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Indian Pharmaceutical

Indian Pharmaceutical Long Term Drivers Intact; Valuation Stretched July 12, 2012 Souvik Chatterjee

Long Term Drivers Intact; Valuation Stretched

Pharmaceutical Long Term Drivers Intact; Valuation Stretched July 12, 2012 Souvik Chatterjee

July 12, 2012

Souvik Chatterjee souvikchatterjee@smcindiaonline.com +91 22 6651451/ Ext:118 Mitesh Shah miteshpshah@smcindiaonline.com

Revenue drivers intact; expect CAGR 20%

Our positive outlook is based on the incrementally balanced growth with a rising contribution from India and other generic pharmerging markets (GEM), compared with the largely-US focused growth. generic pharmerging markets (GEM), compared with the largely-US focused growth.

US to continue to be the major revenue driver for Indian pharma companies. The base business is likely to grow at CAGR 18-20% over the next 3-5 years.markets (GEM), compared with the largely-US focused growth. The Indian domestic pharma market is likely to

The Indian domestic pharma market is likely to be strong (14%-16%, in line with last five years) driven by increasing affordability, launch of new formulations and increase in the incidence, diagnosis/treatment of chronic diseases.is likely to grow at CAGR 18-20% over the next 3-5 years. Growth in the acute

Growth in the acute segment (~6%-8%) is substantially below that of the chronic category (~20%) driven by the absence of infection outbreak and food price inflation.in the incidence, diagnosis/treatment of chronic diseases. Geographical breakup 60% 53% 50% 41% 40% 38% 40%

the absence of infection outbreak and food price inflation. Geographical breakup 60% 53% 50% 41% 40%
Geographical breakup 60% 53% 50% 41% 40% 38% 40% 32% 35% 32% 32% 30% 23%
Geographical breakup
60%
53%
50%
41%
40% 38%
40%
32%
35%
32%
32%
30%
23%
21%
20%
10%
0%
Dr reddy
Cadila
Sun
Lupin
Glanmark
Domestic
US
 

EPS (INR)

PE (x)

EV/EBITDA (x)

Compan

y

CMP (INR)

Rating

Target price

MCap (INR bn)

FY13E

FY14E

FY13E

FY14E

FY13E

FY14E

Dr reddy

1,647

Outperformer

1,985

278

104.5

124.4

15.2

12.8

13.8

11.7

Lupin

548

Market performer

631

245

28.7

34.6

18.3

15.2

13.3

11.0

Glenmark

396

Under performer

435

107

24.2

31.6

16.3

12.3

13.0

9.6

Sun Pharma

625

Under performer

668

648

27.8

30.0

21.9

20.3

16.3

14.6

Torrent Pharma

623

Under performer

629

53

44.9

53.1

14.7

12.4

10.2

8.7

Cadila

765

Under performer

705

157

35.2

45.0

20.9

16.3

13.7

11.1

Biocon

242

Under performer

263

48

16.5

20.5

21.8

17.4

12.3

9.9

Apollo Hospital

653

Under performer

683

81

23.2

27.80*

27.3

23.15*

15.4

11.87*

* CMP as on 11/07/2012

1QFY13 PREVIEW- PHARMACEUTICALS

* Bloomberg

1

Strong Earnings Growth; Valuation Stretched

Strong Earnings Growth; Valuation Stretched Exports (~65% of revenues) growth of 12-15% will according to us,

Exports (~65% of revenues) growth of 12-15% will according to us, be key to sustain the strong revenue and earnings growth of 15% and 18% CAGR in FY12E-FY14E.Strong Earnings Growth; Valuation Stretched We believe the sector valuations are near to peak. Most of

We believe the sector valuations are near to peak. Most of the Indian pharma sector stocks are trading at the higher end of the valuation chart of 17x-21x of 1yr fwd P/E i.e. ~20% premium to the broader market.and earnings growth of 15% and 18% CAGR in FY12E-FY14E. No clarity on the new proposed

No clarity on the new proposed pricing policy (NPPP) or an acceptable alternative will allow manufacturers to garner higher margins in the domestic market.of 1yr fwd P/E i.e. ~20% premium to the broader market. Dr. Reddy’s Lab and Lupin

Dr. Reddy’s Lab and Lupin remains our top pick on account of sharp stock correction resulting in a and Lupin remains our top pick on account of sharp stock correction resulting in a severe discount to its peers.

Global pharmaceutical market CAGR of 7% over

2010-14E

1,140 1,200 1,060 990 1,000 920 875 808 781 800 600 400 200 0 2008
1,140
1,200
1,060
990
1,000
920
875
808
781
800
600
400
200
0
2008
2009
2010E
2011E
2012E
2013E
2014E
Total World Market
Growth Rate
USD Bn

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

GEM to drive future generic pharma growth

30% 25% 20% 15% 10% 5% 0%
30%
25%
20%
15%
10%
5%
0%

China

Russia

India

Brazil

Japan

US

Pharmaceutical growth in CY11

EU

Canada

Source: Company, SMC Research

1QFY13 PREVIEW- PHARMACEUTICALS

2

FTF attractiveness in US dipping out….

FTF attractiveness in US dipping out…. Lower patent expiry opportunity to shrink US opportunity by ~85%

Lower patent expiry opportunity to shrink US opportunity by ~85% post FY12FTF attractiveness in US dipping out…. US generic market turning a volume play with lower margin;

US generic market turning a volume play with lower margin; Penetration levels are above 80% and negative generic inflation hampers growthopportunity to shrink US opportunity by ~85% post FY12 Higher para-IV approval and better than expected

Higher para-IV approval and better than expected US generic market growth act as a potential risk to our estimatesare above 80% and negative generic inflation hampers growth Expect slower CAGR of 7% for the

Expect slower CAGR of 7% for the generic market in the US over FY11-20Emarket growth act as a potential risk to our estimates Sharp drop in the US patent

Sharp drop in the US patent expiry opportunity

30 26.5 25 c85% fall in overall patent expiry opportunity 20 15 c55% fall in
30
26.5
25
c85% fall in overall patent expiry
opportunity
20
15
c55% fall in patent expiry
opportunity
13.8
13 0
.
9.7
9.7
10
8.5
7.0
6.9
6.2
6.0
4.0
4.3
4.0
5
3.2
2.6
2.5
1.6
0.8
0
2003
04
05
06
07
2008
09
10
11
12
13
14
2015
16
17
18
19
2020
U SD Mn

1QFY13 PREVIEW- PHARMACEUTICALS

3

Source: Company, SMC Research

…. while base revenue to grow

…. while base revenue to grow We expect Indian generics firms to retain their importance as
We expect Indian generics firms to retain their importance as low-cost providers of generic

We

expect Indian generics firms to retain their importance as low-cost providers of generic

drugs continued market share growth in the critical US generics market

US base business to register CAGR 18-20% over 2011-15 on the back of better product

US base business to register CAGR 18-20% over 2011-15 on the back of better product

mix and increased opportunity from the patent expiry regime

Generic TRx share in US has doubled from 7% (2007) to ~14% (2011)

Generic TRx in US to grow at a 6.4% CAGR in 2011-14E

(2011) Generic TRx in US to grow at a 6.4% CAGR in 2011-14E USD Mn 1QFY13
USD Mn
USD Mn

1QFY13 PREVIEW- PHARMACEUTICALS

4

Source: Industry, SMC Research

GEM opportunity to drive future growth

GEM opportunity to drive future growth We include India, Japan, China, CIS and LatAm to be

We include India, Japan, China, CIS and LatAm to be part of our GEM growth analysis. We estimate Generic Pharmerging Markets (GEM) to account for ~40% of global healthcare revenue by 2015 at a 15-17% (CAGR) and to reach USD 200-250bn.

INDIA: The rise income level coupled with a rise in chronic diseases in the tier-II/III cities The rise income level coupled with a rise in chronic diseases in the tier-II/III cities are likely to lead 50% rise in healthcare spending by FY15E growing at ~15-16% till

2015.

JAPAN: By 2050 the senior citizen population will account for ~50% (22% currently) of the total By 2050 the senior citizen population will account for ~50% (22% currently) of the total population and is expected to reach 15% of GDP. Generic drugs accounts for less than ~10% in value terms and we expect the Japanese generic industry to reach USD10-15bn by 2015 at a CAGR 9-12%.

CHINA: With a GDP (nominal) of USD ~6.5tn and population of 1.4bn is poised to be With a GDP (nominal) of USD ~6.5tn and population of 1.4bn is poised to be the second largest pharmaceutical market the world after the US by 2015. Generic drugs account to ~63% (USD 29bn) of the total pharmaceutical market and rising at a CAGR of 13% over 2014.

RUSSIA: Expected to reach USD22bn by 2015 (USD8.6bn currently) at CAGR 21%. The per capita pharmaceutical Expected to reach USD22bn by 2015 (USD8.6bn currently) at CAGR 21%. The per capita pharmaceutical spend atUSD130 is among the lowest in the CIS suggesting tremendous growth potential of pharmaceutical industry in Russia.

Latin America: Entire Latin American market is expected to expand at CAGR of 10-12% over 2010-15. One Entire Latin American market is expected to expand at CAGR of 10-12% over 2010-15. One of the major drivers of growth for the pharmaceutical markets is national governments stepped up efforts to increase access to healthcare for its citizens.

1QFY13 PREVIEW- PHARMACEUTICALS

5

Stretched Valuation; Near term upside capped

Stretched Valuation; Near term upside capped Near valuation term upside capped; sector at its best Historically

Stretched Valuation; Near term upside capped Near valuation term upside capped; sector at its best Historically

Near

valuation

term

upside

capped;

sector

at

its

best

Historically traded in a band of 17x-21x 1yr fwd PE which is ~20% premium to the broader market.capped Near valuation term upside capped; sector at its best DRRD and Lupin remain our top

DRRD and Lupin remain our top pick on account of sharp stock correction resulting in a severe discount to its peers1yr fwd PE which is ~20% premium to the broader market. We expect these two stocks

We expect these two stocks to deliver the better earnings growth against their peersstock correction resulting in a severe discount to its peers DRRD and LPC trading at discount

DRRD and LPC trading at discount to its peers

30 25 Sun Cadila 20 Glenmark Lupin 15 Dr redd y Biocon Torrent 10 5
30
25
Sun
Cadila
20
Glenmark
Lupin
15
Dr redd y
Biocon Torrent
10
5
0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
1 yr fwd PE

BSE HC underperformed in June due to overall improvement in market sentiment

in June due to overall improvement in market sentiment EPS Growth FY12-15E (%) 1yr fwd PE

EPS Growth FY12-15E (%)

1yr fwd PE reflects stretch valuations

BSETHC index SENSEX Index 30 25 20 15 10 5 0 Jun-08 Jun-09 Jun-10 Jun-11
BSETHC index
SENSEX Index
30
25
20
15
10
5
0
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12

1QFY13 PREVIEW- PHARMACEUTICALS

Source: Bloomberg, Company , SMC Research

6

1QFY13 Preview

1QFY13 Preview Strong revenue growth to sustain; Earnings to remain muted Revenue growth in 1QFY13 is

Strong revenue growth to sustain; Earnings to remain muted

Revenue growth in 1QFY13 is to be driven by limited competition opportunities in the US, niche segment launches and favourable currency movement. Expect domestic business to grow at ~16% y-o-y on the back of a recovery in acute segment. We expect our Pharma universe revenue to grow by robust 32% y-o-y majorly on account of strong growth in SUNP, DRRD and LPC.Strong revenue growth to sustain; Earnings to remain muted Expect absolute EBITDA to increase by 27%

Expect absolute EBITDA to increase by 27% on the back of high margin on exclusivities, niche segment launches (particularly OCs) and recovery in the domestic market. Operating margin is expected to remain steady at 23-24%.majorly on account of strong growth in SUNP, DRRD and LPC. We expect Net profit for

We expect Net profit for our pharma coverage stocks to increase by just 8.7% in 1QFY13 majorly impacted by increase in financial cost on account of rupee depreciation and tax amendment.Operating margin is expected to remain steady at 23-24%. Healthcare services (Hospitals) universe is expected to

Healthcare services (Hospitals) universe is expected to report revenue growth of 29.1% on account of bed expansion and better occupancy rates.cost on account of rupee depreciation and tax amendment. SMC view: We remain Positive on the

SMC view: We remain Positive on the Indian pharma sector growth in the near to medium term We remain Positive on the Indian pharma sector growth in the near to medium term on the back of higher patent expiry opportunity in the US and strong domestic growth. However on the longer run, we expect US FTF opportunities to reduce posing significant challenges for the industry.

1QFY13 PREVIEW- PHARMACEUTICALS

7

1QFY13 Preview

1QFY13 Preview Dr Reddy 1QFY13 1QFY12 y-o-y (%) 4QFY12 q-o-q (%) Sales EBITDA Margin (%) PAT

Dr Reddy

1QFY13

1QFY12

y-o-y (%)

4QFY12

q-o-q (%)

Sales EBITDA Margin (%) PAT

22,815

19,783

15

26,585

(14)

18

14

377 bps

19

(99) bps

3,445

2,627

31

3,427

1

Lupin

1QFY13

1QFY12

y-o-y (%)

4QFY12

q-o-q (%)

Sales EBITDA Margin (%) PAT

18,793

15,432

22

18,832

(0)

24

19

503 bps

20

431 bps

3,459

2,101

65

1,556

122

Glenmark

1QFY13

1QFY12

y-o-y (%)

4QFY12

q-o-q (%)

Sales EBITDA Margin (%) PAT

10,281

8,683

18

10,659

(4)

21

34

(1,324) bps

21

14 bps

1,442

2,101

(31)

1,504

(4)

Sun Pharma

1QFY13

1QFY13

y-o-y (%)

1QFY13

q-o-q (%)

Sales EBITDA Margin (%) PAT

21,344

16,357

30

23,299

(8)

36

33

266 bps

41

(492) bps

6,653

5,653

18

9,043

(26)

Torrent

1QFY13

1QFY12

y-o-y (%)

4QFY12

q-o-q (%)

Sales EBITDA Margin (%) PAT

7,285

6,134

19

6,540

11

19

25

(626) bps

13

571 bps

921

1,025

(10)

637

45

Cadila

1QFY13

1QFY12

y-o-y (%)

4QFY12

q-o-q (%)

Sales EBITDA Margin (%) PAT

14,090

11,735

20

13,444

5

23

26

(281) bps

21

192 bps

2,212

2,298

(4)

1,709

29

Biocon

1QFY13

1QFY12

y-o-y (%)

4QFY12

q-o-q (%)

Sales EBITDA Margin (%) PAT

5,412

4,420

22

6,102

(11)

26

27

(123) bps

25

75 bps

737

701

5

978

(25)

Apollo Hospital

1QFY13

1QFY12

y-o-y (%)

4QFY12

q-o-q (%)

Sales EBITDA Margin (%) PAT

8,257

6,410

29

7,446

11

18

17

194 bps

16

234 bps

823

513

61

593

39

1QFY13 PREVIEW- PHARMACEUTICALS

8

Company Update and 1QFY13 Preview 1QFY13 PREVIEW- PHARMACEUTICALS 9

Company Update and 1QFY13 Preview

1QFY13 PREVIEW- PHARMACEUTICALS

9

Dr Reddy’s Lab

Outperformer

Attractive valuation; Underperformed the CNX Pharma index by ~13% over past 6MDr Reddy’s Lab Outperformer Gradual improvement in domestic performance; expect 12% growth in FY13 rong US

Gradual improvement in domestic performance; expect 12% growth in FY13Underperformed the CNX Pharma index by ~13% over past 6M rong US b b i us

rong

in domestic performance; expect 12% growth in FY13 rong US b b i us ness grow

US b

b

i

us ness grow

th t

ti

o con nue on

b

k

ac

f St

o

ase

product pipeline

Strong biosimilar portfolio to support long-term growthgrow th t ti o con nue on b k ac f St o ase product

Increased contribution from GEM to add tractionStrong biosimilar portfolio to support long-term growth Headwind in Europe to continue; Betapharm worry remains

Headwind in Europe to continue; Betapharm worry remains (sales down to 5% of revenue in FY12)growth Increased contribution from GEM to add traction Value Dr Reddy’s Lab at 19x FY13 overall

Value Dr Reddy’s Lab at 19x FY13 overall earnings to arrive at our target price of INR 1,985 INR 1,985

INR

3000

2500

2000

1500

1000

500

0

-500

-1000

TP: INR1,985

N R 3000 2500 2000 1500 1000 500 0 -500 -1000 TP: INR1,985 1-year fwd P/E
1-year fwd P/E 25x 20x 15x 12x Dec/05 Apr/06 Aug/06 Dec/06 Apr/07 Aug/07 Dec/07 Apr/08
1-year fwd P/E
25x
20x
15x
12x
Dec/05
Apr/06
Aug/06
Dec/06
Apr/07
Aug/07
Dec/07
Apr/08
Aug/08
Dec/08
Apr/09
Aug/09
Dec/09
Apr/10
Aug/10
Dec/10
Apr/11
Aug/11
Dec/11
Apr/12

Particulars

FY11

FY12

FY13E

FY14E

CAGR (%)

Net Sales (INRmn) EBITDA (INRmn) EPS (INR) EV/EBITDA (x) ROE (%) PE (x)

74,693

96,737

106,847

119,584

17

12,629

18,252

20,821

24,503

25

65.0

84.4

104.5

124.4

24

22.7

15.7

13.8

11.7

NM

24.8

27.6

27.4

26.3

NM

24.6

18.9

15.2

12.8

NM

Souvik Chatterjee (souvikchatterjee@smcindiaonline.com ) +91 22 6651451/ Ext:118 | Mitesh Shah (miteshpshah@smcindiaonline.com)

Dr Reddy’s Lab

Outperformer

TP: INR1,985

Dr Reddy’s Lab Outperformer TP: INR1,985 Under Performed compare to HC and SENSEX 15% 10% 5%
Under Performed compare to HC and SENSEX 15% 10% 5% 0% Feb-12 Mar-12 Apr-12 May-12
Under Performed compare to HC and SENSEX
15%
10%
5%
0%
Feb-12
Mar-12
Apr-12
May-12
Jun-12
-5%
-10%
-15%
BSETHC index
SENSEX Index
DRRD In Equity
Robust product pipeline in US 200 180 160 140 79 120 71 71 100 74
Robust product pipeline in US
200
180
160
140
79
120
71
71
100
74
80
68
60
101
49
40
83
42
71
48
20
35
16
21
0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
ANDAs Approved
ANDAs Pending
Improvement in the domestic formulation segment 18.0 16.7 16.0 14.0 12.0 10.8 10.0 9.5 8.0
Improvement in the domestic formulation segment
18.0
16.7
16.0
14.0
12.0
10.8
10.0
9.5
8.0
6.0
5.7
5.1
4.0
2.0
0.0
Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 US business supported growth; while Europe pulled back 160 140
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
US business supported growth; while Europe pulled back
160
140
133
120
100
80
68
60
48
48
40
42
20
0
14
(1)
(5)
(20)
Q4FY11
Q1FY12
Q2FY12 (11)
Q3FY12
Q4FY12 (10)
US
Europe

Source: Bloomberg, SMC Research

1QFY13 PREVIEW- PHARMACEUTICALS

11

Dr Reddy’s Lab Outperformer Revenue Performance 3,000 45.0 25.0 40.0 38.9 2,500 35.0 20.0 2,000
Dr Reddy’s Lab
Outperformer
Revenue Performance
3,000
45.0
25.0
40.0
38.9
2,500
35.0
20.0
2,000
30.0
29.5
25.0
1,500
15.0
20.0
1,000
15.0
11.9
10.0
10.4
10.0
500
6.3
5.0
1.2
0
0.0
5.0
FY09
FY10
FY11
FY12E
FY13E
FY14E
Global Generics
PSAI
Revenue Growth (%)

TP: INR1,985

Margin Performance

PSAI Revenue Growth (%) TP: INR1,985 Margin Performance 20.5 19.5 18.9 17.6 16.9 16.5 14.8 14.7
20.5 19.5 18.9 17.6 16.9 16.5 14.8 14.7 FY11 FY12E FY13E FY14E EBITDA Net profit
20.5
19.5
18.9
17.6
16.9
16.5
14.8
14.7
FY11
FY12E
FY13E
FY14E
EBITDA
Net profit
%

ROCE Vs ROE

30.0%

25.0%

20.0%

15.0%

10.0%

27.6% 27.4% 26.3%
27.6%
27.4%
26.3%

24.8%

18.2%

27.6% 27.4% 26.3% 24.8% 1 8 . 2 % 17.7% 1 8 . 5 % 1
17.7%

17.7%

27.6% 27.4% 26.3% 24.8% 1 8 . 2 % 17.7% 1 8 . 5 % 1
27.6% 27.4% 26.3% 24.8% 1 8 . 2 % 17.7% 1 8 . 5 % 1

18.5%

27.6% 27.4% 26.3% 24.8% 1 8 . 2 % 17.7% 1 8 . 5 % 1

18.8%

27.6% 27.4% 26.3% 24.8% 1 8 . 2 % 17.7% 1 8 . 5 % 1
27.6% 27.4% 26.3% 24.8% 1 8 . 2 % 17.7% 1 8 . 5 % 1
27.6% 27.4% 26.3% 24.8% 1 8 . 2 % 17.7% 1 8 . 5 % 1
27.6% 27.4% 26.3% 24.8% 1 8 . 2 % 17.7% 1 8 . 5 % 1

FY11

FY12E

FY13E

FY14E

Source: SMC Research

ROCE

ROE

1QFY13 PREVIEW- PHARMACEUTICALS

12

Dr Reddy’s Lab

Outperformer

1QFY13 Preview

TP: INR1,985

Dr Reddy’s Lab Outperformer 1QFY13 Preview TP: INR1,985 Revenue growth driven by strong sales in the

Revenue growth driven by strong sales in the US and Russia. Fondaparinux, exclusivity of gGeodon and strong OTC sales would support the US growth.Dr Reddy’s Lab Outperformer 1QFY13 Preview TP: INR1,985 Russian growth is likely to be on the

Russian growth is likely to be on the back of strong sales in OTC segment.of gGeodon and strong OTC sales would support the US growth. Expect domestic business to growth

Expect domestic business to growth (10-12%), lower than industry growth of ~15% due to product related issues.is likely to be on the back of strong sales in OTC segment. INR mn 1QFY12

INR mn

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

Y-o-Y

Q-o-Q

Net Sales Other Operating Income Total Income Cost of sales Gross Profit Gross margin S,G&A expenses R&D Expenses Total Expenditure EBITDA EBITDA margin Amortization & Impairment Other income / (Loss) EBIT Financial Expenses/ (Income) PBT Tax Tax rate, % Adj. PAT Adj. PAT Margin

19,783

22,679

27,692

26,585

22,815

 

15%

-14%

187

214

165

-

216

15%

NA

19,970

22,893

27,857

26,585

23,030

15%

-13%

9,228

10,473

11,117

12,614

10,267

11%

-19%

10,556

12,206

16,740

13,971

12,548

19%

-10%

53%

54%

60%

53%

55%

164

bps

245 bps

6,757

7,216

7,678

7,217

7,433

10%

3%

1,197

1,459

1,514

1,740

1,255

5%

-28%

17,182

19,148

20,310

21,571

18,954

10%

-12%

2,789

3,745

7,547

5,014

4,076

46%

-19%

14.1%

16.5%

27.3%

18.9%

17.9%

27%

-5%

-

-

-

1,040

-

NA

-NA

4

13

26

198

-

NA

NA

2,793

3,758

7,573

4,172

4,076

46%

-2%

47

50

(174)

(82)

71

50%

-186%

2,746

3,708

7,746

4,265

4,006

46%

-6%

119

631

2,617

838

561

371%

-33%

4%

17%

34%

20%

14%

967

bps

-564 bps

2,627

3,077

5,130

3,427

3,445

31%

1%

13%

14%

19%

13%

15%

182

bps

221 bps

1QFY13 PREVIEW- PHARMACEUTICALS

13

Dr Reddy’s Lab

Outperformer

TP: INR1,985

Dr Reddy’s Lab Outperformer TP: INR1,985 Profit and loss statement (INR mn) Particulars FY11 FY12P FY13E

Profit and loss statement (INR mn)

Particulars

FY11

FY12P

FY13E

FY14E

Net Sales

74,693

96,737

106,847

119,584

COGS

62,064

78,485

86,026

95,081

EBITDA

12,629

18,252

20,821

24,503

EBIT

12,629

18,252

20,821

24,503

Interest expenses

189

(160)

305

85

Other income

3

54

-

-

Profit before tax

11,040

14,262

20,515

24,418

Provision for tax

(1,403)

(4,204)

(2,872)

(3,419)

Net profit

11,040

14,262

17,643

20,999

Reported PAT

11,040

14,262

17,643

20,999

Adjusted Profit

11,040

14,262

17,643

20,999

Balance sheet (INR mn)

Particulars

FY11

FY12P

FY13E

FY14E

Shareholder's equity

45,990

57,443

71,557

88,357

Long-term debt

5,271

16,335

16,335

16,335

Provisions

1,314

1,973

1,120

1,333

Short-term debt

18,220

15,876

15,876

15,876

Current liabilities

21,481

25,660

22,361

26,349

Other Liabilities

707

2,191

542

693

Total Liabilities

92,983

119,477

127,790

148,942

Intangible Assets

15,246

13,529

12,196

10,863

Net fixed assets

29,642

33,247

40,611

47,552

Investments

313

10,541

12,649

15,179

Inventories

16,059

19,352

20,433

21,759

Sundry debtors

17,615

25,339

30,617

34,232

Cash & cash equivalents

5,729

7,978

2,266

10,346

Other Current Assets

8,190

7,109

8,715

8,715

Total current assets

47,593

59,778

62,031

75,052

Deferred tax asset, net

(87)

-

-

-

Other assets

276

2,382

303

296

Total assets

92,983

119,477

127,790

148,942

1QFY13 PREVIEW- PHARMACEUTICALS

14

Dr Reddy’s Lab

Outperformer

TP: INR1,985

Dr Reddy’s Lab Outperformer TP: INR1,985 Cash flow statement (INR mn) Particulars FY11 FY12P FY13E FY14E

Cash flow statement (INR mn)

Particulars

FY11

FY12P

FY13E

FY14E

Net profit

11,040

14,262

17,643

20,999

Depreciation/Impairment

4,148

2,640

3,170

3,436

Change in working capital

(6,738)

(5,098)

(12,117)

(740)

Other non-cash adjustments

(441)

(160)

305

85

Operating cashflow

8,009

11,644

9,002

23,780

Capital expenditure

(8,718)

(5,804)

(6,411)

(7,175)

Change in investments

3,642

(10,228)

(2,108)

(2,530)

Other investing cashflow

(3,513)

(916)

(712)

(1,861)

Investing cashflow

(8,589)

(16,949)

(9,231)

(11,566)

Issue of equity

29

2

-

-

Change in borrowings

3,599

8,720

-

-

Dividend paid

(3,063)

(2,811)

(3,529)

(4,200)

Other financing cashflow

(942)

1,644

(1,955)

66

Financing cashflow

(377)

7,554

(5,483)

(4,134)

Net cash generated during year

(957)

2,249

(5,712)

8,081

Cash at beginning of year

6,545

5,729

7,978

2,266

Cash at end of year

5,729

7,978

2,266

10,346

Key ratios

Particulars

FY11

FY12P

FY13E

FY14E

EPS (INR) BV Per Share (INR) ROE (%) D/E (%)

65.0

84.4

104.5

124.4

227.2

261.6

299.5

342.0

24.0

24.8

27.4

26.3

51.1

56.1

45.0

36.5

Growth (%)

FY11

FY12P

FY13E

FY14E

Revenues

6.3

29.5

10.5

11.9

EBITDA

529.0

44.5

14.1

17.7

Net profit

933.7

29.2

23.7

19.0

EPS

933.7

29.2

23.7

19.0

Margins (%)

FY11

FY12P

FY13E

FY14E

EBITDA

16.9

18.9

19.5

20.5

EBIT

16.9

18.9

19.5

20.5

Net profit

14.8

14.7

16.5

17.6

Valuation ratios

FY11

FY12P

FY13E

FY14E

P/E (x) P/BV(x) M cap/sales (x) EV/sales (x) EV/EBITDA (x) Earnings Yield (%)

24.6

18.9

15.2

12.8

7.0

6.1

5.3

4.7

3.6

2.8

2.5

2.2

3.8

3.0

2.7

2.4

22.7

15.7

13.8

11.7

4.1

5.3

6.6

7.8

1QFY13 PREVIEW- PHARMACEUTICALS

15

Lupin

Market performer

Strong domestic sales driven by strong volume growth; JV with Eli Lilly on anti-diab to help boost domestic salesLupin Market performer Niche segment to boost US revenue. Japan (Kyowa) to add traction; forecast 15%

Niche segment to boost US revenue. Japan (Kyowa) to add traction; forecast 15% revenue CAGR over FY12-14JV with Eli Lilly on anti-diab to help boost domestic sales Lupin to command valuation premium

Lupin to command valuation premium on the back of high earnings visibility and diversified business and aggressive managementto add traction; forecast 15% revenue CAGR over FY12-14 Expect CAGR 21% earnings over FY12-14 on

Expect CAGR 21% earnings over FY12-14 on the back of strong product pipeline and aggressive marketing strategyand diversified business and aggressive management Value Lupin at 22x FY13E earnings of INR28.7 to arrive

Value Lupin at 22x FY13E earnings of INR28.7 to arrive at our target price of INR631 . INR631.

INR

600

500

400

300

200

100

0

TP: INR631

of INR631 . I N R 600 500 400 300 200 100 0 TP: INR631 1-year
1-year fwd P/E 25x 20x 15x 12x Dec/05 Jun/06 Dec/06 Jun/07 Dec/07 Jun/08 Dec/08 Jun/09
1-year fwd P/E
25x
20x
15x
12x
Dec/05
Jun/06
Dec/06
Jun/07
Dec/07
Jun/08
Dec/08
Jun/09
Dec/09
Jun/10
Dec/10
Jun/11

Particulars

FY11

FY12

FY13E

FY14E

CAGR (%)

Net Sales (INRmn) EBITDA (INRmn) EPS (INR) EV/EBITDA (x) ROE (%) PE (x)

58,320

70,829

84,623

100,421

20

11,911

14,447

18,194

21,591

22

19.3

19.4

28.7

34.6

21

20.3

17.0

13.3

11.0

NM

29.5

23.8

28.1

26.9

NM

27.2

27.0

18.3

15.2

NM

Souvik Chatterjee (souvikchatterjee@smcindiaonline.com ) +91 22 6651451/ Ext:118 | Mitesh Shah (miteshpshah@smcindiaonline.com)

Lupin

Market performer

TP: INR631

Lupin Market performer TP: INR631 >40% market share in gGeodon 120% 100% 80% 60% 40% 20%
>40% market share in gGeodon 120% 100% 80% 60% 40% 20% 0% 3/2/2012 4/2/2012 5/2/2012
>40% market share in gGeodon
120%
100%
80%
60%
40%
20%
0%
3/2/2012
4/2/2012
5/2/2012
6/2/2012
Pfizer
Lupin
Greenstone
Dr Reddy

Steady growth in Suprex

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Weekly sales (USD Mn)
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Weekly
sales (USD Mn)
4 3.5 3 2.5 2 1.5 1 0.5 0 Weekly sales (USD Mn) Strong Simva sales
Strong Simva sales despite Atorva Patent expired 40% 30% 20% 10% 0%
Strong Simva sales despite Atorva Patent expired
40%
30%
20%
10%
0%
LUPIN ZYDUS PHARMA TEVA NORTHSTAR RX LL DR.REDDY AUROBINDO
LUPIN
ZYDUS PHARMA
TEVA
NORTHSTAR RX LL
DR.REDDY
AUROBINDO
LPC geographical revenue break-up 120 100 80 60 40 20 0 FY09 FY10 FY11 FY12
LPC geographical revenue break-up
120
100
80
60
40
20
0
FY09
FY10
FY11
FY12
FY13E
FY14E
US
EU
Japan
India
South Africa
Others
API
%

Source: Bloomberg, SMC Research

1QFY13 PREVIEW- PHARMACEUTICALS

17

Lupin

Market performer

TP: INR631

Lupin Market performer TP: INR631 Revenue Performance 120,000 100,000 80,000 60 000 , 40,000 20,000 0
Revenue Performance 120,000 100,000 80,000 60 000 , 40,000 20,000 0 INR Mn
Revenue Performance
120,000
100,000
80,000
60 000
,
40,000
20,000
0
INR
Mn

Margin Performance

35

25%

30

25

20%

20

%

15

15%

10

5

10%

21.5%

20.4%

21.5% 20.2%
21.5%
20.2%

19.1%

20.4%

21.5%

15.4%

14.8% 14.8% 15.2% 14.0% 12.5% 12.3%
14.8%
14.8%
15.2%
14.0%
12.5%
12.3%
FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY08 FY09 FY10 FY11 FY12E FY13E FY14E Advance
FY08
FY09
FY10
FY11
FY12
FY13E
FY14E
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
Advance Market
Emerging Margin
API
Revenue Growth
EBITDA
Net Profit
ROCE Vs ROE
45%
40%
39.8%
35%
35.6%
34.1%
30%
29.5%
28.1%
26.9%
25%
23.8%
22.4%
21.7%
22.1%
22.4%
21.7%
20%
20.4%
17.8%
15%
10%
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
ROCE
ROE

Source: SMC Research,

1QFY13 PREVIEW- PHARMACEUTICALS

18

Lupin

Market performer

1QFY13 Preview

TP: INR631

Lupin Market performer 1QFY13 Preview TP: INR631 Revenue growth driven by ~20% growth in the domestic

Revenue growth driven by ~20% growth in the domestic formulations on the back of JV with Elli Lilly and the strong performance in chronic segment.Lupin Market performer 1QFY13 Preview TP: INR631 Revenue growth in US sales driven by gGeodon exclusivity

Revenue growth in US sales driven by gGeodon exclusivity sales and strong growth sales from niche segment portfolio. Expect strong sales of Suprax and Antara to continue.Elli Lilly and the strong performance in chronic segment. INR mn 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13

INR mn

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

 

y-o-y

q-o-q

Net sales Other Operating Income Total Income COGS Gross profit Gross margin Staff Cost Other Expenditure Total Expenditure EBITDA EBITDA margin (%) Depreciation / Amortisation Other Income EBIT Interest Expenses Net PBT Tax Tax rate, % Reported PAT PAT Margin

15,432

17,417

17,917

18,832

18,793

 

22%

0%

246

307

272

407

376

53%

-8%

15,677

17,724

18,189

19,239

19,169

22%

0%

6,169

5,979

6,259

7,632

6,910

12%

-9%

9,508

11,438

11,658

11,200

11,883

25%

6%

62%

66%

65%

59%

63%

162

bps

376 bps

2,193

2,276

2,525

2,702

2,456

12%

-9%

4,372

5,429

5,671

5,176

4,897

12%

-5%

12,734

13,684

14,454

15,510

14,262

12%

-8%

2,944

4,040

3,735

3,728

4,531

54%

22%

19.1%

23.2%

20.8%

19.8%

24.1%

503

bps

431 bps

471

522

576

706

657

39%

-7%

12

16

33

82

250

NA

203%

2,484

3,535

3,192

3,105

4,124

66%

33%

58

66

86

145

91

57%

-37%

2,426

3,468

3,106

2,960

4,033

66%

36%

286

751

701

1,348

574

101%

-57%

12%

22%

23%

46%

14%

243

bps

NA

2,101

2,669

2,351

1,556

3,459

65%

122%

14%

15%

13%

8%

18%

479

bps

1014 bps

1QFY13 PREVIEW- PHARMACEUTICALS

19

Lupin

Market performer

TP: INR631

Lupin Market performer TP: INR631 Profit and loss statement Particulars (INR mn) FY11 FY12P FY13E FY14E

Profit and loss statement

Particulars (INR mn)

FY11

FY12P

FY13E

FY14E

Net Sales

58,320

70,829

84,623

100,421

Total operating expenses

46,410

56,382

66,429

78,831

EBITDA

11,911

14,447

18,194

21,591

Depreciation & Amortization

1,712

2,275

2,628

3,010

EBIT

10,199

12,172

15,566

18,580

Financial Charges

325

355

363

332

Other income

89

144

97

126

Profit before tax and extraordinary

9,963

11,961

15,299

18,375

Profit before tax

9,963

11,961

15,299

18,375

tax

1,169

3,086

2,295

2,756

Net profit

8,794

8,875

13,004

15,619

Minority Interest

(148)

(199)

(199)

(199)

Income from JV/Associates

20

-

-

-

Reported PAT

8,626

8,677

12,806

15,420

Adjusted Profit

8,646

8,677

12,806

15,420

Balance sheet (INR mn)

Particulars

FY11

FY12P

FY13E

FY14E

Shareholder's equity

32,811

40,178

50,956

63,895

Minority interests

515

723

723

723

Long-term debt

1,206

4,330

1,529

1,597

Provisions

2,718

3,287

2,226

2,680

Short-term debt

10,418

10,479

10,701

10,862

Current liabilities

11,800

17,750

15,222

18,063

Total liabilities & equity

59,468

77,479

81,357

97,821

Net fixed assets

25,881

31,934

34,908

37,280

Investments

32

28

28

28

Inventories

12,000

17,327

15,619

18,532

Sundry debtors

12,558

17,318

17,081

21,230

Loans & advances

6,208

7,031

9,172

11,966

Other current assets

-

1,211

1,211

1,211

Cash & cash equivalents

4,201

4,074

4,781

9,018

Current assets

34,967

46,960

47,864

61,955

Deferred tax asset, net

(1,411)

(1,442)

(1,442)

(1,442)

Total assets

59,468

77,479

81,357

97,821

1QFY13 PREVIEW- PHARMACEUTICALS

20

Lupin

Market performer

TP: INR631

Lupin Market performer TP: INR631 Cash flow statement Particulars (INR mn) FY11 FY12P FY13E FY14E PAT

Cash flow statement

Particulars (INR mn)

FY11

FY12P

FY13E

FY14E

PAT

8,626

8,677

12,806

15,420

Depreciaiton

1,712

2,275

2,628

3,010

Change in working capital

(1,510)

(5,601)

(3,785)

(6,559)

Other non-cash adjustments

(2,195)

(2,700)

(1,932)

(2,425)

Operating cashflow

7,969

5,935

12,211

12,401

Capital expenditure

(4,276)

(8,328)

(5,603)

(5,382)

Change in investments

(51)

4

-

-

Other investing cashflow

12

733

(733)

-

Investing cashflow

(4,315)

(7,592)

(6,335)

(5,382)

Free cashflow to firm

3,693

(2,393)

6,608

7,019

Issue of equity

138

-

-

-

Change in borrowings

1

3,185

(2,579)

230

Dividend paid

(1,432)

(1,508)

(2,226)

(2,680)

Interest Paid

(312)

(147)

(363)

(332)

Financing cashflow

(1,605)

1,530

(5,168)

(2,782)

Key ratios

Particulars

FY11

FY12P

FY13E

FY14E

EPS (INR)