3QFY2012 Result Update | Pharmaceutical

January 31, 2012

Ipca Labs
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Tax Adjusted net profit 3QFY2012 602 17 138 22 104 2QFY2012 618 8 152 26 105 % chg qoq (2.6) 110.4 (9.0) 0.0 (0.7) 3QFY2011 463 3 88 19 53 % chg yoy 29.9 406.0 57.1 19.4 97

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 3,755 0.4 351/230 24765 2 17,194 5,199 IPCA.BO IPCA@IN

`299 `393
12 months

Source: Company, Angel Research

For 3QFY2012, Ipca Labs (Ipca) reported better-than-expected results. The top line grew by 29.9% yoy to `602cr, just in-line with our estimates. Also, OPM came in higher than expected at 23.0%. This also resulted in adjusted net profit growth coming in at 97% yoy, ending the period at `104cr. However, including non-cash forex expenses, net profit came in flat. We recommend Buy on the stock. Results better than expectations: Ipca reported net sales of `602cr, up 29.9% yoy, just in-line with our estimate of `588cr. The company posted OPM of 23.0% vs. expected 20.6%.Recurring profit came in at `104cr, higher than our estimate of `53cr. Segment wise, for 3QFY2012, the overall formulations business grew by 38.5% to `477cr (`345cr), contributing 79.0% to the companys total revenue. The API business witnessed 4.8% growth during the quarter to `124.4cr, contributing 20.7% to the total revenue. Adjusted net profit for the quarter grew by 97% yoy to `104cr. Outlook and valuation: We expect net sales to post a 22.4% CAGR to `2,907cr and EPS to register a 36.9% CAGR to `32.7 over FY201113E, driven by the U.S. and domestic markets and the API segment. At current levels, the stock is trading at 11.2x and 9.1x FY2012E and FY2013E earnings, respectively. We recommend Buy on the stock with a revised target price of `393. Key financials (Consolidated)
Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.1 32.9 9.0 12.0

Abs. (%) Sensex Ipca

3m (2.9) 17.6

1yr (6.2)

3yr 82.4

(1.0) 338.8

Net sales % chg Net profit % chg EPS EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

1,560 21.5 205 104.2 16.4 20.9 18.2 27.0 21.9 3.9 2.4 11.6

1,941 20.7 262 27.8 20.9 17.5 14.3 22.8 18.5 3.6 2.2 12.6

2,419 28.5 333 26.8 26.6 21.5 11.2 28.2 25.3 2.9 1.7 8.1

2,907 20.2 410 23.4 32.7 21.5 9.1 27.9 26.0 2.3 1.4 6.7 Sarabjit Kour Nangra
+91 22 39357800 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Ipca Laboratories | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 Consolidated performance

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin (%) Operating profit Operating margin (%) Interest Depreciation PBT Provision for taxation PAT before Extra-ordinary item Less: Exceptional Items PAT after Exceptional Items EPS (`)
Source: Company, Angel Research

3QFY2012

2QFY2012

% chg (qoq)

3QFY2011

% chg (yoy)

9MFY2012

9MFY2011

% chg (yoy)

602 17 619 368 61.1 138 23.0 11 18 126 22 104 40 64 5.1

618 8 626 375 60.6 152 24.6 12 18 131 26 105 27 77 6.2

(2.6) 110.4 (1.2) (1.9) (9.0)

463 3 467 272 58.7 88 19.0 6

29.9 406.0 32.6 35.1 57.1 93.0 27.7 76.5 19.4 96.9 (0.0)

1746 31 1777 1058 60.6 382 21.9 31 51 332 70 261 58 204 11.1

1392 18 1410 822 59.0 270 19.4 22 41 224 65 160 (37) 197 10.6

25.4 76.1 26.1 28.8 41.8 38.7 25.4 47.8 8.3 63.8 3.4

3.1 (3.4) (14.3) (0.7) (17.3)

14 72 19 53 (11) 64 5.1

Exhibit 2: 3QFY2012 Actual vs. Angel estimates

(` cr) Net sales Other income Operating profit Interest Tax Adjusted Net profit
Source: Company, Angel Research

Actual

Estimates

Variation (%)

602 17 138 11 22 104

588 7 121 6 50 53

2.4 129.7 13.8 93.4 (55.1) 97

Revenue up by 29.9%, higher than estimates: Ipca reported net sales of `602cr, up 29.9% yoy, just in-line with our estimate of `588cr. Segment wise, for 3QFY2012, the overall formulations business grew by 38.5% to `477cr, contributing 79.0% to the companys total revenue. The API business witnessed 4.8% growth during the quarter to `124.4cr, contributing 20.7% to the companys total revenue.

January 31, 2012

Ipca Laboratories | 3QFY2012 Result Update

Exhibit 3: Domestic sales trend

280 240 200 178 129 189 229 188

(` cr)

160 120 80 40 0 3QFY2011 32

35

41

36

33

4QFY2011

1QFY2012

2QFY2012
API

3QFY2012

Formulation

Source: Company, Angel Research

Exhibit 4: Export sales trend

320 280 240 200 227 167 87 90 93 91.1 207 260 290

(` cr)

160 120 80 40 0 3QFY2011 4QFY2011 1QFY2012 2QFY2012

API

82

3QFY2012

Formulation

Source: Company, Angel Research

OPM inches higher: Ipcas gross margin came in at 61.1% for the quarter. OPM came in at 23.0%. Gross margin improvement came on the back of improved product mix. This along with the lower rise in other expenditure resulted in higher operating margins expansion of ~4.0% in comparison to the 2.4% expansion in the gross margin.

January 31, 2012

Ipca Laboratories | 3QFY2012 Result Update

Exhibit 5: OPM trend

28.0 25.0 22.0 24.6 19.0 19.8 17.4 23.0

(%)

19.0 16.0 13.0 10.0

3QFY2011

4QFY2011

1QFY2012

2QFY2012

3QFY2012

Source: Company, Angel Research

Net profit higher than estimates: Ipca reported adjusted net profit of `104cr, reporting 97% yoy growth. Higher-than-expected growth in net profit came on the back of the higher than expected OPM. However, on the back of higher forex losses of ~`39.9cr during the quarter, reported net profit remained flat during the quarter.

Exhibit 6: Net profit trend

100 80 64 60 40 20 0 3QFY2011 4QFY2011 1QFY2012
Net Profit

78 69 62 64

(` cr)

2QFY2012

3QFY2012

Source: Company, Angel Research

Concall takeaways
Management has guided for 13-15% growth for FY2013 in domestic markets. On the Indore SEZ facility, the facility was inspected in January 2012, without any observations. USFDA approval may trigger 5-6 ANDA approvals. This facility has the peak revenue potential of `400cr over the next 2-3 years Management has guided for 25-26% tax rate in FY2012.

January 31, 2012

Ipca Laboratories | 3QFY2012 Result Update

Investment arguments
Domestic formulations business The cash cow: Ipca has been successful in changing its business focus to the high-margin chronic and lifestyle segments from the low-margin anti-malarial segment. The chronic and lifestyle segments, comprising CVS, anti-diabetics, pain-management, CNS and dermatology products, constitute more than 50% of its domestic formulation sales. Management has ramped up its field force significantly with additions of divisions in the domestic formulations segment, taking the current total strength to nearly 5,000 MRs. Exports to be the next growth avenue: On the formulations front, Ipca has been increasing its penetration in regulated markets, viz. Europe and U.S., by expanding the list of generic drugs backed by its own API. In the emerging and semi-regulated markets, Ipca plans to focus on building brands in the CVS, CNS, pain-management and anti-malarial segments along with tapping new geographies. On the API front, where it is among the low-cost producers, Ipca is aggressively pursuing supply tie-ups with pharma MNCs. Indore SEZ approval and tender business to enhance momentum: Ipca is awaiting USFDA approval for its Indore SEZ. Once approved, the facility would cater to the U.S. generic market and could post sales of `300cr350cr. Further, Ipca has received approval from the WHO for its anti-malarial product, making the company eligible to participate in the global tender worth US$300mn along with three other players. Valuation: We expect net sales to post a 22.4% CAGR to `2,907cr and EPS to register a 36.9% CAGR to `32.7 over FY201113E, driven by the U.S. and domestic markets and the API segment. At current levels, the stock is trading at 11.2x and 9.1x FY2012E and FY2013E earnings, respectively. We recommend Buy on the stock with a target price of `393.

Exhibit 7: Key assumptions

(` cr)

Domestic sales growth (%) Export sales growth (%) Growth in employee expenses (%) R&D as % of sales Operating margins (%) Capex (`) Net debt/equity (x)
Source: Company, Angel Research

FY2012E Earlier Revised Estimates Estimates 14.9 13.7 19.5 24.4 4.0 20.5 189 0.4 40.7 27.2 4.0 21.5 189 0.3

FY2013E Earlier Revised Estimates Estimates 12.7 12.8 17.5 15.4 4.0 21.5 180 0.3 25.0 20.2 4.0 21.5 180 0.3

January 31, 2012

Ipca Laboratories | 3QFY2012 Result Update

Exhibit 8: One-year forward PE band

500 400 300 200 100 -

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Jan-08

Jan-09

Jan-10

Jan-11

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

5x
Source: Company, Angel Research

8x

12x

16x

Exhibit 9: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Buy Sell Buy Accumulate Buy Buy Neutral Buy Buy Buy Buy Neutral Neutral CMP (`) 38 115 2,287 661 349 1,688 52 1,933 430 299 474 169 450 548 Tgt Price Upside (`) 77 166 1,937 965 369 1,920 68 583 393 593 270 569 % 103 45.0 PE (x) 4.9 8.3 FY2013E 0.7 1.0 3.1 2.1 3.4 3.0 1.3 5.0 1.0 1.4 2.6 1.1 1.4 5.9 4.9 6.7 20.6 11.2 16.2 12.1 7.2 14.1 6.3 6.7 13.0 5.1 5.9 16.9 FY11-13E 30.6 9.9 15.4 19.4 23.8 22.7 5.7 14.6 15.6 36.4 24.0 29.0 21.8 21.4 FY2013E 26.6 10.2 15.7 25.2 16.6 22.2 7.9 41.0 14.2 26.0 23.9 12.0 27.7 22.4 37.0 15.0 17.1 31.1 18.2 25.2 9.2 30.7 16.9 27.9 30.8 23.0 30.0 22.4 EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) ROE (%)

(15.3) 25.5 45.8 13.7 5.7 18.9 13.7 17.6 31.5 41.6 31.6 60.0 4.4 7.8 9.1 4.6 8.5 - 22.2

25.3 16.0

3.8 21.2

Source: Company, Angel Research; Note: * December year ending

January 31, 2012

Jan-12

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Ipca Laboratories | 3QFY2012 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & amortisation Interest & other charges Other Income Share in profit of asso. Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 1,097 46 1,051 40 1,092 16.1 884 464 134 147 138 168 (9.6) 16.0 33 20 20 175 13.7 175 35.8 20.4 140 (4) 136 136 8.9 12.9 10.8 10.8 7.5 1,326 1,602.8 43 1,284 9 1,292 18.4 1,027 507 147 188 185 256 52.8 20.0 40 32 1 194 10.7 76 118 23.3 19.7 95 6 101 177 29.9 7.8 8.1 8.1 (25.8) 43 1,560 7 1,567 21.2 1,233 646 158 221 208 326 27.4 20.9 47 26 3 263 35.3 (3) 266 62.7 23.6 204 2 205 202 14.3 13.2 16.4 16.4 103.7 1,954 13 1,941 16 1,957 24.9 1,602 811 194 266 330 339 3.9 17.5 56 31 29 298 13.2 (43) 341 78.4 23.0 263 (0) 262 219 8.4 13.5 17.5 17.5 6.8 2,484 65 2,419 22 2,441 24.7 1,899 1,009 218 339 334 520 53.4 21.5 61 40 441 48.1 441 108.3 24.6 333 333 333 52.0 13.8 26.6 26.6 51.6 2,981 74 2,907 27 2,934 20.2 2,282 1,241 233 407 401 625 20.2 21.5 70 40 543 23.0 543 132.2 24.4 410 410 410 23.4 14.1 32.7 32.7 23.3

January 31, 2012

Ipca Laboratories | 3QFY2012 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders Funds Minority interest Total loans Deferred tax liability Total Liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Investments Current assets Cash Loans & advances Other Current liabilities Net Current Assets Total Assets 579 165 414 128 10 605 9 69 527 157 448 1,000 779 202 577 14 41 740 11 83 645 216 524 1,156 881 243 638 38 33 899 11 120 768 210 689 1,398 988 289 699 113 41 1,059 11 118 930 249 810 1,663 1,178 350 828 113 41 1,398 61 206 1,131 419 979 1,960 1,366 420 946 113 41 1,697 83 247 1,367 487 1,210 2,310 25 564 589 353 57 1,000 25 606 631 (0) 460 65 1,156 25 840 865 (1) 455 79 1,398 25 1,026 1,052 (1) 531 81 1,663 25 1,281 1,306 (1) 531 123 1,960 25 1,613 1,639 (1) 531 141 2,310 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in working capital Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in fixed assets (Inc.)/Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 175 33 (48) (29) 131 (144) (4) (148) 2 74 (22) (37) 17 (1) 10 10 118 40 (88) (22) 48 (90) (90) (5) 26 (34) 56 44 2 10 12 266 47 (98) (46) 169 (134) (134) 0 (7) (38) 10 (35) (1) 12 11 341 56 (120) (78) 198 (182) (8) (190) 0 76 (61) (23) (8) 0 11 11 442 61 (118) (66) 319 (190) (190) (78) (78) 51 11 61 544 70 (210) (114) 290 (188) (188) (78) (78) 24 61 83

January 31, 2012

Ipca Laboratories | 3QFY2012 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.6 2.0 6.6 0.7 1.8 6.8 0.5 1.4 10.6 0.5 1.5 9.0 0.4 0.9 11.5 0.3 0.7 13.9 2.0 84 74 28 126 1.9 81 85 31 134 1.9 80 85 26 139 2.1 79 79 24 138 2.3 76 78 30 128 2.3 42 43 17 127 15.3 17.3 25.6 20.1 21.7 29.0 21.9 22.6 27.0 18.5 19.6 22.8 25.3 27.6 28.2 26.0 28.5 27.9 12.9 79.6 1.3 12.8 5.5 0.5 16.7 16.9 80.3 1.2 16.4 6.3 0.6 23.0 17.9 76.4 1.2 17.0 4.4 0.6 24.6 14.6 77.0 1.3 14.5 4.9 0.5 19.3 19.0 75.4 1.4 19.7 5.7 0.4 25.7 19.1 75.6 1.4 20.5 5.7 0.3 25.2 10.8 10.8 13.4 1.6 47.0 8.1 8.1 11.2 2.2 50.5 16.4 16.4 20.1 2.8 69.1 17.5 17.5 25.3 4.2 83.7 26.6 26.6 31.3 5.3 103.9 32.7 32.7 38.2 6.5 130.4 25.7 20.7 5.9 0.6 3.7 22.9 3.8 34.6 24.8 5.5 0.8 3.1 15.3 3.4 18.2 14.8 4.3 0.9 2.7 12.8 3.0 17.0 11.8 3.6 1.4 2.2 12.6 2.6 11.2 9.5 2.9 1.8 1.7 8.1 2.2 9.1 7.8 2.3 2.2 1.4 6.7 1.8 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

January 31, 2012

Ipca Laboratories | 3QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Ipca Laboratories No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

January 31, 2012

10