.6 1.8
74.5 50.8 53.2 45.0 60.4 39.6 226.7 32.8 40.7 -297.8
79.9 68.2 70.3 50.0 73.4 26.6 237.3 34.5 42.3 -321.8
75.4 75.4 78.3 55.0 73.0 27.0 248.9 31.0 36.6 -413.7
86.3 86.3 90.0 60.0 69.5 30.5 265.6 33.5 40.1 -630.9
(D) Valuation Ratios Market Price - Average (`) 2,282 2,282 Price / Earnings Ratio - Average (x) 30.6 28.5 Average Market Cap. (` Mn.) 193,318 193,318 Market Capitalisation to Sales (x) 8.3 7.4 Enterprise Value (` Mn.) 173,503 172,956 EV/Sales (x) 7.4 6.7 EV/EBDITA (x) 22.2 21.1 Market Price to Book Value (x) 10.1 9.6 Dividend Yield (%) 2.0 2.2 E-estimates
2,282 30.3 193,318 6.9 172,854 6.2 23.1 9.2 2.4
2,282 26.4 193,318 6.2 171,468 5.5 19.7 8.6 2.6
September 4, 2013
GSK Pharma
44
Glenmark Pharmaceuticals
CMP: ` 514
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 271mn ` 1/` 139bn USD 2079mn ` 612 / 386 374912 532296 GLENMARK GNP IN GLEN.BO 18235 5341
DOLAT CAPITAL
Target Price: ` 561

All Round Growth....
Accumulate
Glenmark continues to build upon branded generics market across emerging markets including India and focus on specialty products such as oral contraceptives (OC) and dermatology in the US/Europe generics market. Moreover, Glenmark has a strong track record of monetizing molecules in early phase of R&D. We expect Glenmark to sustain revenue CAGR of 18% over FY13-15E.
US biz focusing on specialty products for growth We anticipate US generics segment (34% of sales) to be the key growth driver in the near future. The company is focusing on specialty therapies including dermatology and oral contraceptives which offer strong visibility in the long term. In the near term, growth would be supported by niche opportunites such as gVanos, gLocoid and 4-5 oral contraceptives. Moreover, Glenmark is focusing on oncology and controlled substances for future growth. Currently, the company has 53 ANDAs pending approval, of which 26 are Para IVs. We estimate US sales to register 18% CAGR over FY13-FY15E. Domestic biz Sustained momentum Glenmark has recorded a robust 20% CAGR on its domestic formulation biz over FY08-13. As per ORG IMS Mat June 2013, Glenmark has gained three ranks to be 19th in the industry with dominant position in dermatology, respiratory and CVS segments. Going ahead, we believe the company would continue to outperform industry growth led by launch of inhalers in the Indian market and entry into womens healthcare. Moreover, the new pricing policy is expected to have negligible impact on domestic sales. Going ahead, we anticipate Glenmark to sustain 18% CAGR over FY1315E in domestic sales. R&D status Focus back on out-licensing income Glenmark is likely to report the NCE clinical data for various NCEs commencing with Asthma trial data for GRC 4039 (Revamilast) and three other NCEs by end of FY14E. Three molecules (GBR500, GRC15300 and mPGES-1 inhibitor) are currently out-licensed and may bring further milestone based payments in FY14E. However, our estimates exclude potential upsides from these.

GPL relative to Sensex 150 140 130 120 110 100 90 80 Aug-12 Apr-13 Dec-12
48.30 33.89 7.08 10.73
GPL
Sensex
Financials
Year Net Sales % Growth EBIDTA OPM % Adj.PAT % Growth Adj.EPS (`) % Growth PER (x) ROANW(%) ROACE (%) FY12 40,206 36.3 8,642 21.5 5,919 80.6 21.9 29.4 23.5 20.5 17.4 FY13 50,123 24.7 10,207 20.4 6,147 3.8 22.7 3.7 22.7 23.6 18.6 FY14E 58,548 16.8 12,146 20.7 7,201 17.1 26.6 17.1 19.3 23.1 20.0 FY15E 68,840 17.6 14,579 21.2 8,944 24.2 33.0 24.2 15.6 23.1 22.2 Figures in ` mn
September 4, 2013
Aug-13
Oct-12
Feb-13
Jun-13
Glenmark Pharma
45
DOLAT CAPITAL
Valuation We expect Glenmark to post revenue CAGR of 18% and PAT CAGR of 19.8% over FY13-15E on the back of: a) strong pipeline of 53 ANDAs pending approval in US b) 18% CAGR in domestic formulation biz and 20% CAGR in semi-regulated markets and c) higher contribution from FTF and high margin products. At CMP, the stock trades at 19.3x FY14E & 15.6x FY15E earnings. We initiate coverage on Glenmark with Accumulate recommendation and a target price of ` 561 (17x to FY15E EPS).
September 4, 2013
Glenmark Pharma
46
DOLAT CAPITAL
INCOME STATEMENT Particulars Net Sales Other Operational income Income for Operations Total Expenditure EBIDTA (Excl. Other Income) Other Income EBIDTA (Incl. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Extra Ordinary Exps/(Income) Profit Before Tax Tax Net Profit Minority Interest Net Profit Adj.Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Other Reserves Net Worth Minority Interest Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 271 23,746 24,016 250 6,875 13,125 19,999 (2,674) 41,592 Mar13 271 27,359 27,630 244 3,678 19,203 22,881 (3,803) 46,952 Mar14E 271 34,006 34,277 244 5,000 15,000 20,000 (3,803) 50,718 Mar15E 271 42,395 42,666 244 5,000 12,000 17,000 (3,803) 56,107 Mar12 40,206 10 40,216 31,746 8,470 171 8,642 1,466 7,176 979 6,197 1,317 4,880 238 4,643 40 4,603 5,919 Mar13 50,123 14 50,137 40,024 10,113 94 10,207 1,600 8,607 1,270 7,337 0 7,337 1,107 6,230 83 6,147 6,147 Mar14E 58,548 0 58,548 46,502 12,046 100 12,146 1,755 10,391 1,500 8,891 0 8,891 1,600 7,291 90 7,201 7,201 ` mn Mar15E 68,840 0 68,840 54,362 14,479 100 14,579 1,800 12,779 1,750 11,029 0 11,029 1,985 9,044 100 8,944 8,944 CASH FLOW Particulars Mar12 Profit before tax 6,197 Depreciation & w.o. 979 Net Interest Exp 1,466 Direct taxes paid (238) Chg. in Working Capital (1,050) (A) CF from Operating Activities 7,354 Capex (3,103) Free Cash Flow 4,251 Inc./ (Dec.) in Investments 128 (B) CF from Invt. Activities (2,975) Inc./(Dec.) in Debt (1,117) Interest exp net (1,466) Dividend Paid (Incl. Tax) (554) Other (bal fig.) 0 (C) Cash Flow from Financing (3,137) Net Change in Cash 1,242 Opening Cash balances 1,958 Closing Cash balances 3,201 E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) 21.1 EBIDTA Margin (incl. O.I.) 21.1 Gross Profit Margin 17.4 Tax/PBT 4.9 Net Profit Margin 11.4 (B) As Percentage of Net Sales Excise Duty % of Gross Sales Raw Material Employee Expenses Other Expenses (C) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost Of Debt (%) Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) Non Cash Working Capital (` Mn) (D) Measures of Investment EPS (`) (excl EO) EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (E) Valuation Ratios CMP (`) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates Mar13 Mar14E Mar15E Mar13 7,337 1,270 1,600 (1,107) (2,272) 6,828 (4,705) 2,123 0 (4,705) 2,882 (1,600) (555) 0 728 2,851 3,201 6,052 Mar14E 8,891 1,500 1,755 (1,600) (1,242) 9,304 (4,235) 5,069 0 (4,235) (2,881) (1,755) (555) (90) (5,281) (212) 6,052 5,840 Mar15E 11,029 1,750 1,800 (1,985) (2,480) 10,114 (5,500) 4,614 0 (5,500) (3,000) (1,800) (555) (100) (5,455) (841) 5,840 4,999
20.2 20.2 17.0 15.1 12.3
20.6 20.6 17.6 18.0 12.3
21.0 21.0 18.4 18.0 13.0
Applications of Funds Gross Block 26,334 Less: Accumulated Depreciation 4,147 Net Block 22,187 Capital Work in Progress 2,060 Investments 181 Current Assets, Loans & Advances Inventories 7,877 Sundry Debtors 12,436 Cash and Bank Balance 3,201 Loans and Advances 6,109 Other Current Assets 609 sub total 30,231 Less : Current Liabilities & Provisions Current Liabilities 12,560 Provisions 509 sub total 13,068 Net Current Assets 17,163 Total Assets E-estimates 41,592
28,834 5,417 23,417 4,265 181 8,435 16,400 6,052 6,784 603 38,276 18,176 1,011 19,187 19,089 46,952
31,334 6,917 24,417 6,000 181 8,720 16,843 5,840 7,802 603 39,808 17,689 2,000 19,689 20,119 50,718
33,834 8,667 25,167 9,000 181 10,083 19,803 4,999 8,972 603 44,461 19,703 3,000 22,703 21,758 56,107
1.6 33.5 15.6 29.9
1.3 33.0 15.7 31.1
1.3 30.2 15.9 33.3
1.3 29.7 15.9 33.3
0.8 0.2 7.1 113 72 5.1 1.5 1.3 27,030
0.8 0.2 7.5 119 61 5.9 1.7 1.3 32,224
0.6 0.1 8.2 105 54 6.7 1.9 1.5 33,968
0.4 0.1 9.7 105 53 6.8 2.0 1.5 39,462
21.9 21.9 20.6 1.8 8.2 91.8 89.7 20.5 17.4 23.4
22.7 22.7 27.4 1.8 7.9 92.1 102.9 23.6 18.6 26.5
26.6 26.6 32.1 1.8 6.8 93.2 127.5 23.1 20.0 29.0
33.0 33.0 39.5 1.8 5.5 94.5 158.4 23.1 22.2 31.3
514 514 23.5 22.7 139,107 139,271 3.5 2.8 155,905 156,100 3.9 3.1 18.4 15.4 5.7 5.0 0.4 0.4
514 19.3 139,271 2.4 151,431 2.6 12.6 4.0 0.4
514 15.6 139,271 2.0 146,272 2.1 10.1 3.2 0.4
September 4, 2013
Glenmark Pharma
47
DOLAT CAPITAL

Glenmark Pharma
September 4, 2013
48
IPCA Laboratories
CMP: ` 647
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 252mn ` 2/` 82bn USD 1217mn ` 708 / 389 168437 524494 IPCALAB IPCA IN IPCA.BO 18235 5341
DOLAT CAPITAL
Target Price: ` 743

Entering the Big League...
Accumulate
IPCA has transformed itself from a leading API manufacturer to a fully integrated formulation company. The company has a dominant position in the anti-malaria segment in India with 48% market share in FY13. The domestic formulations segment is expected to record 15% CAGR over FY13-15E, led by increasing contribution from CVS and pain segment. Moreover, new pricing policy will not have any material impact on domestic sales. We anticipate export formulations to register 24% growth over FY13-15E mainly driven by increasing contribution from institutional based sales and ramp up in its US generics biz. In addition, commercialization of Indore SEZ shall do away with capacity constraints and pave way for market share gains in existing products and facilitate new launches.
Integrated Generic Play - IPCA has transformed itself from an API manufacturer to a fully integrated formulation company. Formulations constitute 76% of the product mix with APIs mainly for captive consumption. The company follows a two pronged growth strategy viz., emphasis on branded formulations with front end presence in fast growing emerging markets and is a preferred supplier for generics (APIs/ formulations) to its partners based in the regulated markets and thus stays away from any patent litigation. Domestic business- No material impact of new pricing policy: IPCA holds 1.7% market share in the domestic pharma market (MAT June13). Anti-malarials, CVS and pain management constitute more than 50% of the domestic business. As per company, the new DPCO 2013 coverage is expected to increase to `1.7bn from ` 710mn (under DPCO 1995). However, the impact could be partially set off by 10% price hike in the portfolio coming out of DPCO 2013, 7.5% price hike taken in portfolios common to DPCO 1995 and 2013 and existing products outside price control. We anticipate the company to witness a growth of 14% in FY14E and 16% in FY15E. US business- growth to be driven by Indore SEZ commercialization: Ipca faces capacity constraints and has not been able to launch new products/increase market share in existing products. We anticipate Indore
% Growth PER (x) ROANW(%) ROACE (%) 49.8 24.7 28.6 25.4 17.2 21.1 27.3 26.1 18.5 17.8 26.0 26.2 20.4 14.8 25.3 26.7
45.89 22.96 13.50 17.65
IPCA relative to Sensex 160 150 140 130 120 110 100 90 80 Aug-12 Apr-13 Dec-12 Aug-13 Oct-12 Feb-13 Jun-13
IPCA
Sensex
Financials
Year FY12 FY13 FY14E FY15E Net Sales# % Growth EBIDTA OPM % Adj.PAT % Growth EPS (`) 23,587 24.2 5,135 21.8 3,298 50.3 26.1 28,131 19.3 6,232 22.2 3,867 17.3 30.6 32,711 16.3 7,274 22.2 4,582 18.5 36.3 38,322 17.2 8,681 22.7 5,515 20.4 43.7
Figures in ` mn, # Includes other operating income .
September 4, 2013
IPCA Labs
49
DOLAT CAPITAL
SEZ to be commercialized in Q4FY14 and growth to revive from FY15E onwards. Over next 2-3 years, incremental revenue of USD 80mn is expected from Indore SEZ as per management. We estimate US business to grow by 51% CAGR over FY13-15E to `4.2bn, led by incremental revenues due to Indore SEZ commercialization (USD 10mn in FY14E and USD 30mn in FY15E). Institutional business to sustain growth: Currently, ~95% of institutional business is primarily focused on malaria and sold in African countries where the incidence of malaria is very high. The company has guided for 17% revenue growth in FY14E, on the back of strong order book position and is expected to pick-up in H2FY14E. Notably, funding commitment over AMFm (Affordable Medicines Facility- Malaria) programs and increased off take of Artermether-Lumefantrine (AL) formulation ensures revenue visibility in its institutional business. The management believes the institutional business can grow to ` 8bn from guided sales of ` 4.6bn in FY14 over the next three years. Valuation We expect acceleration in export formulation revenues mainly led by a) uptick in US revenues-commercialization of Indore SEZ in Q4FY14E, b) sustained growth in its institutional business and c) gradual recovery in domestic formulations hereon shall add to growth momentum. We estimate adjusted earnings to record 22% CAGR over FY13-15E. At CMP, the stock trades at 17.8x FY14E and 14.8x FY15E earnings. We recommend Accumulate on the stock with a target price of ` 743 (17x FY15E EPS).
September 4, 2013
IPCA Labs
50
DOLAT CAPITAL
INCOME STATEMENT Particulars Net Sales Operating Income Income from Operations Other income Total Income Total Expenditure Other Expenses EBIDTA (Excl. Other Income) EBIDTA (Incl. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Extra Ordinary Exps/(Income) Profit Before Tax Tax Net Profit Share of associates Adj.Net Profit Forex Losses/(Gains) PAT BALANCE SHEET Particulars Sources of Funds Equity Capital Share Premium Other Reserves Net Worth Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 252 436 11,852 12,540 5,038 984 6,022 932 19,493 Mar13 252 436 15,059 15,747 5,063 1,045 6,108 932 22,787 Mar14E 252 436 18,834 19,522 4,963 1,055 6,018 932 26,472 Mar15E 252 436 23,396 24,084 4,813 1,105 5,918 932 30,934 Mar12 23,140 448 23,587 120 23,707 18,452 5,966 5,135 5,255 413 4,842 671 4,170 0 4,170 881 3,289 (9) 3,298 527 2,771 Mar13 27,537 595 28,131 143 28,274 21,899 7,015 6,232 6,375 334 6,041 867 5,174 0 5,174 1,299 3,875 8 3,867 631 3,236 Mar14E 32,161 550 32,711 200 32,911 25,437 7,952 7,274 7,474 415 7,059 1,027 6,032 0 6,032 1,450 4,582 0 4,582 0 4,582 ` mn Mar15E 37,822 500 38,322 150 38,472 29,641 9,233 8,681 8,831 402 8,430 1,172 7,258 0 7,258 1,743 5,515 0 5,515 0 5,515 CASH FLOW Particulars Profit before tax Depreciation & w.o. Net Interest Exp Direct taxes paid Chg. in Working Capital (A) CF from Opt. Activities Capex Free Cash Flow (B) CF from Invt. Activities Issue of Equity/ Preference Inc./(Dec.) in Debt Interest exp net Dividend Paid (Incl. Tax) Other (Bal.fig) (C) Cash Flow from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) 21.8 EBIDTA Margin (incl. O.I.) 22.3 Interest / Sales 1.8 Gross Profit Margin 20.4 Tax/PBT 21.1 Net Profit Margin 14.0 (B) As Percentage of Net Sales Raw Material Employee Expenses Other Expenses (C) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost Of Debt (%) Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) Non Cash Working Capital (` Mn) (D) Measures of Investment EPS (`) (excl EO) EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (E) Valuation Ratios CMP (`) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 38.7 14.2 25.3 0.5 12.7 7.3 55 106 3.5 1.8 2.7 8,435 26.1 22.0 31.5 3.2 14.5 85.5 99.4 28.6 25.4 25.5 647 24.7 81,569 3.5 87,468 3.8 17.0 6.5 0.5 Mar13 Mar14E Mar15E Mar12 4,170 671 413 (881) (435) 3,938 (3,289) 649 (3,289) 13 703 (413) (468) (466) (631) 18 104 122 Mar13 5,174 867 334 (1,299) (1,635) 3,441 (3,292) 149 (3,292) 0 87 (334) (660) (0) (907) (758) 122 (644) Mar14E 6,032 1,027 415 (1,450) (1,764) 4,260 (2,800) 1,460 (2,800) 0 (90) (415) (807) (0) (1,312) 148 (644) (496) Mar15E 7,258 1,172 402 (1,743) (2,841) 4,248 (2,800) 1,448 (2,800) 0 (100) (402) (953) (0) (1,455) (7) (496) (503)
22.2 22.7 1.2 21.4 25.1 13.7 39.0 13.9 24.9 0.4 19.1 5.5 70 93 3.9 1.7 2.9 10,070 30.6 25.6 37.5 4.5 17.6 82.4 124.8 27.3 26.1 25.7 647 21.1 81,601 3.0 88,353 3.2 14.2 5.2 0.7
22.2 22.8 1.3 21.4 24.0 14.0 39.5 13.9 24.3 0.3 18.0 6.8 71 94 3.9 1.6 2.8 11,834 36.3 36.3 44.4 5.5 15.1 84.9 154.7 26.0 26.2 25.6 647 17.8 81,601 2.5 88,115 2.7 12.1 4.2 0.9
22.7 23.0 1.1 21.9 24.0 14.4 39.7 13.5 24.1 0.2 22.0 6.7 73 97 3.8 1.7 2.7 14,674 43.7 43.7 53.0 6.5 14.9 85.1 190.8 25.3 26.7 26.2 647 14.8 81,601 2.2 88,022 2.3 10.1 3.4 1.0
Applications of Funds Gross Block 13,150 Less: Accumulated Depreciation 3,945 Net Block 9,205 Capital Work in Progress 1,155 Goodwill 236 Investments 341 Current Assets, Loans & Advances Inventories 6,699 Sundry Debtors 3,491 Cash and Bank Balance 122 Loans and Advances 2,025 Other Current Assets sub total 12,337 Less : Current Liabilities & Provisions Current Liabilities 3,403 Provisions 377 sub total 3,780 Net Current Assets 8,556 Total Assets E-estimates 19,493
16,305 4,812 11,493 1,292 236 341 7,016 5,281 (644) 2,125 13,779 3,852 500 4,353 9,426 22,787
19,596 5,839 13,758 800 236 341 8,283 6,256 (496) 2,225 16,268 4,391 540 4,930 11,338 26,472
22,396 7,010 15,386 800 236 341 10,051 7,564 (503) 2,425 19,538 4,680 686 5,367 14,171 30,934
September 4, 2013
IPCA Labs
51
DOLAT CAPITAL

IPCA Labs
September 4, 2013
52
Lupin
CMP: ` 840
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 895mn ` 2/` 376bn USD 5613mn ` 908 / 540 1274208 500257 LUPIN LPC IN LUPN.BO 18235 5341
DOLAT CAPITAL
Target Price: ` 965

Fundamentally Healthy...
Accumulate
Lupin is our preferred pick on account of successful transformation from a Tier-II API manufacturer to a fully integrated global generic player. It has managed to deliver superior growth of 44% CAGR in export formulations; 20% CAGR in domestic formulations over FY0813 aided by selective launches in niche fast-growing therapeutic areas. We expect the export formulation business to grow by 14% CAGR over FY13-15E led by monetization of its generic pipeline (FTFs and OCs) in the US market and consolidation of its position in the Japanese market. Growth in domestic formulations (16% CAGR over FY13-15E) business will be primarily driven by new launches and incremental sales from Eli Lilly alliance.
US generics targeting niche opportunities Lupin has differentiated itself from other Indian generic companies in the US by a) focusing on branded innovator products b) launching lowcompetition/patent challenge product in the US and c) in-licensing products. The company is focusing on complex molecules and therapies including OCs, dermatology and ophthalmology. The company has 65 ANDAs pending approval, of which 38 are Para IVs and 8 FTF opportunities. We anticipate limited competition generic launches in US (Niaspan, Renagel, Trizivir, Lunesta, Zymar, TriLipix and Asacol) to aid growth trajectory. In addition, launch of Seasonique and Yasmin in July13, to further ramp-up sales in US going ahead. We estimate US sales to register USD 740mn in FY14E and USD 850mn in FY15E. Japan biz Increasing profitability Lupin has built up a sizeable presence in the Japan market through the acquisition of Kyowa and Irom. The company aims to increase its profitability with captive API sourcing. We estimate Japan biz to record 16% CAGR over FY13-15E to USD 275mn.

Lupin relative to Sensex 140 130 120 110 100 90 80 Oct-12 Feb-13 Dec-12 Aug-12 Apr-13 Jun-13
46.81 30.67 12.40 10.12
Aug-13
Lupin
Sensex
Domestic Formulation business Shifting focus from acute to chronic Lupin expects its strategy to focus on chronic therapies (60% contribution to domestic business; aims to increase it to 70% in next couple of years) to help it grow faster than industry growth of 12%. While CVS, metabolic,
Financials
Year FY12 FY13 FY14E FY15E Net Sales# % Growth EBIDTA OPM % Adj.PAT* % Growth EPS (`) % Growth PER (x) ROANW(%) ROACE (%) 70,829 21.7 14,447 20.4 8,875 0.9 19.8 0.9 41.1 24.3 23.4 96,413 36.1 22,700 23.5 13,404 51.0 30.0 51.0 27.2 29.3 30.7 111,299 15.4 26,155 23.5 15,572 16.2 34.8 16.2 23.4 26.8 30.7 128,689 15.6 30,885 24.0 17,990 15.5 40.2 15.5 20.3 24.9 31.1
Figures in ` mn, * Adjusted,# Includes income from Operations
September 4, 2013
Lupin
53
DOLAT CAPITAL
ophthalmology, respiratory and gastro would remain, women healthcare and IV fluids would provide growth opportunities. We expect Lupins domestic formulations to post revenue of 16% CAGR over FY13-15E, led by a rapidly expanding presence in fast growing chronic therapeutic areas like CVS and anti-diabetes, increase in its field force and new launches. We believe Lupin will continue its out-performance of the industry as historically it has grown much faster than the industry, clocking revenue CAGR of 20% over FY08-13. Valuations We expect Lupin to register earnings CAGR of 14% over FY13-15E, led by limited competition generic launches in US (Niaspan, Renagel, Trizivir, Lunesta, Zymar, TriLipix and Asacol). Its business model enables healthy cash flow generation and augments requisite growth funding. The company continues to seek high-potential, low-risk acquisitions in key markets which shall further complement its organic growth momentum. At CMP, the stock trades at 24.2x FY14E and 20.9x FY15E earnings. We recommend Accumulate on the stock with a target price of ` 965 (24x FY15E earnings). We continue to have Lupin in our preferred picks list.
September 4, 2013
Lupin
54
DOLAT CAPITAL
INCOME STATEMENT Particulars Mar12 Net Sales 69,597 Operating income 1,232 Income from Operations 70,829 Other Income 144 Total Income 70,973 Total Expenditure 56,382 Other Expenses 20,648 EBIDTA (Excl. Other Income) 14,447 EBIDTA (Incl. Other Income) 14,591 Interest 355 Gross Profit 14,236 Depreciation 2,275 Profit Before Tax & EO Items 11,961 Profit Before Tax 11,961 Tax 3,086 Net Profit before Minority Interest 8,875 Share of Associates 0 Minority Interest 0 Net Profit 8,875 BALANCE SHEET Particulars Sources of Funds Equity Capital Share Premium Other Reserves Net Worth Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Minority Interest Total Capital Employed Mar12 894 5,249 33,987 40,129 8,170 8,230 16,400 1,442 723 58,695 Mar13 895 5,249 45,282 51,426 10,979 4,465 15,444 1,532 923 69,325 Mar14E 895 5,249 58,494 64,637 8,000 3,500 11,500 1,532 1,123 78,792 Mar15E 895 5,249 73,620 79,764 7,500 3,000 10,500 1,532 1,323 93,119 IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) 20.4 EBIDTA Margin (incl. O.I.) 20.6 Interest / Sales 0.5 Gross Profit Margin 20.1 Tax/PBT 25.8 Net Profit Margin 12.5 (B) As Percentage of Net Sales Raw Material Employee Expenses Other Expenses (C) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost Of Debt (%) Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) Non Cash Working Capital (` Mn) (D) Measures of Investment EPS (`) (excl EO) EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (E) Valuation Ratios CMP ( `) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 36.8 13.7 29.2 0.4 41.1 2.5 91 91 4.0 1.9 2.7 22,171 19.8 19.8 25.0 3.2 16.1 83.9 89.8 24.3 23.4 25.4 Mar13 Mar14E Mar15E Mar13 94,616 1,797 96,413 279 96,692 73,713 25,745 22,700 22,978 410 22,568 3,322 19,246 19,246 5,842 13,404 0 0 13,404 Mar14E 109,299 2,000 111,299 900 112,199 85,144 30,051 26,155 27,055 526 26,529 4,318 22,211 22,211 6,663 15,547 (300) 275 15,572 ` mn Mar15E 126,589 2,100 128,689 1,000 129,689 97,804 34,746 30,885 31,885 575 31,310 5,182 26,128 26,128 7,838 18,290 0 300 17,990 CASH FLOW Particulars Profit before tax Depreciation & w.o. Net Interest Exp Direct taxes paid Chg in Working Capital (A) CF from Opt. Activities Capex Free Cash Flow Inc./ (Dec.) in Investments Other (Bal.Fig) (B) CF from Invt. Activities Issue of Equity/ Preference Inc./(Dec.) in Debt Interest exp net Dividend Paid (Incl. Tax) (C) CF from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates Mar12 11,961 2,275 355 (3,086) (5,931) 5,574 (10,144) (4,570) 4 1,346 (8,794) 52 4,776 (355) (1,430) 3,044 (176) 4,201 4,025 Mar13 19,246 3,322 410 (5,842) (5,896) 11,241 (5,500) 5,741 0 (29) (5,529) 2 (956) (410) (1,790) (3,155) 2,557 4,025 6,582 Mar14E 22,211 4,318 526 (6,663) (6,607) 13,785 (6,000) 7,785 0 102 (5,898) 0 (3,944) (526) (2,238) (6,708) 1,179 6,582 7,761 Mar15E 26,128 5,182 575 (7,838) (6,911) 17,136 (6,000) 11,136 0 (278) (6,278) 0 (1,000) (575) (2,685) (4,260) 6,597 7,761 14,358
23.5 23.8 0.4 23.4 30.4 13.9 36.8 13.0 26.7 0.3 56.0 2.6 85 87 4.2 2.1 2.7 28,067 30.0 30.0 37.4 4.0 13.4 86.6 114.9 29.3 30.7 33.5
23.5 24.3 0.5 23.8 30.0 14.0 36.0 13.5 27.0 0.2 51.4 3.9 88 84 4.3 2.1 2.6 34,674 34.8 34.8 44.4 5.0 14.4 85.6 144.4 26.8 30.7 34.0
24.0 24.8 0.5 24.3 30.0 14.0 35.5 13.5 27.0 0.1 55.5 5.2 88 84 4.3 2.2 2.3 41,585 40.2 40.2 51.8 6.0 14.9 85.1 178.2 24.9 31.1 35.7
Applications of Funds Gross Block 36,878 Less: Accumulated Depreciation 14,422 Net Block 22,457 Capital Work in Progress 4,974 Goodwill on consolidation 5,040 Investments 28 Current Assets, Loans & Advances Inventories 17,327 Sundry Debtors 17,318 Cash and Bank Balance 4,025 Loans and Advances 7,705 sub total 46,374 Less : Current Liabilities & Provisions Current Liabilities 16,891 Provisions 3,287 sub total 20,178 Net Current Assets 26,196 Total Assets E-estimates 58,695
44,852 17,744 27,108 2,500 5,040 28 22,552 22,034 6,582 8,841 60,010 21,817 3,544 25,361 34,649 69,325
50,852 22,062 28,790 2,500 5,040 28 25,154 26,352 7,761 9,807 69,073 22,567 4,071 26,638 42,434 78,792
56,852 27,244 29,608 2,500 5,040 28 29,133 30,520 14,358 10,944 84,955 24,414 4,598 29,012 55,943 93,119
840 840 840 840 42.4 28.1 24.2 20.9 375,468 376,099 376,099 376,099 5.4 4.0 3.4 3.0 387,844 384,961 379,838 372,240 5.6 4.1 3.5 2.9 26.8 17.0 14.5 12.1 9.4 7.3 5.8 4.7 0.4 0.5 0.6 0.7
September 4, 2013
Lupin
55
DOLAT CAPITAL
September 4, 2013

Lupin
56
Sun Pharmaceuticals
CMP: ` 510
BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 1036mn ` 1/` 1057bn USD 16bn ` 581 / 321 1,562,022 524715 SUNPHARMA SUNP IN SUN.BO 18235 5341
DOLAT CAPITAL
Target Price: ` 603

Firing on all cylinders
Accumulate
Sun Pharma (SUNP) has outperformed market growth over the past seven years (CAGR of 17.5% over FY03-13) and has consistently improved its market share. In addition, Sun has strengthened its presence in the US market by acquisition of URL Pharma (adds 107 products to US portfolio), DUSA pharma (gives access to branded dermatology product portfolio) and Taro (dermatology and topical products). We estimate Sun to report revenue CAGR of 19.5% over FY13-15E and earnings CAGR of 18.5% over FY13-15E.
Domestic Formulations Growth led by chronic therapies SUNP has recorded a robust 17.5% CAGR on its domestic formulation biz over FY06-13. As per AIOCD-AWACS June 2013, SUNP is ranked 2nd and holds 5.1% market share in the Indian pharma market. The company has dominant position in CVS, CNS and gastro portfolio. Going ahead, we believe the company would continue to outperform industry growth led by new product launches and market share gain in existing product portfolio. Moreover, the new pricing policy is expected to have negligible impact on domestic sales. We anticipate SUNP to sustain 18% CAGR over FY13-15E in domestic sales. US generics Niche filings We anticipate US generics segment excl. Taro (30% of sales) to be the key growth driver in the near future. The company is focusing on complex molecules and therapies including controlled substances, dermatology and injectables which offer strong visibility in the long term. In July 2013, SUNP launched gPrandin with 180 day exclusivity in US. Prandin has market size of USD200mn. SUNP expects entry of atleast 3 generic players post conclusion of 180 day exclusivity.
63.68 22.76 3.24 10.32
SUN Pharma relative to Sensex 160 150 140 130 120 110 100 90 80 Oct-12 Dec-12 Feb-13 Aug-12 Apr-13 Jun-13 Aug-13
Sun Pharma
Sensex
Taro Pharma: Management has reiterated that the price increase undertaken by Taro for some of its dermatology products may not be sustainable in the long-term. It also indicated that competition for its top product, Nystatin, has increased with Sandoz re-entering the market. The company expects increased R&D investments to strengthen Taros generic pipeline.
Financials
Year FY12 FY13 FY14E FY15E Net Sales# % Growth EBIDTA OPM % Adj.PAT % Growth EPS (`) % Growth PER (x) ROANW(%) ROACE (%) 80,197 40.2% 32,648 40.7 22,653 24.7 21.9 24.7 23.3 22.8 29.7 112,999 40.9% 49,673 44.0 35,916 58.6 34.7 58.6 14.7 29.7 35.6 133,182 17.9% 58,295 43.8 44,696 24.4 21.6 -37.8 23.7 33.1 35.7 160,838 20.8% 68,512 42.6 49,977 11.8 24.1 11.8 21.2 31.3 35.7
Figures in ` mn, #Includes Other Operating Income
September 4, 2013
Sun Pharma
57
DOLAT CAPITAL
URL Pharma and Dusa Acquisition: SUNP indicated that the performance of URL Pharma/DUSA Pharma has been above expectations so far. While the company has not disclosed the revenue size of URL Pharma, it had earlier indicated that the profit margins are well below the consolidated entity. We expect US biz to grow at 15% CAGR over FY13-15E.
Valuation We expect SUNP to post revenue CAGR of 19.5% and PAT CAGR of 18.5% over FY13-15E on the back of: 1) Superior revenue mix; 2) Domestic market growth rate to be higher than the market @ 18%; 3) Higher R&D expenditure productivity 4) Competition in Taro products leading to price normalization; 5) Increased visibility in US on account of upsides from URL and DUSA acquisitions. At CMP, the stock trades at 23.7x FY14E & 21.2x FY15E earnings. We initiate coverage on SUNP with Accumulate recommendation and a target price of ` 603 (25x FY15E EPS).
September 4, 2013
Sun Pharma
58
DOLAT CAPITAL
INCOME STATEMENT Particulars Net Sales Other Operational income Income from Operations Total Expenditure EBIDTA (Excl. Other Income) Other Income EBIDTA (Incl. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Extra Ordinary Exps/(Income) Profit Before Tax Tax Net Profit Minority Interest Net Profit Adjusted Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Other Reserves Net Worth Minority Interest Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 1,036 110,410 111,445 11,615 1,554 1,096 2,650 1,636 127,346 Mar13 1,036 129,082 130,118 16,351 1,153 830 1,982 2,064 150,514 Mar14E 2,071 137,943 140,014 22,891 1,153 830 1,982 2,579 167,467 Mar15E 2,071 177,258 179,330 32,048 1,153 830 1,982 3,224 216,583 Mar12 80,057 141 80,197 47,550 32,648 4,100 36,747 282 36,465 2,912 33,554 0 33,554 3,132 30,422 3,855 26,567 22,653 Mar13 112,389 610 112,999 63,326 49,673 3,117 52,790 443 52,346 3,362 48,985 5,836 43,149 8,206 34,943 4,863 30,081 35,916 Mar14E 132,832 350 133,182 74,887 58,295 3,400 61,695 450 61,245 4,982 56,264 25,174 31,090 6,218 24,872 5,349 19,523 44,696 ` mn Mar15E 160,488 350 160,838 92,326 68,512 4,800 73,312 451 72,861 4,737 68,124 0 68,124 12,262 55,861 5,884 49,977 49,977 CASH FLOW Particulars Profit before tax Depreciation & w.o. Direct taxes paid Chg. in Working Capital (A) CF from Opt. Activities Capex Free Cash Flow Inc./ (Dec.) in Investments (B) CF from Investing Activities Issue of Equity/ Preference Inc./(Dec.) in Debt Interest exp net Dividend Paid (Incl. Tax) (C) CF from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) 40.7 EBIDTA Margin (incl. O.I.) 45.8 Interest / Sales 0.4 Gross Profit Margin 45.5 Tax/PBT 9.3 Net Profit Margin 33.1 (B) As Percentage of Net Sales Raw Material Employee Expenses R&D Expenses Other Expenses 20.5 14.8 5.5 5.5 Mar13 Mar14E Mar15E Mar12 29,699 2,912 (3,818) (9,844) 18,948 (9,887) 9,061 169 (9,719) 0 (1,001) (282) (4,039) (5,322) 5,992 22,046 28,039 Mar13 38,286 3,362 (8,980) 4,191 36,858 (21,680) 15,179 (1,987) (23,667) 0 (668) (443) (4,557) (5,668) 8,256 33,672 41,928 Mar14E 25,741 4,982 (7,767) (5,519) 17,437 (8,990) 8,448 (884) (9,874) 1,036 0 (450) (9,113) (8,528) (1,278) 40,587 39,309 Mar15E 62,240 4,737 (13,811) (6,437) 46,729 (10,242) 36,487 0 (10,242) 0 0 (451) (9,113) (9,564) 38,882 45,849 84,731
44.0 46.7 0.4 46.3 19.0 26.6 18.4 13.6 6.2 6.2 119.1 19.1 60 84 4.4 1.5 1.7 25,864 34.7 29.0 32.3 4.4 15.1 84.9 125.6 29.7 35.6 48.6
43.8 46.3 0.3 46.0 20.0 14.7 23.2 12.9 5.0 5.0 137.1 22.7 60 83 4.4 1.6 1.7 31,899 21.6 9.4 11.8 4.4 46.7 53.3 67.6 33.1 35.7 49.0
42.6 45.6 0.3 45.3 18.0 31.1 25.8 12.0 4.9 4.9 162.6 22.8 61 83 4.4 1.8 1.2 38,981 24.1 24.1 26.4 4.4 18.2 81.8 86.6 31.3 35.7 56.1
Applications of Funds Gross Block 54,269 Less: Accumulated Depreciation 24,973 Net Block 29,295 Capital Work in Progress 3,447 Investments 22,129 Current Assets, Loans & Advances Inventories 20,870 Sundry Debtors 19,261 Cash and Bank Balance 33,672 Loans and Advances 16,877 sub total 90,680 Less : Current Liabilities & Provisions Current Liabilities 14,499 Provisions 10,541 sub total 25,040 Net Current Assets 65,640 Deferred Tax Asset 6,835 Total Assets E-estimates 127,346
74,430 28,624 45,806 4,965 24,116 25,778 18,408 40,587 21,660 106,433 15,855 24,126 39,981 66,451 9,176 150,514
81,930 32,842 49,088 6,455 25,000 30,329 21,789 45,849 25,836 123,804 17,973 28,083 46,056 77,748 9,176 167,466
90,236 49,088 41,148 8,391 25,000 36,638 26,768 93,888 31,211 188,505 21,712 33,925 55,636 132,869 9,176 216,583
(C) Measures of Financial Status Interest Coverage (x) 130.3 Average Cost Of Debt (%) 9.0 Debtors Period (days) 88 Closing stock (days) 95 Inventory Turnover Ratio (x) 3.8 Fixed Assets Turnover (x) 1.5 Working Capital Turnover (x) 1.2 Non Cash Working Capital (` Mn)31,969 (D) Measures of Investment EPS (`) (excl EO) 21.9 EPS (`) 25.7 CEPS (`) 28.5 DPS (`) 3.9 Dividend Payout (%) 15.2 Profit Ploughback (%) 84.8 Book Value (`) 107.6 RoANW (%) 22.8 RoACE (%) 29.7 RoAIC (%) (Excl Cash & Invest.) 39.3 (E) Valuation Ratios CMP ( `) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates
510 510 510 510 23.3 14.7 23.7 21.2 528,622 528,622 1,057,244 1,057,244 6.6 4.7 8.0 6.6 497,600 490,017 1,013,377 965,338 6.2 4.4 7.6 6.0 15.2 9.9 17.4 14.1 4.7 4.1 7.6 5.9 0.8 0.9 0.9 0.9
September 4, 2013
Sun Pharma
59
DOLAT CAPITAL
BUY ACCUMULATE REDUCE SELL Upside above 20% Upside above 5% and up to 20% Upside of upto 5% or downside of upto 15% Downside of more than 15%
Analyst Amit Khurana, CFA Amit Purohit Milind Bhangale Nehal Shah Priyank Chandra Rahul Jain Rajiv Pathak Ram Modi Prachi Save
Sector/Industry/Coverage Co-Head Equities and Head of Research Consumer Pharma Midcaps & Agrochem Oil & Gas IT Services Financials Metals & Mining Derivatives
E-mail amit@dolatcapital.com amitp@dolatcapital.com milindb@dolatcapital.com nehals@dolatcapital.com priyank@dolatcapital.com rahul@dolatcapital.com rajiv@dolatcapital.com ram@dolatcapital.com prachi@dolatcapital.com
Tel.+91-22-4096 9700 91-22-40969745 91-22-40969724 91-22-40969731 91-22-40969753 91-22-40969737 91-22-40969754 91-22-40969750 91-22-40969756 91-22-40969733
Associates Pranav Joshi Manish Raj Afshan Sayyad
Sector/Industry/Coverage Financials Metals & Mining Economy
E-mail
Tel.+91-22-4096 9700 91-22-40969706 91-22-40969725 91-22-40969726
pranavj@dolatcapital.com manishr@dolatcapital.com afshans@dolatcapital.com E-mail
Equity Sales/Trading Designation Purvag Shah Vikram Babulkar Kapil Yadav Parthiv Dalal Jatin Padharia P. Sridhar Chirag Makati Chandrakant Ware Aadil R. Sethna Principal Co-Head Equities and Head of Sales AVP - Institutional Sales AVP - Institutional Sales Institutional Sales - FII Head Sales Trading AVP - Sales Trading Senior Sales Trader Head of Derivatives
Tel.+91-22-4096 9797 91-22-40969747 91-22-40969746 91-22-40969735 91-22-40969705 91-22-40969748 91-22-40969728 91-22-40969702 91-22-40969707 91-22-40969708
purvag@dolatcapital.com vikram@dolatcapital.com kapil@dolatcapital.com parthiv@dolatcapital.com jatin@dolatcapital.com sridhar@dolatcapital.com chiragm@dolatcapital.com chandrakant@dolatcapital.com aadil@dolatcapital.com
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Sector Note

Indian Pharma Sector

Global Generics: Patent cliff around?

Global Generics: Patent cliff around?

Source: IMS Institute for Healthcare Informatics, May 2012

Source: IMS Market Prognosis, May 2012

Contribution to Developed Maket Growth

Source: IMS Market Prognosis, May 2012

Source: IMS Market Prognosis, May 2012

Controlled substances, dermatology, OCs, Branded products, dermatology

Dermatology, Controlled substance, OCs

Source: Dolat Research

US Sales of Indian Companies

Source: Dolat Research

Source: Dolat Research

Source: Dolat Research

Source: Dolat Research

Source: Dolat Research

MSD Mylan Bayer Eli Lilly Merck

DSM Pharma Sanofi Pasteur

Indoco Remedies Emcure

Austria and other international markets India

Source: Dolat Research

for which a potential 180-day exclusivity entitlement exists.

Generic applications vs employees.

Source: FDA September 4, 2013 15

RPG Lifesciences Sun pharma/ Caraco

Wockhardt Zydus Cadila

* December year ending

Target Price: ` 258

Shareholding Pattern as on June13(%)

Promoter FIIs MF/Banks/FIs Public / Others

54.84 17.87 13.78 13.51

Int en tio na lly Le ft B lan k

Target Price: ` 399

Shareholding Pattern as on June13(%)

Promoter FIIs MF/Banks/FIs Public / Others

52.15 14.85 12.50 20.50

Figures in ` mn, # Figures are ex-Axicorp

Mar13 21.8 24.0 0.3 23.6 16.0 12.3

Mar14E 22.3 24.0 0.4 23.6 22.0 13.3

Mar15E 22.7 24.2 0.4 23.8 22.0 13.9

0.1 47.4 4.0 86 66 5.5 1.7 7.2

0.1 73.5 3.1 75 59 6.2 1.7 3.9

0.2 63.8 3.1 86 60 6.1 1.7 3.6

0.2 62.9 2.5 87 60 6.1 1.7 3.3

339 20.1 67,870 3.3 65,345 3.1 12.6 3.0 1.5

339 22.1 67,870 2.7 63,629 2.6 11.7 2.5 1.6

339 17.5 67,870 2.3 65,178 2.2 10.0 2.3 1.8

339 14.5 67,870 2.0 65,726 1.9 8.6 2.1 1.9

Int en tio na lly Le ft B lan k

Target Price: ` 727

Shareholding Pattern as on June13(%)

Promoter FIIs MF/Banks/FIs Public / Others

74.79 5.42 9.92 9.87

Int en tio na lly Le ft B lan k

Target Price: ` 480

Shareholding Pattern as on June13(%)

Promoter FIIs MF/Banks/FIs Public / Others

36.80 23.11 10.81 29.28

Cipla relative to Sensex 115 110 105

100 95 90 Aug-12 Apr-13 Dec-12 Aug-13 Oct-12 Feb-13 Jun-13

Int en tio na lly Le ft B lan k