3QFY2012 Result Update | Pharmaceutical

March 5, 2012

Cipla
Performance Highlights
Y/E March (` cr) Net sales Other income Gross profit Operating profit Net profit 3QFY2012 1,711 77 996 345 270 2QFY2012 1,731 71 1,019 391 308 % chg qoq (1.1) 8.7 (2.3) (11.7) (12.4) 3QFY2011 1,501 78 806 266 233 % chg yoy 14.0 (1.7) 23.7 29.8 16.1

ACCUMULATE
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 25,119 0.6 359/274 142,619 2 17,363 5,280 CIPL.BO CIPLA@IN

`312 `341
12 months

Source: Company, Angel Research

For 3QFY2012, Ciplas numbers came just in line with our expectations on the top-line and bottom-line fronts. The net sales and profits for the quarter was `1711cr and `270cr, registering a growth of 14% yoy and 16% yoy respectively. On the profitability front, the gross margins and operating profits came in lower than the expectations. We recommend an Accumulate on the stock. Results in line with expectations: The 3QFY2012, a reported just in line numbers. The net sales and profits for the quarter was `1711cr and `270cr, registering a growth of 14% yoy and 16% yoy respectively. On the profitability front, the gross margins and operating profits came in lower than the expectations. The gross margins and operating margins came in at 58.2% and 20.2% in compared to the expectations of 58.1% and 21.8% respectively. The margins were compressed on back of higher salary expenses, which rose by 38.8% yoy. Consequently the net profit came in at `270cr, a bit lower than the expected than `295cr. Outlook and valuation: We expect the companys net sales to post a 11.7% CAGR to `7,639cr and EPS to record a 18.9% CAGR to `17.0 over FY201113E. The stock is trading at 22.2x and 18.3x FY2012E and FY2013E earnings, respectively. We recommend an Accumulate on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 36.8 20.4 16.5 26.3

Abs. (%) Sensex Cipla

3m 4.7 (5.5)

1yr 2.9

3yr 54.3

(4.6) 111.8

Key financials (Consolidated)

Y/E March (` cr) 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

FY2010 5,358 8.0 1,081 40.2 13.5 19.9 23.1 19.2 15.6 4.2 4.7 23.4

FY2011 6,124 14.3 990 (8.5) 12.0 18.7 25.9 15.4 13.4 3.8 4.1 22.0

FY2012E 6,683 9.1 1,105 11.6 14.1 20.0 22.2 16.0 14.1 3.3 3.8 18.8

FY2013E 7,639 14.3 1,352 22.4 17.0 21.2 18.3 17.0 15.5 2.9 3.3 15.4

Sarabjit Kour Nangra

+91 22 3935 7600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Cipla | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 performance (Consolidated)

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

3QFY2012 1,711 76.7 1,788 996 58.2 345 20.2 3.2 76 343 73 270 270 3.4

2QFY2012 1,731 70.5 1,802 1019 58.9 391 22.6 2.4 66 393 85 308 308 3.8

% chg (qoq) (1.1) 8.7 (0.7) (2.3) (11.7) 36.1 15.4 (12.8) (14.4) (12.4) (12.4)

3QFY2011 1,501 78.0 1,579 806 53.7 266 17.7 2.9 65 276 43 233 233 2.9

% chg (yoy) 14.0 (1.7) 13.2 23.7 29.8 10.6 16.1 24.3 69.1 16.1 16.1

9MFY12 4,993 213.1 5,206 2898 58.0 1064 21.3 9.9 212 1056 224 832 832 10.4

9MFY11 4,632 196.1 4,828 2519 54.4 925 20.0 7.5 199 915 166 749 749 9.3

% chg 7.8 8.7 7.8 15.0 15.0 32.3 6.1 15.4 35.4 11.0 11.0

Exhibit 2: 3QFY2012 Actual vs. Angel estimates

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

Actual 1,711 77 345 73 270

Estimates 1,662 78 362 74 295

Variance (%)

3.0 (1.7) (4.7) (1.3) (8.4)

Top-line growth mostly in-line with expectations

For 3QFY2012, a reported just in line numbers. The net sales came in at `1,711cr vis--vis estimates of `1,662cr, registering a growth of 14% yoy. The domestic formulation segment grew by 18.4% yoy to `868cr. Overall exports increased by 10.8% yoy to `866cr, contributing 50.0% to overall sales. The API segment reported revenue of `164cr, up 18.1% yoy. Revenue of the formulation exports segment stood at `702cr during the quarter, registering a growth of 9.2% yoy. Technological know-how fees stood at `7.8cr (`15.0cr), registering a dip of 48.5% yoy. However, overall other operating income reported a dip of 11.1% yoy to `46.5cr (`52.3cr) in 3QFY2012.

March 5, 2012

Cipla | 3QFY2012 Result Update

Exhibit 3: Sales trend

1,200 1,000 800 734 782 652 975 744 830 847 911 869866

(`cr)

600 400 200 0 3QFY2011 4QFY2011 Domestic 1QFY2012 2QFY2012 Export 3QFY2012

Source: Company, Angel Research

Significant improvement in gross and operating profit

For 3QFY2012, the companys gross margin expanded by 465bp yoy to 58.2%. This was mainly on account of better product mix, which had lower proportion of anti-retroviral in formulation exports and domestic formulation sales. This aided the OPM, to end at the end the period at 20.2% an expansion of 245bps. However, the same was lower than expected OPMs of 21.8%, on back of 38.8% yoy rise in employee expenses and 29.8% yoy rise in other expenditure.

Exhibit 4: OPM trend

25.0 20.0 22.6 20.2 17.7 15.4 15.0 10.0 5.0 0.0 3QFY2011 4QFY2011 1QFY2012 2QFY2012 3QFY2012 21.2

Source: Company, Angel Research

March 5, 2012

(%)

Cipla | 3QFY2012 Result Update

Net profit below expectations

For 3QFY2012, the companys net profit came in at `270cr, posting 16.1% yoy growth, lower than our estimate. Net profit growth was low mainly on the back of lower than expected operating profit during the quarter.

Exhibit 5: Net profit trend

360 320 280 240 200 160 120 80 40 0 3QFY2011 4QFY2011 1QFY2012 2QFY2012 3QFY2012 233 253 214 308 270

Source: Company, Angel Research

Concall takeaways
For, the FY2012, the company maintains a Topline growth of 10-12% on the sales. For domestic Formulation the management expects to sustain a growth of 15 16%. For formulation exports, the Management has indicated a growth of 10%. Indore SEZ has been approved by several regulators from developed and emerging markets, however USFDA approval is underway. Capex for FY2012 is expected to be around `500-600cr. Tax rate for FY2012 is expected to be around 20% of PBT.

March 5, 2012

(`cr)

Cipla | 3QFY2012 Result Update

Recommendation rationale
Export segment to be the growth driver: Cipla exports to more than 175 countries, with growth coming through marketing alliances and distribution tie-ups in various markets. Exports contributed 52% to the total turnover of FY2011, with Africa, US and Latin America constituting more than 60% of total exports. In the US, Cipla has entered into a partnership with 22 players and has cumulative 64 approved ANDAs, of which 35 have been launched, while 46 are pending for approval. Further, Cipla has launched Salbutamol inhalers in the UK and has received approvals for Budesonide inhalers in Germany and Portugal and Beclomethasone in Portugal. Cipla has developed eight CFC-free inhalers for the EU region, of which six have been submitted for regulatory approvals. Launch of CFC-free inhalers in Europe and US with a potential market size of more than US$3bn would be the long-term growth driver for the company. Management has also indicated that it is negotiating with MNCs such as Pfizer, GSK and Boehringer for long-term supply agreements. Increasing penetration in the domestic market: Cipla is one of the largest players in the domestic formulation market, with a market share of around 5%, contributing 46% to the total turnover in FY2011. The company is the market leader in key therapeutic areas such as respiratory care, anti-viral and urological. Ciplas distribution network in India consists of a field force of around 7,000 employees. The company plans to increase its focus on domestic markets with new therapies such as oncology and neuro-psychiatry in the offering. Cipla plans to focus on growing its market share and sales by increasing penetration in the Indian market, especially in rural areas and plans to expand its product portfolio by launching biosimilars, particularly relating to the oncology, anti-asthmatic and anti-arthritis categories. Return ratios to improve going ahead: Since FY2006, Cipla has incurred capex of `2,500cr (71% of GFA) for upgrading its existing manufacturing facilities at Kurkumbh, Patalganga, Bengaluru, Goa and Baddi, as well as setting up new facilities in Sikkim and Indore. While Cipla has already commenced the Sikkim plant, the Indore SEZ has also commenced operations. With significant capex been incurred and with most of the facilities commercialized, management expects Ciplas return ratio to improve as productivity level increases. Valuation: For FY2012, Cipla has guided for 1012% overall revenue growth. The company is expected to maintain OPM of 1820% (excluding tech fees) for FY2012. We expect the companys net sales to post 11.7% CAGR to `7,639cr and EPS to record an 18.9% CAGR to `17.0 over FY201113E. The stock is trading at 22.2x and 18.3x FY2012E and FY2013E earnings, respectively. We recommend a accumulate on the stock.

March 5, 2012

Cipla | 3QFY2012 Result Update

Exhibit 6: Key assumptions

Key assumptions Sales growth (%) Growth in employee expenses (%) Operating margins (excl tech. know-how fees) (%) Capex (` cr)
Source: Company, Angel Research

FY2012E 14.4 17.4 20.0 500

FY2013E 16.5 19.0 21.2 400

Exhibit 7: One-year forward PE band

500 400 300

(`)
200 100 -

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Jul-11

Oct-11

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Price

10x

15x

20x

25x

Source: Company, Angel Research

Exhibit 8: 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 Neutral Buy Accumulate Buy Neutral Buy Buy Buy Buy Neutral Neutral CMP Tgt. price Upside (`) 46 122 2,220 702 312 53 2,072 415 333 493 186 426 568 (`) 82 166 866 341 1,920 81 555 393 593 255 % 77.3 36.5 28.2 9.2 14.0 52.2 33.7 18.0 20.0 37.1 5.6 8.9 20.1 15.6 18.3 17.5 5.3 23.8 7.5 10.2 16.6 6.6 8.1 21.3 FY2013E 0.7 0.9 2.8 2.5 3.3 3.1 1.0 5.4 0.9 1.6 2.7 1.3 1.4 6.1 4.6 6.5 18.4 13.3 15.4 12.0 5.4 15.3 6.1 7.3 13.8 6.3 5.7 16.8 FY11-13E 34.8 9.9 13.6 11.7 16.9 22.7 0.6 14.6 15.6 25.4 23.9 13.7 21.8 23.5 FY2013E RoE (%) 38.80 15.0 20.4 29.5 17.0 24.9 8.5 30.7 16.9 27.8 28.6 15.8 30.0 22.5 26.6 10.2 17.7 17.2 15.5 21.8 7.3 41.0 14.2 25.9 24.8 8.9 27.7 22.6 PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%)

Accumulate 1,684

Source: Company, Angel Research; Note: *December year ending;#Based on CY2012 estimates

March 5, 2012

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Cipla | 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 (% of Net Sales) Depreciation & amortisation Interest & other charges Other Income Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 4,101 90.7 4,010 207 4,217 18.4 3,384 2,054 314 214 802 626 15.6 116 11 133 838 3.8 838 136.9 16.3 701 701 701 5.1 17.5 9.0 9.0 5.1 5,022 61.0 4,961 276 5,236 24.2 4,013 2,347 439 271 955 948 19.1 152 33 90 1,129 34.7 233.3 895 124.5 13.9 771 771 1,004 43.3 15.5 9.9 9.9 9.9 5,410 52.2 5,358 265 5,623 7.4 4,292 2,453 445 319 1,075 1,066 19.9 167 23 88 1,230 8.9 (95.0) 1,325 243.5 18.4 1,081 1,081 986 (1.8) 20.2 13.5 13.5 35.9 6,173 48.7 6,124 194 6,318 12.4 4,981 2,915 582 541 943 1,143 18.7 254 5 79 1,158 (5.8) 1,158 191.0 16.5 967 22 990 990 0.3 16.2 12.0 12.0 (10.7) 6,715 31.7 6,683 206 6,889 9.0 5,344 3,034 538 635 1,136 1,340 20.0 280 11 98 1,353 16.8 1,353 248.2 18.3 1,105 1,105 1,105 11.6 16.5 14.1 14.1 16.9 7,675 36.0 7,639 227 7,866 14.2 6,016 3,460 577 756 1,222 1,623 21.2 303 9 115 1,652 22.1 1,652 300.3 18.2 1,352 1,352 1,352 22.4 17.7 17.0 17.0 21.0

March 5, 2012

Cipla | 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 Goodwill Investments Current assets Cash Loans & advances Others Current liabilities Net current assets Mis. Exp. not written off Total assets 2,202 540 1,661 233 93 3,745 80 1,138 2,527 1,288 2,457 4,445 2,693 701 1,992 366 80 4,418 53 1,113 3,251 1,405 3,013 5,452 2,897 886 2,011 684 246 4,367 62 1,226 3,079 1,214 3,153 6,095 4,241 1,147 3,094 285 590 4,660 101 1,162 3,397 1,179 3,481 7,451 4,741 1,353 3,388 285 590 5,506 560 1,270 3,676 1,270 4,236 8,500 5,142 1,640 3,502 284 590 6,374 721 1,451 4,201 1,451 4,923 9,300 155 3,600 3,755 540.5 149.2 4,445 155 4,192 4,348 940.2 164.2 5,452 161 5,750 5,911 5.1 179.2 6,095 161 6,506 6,666 571.4 213.1 7,451 161 7,384 7,545 640.4 314.2 8,500 161 8,462 8,624 323.4 352.8 9,300 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income 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 171 168 (562) 25 (537) 448 (155) 25 318 (52) 132 80 65 400 (625) 13 (612) 395 (155) (54) 186 (26) 80 53 256 1,105 (522) (166) (688) 669 (935) (155) 13 (408) 9 53 62 225 898 (945) (344) (1,289) 566 (194) 57 429 39 62 101 221 1,116 (500) (500) 69 (226) (157) 459 101 560 278 1,152 (400) (400) (317) (274) (591) 161 560 721 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 838 116 (615) 895 152 (583) 1,325 167 (131) 1,158 254 (289) 1,353 280 (296) 1,652 303 (525)

March 5, 2012

Cipla | 3QFY2012 Result Update

Key Ratio
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.) 0.1 0.7 45.0 0.2 0.9 24.2 (0.01) (0.1) 39.2 0.1 0.4 0.0 0.1 (0.0) (0.2) 2.1 91 105 45 179 2.1 88 114 45 186 2.0 94 111 54 196 1.8 97 102 56 187 1.5 104 111 52 187 1.6 103 111 51 183 12.9 13.8 20.1 16.1 17.4 24.8 15.6 17.3 19.2 13.1 14.3 15.7 13.3 14.4 15.5 14.8 16.5 16.7 12.7 83.7 1.1 11.6 2.9 0.1 12.2 16.1 86.1 1.1 14.8 3.8 0.2 16.6 16.8 81.6 1.0 13.5 4.0 0.1 14.4 14.5 83.5 0.9 11.5 1.5 0.0 11.8 15.9 81.7 0.9 11.7 1.4 0.0 12.1 17.3 81.8 1.0 13.5 1.6 (0.0) 13.3 9.0 9.0 10.5 2.0 48.3 9.9 9.9 11.9 2.0 55.9 13.5 13.5 15.5 2.0 73.6 12.0 12.0 15.5 2.4 83.0 14.1 14.1 17.2 2.8 94.0 17.0 17.0 20.6 3.4 107.4 34.6 29.7 6.5 0.6 6.2 39.5 5.6 31.5 26.3 5.6 0.6 5.1 26.5 4.6 23.1 20.1 4.2 0.6 4.7 23.4 4.1 25.9 20.2 3.8 0.8 4.2 22.3 3.4 22.2 18.1 3.3 0.9 3.8 18.8 3.0 18.3 15.1 2.9 1.1 3.2 15.2 2.7 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

March 5, 2012

Cipla | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

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

Cipla 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%)

March 5, 2012

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