Emkay Research

Emkay Research 26 September, 2011
Pharma Sector
2
Contents
Pharma Sector
Synopsis ............................................................... .......................................... .......................................... ...................... 3
Valuation ............................................................... .......................................... .......................................... ...................... 4
Domestic Formulations .............................................................. ......................................... ......................................... ... 6
Domestic Formulations: Taking a breather .............................................................. .......................................... .......... 7
Performance of Top Pharma companies .............................................................. .......................................... ............. 9
Company specific issues - What management has to say? .................................................................. ................... 10
Pharma Industry : Recent Trends ............................................................. ........................................ ........................ 11
Key Factors Driving The Slowdown............................................................. ........................................ ........................... 12
Weakening macro factors to impact Indian Pharma growth ............................................................... .................. 13
Increase in competition has led to ramp-up of sales force ............................................................. ...................... 14
MNCs getting aggressive .............................................................. ......................................... ............................. 15
Pricing pressure on top brands................................................................ .......................................... .................. 18
Anti-Infective Category Therapy bifurcation ................................................................. ...................................... 20
National List of Essential Medicines .............................................................. ......................................... ....................... 22
Impact of challanges ............................................................. ........................................ ........................................ ........ 25
Indian Pharma growth slowing down ............................................................. ........................................ ............... 26
Stress-Test on the profile of pharma companies ............................................................. ..................................... 28
Rivision of estimates for domestic growth ............................................................... ......................................... .... 32
Significance of domestic business - Cash Cow ............................................................... .................................... 33
Revise in earnings estimates................................................................ .......................................... ..................... 34
Conclusion and Recommendation ............................................................. ........................................ .................. 35
Companies
Cadila Healthcare ............................................................... .......................................... .......................................... ....... 37
Cipla Ltd ............................................................. ........................................ ........................................ .......................... 41
Dr. Reddy's Lab ............................................................... .......................................... .......................................... .......... 45
Glenmark Pharma .............................................................. ......................................... ......................................... ......... 49
GlaxoSmithKline Pharma ................................................................ .......................................... .................................... 53
Ipca Laboratories Ltd ............................................................. ........................................ ........................................ ........ 56
Lupin Ltd. ............................................................... .......................................... .......................................... ................... 60
Pfizer Ltd ............................................................... .......................................... .......................................... ................... 64
Ranbaxy Labs .............................................................. ......................................... ......................................... ............... 67
Sun Pharma .............................................................. ......................................... ......................................... .................. 71
Torrent Pharma............................................................. ........................................ ........................................ ................. 76
Unichem Labs .............................................................. ......................................... ......................................... ............... 80
Pharma Sector
3
Synopsi s
Last year, Indian Pharma industry grew by 16%, one of the highest growth rates in the
world Pharma market. In the first two quarters Indian Pharma market growth has slowed
down to 13% from 16% in 2010. Domestic Indian companies are the ones which are
impacted most by this slowdown in growth.
In our report, Domestic Pharma market , we have diagnose the chal lenges faced by
the Indian Pharma market, which was valued at USD 12 billion in 2010 and tried to
answer the following questions.
What are the reasons for decline in the growth rate of Indian Pharma industry in
the first hal f of 2011?
What is the impact of these factors on different pharma companies?
Find out which company will outperform the industry growth rate?
Our analysis shows that there is a high degree of correlation between macro factors,
economic growth and Indian pharma industry growth. When the pace of economic reforms
and economic growth slows down it impacts the pharma industry growth. Other reason
was, every company has increased the strength of MRs in last two years and as a result
there was a spurt of growth last year which is tapering down this year. Impact of slowdown
in growth is more pronounced in mid and smal l cap companies and the companies
which have more exposure in GP therapies, which is more susceptible to competition.
Competition is increasing from low cost players like Mankind & Alkem labs in the mass
product therapies like anti-infective. MNCs which were focused more on acute categories
till now are increasingly launching products in chronic space & that too at competitive
prices.
To analyse the impact of these challenges on pharma companies domestic portfolio, we
have devised the 4 Step Stress Test to find out how various companies will get impacted.
Even though domestic business is only 20%-50% of the overall revenues, its contribution
to the base business earnings is higher at 50%- 70%. ROCE of domestic business is
much higher at 40%-60% compared to other businesses which have less than 20% and
as a result multiples are mainly driven by domestic business. Our analysis suggests that
any change in the domestic revenue has an amplified impact on the earnings and multiples
of the companies.
Pharma Companies which are mai nly focused on domestic business will be the one
which will get impacted the most like - Cipla, Torrent, IPCA and Unichem. Other pharma
companies which have sizeable opportunities in form of Para IVs and FTF in US will able
to cushion the impact like Ranbaxy and Dr. Reddy. Sun and Lupin have superior portfolio
in domestic business with more focus on Chroni c category and good opportunit ies in
form of Para IV and FTFs.
We have cut down the domestic growth estimates for Cadila, Cipla, Dr. Reddy, IPCA,
Torrent and Unichem for FY12 and FY13 by 3% to 7% and earnings growth estimates by
2% to 9% & retained the growth and earnings estimates for Lupin, Ranbaxy, Sun, GSK
and Pfizer.
Buy - Glenmark and IPCA
Accumulate Lupin and Sun Pharma
Hold - Cadila, Cipla, Dr. Reddy, Ranbaxy, Torrent and Unichem
Growth in domestic
pharma industry to
slow down to 12-13%
in 2011 due to weak
macro factors and
increase in competition
from unlisted players
and MNCs
Cut down the domestic
growth estimates by 3-7%
and earnings estimates
by 2-9% for FY12 for
Cipla, Cadila, Dr. Reddy,
IPCA and Torrent
Pharma Sector
4
Pharma Sector
5
Pharma Sector
6
Domestic Formulations
Domesti c Formul ations: Taking a breather
Performance of Top Pharma companies
Company specific i ssues - What management
has to say?
Pharma Industry : Recent Trends
Pharma Sector
7
Source: AIOCD AWACS, Emkay Research
IPM growth showing downward trend in the recent months
Therapy-wi se growth trend
FY10 Q-Mar ' 11 Q-Jun' 11
Chronic 19.2 16.0 16.4
Acute 14.9 12.9 12.2
Overal l 16.2 13.9 13.5
Source:Company, Emkay Research
Slowdown in growth is visible across the Chronic and Acute categories even though the
reasons are different for both the categories.
In Acut e segment, the therapi es which are more commodit ized in nature have seen
increased competit ion and price pressures, whereas in Chronic segment, it has been
more due to macro economic factors. In the last 2 years everybody has increased its MR
strength and as a result, there is an increase in competition which is now taking its toll.
MNC pharma companies are expanding very aggressively in India and have very high
aspirati ons for their Indian businesses. They are rapidly expanding their field force to
extend their geographical reach. MNCs which have strong foothold in acute therapies, are
now aggressively moving into chronic therapies. In some of the products which are not
core to their business, they are entering with extremely competitive pricing versus Indian
companies. All these factors together with weak macro economic outlook is adding to the
slowdown in growth.
Domesti c Formul ations: Taking a breather
Indian pharma market (IPM), which had grown by 16% in 2010 has slowed down to 13.5%
in the first half of 2011. This is as per AIOCD data, which is collected from secondary
sources. However, if we see the performance of most of the pharma companies in the
domestic space in the first half of 2011, then everybody has shown considerable decline
growth. Primary data shows that the decline is much steeper.
Most of the pharma
companies have
shown considerable
decline in growth in first
half of 2011
Acute segment - The
therapies which are more
commodi tized in nature
have seen increased
competition and price
pressures, whereas in
Chronic segment, it was
more due to macro
economic factors
14.9
14.2
15.0
10.4
16.2
14.5
13.9
13.5
0.0
4.0
8.0
12.0
16.0
20.0
2006 2007 2008 2009 2010 MAT
Jul'11
Q - Mar'11 Q - Jun'11
Pharma Sector
8
Top 10 categories growth rate
Rs Cr % Share YoY Growth (%)
MAT' Jul '11 MAT' Jul 11 MAT' Jun 11 Jan'11 Feb' 11 Mar' 11 Apr' 11 May' 11 Jun' 11 M-Ju1' 11
Anti Diabetic 3358 6% 22.0 21.6 19.3 22.4 25.2 24.2 22.1 17.4
Anti-Infectives 9681 17% 11.3 11.8 9.9 9.3 8.6 9.6 8.0 5.8
Cardiac 6597 12% 18.2 17.1 17.2 17.4 17.6 19.3 17.5 14.6
Derma 2813 5% 13.1 12.7 12.0 11.2 13.2 12.0 11.9 9.2
Gastro intestinal 6563 12% 13.8 12.5 11.7 11.9 12.1 12.8 7.9 5.2
Gynaecological 3538 6% 15.8 12.3 13.2 11.8 9.6 10.8 8.5 10.6
Neuro / CNS 3463 6% 14.2 14.3 13.3 12.3 13.6 14.8 12.1 9.5
Pain / Analgesics 4488 8% 14.1 19.8 11.1 6.7 10.9 13.6 12.2 7.6
Respiratory 4469 8% 11.4 14.7 10.2 12.7 12.2 13.8 7.6 6.3
Vitamins / Minerals 4678 8% 13.9 13.7 12.3 10.2 12.1 13.1 12.4 11.5
Total 56483 14.5 14.7 13.0 12.4 12.8 14.3 12.1 9.6
If we evaluate the performance of the Indian pharma companies w.r.t different therapies,
then anti-infective, pain, gynecology and gastro, show visible slowdown in growth. Anti-
infective, pain and gastro which together contribute ~1/3rd of the total pharma market, are
witnessing lot of competition from un-listed Indian companies such as Mankind. MNCs,
which have strong hold in these categories, are now moving aggressively towards chronic
therapies, due to superior growth rate and higher entry barriers associated with this
category.
Anti-infective, pain,
gynecology and gastro
show visible slowdown
in growth
Pharma Sector
9
15%
23%
11%
15%
21%
37%
5%
5%
9%
11%
13%
11%
34%
24%
10%
8%
8%
12%
20%
17%
6%
12%
9%
13%
12%
14%
22%
22%
Cipla
Cadila
Ranbaxy
Sun
Glenmark
Lupin
Dr. Reddy
Ipca
Torrent
GSK
Aventis
Pfizer
Astra
Mankind
Q4FY11 Q1FY12
Growth in Q4'11 & Q1'12
YoY Growth %
Performance of top pharma companies
Source: Emkay Research
Performance of top pharma companies
From the corporate performance of Indian Pharma companies in last two quarters, mid &
small cap companies, have been the most impacted.
MNC pharma companies continue to grow in line with industry growth of ~13%, except
Astra which has grown by more than 20%. These MNCs are aggressively investing in
branded generics and moving into newer therapies like CVS, CNS and anti diabetes. In a
bid to increase their presence in some of the branded generics, MNCs have aggressively
priced thei r products below their Indian counterpar ts. While this has not signifi cantl y
dented market share, it is a precursor to the competitive intensity in the future.
In small and mid cap companies - Unichem, IPCA and Torrent are the ones which have
been impacted the most. And in large cap companies - Dr. Reddys, Ranbaxy & Cipla have
been impacted. For the last 3-4 years barring 2009, most of these compani es were
growing above or in-line with the market growth on back of strong macro environment.
Now unfavorable macro enviroment coupled with intense competition from unlisted players
in some therapies of acute segment has made the market even more competitive.
Pharma Sector
10
Cadila
Sales in Q1FY12 were lower as the company pushed inventory
into the market in Q4FY11 (registered YoY growth of 23%) in
order to achieve US$1bn revenue target.
Cipla
Growth was below industry rate as the Acute segment
witnessed intense competition from industry peers during the
quarter. Respiratory segment continues to do well for the
company.
Dr. Reddys
India business which contributed 15%, grew at a lower rate of
6% compared to industry rate of 14% due to ongoing issues of
DCGI on the company' s top sell ing pain brand Nise
(nimusulide).
Glenmark
India revenues grew 20% YoY led by market share gains in key
therapies of anti-infectives, cardiac, respiratory, diabetes and
dermatology & 2 new product launches i.e. Doriglen and Vorth
TP in orthopedic segment. Management has guided for
increased competitive pressures from unlisted players. As a
result, growth going ahead is expected to be in the range of 16-
17%.
Ipca
Lower growth was mainly due to decline in Anti bacterial (down
13%) and Cardiac segment (up 6%). Regrouping of sales rep
and brands and high attrition rate also impacted growth.
Lupin
17% growth was on account of new product launches and
improved performance from the company's chronic portfolio.
Pf izer
Above industry growth was led by volume increase (11% growth)
and price increase (3% growth). Although the anti -infecti ve
segment witnessed 12.5% growth on account of 3 new launches
viz. Getex, Getex Suspension and Cefixime, management has
admitt ed to increased compet ition in the anti-i nfecti ves and
the Vitamins/ Minerals segment.
Ranbaxy
India business (contributed 20%) grew below industry rate at
6% YoY, mainly led by anti-infective and gastro segment, which
witnessed lower traction due to increased competition from its
peers.
Sun Pharma
Domestic branded formulations grew 12% YoY due to
discontinuation of third party sales and netting of VAT. Adjusting
for third-party sales, domestic revenues grew by 18% YoY.
Torrent
The chronic portfolio, which contributes 60% of domestic
portf olio reported strong growth of 17-18% duri ng Q1FY12.
However, acute therapy almost remained flat due to increased
competition mainly in anti-infective and pain segments.
Unichem
Unichem has initiated inventory rationalization at the distributor
level in order to improve internal processes and reduce inventory
by 21-30 days. This has led to 5% YoY decline in domestic
formulation revenues in Q1FY12. Among the company's top 10
brands, 6 brands reported negative YoY growth. Management
admits to increased competitive pressures from local as well
as MNC players.
Company specific issues - What management has to say?
Pharma Sector
11
Key trends
Sun - Mer ck JV
Sun and Merck have formed a JV to develop, manufacture and
commercialize new combinations and formulations of
innovative, branded generics in the Emerging Markets. The
partnership will use Sun Pharma Advanced Research
Company Ltd's propriet ary platfor m technologies, and Sun
Pharma's world-class manufacturing network. Merck will use
its clinical development and registration expertise to
commercialize the products. Under the JV, Sitagl iptin and
Sitagliptin + Metformin have already been commercialized in
the Indian markets.
Lupin -Lilly
Eli Lilly India and Lupin have entered into a strategic
collaboration to promote and distribute Lilly's Humi nsulin
range of products. Lupin will promote and distribute the range
of products in India and Nepal and will double the number of
sales representatives behind the diabetes care product.
Cadila - Bayer JV
Cadila and Bayer have formed a JV to distribute medicine in
the Indian market. About 600 employees from both companies
will work for the venture. The venture will sell brands from
both companies, such as Bayer's blood thinner Xarelto and
Cadila' s Euglim for diabetes
Biocon - Pf izer
Biocon and Pfizer have entered into a strategic collaboration
to commercialize Biocon's bio-similar version of Insulin and
Insulin analogue products such as recombinant human
insulin, Glargine, Aspart and Lispro. Pfizer will have the
exclusive rights to commercialize these products globally
including co-exclusive rights with Biocon in Germany, India
and Malayasia.
Universal Medicines- Aventis
Sanofi Aventis has acqui red Uni versal Medicines for over
US$100mn. This acquisition is in-line with Sanofi-Aventis
global strategy to expand its foot-print in the Emerging Markets.
Uni versal Medicare manuf actures markets and distributes
branded nutraceutical formulations in India, including its
popular cod liver oil capsules. This will help Sanofi to boost
its over-the-counter business in India.
Pharma Industry : Recent trends
Increase i n
MR st rengt h
St rat egi c t i e-ups
Geographi cal
expansi on
Shi f ti ng di sease
pr of i l e
Acqui si ti on by
MNCs
All companies, including
MNCs, have increased
their field force in the
last one year
Indian companies are
entering in to strategic
tie-ups with MNCs to
strengthen their product
portfolio
Expanding their
presence in rural
markets (67% of the
total population)
Increasing prosperity &
changing lifestyle -
propelling higher growth
in the chronic segment
Acquisitions by MNCs to
gain quick foothold in
the fastest growing
Indian pharma market
Pharma Sector
12
Key Factors driving
the slowdown
Weakening macro factors
Increase in competition
MNC's getting aggressive
Competition from unlisted players
Pricing pressure in anti-infectives
National Li st of Essential Medicines - Future impact
analysis
Pharma Sector
13
9.8% 9.5%
7.6%
7.4%
7.2%
8.9%
12.6% 14.9%
14.2%
15.0%
10.4%
16.2%
6.0%
7.0%
8.0%
9.0%
10.0%
2006 2007 2008 2009 2010 2011 *
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
GDP Gr % (LHS) IPM Gr % (RHS)
* Project numbers based on historic GDP average and Emkay Economics
Rise in disposable income and favorable income demographies are the major catalyst
responsible for the growth of the Indian pharma industry. Within this, increase in disposable
income is a larger contributor (approx. 40%). However, with rise in interest rate scenario,
the Indian economy is slowing down and is expected to grow by 7.6% during 2011 as
compared to 8.9% in 2010. Home loan EMIs are going up, salary growth has slowed
down; as a consequence, the disposable income has also got impacted resulting in
slowing the pace of the Indian pharma industry. According to Mckinsey report on Indian
Pharma, rise in disposable income and upward shift in income demographies account
for 40% of the Indian pharma market growth, as depicted below.
IPM has a strong correlation with India GDP growth
With rising interest rate,
the Indian economy is
slowing down, resulting in
slower growth in Indian
pharma also
IPM growth largel y driven by rise in income level s
Source: Mckinsey Report on Indian Pharma
With increase in interest rate, the capital expenditure for new medical infrastructure will
also slow down as it is a capital intensive segment. Growth in insurance penetration will
also slow down resulting in overall slow down in the growth of Indian Pharma.
Rise in interest rates have
impacted disposable
income, which is the largest
growth driver of the Indian
pharma industry
Weakening macro factors impacting Indian pharma growth
15%
10%
15%
20%
40%
Others Increase in prevalence Insurance penetration
Medical Inf rastructure Income Growth
Pharma Sector
14
10%
25%
14% 11%
18%
17%
10%
15%
20%
18%
14%
16%
20%
8%
15%
15%
14%
17%
15%
12%
0
5000
10000
15000
20000
25000
30000
Cipla Ipca Cadila Ranbaxy Lupin Torrent GSK Sun DRL Glen
FY10 FY11
28
7
19
16 16
8
19
24
12
8
Growth in domestic revenues in % Domestic Revenues in Rs bn
During the past 2 years, most of the Indian pharma companies have resorted to strong
addition of MRs in order to give a boost to its domestic business. For e.g. Ipca Labs has
added around 1,800 MRs to its force taking the total to 5,000 MRs, which is one of the
highest in the industry. As a result, its domestic formulation business grew by 21% CAGR
over FY09-11 to Rs7bn. Similarly, Cadila added around 1,550 MRs to its field force taking
the total to 4,500 MRs by end of FY11, resulting in its domestic formulations business
growing by 17% CAGR to Rs22bn. In contrast, dispite a meagre addition of just 200 MRs
(taking its field force to 2,700) in last 2 years buy Sun pharma, its domestic formulation
business has grown by 16% CAGR to Rs24bn.
Going ahead, we believe all the domestic companies who have strengthed the field force
to spurt up the growth will eventually witness a slowdown in domestic growth rates. In
order to sustain higher growth rates of 15-16%, companies will have to increasingly focus
on improving MR productivity by expanding to new therapies, newer markets and new
launches. Companies like Sun pharma and Lupin with strong brand equity are likely to
outperform.
Increase in competition has led to ramp-up of sales force
Some of the initiatives adopted by the Indian pharma companies in the domestic business
Pfizer
The company has launched two new
divi sions CNS and Diabetes and has
added 300 peopl e across two
divisions. The company plans to launch
insulin products from Biocons portfolio
in the next quarter. This will help the
company focus on branded generics
and fill portfolio gaps.
Ranbaxy
The company launched Project Viraat
in order to ramp up its presence across
the country, especial ly in rural areas.
This i ncluded int roduction of new
products, increasing its field force and
targeting more than 350,000 doctors.
Pharma companies have ramped up their fiel d force...
8% 38% 36% 56% 26% 24% 4% 4% 5% 11%
21%
14%
13%
12% 47%
7%
23%
4% 32%
10%
0
1500
3000
4500
6000
7500
Cipla Ipca Cadila Ranbaxy Lupin Torrent GSK Sun DRL Glen
FY10 FY11
4.8
1
4
4 3
2
6 8
4
3
Marketing Representatives Growth
Rates in %
Sales per MR
in numbers (at top of bar)
...leading to pharma companies clocking good growth
Pharma Sector
15
5%
13%
18%
56%
95%
87%
82%
44%
0%
20%
40%
60%
80%
100%
GSK Pfizer Novartis Aventis
Chronic % Acute %
MNC pharma companies continue to growing in line with industry growth of ~13% except
AstraZeneca which has grown by more than 20%. Major chunk of the portfolio of these
MNCs is from acute category. In acute category, they are able to withstand the competition
because of their superior brand strength. Going forward, competition will hot-up even in
chronic category as these MNCs are now increasingly focussing on chronic therapies.
MNC Pharma - Currently focussed on acute therapy
MNC pharma companies continue to grow in line with industry growth of ~13%, except
Astra which has grown by more than 20%. These MNCs are aggressively investing in
branded generics and moving into newer therapies like CVS, CNS and anti diabetes. In a
bid to increase their presence in some of the branded generics, MNCs have aggressively
priced thei r products below their Indian counterpar ts. While this has not signifi cantl y
dented market share, it is a precursor to the competitive intensity in the future.
GSK
GSK derives its strength from anti-infective, dermatology, pain
& vaccines segments. GSK is the leader in the vaccine
segment in India with an effective market share of ~20%. GSK's
strategy has been to create portfolio of high value products.
GSK has 4 business verticals namely, Vaccines, Specialties,
Mass specialties and Mass markets. Glaxo Plc, the parent
company, has outlined one of the most aggressi ve growth
plans for emerging markets, with India being one of the key
markets. The acute segment (contributes 95% of the domestic
sales) is growing by 12% and the chronic segment (5% of
domestic sales) is growing by 12%. GSK has launched 2
patented products from its parent's portfolio i.e. Revolade (drug
for low platelets) and Votrient (metastatic renal cell carcinoma)
in the oncology segment. Earlier, GSK had successfully
launched an Onco product Tykerb in India in May 2008.
According to the management, within the first year of its launch
it self Tykerb has clocked revenue of Rs70-80mn according to
the management and is expected to gain.
Pfizer
Pfizer's current portfolio derives strength from Respiratory, Anti-
infective and Vitamins/ Minerals segment. The acute segment
(contributes 87% of the domestic sales) is growing by 20%
and the chronic segment (13% of domestic sales) is growing
by 25%. With a view to improve focus on chronic therapy, Pfizer
has recently launched two new divisions - CNS and Diabetes
and has added 300 people across these divisions. The
company will also be launching insulin products from Biocon's
portfolio in FY12. This will help the company focus on branded
generics and fill the gaps in its portfolio. The company's six
key brands are in the list of top 100 in the industry. Becosules
and Corex are ranked # 1 in their respective therapeutic
segments.
MNCs getting aggressive
Pharma Sector
16
Exhibi t 5: MNCs are adopting aggressive pricing strategies in many of the new products
Indi an Company Brands
MNC Mol ecul es Ther apy Brand Name Pr i ci ng Company Brand Name Pr i ci ng Pack
GSK Atorvastatin Cardio Lilo Rs43 Ranbaxy Storvas Rs180 10 tablets
10 tablets Intas Lipicor Rs125 10 tablets
Dr. Reddys Atocor R Rs110 10 tablets
Cipla Atorlip - 5 Rs157 10 tablets
Pfizer Rabeprazole Gastro Above 5 Rs24 Intas Raium Plus Rs55 15 tablets
7 tablets Cipla Rabicip - 10 Rs64 15 tablets
Dr. Reddys RZ 20 Rs70 10 tablets
Sanofi Metoprolol Cardio Sitelol Rs30 Cipla Metolar-XR Rs39 10 tablets
10 Capsules USV Metzok Rs30 10 tablets
Sun Pharma ProlometXR Rs40 10 tablets
Lupin Topol XL Rs40 10 tablets
Source: CIMS, Emkay Research
Pharma Sector
17
New products launched by MNCs during the l ast 1 year
New Launches Sal es (Rs Cr )
COMPANY BRAND Ther apy MAT Jul y 11
GSK Rosutec Hormones 1.80
(17 pdt s) Calpol T Pain 1.53
Ansolar SPF Onco 1.28
Lilo 0.67
Modvate 3 Derma - antibiotics 0.43
Modvate AF Derma - antibiotics 0.22
Metlead Anti-diabetic 0.04
Tot al 5.98
PFIZER LTD Jetex Hormones 1.34
(29 pdt s) Dolonat Derma 1.12
My Pal 0.99
Debrit 0.36
Vicon Iron supplements 0.32
Cytosar Onco 0.23
Maxtorin Hormones 0.21
Prostin VR Hormones 0.16
Atubri 0.12
Tuvace 0.12
Levefree 0.11
IMEDIAB M Anti-diebetics 0.10
Aivo 0.08
Imediab Anti-diebetics 0.07
Bidiab Anti-diebetics 0.04
Felban AL Hormones 0.02
Tot al 5.42
SANOFI-AVENTIS Solian 1.94
(18 pdt s) Rejusite AI 0.59
Telsite h CVS 0.55
Multaq GI 0.52
Cardace Protect CVS 0.42
Amaryl P Anti-diabetic 0.41
Sitelol 0.18
Sofrahext 0.14
Sitestat F 0.11
Vitahext Vitamins 0.07
Menomune Onco 0.06
Fasturtec Onco 0.05
Sitelol am CVS 0.03
Cetapin V Anti-diebetics 0.02
Shanchol AI 0.02
Tot al 5.11
NOVARTIS Pactel CNS 2.05
(16 pdt s) Aclasta Onco 0.86
Onbrez Breezhaler 0.85
Tacsant AI 0.11
Macalvit New Vitamins 0.09
Vingose 0.08
Afinitor Onco 0.05
Tminic Cold 0.03
Sacsecure 0.03
Calc(i)ayur 0.02
Certican 0.02
Calc(c)ayur 0.02
Tot al 4.20
Pharma Sector
18
67
54
50
0
10
20
30
40
50
60
70
80
90
Augmentin-GSK Clavam-Alkem Moxikind-Mankind
25% premium
34% premium
86
70
54 53
50
0
10
20
30
40
50
60
70
80
90
Mox-
Ranbaxy
Novamox-
Cipla
Moxydil-
Solvay
Lupimox-
Lupin
Glamoxin-
GSK
24% premium
73% premium
Top Brands Company Year of Ther apy Mar ket MAT YoY
MAT Jul 2011 Launch Share (%) Jul 11 Gr. %
Corex Pfizer 1993 Respiratory 0.5 210 -0.2
Human Mixtard Novo Nordisk 1994 Anti-Diabetic 0.4 196 10.4
Monocef Aristo Pharma 2001 Anti-Infective 0.3 187 11.9
Voveron Novartis 1986 Pain 0.4 185 5.5
Augmentin GSK 1992 Anti-Infective 0.4 177 6.1
Revital Ranbaxy 1989 Vitamins 0.4 151 10.5
Taxim - O Alkem 1998 Anti-Infective 0.3 150 17.7
Taxim Alkem 1990 Anti-Infective 0.3 149 11.2
Dexorange Franco Indian 1990 Vitamins 0.3 143 9.0
Betadine Win Medicare 1990 Derma 0.3 142 10.7
Asthalin Cipla 1993 Respiratory 0.3 142 11.5
Storvas Ranbaxy-Stancare 1999 Cardiac 0.2 138 7.6
Calpol GSK 1995 Pain 0.2 137 6.8
Phensydyl Cough Piramal 1996 Respiratory 0.4 134 -25.8
Zifi FDC 1999 Anti-Infective 0.3 134 6.2
Liv - 52 Himalaya 1989 Gastro 0.3 123 22.4
Becosules Pfizer 1989 Vitamins 0.3 119 13.4
Zinetac GSK 1986 Gastro 0.2 117 5.3
Mox Ranbaxy 1997 Anti-Infective 0.3 115 -2.1
Source: AIOCD, Emkay Research
Growth in Anti-Infective segment has slowed down during the past 2 quarters due to
increase in competi tion and pricing pressure both from local peers as well as MNCs.
Competition in the top 20 brands in Indian Pharma market is also increasing with average
growth slowing down to single digit.
Most of the products, which feature in the top 20 list belong to acute therapy. Companies
like Mankind are increasingly targeting these products and launching cheaper alternatives.
Not only Mankind Pharma but even MNCs have been launching many drugs at considerably
lower prices.
Pricing pressure in Ranbaxy's Mox (Anti-Infective) -250mg
15 strip capsules
Pricing pressure in GSK's Augmentin (Anti-Infective) -
Amoxcillin + Clavulanic Acid combination
Pricing pressure on top brands
Pharma Sector
19
218
159
122
0
50
100
150
200
250
Insuman Rapid-
Sanofi
Human Mixtard Insugen-Biocon
37% premium
79% premium
70
64
45
40
0
20
40
60
80
Phensedyl-
Abbott
Corex Ascoril-
Glenmark
Codocuf-
Zydus
9% premium
74% premium
Pricing pressure in NovoNordisk' s Human Mixtrad
(Anti-Di abetic) - 70:30 Isophane/ Soluble Insulin
Pricing pressure in Abbotts Phaensedyl & Pfizer' s Corex
Syrup - 100ml SYR
Doctor Vi sit Key Notables
We visited set of doctors who are providing services in big hospitals in Mumbai and also had their private practice.
During our visit to some of the General Practitioners in Mumbai, we found that for most of the infections and general illness, they
was prescribing Mankind medicines. E.g. most of anti-infective prescribed belonged to penicillins and cephalosporins category.
During our interaction, we understood that Mankind gives superior incentives for each prescription written by the doctor. If the
patients case is very serious, then higher class of anti-infectives i.e. Penems were prescribed by the doctors and that too only
MNC brands. The reason cited was MNC
brands are original research molecules and so
doctors comfort level is usually higher when
prescribi ng these medi cines.
The l i ne of t r eat ment act i on begins with
prescribing penicillins and cephalosporins
(Mankind is the preferred company in the anti-
infective space) and higher treatment uses
penems where MNC drugs are preferred.
Pharma Sector
20
Rs Cr YoY Growth % MAT Jun 11 Gr. Contr i but ors
Gr oups MAT % MAT Sept 10 Dec 10 Mar 11 Jun 11 Vol Pr i ce NP
Jun11 Shar e Jun11 GR GR GR
Systemic Antibacterials 8,596 91% 11.7 13.0 12.9 10.4 8.2 6.6 0.3 4.8
Cephalosporins 4,191 44% 14.2 19.4 14.6 11.5 10.3 8.8 -0.5 5.9
Broad spectrum penicillins 1,618 17% 9.5 14.4 5.1 9.2 9.4 6.5 -0.8 3.8
Macrolides and similar types 1,092 12% 14.6 20.0 9.9 14.2 14.8 10.0 0.5 4.2
Fluoroquinolones 1,070 11% 4.3 8.6 4.3 5.9 -2.5 -1.2 1.9 3.6
Tetracyclines and combinations 123 1% 9.7 14.0 11.8 7.4 5.1 -2.0 2.8 9
Others 502 5% - -26.3 71.1 6.8 -0.5 - - -
Anti - fungals 237 3% 23.3 15.5 16.6 38.0 27.0 18.8 -2 6.4
Antimyco - bacterials 395 4% 10.5 12.7 6.7 11.6 11.0 8.7 1.2 0.6
Anti - virals 211 2% 19.1 13.8 15.6 25.2 21.9 8.7 0.2 10.2
Total Sal es 9,428 100% 12.0 13.0 12.8 11.3 9.1 6.7 0.5 4.8
Anti-infective category therapy bifurcation
Growth in anti-infective category is mainly coming from volume growth and new product
launches. Failure to launch new products will make it difficult for the companies to match
the industry growth. Cephalosporins which contribute ~ 44% to the Anti-Infective category
was impacted most.
Reasons for the slowdown in Anti Infective category are
Weather patterns Heat wave was not that strong in North
Decline in API prices of Cephalosporins due to dumping in China
Pricing pressure due to Increase in competition
Lower success rate of new product launches
Top Companies in the Anti-Infective Category (Rs bn)
Rs bn YoY Gr. (%)
Ant i -Inf ect i ve MAT Jun 11 MAT Jun 11 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11
Ranbaxy 8.6 13.0 11.7 13.7 25.1 16.8 19.2 25.9 21.3 14.7
Alkem 8.4 20.2 20.4 10.6 13.2 9.9 14.8 13.0 14.9 16.2
GSK Pharma 6.6 10.0 7.0 4.9 10.0 13.9 8.5 12.7 14.9 10.4
Cipla 6.4 8.3 15.7 0.1 3.2 2.2 5.2 -0.7 -7.6 -3.8
Mankind 5.4 22.2 27.3 21.4 24.8 19.4 13.2 14.2 17.0 9.2
Lupin 3.1 7.8 5.9 4.8 5.9 5.9 6.4 -0.3 3.5 -4.2
Glenmark 1.5 10.5 6.8 4.3 9.0 15.1 -2.6 -0.8 11.8 1.1
Zydus Cadila 1.2 -6.5 1.2 -7.4 -13.7 -18.4 -15.8 -2.5 -7.0 -8.9
Dr. Reddys 1.1 6.7 7.4 8.3 21.3 9.9 6.2 -7.3 -1.6 -6.7
Total AI 96.3 12.0 11.6 9.0 11.8 9.9 9.3 8.6 9.6 8.0
Most of the companies in Anti infective category barring Ranbaxy have been erratic in their
growth. Ranbaxy, the largest company in category, grew in line with the industry, on the
back of higher volumes (driven by increse in field force and new launches). Industr y
growth is mainly driven by unlisted players like Mankind and Alkem - evident from top 10
brand performance in this catagory.
Pharma Sector
21
Top brands in anti-i nfective in Rs bn
Brand Company Name MAT Val ue MAT Val ue YoY Gr. YTD YTD YoY Gr.
June 11 June 10 (%) June 11 June 10 (%)
Monocef Aristo Pharma 1.9 1.6 15.5 0.5 0.4 7.6
Augmentin GSK 1.8 1.7 5.4 0.4 0.4 11.4
Taxim O Alkem Lab 1.5 1.2 19.2 0.4 0.3 18.1
Taxim Alkem Lab 1.5 1.3 12.5 0.4 0.3 1.9
Zifi FDC 1.3 1.3 6.2 0.3 0.3 4.5
Clavam Alkem Lab 1.2 1.0 24.9 0.3 0.2 29.5
Mox Ranbaxy Lab 1.2 1.2 -0.3 0.2 0.2 -4.7
Mikacin Aristo Pharma 1.1 1.0 10.9 0.3 0.3 -7.3
Ceftum GSK 1.0 1.0 9.5 0.3 0.2 12.8
Moxikind CV Mankind Pharma 1.0 0.8 20.9 0.2 0.2 20.5
Total 96.3 85.9 12.0 22.3 20.3 9.7
Top brands of Mankind Strategic pricing has led to intense competition
Ot her Indi an Company Brands
Brand Ther apy Pr i ci ng Company Brand Name Pr i ci ng Pack
Moxikind CV Anti-Infective Rs114 Ranbaxy Moxclav Rs403 10 tablets
6 tablets Aristo Mega CV Rs99 6 tablets
Cipla Novaclav Rs240 6 tablets
Abbott Nuclav Duo Rs206 6 tablets
Bandy Plus Anti Parasitic Rs6 Zydus Biwom Rs11 1 tablet
1 tablet Lupin Lupibend Rs12 1 tablet
Ipca Nemozole Rs12 1 tablet
Dr. Reddys Rediout Rs35 5 tablets
Unwanted Kit Gynaec Rs335 Cipla MT Pill Rs331 1 tablet
1 tablet Zydus Mifegest Rs370 10 tablets
FDC Undo Rs367 3 tablets
Nurokind Plus Vitamins Rs36 Lupin Matilda Forte Rs103 10 Capsules
6 Capsules Zuventus Mecovon Rs90 10 Capsules
Manforce Stimulants Rs142 Ranbaxy Caverta Rs173 4 tablets
4 tablets Lupin Enthusia Rs108 4 tablets
Zydus Penegra Rs124 4 tablets
Cipla Progra Rs108 4 tablets
Mankind has been pricing its product s at relatively lower rates as compared to other
pharma companies in India. Manki nd is particularly strong in commoditized therapi es
such as the anti-infectives, gynaecology and gastro which together contribute more than
50% of the domestic revenues.
Mankind Pharma - Therapy-wise Revenue breakup
Rs bn FY11 MAT MAT YoY
% Contr. Jul 11 Jul 10 Gr.
Anti-infecti ves 29.0% 5.4 4.5 19.4%
Gastro 13.1% 2.4 2.0 23.3%
Gynaecology 10.2% 1.9 1.4 30.8%
Vitamins 7.8% 1.4 1.1 26.9%
Stimulants 6.9% 1.3 1.1 15.6%
CVS 5.8% 1.1 0.8 28.4%
Pain 5.0% 0.9 0.8 17.8%
Anti-Diabetic 3.3% 0.6 0.4 37.5%
CNS 2.8% 0.5 0.4 22.2%
Others 99.2% 18.4 14.6 25.7%
Acute 86.4% 16.0 12.8 24.7%
Chronic 13.6% 2.5 1.9 32.0%
Total Sal es 100.0% 18.5 14.7 25.7%
Pharma Sector
22
National List of Essential Medici nes
What i s NLEM?
Essenti al medicines are those that satisfy the priority healthcare needs of majority of the
popul ation. The essenti al medi cines list needs to be countr y speci fic addressi ng the
disease burden of the nation and the commonly used medicines at primary, secondary
and tertiary healthcare levels.
The medicines in National List of Essenti al Medicines (NLEM) should be available at
affordable costs and with assured quality. The medicines used in the various national
health programs, emerging and re-emerging infections should be addressed in the list.
The Government of India, Ministry of Health & Family Welfare (MOHFW) is mandated to
ensure quality healthcare by assuring availabilit y of safe and efficacious medicines for
its popul ation.
In a move that could bring more than half the country s Rs 65,000-crore medicine market
under price control, the health ministry plans to enlarge the scope and size of the
National List of Essential Medicines (NLEM).
Following a Supreme Court directive to include all NLEM drugs under price control, the
central government is working out a new policy incorporati ng such changes. While the
current NLEM list, prepared in 2003, does not have too many drugs to be included in the
price control list, the revision will bring about a significant change.
According to rough estimate, the government currently controls the prices of about 20
per cent of the domestic drug market. The span of price control will go up to 35 per cent
once the drugs mentioned in the current NLEM gets included.
Main features of NLEM 2011
The medici nes have been categorized according to therapeut ic area. Therefore, it is
possible that a medicine with more than one indication appears in more than one
category.The issue of mentioning the strength of the medicine dose was deliberated. The
committee took the considered view that the strength should be mentioned in the NLEM.
For essentiality of requirement the medicines have been categorized as follows:
- P, S and T denote essentiality at Primary, Secondary and Tertiary levels respectively
while P, S, T (U in NLEM 2003) indicates essentiality at all the levels.
A total of 348 medicines (excluding repetitions) are present in NLEM 2011.
In the NLEM 2011, 181 medicines fall under the category of P, S and T, 106 medicines fall
under the category of S, T while 61 medicines are categori zed as T only.
In compar ison to NLEM 2003, number of medi cines delet ed is 47 and 43 medicines
have been added
Pharma Sector
23
Medi ci nes Cadi l a Ci pl a Dr. Reddy Gl enmar k Ipca Lupi n Ranbaxy Sun Tor r ent Uni chem GSK
Amoxicillin+Clavulinic Acid
Atorvastatin
Betamethasone
Carboplatin
Cefixime
Cetrizen
Chlorambucil
Clindamycin
Clopidogrel
Decarbazine
Daunorubicin
Diazepam
Enoxaparin
Famotidine
Fentanyl
Filgrastim
Hydroxychloroquine phosphate
Ifosfamide
Imatinib
Ipratropium bromide
Leflunomide
Lorazepam
Mefloquine
Mesna
Misoprostol
N-acetylysteine
Olanzapine
Oxaliplatin
Pantaprazole
Permethrin
Piperazine
Premix Insulin 30/70 Inj
Propofol
Stavudine+Lamivudine
Tramadol
Vecuronium
Zidovudine+Lamivudine
+Nevirapine
Total 15 14 6 4 2 10 5 7 6 4 6
Recently 43 new medicines added to NLEM List
Pharma Sector
24
NLEM Impact Analysi s
Category: Oncology
Medicines Added: Imatinib mesylate
Companies Impacted:
The medicines that would be enlisted in the revised NLEM include costly blood cancer
drug, imatini b mesylate, sold by Swiss multinati onal Novart is under the brand name
Glivec. Other medicines in the list are carboplatin, daunorubicin, filgrastim, ifosfamide,
mesna, oxaliplatin and clorambucil, manufactured by leading companies such as Bristol
Myers Squibb, GlaxoSmithKline, Amgen, Dr Reddys, Intas and Sun Pharma. All the cancer
medicines in the current NLEM list, which was prepared in 2003, have been retained
Category: Anti-Infective
Medicines Added: Amoxicillin + Clavulanic Acid and Cefixime
Companies Impacted:
Amoxicillin + Clavulanic Acid Augmentin, Clavam and Moxikind are the top 10 brands
in the anti-infective category. These brands are owned by GSK, Alkem and Mankind Pharma
respectively. These 3 brands collectively contribute ~30% of the top 10 brand sales and
~4% to the anti-infective category.
Cefixime Companies impacted are Alkem (Brand Taxim) and FDC (Brand Zifi) which
contribute ~32% to the top 10 brands and ~4% to the anti-infective category.
Category: Cardiovascular
Medicines Added: Atorvastatin
Companies Impacted:
Atorvastatin Atorva and Strovas are the two brands owned by Cadila and Ranbaxy
Labs. These 2 brands contribute 3% to the Indian pharma CVS category and 27% of the
top 10 brands in the category.
Category: Hormones
Medicines Added: Betamethasone
Companies Impacted: GSK Pharma
Betnesol - N This is a GSK Pharma product which, falls in the top 10 brands in the
Hormones category. It contributes 9% to the IPM and 16% to the top 10 category.
Category: CVS
Medicines Added: Enoxaparin
Companies Impacted: Lupin
Lupenox Among our coverage companies, Lupin is the only company having a drug in
this category. Other notable companies are Sanofi Aventis and Biocon.
Category: Gastrointestinal
Medicines Added: Famotidine
Companies Impacted:
Most of the top Indian companies like Alkem, Sun Pharma, Cadila and Torrent Pharma
have an established presence in the gastro segment.
Pharma Sector
25
Impact of challanges
Indian Pharma growth slowing down
4 Step Stress Test
Revisi on of estimates for domestic growth
Significance of domestic busi ness - Cash Cow
Conclusion and Recommendation
Pharma Sector
26
As discussed earlier, the following factors have been responsible for the slowdown in
IPM-
Weakening macro factors affecting the growth
Increasing competition
MNCs getting aggressive
Pricing pressures
Indian pharma growth slowing down
Indian Pharma (IPM) Growth Sl owing Down
~ -3 %
~ 16.2 %
~ 13%
2010 2011
Growth Forecast
in %
Others
15
40
20
15
10
Increased
Competition
Macro
factors
Pricing
Pressure
MNCs more
aggressive
Pessimistic
Scenario
Base Case Optimistic
Scenario
2011
CAGR 11%
CAGR 15%
2010
53
58.5
59.5
60.6
CAGR 13%
Rs bn
Revenue Forecast
Scenario Analysis for Indian Pharma - 2011
Pharma Sector
27
Segmentation of different therapies by way of prescriptions
IPM OTC/ Brands GP s Speci al ti es
% Contri but i on
Anti-Infectives
Cardiac
Gastro
Respiratory
Pain
Anti-Diabetic
Vitamins
CNS
Others
Total Contribution 10.0% 45.0% 45.0%
Current Growth Scenario 13.5% 10.0% 15-18%
3-5 Years Growth Scenario 15-16% 12-13% 18-20%
Speciality category contributes ~45% of total Indian pharma market. This includes chronic
therapies and also some of the acute therapies like the opthal, hormones, derma, gynaec
and vaccines. This category will grow by 15-18% in the current scenario and has the
potential to grow by 18-20% once the macro factors improve.
General practitioners (GPs) category includes Anti-Infectives, Pai n, Gast rointestinal,
Vitamins and others and contributes ~45% of the total Indian pharma market. Pricing
pressure and competition is intense in this category mainly from unli sted players like
Mankind, Intas, Alkem, etc. Hence, relationship with doctors is of utmost importance for
the companies, so that it becomes easier to push newer products into the market. This
category will grow by 10% in current year and has the potential to grow by 12-13% in the
longer run.
Pricing pressure and
competition is intense
in this category
mainly from unlisted
players like Mankind,
Intas, Alkem, etc.
Acute category- Increase
in competition and pricing
pressures have affected
mass catagaries, anti-
infectives and pain
management . However
speciality therapies remain
unaffected
These factors are affecting the therapies in different ways. One of the most preferred and
widely adopted methodologies to categorize the Indian pharma market is to dissect it into
acute and chroni c therapies. However, our view point differs from the conventional
methodology as this approach fails to address the problem areas in the industry and to
forecast how companies will perform under challenging times.
In acute category, increase in competition and pricing pressures are affecting the anti-
infective therapy and to some extent pain management. However, other therapies in acute
category like ophthalmology, gynecology, hormones and vaccines which are specialty in
nature are not affect ed by competit ion. Hence another way to dissect Indian pharma
industry is how drugs are being prescribed or sold in the market i.e. addressed to GPs,
Specialties and OTCs. This will be more relevant because competitive companies target
drugs that have huge revenue potential and can be sold easily through existing relationship
with doctors. Specialist categories have high entry barriers and hence lower price pressures
compared to GP category.
Pharma Sector
28
Stress-Test on the profile of pharma companies
Till now, we have identified the challenges faced by pharma industry. Now we will do
4 step stress test on the profile of different pharma companies.
Our 4 Step Test will help us in identifying the companies which will be able to withstand
the competitive and pricing pressures and continue to depict strong growth.
We have devised the following approach
Step 1: Companies having strong presence in the special ty therapi es - less prone to
competition
Step 2: Companies having fewer top products in the GP category - lower pricing pressure
Step 3: Companies having lower dependance on a single therapy - lower concentration
risk
Step 4: Domesti c companies having tied-up with MNCs for launching products in the
specialty category - competitive advantage
Step 1: Identifing companies, which have strong presence in specialty
therapies
Going ahead, we expect companies with niche product portfolio and healthy exposure to
specialty therapies to continue to outperform the industry. Speciality category contributes
45% to the total Indian pharma market. This includes chronic categories and some of the
acute therapies like opthal, hormones, derma, gynaec and vaccines. This category will
grow by 15-18% in the current scenario and has the potential to grow by 18-20% once the
macro factors improve. General practitioners (GPs) category includes Anti-Infectives, Pain
and others and contributes ~45% of the total Indian pharma market. Pricing pressure and
competition is intense in this category mainly from unlisted players like Mankind, Intas,
Alkem, etc. This category is growing by 10% in current year and has the potential to grow
by 12-13% in the longer run.
We expect companies
with niche product
portfolio and healthy
exposure to specialty
therapies to continue to
outperform the industry
Source: Emkay Research Graph not to scale
Expected growth in the domestic portfolio for Indian companies
Company
Cadila 11% 41% 49%
Cipla 10 31% 59%
Dr. Reddys Lab
12 44% 44%
Glenmark 14 23% 63%
Torrent 16 23% 61%
GSK 10 45% 45%
Ipca 9% 56% 35%
Unichem 12 38% 53%
Lupin 13 30% 57%
Pfizer 7% 45% 48%
Ranbaxy 9% 29% 62%
Sun Pharma 8% 24% 69%
OTC/ Brands GP's Specialty
Pharma Sector
29
Pfizer, Sun Pharma, Ranbaxy and Glenmark are best placed to capture the opportunity.
These companies have more than 60% of its sales coming from the specialty segment.
The inherent benefits of specialty segment are
Higher entry barriers due to requirement of specialized sales personals
Lower competition
Good growth prospects in most of the categories
As a result, growth and margins are better in this segment.
Step 2: Identifing the companies having fewer top products falling
into the GP category
Below we have highlighted the companies whose brands fall into the GP category. The
brands have been selected from the industrys Top 10 brands in the respective therapeutic
segments. We rate 0-3 scale as favorable and 4& Above scale as unfavorable for the
company.
In this step, we have identified companies having fewer top 10 brands in the GP category.
It is well known that the top brands in GP category face the maximum competition making
it difficult for them to grow above the market. Companies having more than top 5 brands
falling into the GP category, will be highly susceptible to competition and price pressures.
Number of brands fal ling in the GP category
0-1 Sun Pharma
Cadila
Cipla
Lupin
Glenmark
2-3 Torrent
GSK
Pfizer
Dr. Reddys
4-5 Ipca
Above 5 Ranbaxy
Companies havi ng
more than top 5
brands falling into
the GP category, will
be highly
susceptible to
competition and
price pressures
Pharma Sector
30
Step 3: Concentration Risk
In this step, we have identified the dependence or reliance of pharma companies on a
single therapy. For example, Cipla has a higher concentration in the Respiratory therapy
(6 products in top 10 brands contribute 19% to domestic sales). Ranbaxy has a higher
concentration in the Anti-Infective therapy (5 products in top 10 brands contribute 18% to
domestic sales) and Ipca has a higher concentration in the Anti-Mal arial portfolio (5
products in top 10 brands contri bute 21% to domestic sales) . We believe, such high
dependence on a single therapy is detrimental for the companys long term growth
prospects.
Company Ther apy % contri buti on to i ts Top br ands
domest i c sal es
Ci pl a Respiratory 19% Asthalin
Sereflo
Foracort
Aerocort
Budecort
Duolin
Dr. Reddys Lab Anti-Infective 18% Omez
Omez D
Razo
Clamp
Ipca Anti-Malarial 21% Lariago
HCQS
Rapither AB
Larinate
Lumerax
Ranbaxy Anti-Infective 18% Mox
Cifran
Zanocin
Sporidex
Cilanem
GSK Anti-Infective 24% Augmentin
Zinetac
Ceftum
Phexin
Neosporin
Augmentin Duo
Pharma Sector
31
Step 4: List down the companies who have tied-up with MNCs to launch products in the specialty
category
Company JV Company Ar ea Commen t s
Sun Pharma MSD Manufacture & The partnership will use Sun Pharma Advanced Research Company Ltds
Commercialize proprietary platform technologies, and Sun Pharmas world-class manufacturing
formulation in EMs network. Merck will will use its clinical development and registration expertise to
commercialize the products. Under the JV, Sitagliptin and Sitagliptin + Metformin
have already been commercialized in the Indian markets
Cadi l a Bayer Distribute medicines About 600 employees from both companies will work for the venture. The
in the Indian Market venture will sell brands from both companies, such as Bayers blood thinner
Xarelto and Cadilas Euglim for diabetes. Bayer HealthCare will contribute its
existing sales and marketing business in India to the venture, while Cadila will
contribute its womens health, diagnostic-imaging business and other products
Lupi n Lilly Distribute Lillys Lupin will promote and distribute the range of products in India and Nepal and
Huminsulin range will double the number of sales representatives in the diabetes care product
of products in
India & Nepal
In this step, we have identified domestic companies having tie ups with MNCs and have
access to their expertise & blockbuster drugs. We believe these companies will always
have an edge vis--vis competition because of their alliance with the MNCs, which helps
them club their distribution strength with a superior product portfolio. Sun Pharma has a
tie-up wit h Merck and under t his JV, it has already launched Sitaglipti n and
Sitagliptin+Metformin combination in the Indian market. Similarly, Lupin has a tie-up with
Lilly to market Humisulin in India and Nepal. Also, Cadila has a tie-up with Bayer in the
areas of women's health, diagnostic-imaging business and other products.
Pharma Sector
32
Rivision of estimates for domestic growth
Our analysis shows that there is a high degree of correlation between macro factors,
economic growth and Indian pharma industry growth. When the pace of economic reforms
and economic growth slows down it impacts the pharma industry growth. Other reason
was every company has increased the strength of MRs in last two years and as a result
there was a spurt of growth last year which is tapering down this year. Impact of slowdown
in growth is more pronounced in mid and smal l cap companies and the companies
which have more exposure in GP therapies, which is more susceptible to competition.
Competition is increasing from low cost players like Mankind & Alkem labs in the mass
product therapies like anti-infective. MNCs which were focused more on acute categories
till now are increasingly launching products in chronic space & that too at competitive
prices.
Going forward, 2011 will be a subdued year in terms of growth of pharma industry. The
pharma industry will grow by 12%-13% in 2011 which will rebound in 2012 to normal
growth of 14-15%. Accordingly, we have cut down the growth estimates for various
companies which are listed below.
Indian Pharma Domestic growth expectations
Company FY12 Earl i er Esti mat es % Change
Domesti c Gr. Domesti c Gr.
Cadila 12% 15% -3%
Cipla 10% 15% -5%
Dr. Reddys Lab 10% 15% -5%
Glenmark 16% 16% 0%
Ipca 10% 17% -7%
Lupin 19% 19% 0%
Ranbaxy 12% 12% 0%
Sun Pharma 15% 18% -3%
Torrent 12% 12% 0%
Unichem 5% 9% -4%
GSK 13% 13% 0%
Pfizer 14% 14% 0%
On the basis of our 4 step stress test we conclude Sun, Lupin and MNC pharma
companies will outperform the industry, with rest being underperformers.
We have cut down the domestic growth estimates for Cadila, Cipla, Dr. Reddy, IPCA,
Torrent and Unichem for FY12 and FY13 by 2% to 5% and retained the growth estimates
for Lupin, Ranbaxy, Sun, GSK and Pfizer.
Pharma Sector
33
Snapshot of the domestic business
Compani es Domest i c Domest i c Domest i c Domest i c Domest i c Rest of the Total Co.
Revenues revenue as % EBITDA margi ns EBITDA as % of ROCE busi ness ROCE
to t otal revenue total EBITDA ROCE
Sun 23801 41.0% 40% 47.9% 60.2% 20.0% 25.0%
Cadila 21068 38.9% 30% 53.3% 55.2% 20.0% 27.8%
Lupin 15509 27.2% 30% 39.1% 54.7% 17.2% 21.1%
Cipla 31639 45.1% 30% 61.9% 44.7% 8.8% 15.0%
Dr. Reddy 12911 13.7% 30% 20.8% 43.8% 32.4% 25.0%
Ranbaxy 17924 20.4% 25% 24.4% 30.1% 17.5% 16.2%
Glenmark 8447 28.7% 25% 35.8% 44.0% 15.5% 19.3%
Ipca 6964 37.0% 25% 48.4% 48.5% 13.9% 18.8%
Torrent 8416 39.0% 25% 47.6% 45.0% 18.5% 21.2%
Unichem 6072 65.1% 24% 92.8% 30.5% 1.6% 14.9%
GSK 21511 100.0% 35% 98.2% 671.9% 3.6% 41.0%
Pfizer 8359 97.4% 20% 90.9% 118.6% 4.3% 17.1%
Source: Company, Emkay Research
Significance of domestic busi ness - Cash Cow
Below we have highlighted the significance of domestic business in terms of -
Contribution to the overall revenue and growth
Contribution to the earnings
Contribution to the return on capital employed
For most of the pharma companies, domestic business contributes in the range of ~20-
50% of the overall revenues. US business contribution stands at ~20-30% and the
remaining comes from RoW markets. Even though domestic business is only 20%-50%
of the overall revenues, its contribution to the base business earnings is higher at 50%-
70%. ROCE of domestic business is much higher at 40%-60% compared to other
businesses which have less than 20% and as a result multiples are mainly driven by
domestic business. Our analysis suggests that any change in the domestic revenue has
an amplified impact on the earnings and multiples of the companies.
Sun has the highest margins and highest ROCE among the domestic companies because
of its focus on specialist therapies and high per MR productivity.
How decel eration i n domesti c business impacts the earnings and
multiples
Suppose if domestic business contributes 40% of the company's revenue and has 30%
margins compared to the overall margins 20% of the company. If there is a 5% decline in
the domestic growth than there will be 3% decline in the earnings and ROCE, which
directly impacts the multiples.
Companies present in specialty therapies where competition is less and entry barriers
are high and growth is good, command higher multiple compared to the companies who
have higher exposures to the GP categories.
Pharma Sector
34
Comparison wi th the consensus estimates
Company EPS (Emkay) EPS (BB Consensus)
FY12E FY13E FY12E FY13E
Cadila 36.4 44.8 40.8 50.8
Cipla 14.2 17.8 14.3 17.0
Dr. Reddys Lab 68.6 90.0 81.2 93.1
Glenmark 24.0 23.8 22.1 22.2
Ipca 22.2 28.0 22.7 27.8
Lupin 21.8 25.3 22.0 26.8
Ranbaxy 31.2 40.9 25.5 32.9
Sun Pharma 21.6 27.3 20.5 24.4
Torrent 36.1 44.2 39.0 47.4
Unichem 10.9 13.2 11.2 15.2
GSK 77.5 86.4 76.8 88.3
Pfizer 66.2 78.7 67.1 82.2
Cipla - We have assumed the supply of API for olazapine and escitalopram which was not
in our earlier assumpt ions.
The highest cut in earnings is in case of Cadila, where we have cut the earnings estimates
by 9% for FY12 and 12%% for FY13. The cut in estimates is mainly due to lower growth in
domestic business, lower traction from the JVs, USFDA issues due to which new approvals
in US will slow down and de-accelerat ion in consumer OTC business where volume
growth had slowed down to 10%-12% due to weakening macro factors.
In Ipca Labs, cut in growth estimates for domestic business stands highest at 7% resulting
in 4% cut in earnings. This is mainly led by company' s high dependence on the anti
malarial and anti infecti ve therapies. These two therapies contribute 31% of the total
revenue and five of the top10 brands come from these therapies.
In case of Dr. Reddy, we have cut the domestic growth estimates by 5% and earnings
estimates by 7%. This is mainly led by controversy related to one of its top brand Nice in
its anti infective therapy due to which there was a decline in this therapy which brought
down the overall growth. We have also changed the estimate for one of its limited
competition product i.e. Fondaparinux due to which earnings downgrade is steeper than
cut in domestic growth estimates.
Company Domesti c Gr. Domesti c Gr. % Change EPS EPS % Change
New Est. Earl i er Est. New Est. Earl i er Est. i n Earni ngs
Cadila 12% 15% -3% 36.4 39.9 -9%
Cipla 10% 15% -5% 14.2 14.2 0%
Dr. Reddys Lab 10% 15% -5% 68.6 70.0 -2%
Glenmark 16% 16% 0% 24.0 24.0 0%
Ipca 10% 17% -7% 22.2 23.1 -4%
Lupin 19% 19% 0% 21.8 21.0 4%
Ranbaxy 12% 12% 0% 31.2 31.2 0%
Sun Pharma 15% 18% -3% 21.6 20.0 8%
Torrent 12% 12% 0% 36.1 36.1 0%
Unichem 5% 9% -4% 9.1 11.3 -20%
GSK 13% 13% 0% 77.5 77.5 0%
Pfizer 14% 14% 0% 66.2 66.2 0%
Revise in earnings estimates
Pharma Sector
35
Conclusion
Pharma sector has outperformed the overall sensex for the past two years. This was
mainly due to
Strong growth in domestic market
Para IV opportunities in US market.
Today pharma companies have started facing challenges in the domestic market due to
increase in competition from unlisted players and Multi National companies. Going forward
these players will take increased share of the growth in the pharma industry. In US the
para IVs are not cake walks any more. Innovator Multi National companies provides stiff
challenges and number of Para IVs challengers are very high and is some cases as high
as 7-8, which make the opportunity very small. Once the product goes off patent then the
competition hot up so much that very few companies are able to make up the money.
Companies like Cipla, Torrent, IPCA which are mainly focused on Indian markets are
already feeling the heat of competition. The growth rate of these companies in domestic
market has already come down to single digit. As the domestic growth came down the
multiples at which they were trading has also came down.
Going forward this is also evident in Cadila where domestic growth has come down to
single digit and in US market new approvals will slowdown because of US FDA issues.
Cadila also doesn't have any para-IVs in next 1-2 years.
In case of Dr. Reddy and Ranbaxy domestic growth is coming down due to high exposure
to the anti-infective category but strong growth will come from US market due to strong
para-IV pipeline.
Lupin and Sun are the one which are growing robust in the domestic market due to strong
focus on the specialt y therapies where competition is comparativel y less and growth
rates are better. In US they have strong para-IV and limited competition pipeline which will
sustain the strong growth.
Change in recommendations
Large Cap Mi d Cap
Buy - Glenmark, IPCA
Accumul at e Sun Pharma, Lupin -
Hol d Cadila, Cipla, Dr. Reddy & Ranbaxy Torrent, Unichem
Pharma Sector
36
Companies
Cadila Healthcare
Cipla Ltd
Dr. Reddy's Lab
Glenmark Pharma
GlaxoSmithKline Pharma
Ipca Laboratories Ltd
Lupi n Ltd.
Pfizer Ltd
Ranbaxy Labs
Sun Pharma
Torrent Pharma
Unichem Labs
Y/E, Mar Net EBIDTA EBIDTA APAT EPS EPS RoE P/E EV / P/BV
(Rs mn) Sal es (Cor e) (%) (Rs) % chg (%) (x) EBITDA (x)
FY10 36,580 7,798 21.3 4,799 23.4 50.7 37.0 34.4 21.8 6.5
FY11 45,925 9,885 21.5 6,733 32.9 40.3 39.1 24.5 16.9 7.2
FY12E 51,563 11,495 22.3 7,452 36.4 10.7 31.3 22.1 14.5 5.7
FY13E 60,618 13,581 22.4 9,159 44.7 22.9 30.4 18.0 11.9 4.5
Val uation table
Your success i s our success
Cadila Healthcare
Opportunities galore but visibility low - Downgrade to Hold
Emkay Global Financial Services Ltd.
Reco Previous Reco
Hold Accumulat e
CMP Target Price
Rs806 Rs806
EPS change FY12E/13E (%) -9 / -12
Target price change (%) -21
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute (2) (8) 3 27
Rel. to Nifty (2) 0 20 56
Source: Bloomberg
Rel ative price chart
26 September, 2011
Source: Bloomberg
Stock details
Sector Pharmaceuticals
Bloomberg CDH@IN
Equity Capital (Rs mn) 1024
Face Value (Rs) 5
No of shares o/s (mn) 205
52 Week H/L (Rs) 984/625
Market Cap (Rs bn/USD mn) 165/3,335
Daily Avg Vol (No of shares) 132996
Daily Avg Turnover (US$ mn) 2.4
Shareholding Pattern (%)
Jun-11 Mar-11 Dec-10
Promoters 74.8 74.8 74.8
FII/NRI 5.9 5.5 5.1
Institutions 12.6 13.3 13.8
Private Corp 1.8 1.5 1.4
Public 4.9 4.9 5.1
Source: Capitaline
Domest i c busi ness - t o gr ow at l ow er r evenue CAGR of 13%
over FY11-13E on ac c ount of i nc r eased c ompet i t i on and
pr i c i ng pr essur e f r om l oc al as w el l as MNC pl ayer s
US busi ness t o show dow n due t o US FDA i ssues, unc er t ai ni t y
on new l aunc hes. Est i mat e 22% r evenue CAGR over FY11-13E
Suppl y agr eement w i t h Abbot t and J V' s w i t h Hospi r a, Nyc omed
& Bayer pr ovi de l ong t er m vi si bi l i t y
Wi t h domest i c busi ness under pr essur e and l ow vi si bi l i t y i n
Eur ope, Br azi l and J Vs, w e dow ngr ade t he st oc k t o Hol d w i t h a
r evi sed t ar get pr i c e of Rs806 (18x FY13 ear ni ngs of Rs45)
Domestic business reeling under pressure
Domestic formul ation (contributes 38%) grew by 19% to Rs17bn in FY11 due to
increase in field force by 13% and launch of 10-12 products. With market share of
3.93%, Cadila is the 6th largest players in India and is a leader in Specialty therapies
like the CVS, gastro and gynecology
However, with increased competition and pricing pressure, domestic business is set
to grow at lower rate of 12% in FY12. We expect FY13 sales to grow by 15% with
improvement in field force productivity and focus on chronic therapies
Hospira JV, Bayer JV and Abbott agreements - long term opportunities
Cadila has entered into strategic alliance with Abbott to out-license 24 products for
emerging markets, which is further extended by 8 products this quarter. Revenues
from these products are expected to flow in from FY13 onwards
For the domestic market, Bayer JV is expected to commence the operations from
H2FY12, with a focus on women's healthcare, metabolic disorders, diagnostic imaging,
CVS, oncology and anti diabetic.
We expect the decline in profit from Protonix for the existing Nycomed JV to be offset by
the profit from the Hospira JV, set up for the manufacturing of oncology Injectables for
Europe & the US. Hospira JV currently has launched 3 products and 3 are in the
pipeline for launch
Nesher' s acquisiti on to contribute USD30mil lion and is expected to turn profitable
from FY13. With increasing product basket, the company expects to achieve USD100
million in revenues over next 3 years
Valuation
We expect Cadila to report 12% revenue growth in FY12 and 18% growth in FY13. We
expect EBIDTA margins to move from 21.5% in FY11 to 22.3% in FY12 and 22.4% in FY13.
Earnings will grow by 17% CAGR over FY11-13E. We value the company at 18x FY13 EPS
of 45 with a target price of Rs806 and Hold rating. At current price of Rs806, the stock
trades at 22x FY12E EPS of Rs36 and 18X FY13E EPS of 45.
600
675
750
825
900
975
Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11
Rs
0
14
28
42
56
70 %
CadilaHealthcare(LHS) Rel to Nifty (RHS)
Pharma Sector
38
Cadila Healthcare
Growth drivers - Volume/ Price/ New launches Top 10 brand performance
Rs Cr Ther apy MATJun' 10 MATJun' 11 YoY Gr.
Aten CNS 85.7 94.0 9.8%
Deriphyllin Resp 69.0 73.2 6.2%
Atorva CVS 59.6 71.8 20.5%
Pantodac Gyn0aec 53.7 67.0 24.8%
Falcigo AM 62.4 66.7 7.0%
Mifegest Kit Gynaec 21.1 57.7 174.0%
Ocid Gastro 56.3 55.6 -1.3%
Primolut N Gynaec 40.0 46.9 17.3%
Amlodac CVS 36.4 42.7 17.2%
Dexona Hormones 37.8 41.9 10.8%
Total 521.8 617.6 18.3%
Cadila outpaced industry in volume growth & new product
launches during MAT Jun'11
Top 10 brands contribute 28% to the domestic formulation sales
Pantodac and Mifegest Kit registered strong growth of 25% and
174% respectively during MAT Jun'11
Cadi la s Domestic Met rics
Cadila' s therapeutic growth Field force productivity
FY11% MAT MAT YoY
Ther api es Cont ri but i on Jun' 11 Jun' 10 Gr. %
CVS 18.1% 4.0 3.4 16.6%
Gastro 18.5% 4.1 3.5 18.3%
Respiratory 10.2% 2.3 1.9 20.5%
Gynecology 14.3% 3.2 2.4 29.8%
Anti-Infective 6.0% 1.3 1.4 -4.2%
Pain Mgmt 7.9% 1.8 1.4 25.0%
CNS 3.3% 0.7 0.7 11.1%
Dermatology 2.5% 0.6 0.4 44.1%
Anti diabetic 1.1% 0.2 0.2 4.8%
Others 18.1% 4.0 3.4 19.5%
Acut e 67.3% 1493.1 1245.3 19.9%
Chr oni c 32.7% 725.8 621.7 16.7%
Total 100.0% 22.2 18.7 18.8%
Jul ' 11 MAT growth for Cadi l a i s 19%
AI segment which contributes 6% declined by 4%
Chronic segment which contributes 33% grew by 17%
The company has hired ~500 people during FY11 & 1050 during
FY10
With increase in MR productivity, formulation sales will continue to
grow above industry rates
6.5
5.9
1.7
2.6
11.3
5.5
0
4
8
12
16
20
Industry Cadila
Vol Gr. Price Gr. New Pdts Gr.
Total Gr. 14.6%
Total Gr. 18.9%
7.2
5.3 5.4
4.6 4.9
12.9
16.8
11.3
14.5
19.9
39
62
60
35
60
0
10
20
30
40
50
60
FY07 FY08 FY09 FY10 FY11
0
1000
2000
3000
4000
5000
Filed Force Productivity
Dom Gr. % New launches
Pharma Sector
39
Financial Overview
Rs mn FY11 Gr(%) FY12E Gr(%) FY13E Gr(%)
Domestic Formulation 17145 18.6% 19236 12.2% 22120 15.0%
Consumer/OTC 3355 25.4% 3758 12.0% 4434 18.0%
Animal Health 1472 23.6% 1678 14.0% 1777 5.9%
Export formul ati on 17062 29.5% 19977 17.1% 23894 19.6%
US generics 9655 43.8% 11586 20.0% 14483 25.0%
Europe 2755 0.5% 3086 12.0% 3086 0.0%
Japan 422 33.5% 633 50.0% 886.2 40.0%
Brazil 2250 23.8% 2475 10.0% 2846 15.0%
Other emerging markets 1980 24.5% 2198 11.0% 2593 18.0%
JVs 2708 69.6% 2628 -2.9% 3633 38.2%
Nycomed 556 -26.6% 584 5.0% 730 25.0%
Hospira 2152 156.5% 2044 -5.0% 2453 20.0%
Abbott Alliance 0 450
API 3468 17.2% 3824 10.3% 4506 17.8%
Domestic 352 9.5% 334 -5.0% 318 -5.0%
Others 3116 18.1% 3490 12.0% 4188 20.0%
Total Gross Sal es 45210 25.4% 51101 13.0% 60364 18.1%
R&D expenses 2502 50.7% 2503 0.1% 2784 11.2%
R&D (NCE) 876 50.7% 876 0.1% 974 11.2%
Base EBITDA 8680 24.7% 10483 20.8% 12522 19.5%
Base EBITDA margin 19% 21% 21%
EBITDA excl NCE 9555 26.7% 11359 18.9% 13497 18.8%
EBITDA margins excl NCE 21% 22% 23%
PAT 6830 42.0% 7452 9.1% 9159 22.9%
PAT excl NCE 8010 43.0% 8622 7.6% 10537 22.2%
EPS 33.3 42.0% 36.4 9.1% 44.7 23.2%
EPS excl NCE 39.1 43.0% 42.1 7.6% 51.4 22.2%
PE @ CMP 24.2 22.2 18.0
PE excl NCE @ CMP 20.6 19.2 15.7
Cadila Healthcare
Pharma Sector
40
Financial Tables
Income St atement (Rs. Mn)
Y/E, Mar (Rs. mn) FY10 FY11 FY12E FY13E
Net Sal es 36,580 45,925 51,563 60,618
Growth (%) 25.0 25.5 12.3 17.6
Expendi t ure 28,782 36,040 40,068 47,037
Raw Materials 11,784 14,754 16,191 19,335
SGA 11,889 13,982 16,239 19,024
Employee Cost 3,930 6,089 6,083 6,891
Other Exp 1,179 1,215 1,554 1,787
EBITDA 7,798 9,885 11,495 13,581
Growth (%) 28.7 26.8 16.3 18.1
EBITDA margi n (%) 21.3 21.5 22.3 22.4
Depreciation 1,339 1,269 1,478 1,620
EBIT 6,459 8,616 10,017 11,961
EBIT margi n (%) 17.7 18.8 19.4 19.7
Other Income 158 131 146 149
Interest expenses 821 699 758 550
PBT 6,039 8,498 9,405 11,560
Tax 741 1,064 1,693 2,081
Effective tax rate (%) 12.3 12.5 18.0 18.0
Adj usted PAT 4,552 6,482 7,192 8,839
(Profit)/loss from JV's/Ass/MI -247 -251 -260 -320
Adj usted PAT after MI 4,799 6,733 7,452 9,159
Growth (%) 50.7 40.3 10.7 22.9
Net Margi n (%) 13.1 14.7 14.5 15.1
E/O items 243 450 0 0
Reported PAT 5,051 7,183 7,452 9,159
Growth (%) 71.7 42.2 3.7 22.9
Bal ance Sheet (Rs. Mn)
Equity share capital 682 1,024 1,024 1,024
Reserves & surplus 15,501 20,691 26,586 33,828
Net wort h 16,183 21,715 27,610 34,852
Mi nor i t y Int er est 392 669 929 1,249
Secured Loans 8,066 8,052 6,052 3,552
Unsecured Loans 2,839 2,921 1,921 1,421
Loan Funds 10,905 10,973 7,973 4,973
Net deferred tax liability 1,142 1,128 1,128 1,128
Total Li abi l i ti es 28,622 34,485 37,640 42,203
Gross Block 25,578 28,320 32,828 35,784
Less: Depreciation 8,733 9,994 11,477 13,097
Net bl ock 16,845 18,326 21,351 22,688
Capital work in progress 2,482 4,310 4,310 4,310
Invest ment 207 207 207 207
Cur r ent Asset s 17,749 22,902 23,607 28,990
Inventories 7,504 7,028 8,742 10,317
Sundry debtors 4,668 6,624 7,733 9,127
Cash & bank balance 2,507 5,145 3,299 5,022
Loans & advances 3,070 4,106 3,833 4,524
Other current assets 0 0 0 0
Current l i a & Prov 8,661 11,260 11,836 13,992
Current liabilities 6,710 8,955 9,386 11,059
Provisions 1,951 2,305 2,450 2,933
Net cur r ent asset s 9,088 11,642 11,772 14,998
Misc. exp & Def. Assets 0 0 0 0
Tot al Asset s 28,622 34,485 37,640 42,203
Key Ratios
Y/E, Mar FY10 FY11 FY12E FY13E
Profi t abi l i t y (%)
EBITDA Margin 21.3 21.5 22.3 22.4
Net Margin 13.1 14.7 14.5 15.1
ROCE 25.0 28.7 29.1 31.2
ROE 37.0 39.1 31.3 30.4
RoIC 30.1 37.4 38.2 39.7
Per Share Data (Rs)
EPS 23.4 32.9 36.4 44.7
CEPS 30.0 39.1 43.6 52.6
BVPS 79.6 106.1 134.9 170.2
DPS 5.0 6.5 6.5 8.0
Val uati ons (x)
PER 34.4 24.5 22.1 18.0
P/CEPS 26.8 20.6 18.5 15.3
P/BV 6.5 7.2 5.7 4.5
EV / Sales 5.1 4.1 3.6 2.9
EV / EBITDA 21.8 16.9 14.5 11.9
Dividend Yield (%) 1.0 0.8 0.8 1.0
Geari ng Rati o (x)
Net Debt/ Equity 0.5 0.3 0.2 0.0
Net Debt/EBIDTA 1.1 0.6 0.4 0.0
Working Cap Cycle (days) 85 70 77 78
Cash Fl ow (Rs. Mn)
PBT (Ex-Ot her i ncome) 5,881 8,367 9,259 11,411
Depreciation 1,339 1,269 1,478 1,620
Interest Provided 821 699 758 550
Other Non-Cash items 0 0 0 0
Chg in working cap -403 12 -1,976 -1,503
Tax paid -741 -1,064 -1,693 -2,081
Operat i ng Cashf l ow 6,897 9,283 7,826 9,997
Capital expenditure -3,478 -4,578 -4,504 -2,956
Free Cash Fl ow 3,419 4,705 3,323 7,041
Other income 158 131 146 149
Investments 42 0 0 0
Invest i ng Cashf l ow -3,278 -4,447 -4,357 -2,807
Equity Capital Raised 57 174 0 0
Loans Taken / (Repaid) -1,768 68 -3,000 -3,000
Interest Paid -821 -699 -758 -550
Dividend paid (incl tax) -1,237 -1,539 -1,557 -1,916
Income from investments 0 0 0 0
Others 140 -202 0 0
Fi nanci ng Cashf l ow -3,629 -2,198 -5,315 -5,467
Net chg i n cash -10 2,638 -1,846 1,723
Opening cash position 2,517 2,507 5,145 3,299
Cl osi ng cash posi ti on 2,507 5,145 3,299 5,022
Cadila Healthcare
FY10 56,057 13,742 24.5 10,545 13.1 8.5 21.1 24.7 16.6 3.9
FY11 63,180 13,375 21.2 9,692 12.1 (8.1) 15.6 27.2 17.4 3.4
FY12E 71,863 15,444 21.5 11,395 14.2 17.6 16.0 22.8 15.1 3.0
FY13E 83,325 18,765 22.5 14,169 17.6 24.3 17.5 18.4 12.3 2.6
Val uation table
Cipla Ltd
API supplies to boost bottom-line - Upgrade to Hold
Reco Previous Reco
Hold Reduce
CMP Target Price
Rs284 Rs282
EPS change FY12E/13E (%) 0 / 1
Target price change (%) 12
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute 1 (10) (8) (10)
Rel. to Nifty 2 (2) 7 11
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg CIPLA@IN
Face Value (Rs) 2
52 Week H/L (Rs) 381/274
Promoters 36.8 36.8 36.8
FII/NRI 18.4 19.1 19.3
Public 21.0 21.1 21.1
Source: Capitaline
Domest i c busi ness l oosi ng st eam w i t h ac ut e segment
w i t nessi ng i nt ense c ompet i t i on f r om peer s l eadi ng t o subdued
10% CAGR over FY11-13E i n t he domest i c busi ness
Aggr essi ve c apex t o pr essur i ze mar gi ns t i l l asset s get f ul l y
pr oduc t i ve. Asset t ur nover has decl i ned f r om 2.6x i n FY05 t o
1.8x i n FY11
Commenc ement of API suppl i es t o Teva begi nni ng Oc t ' 11 and
Mar ' 11 t o boost t opl i ne and bot t oml i ne gr ow t h
Hi gher r evenues f r om API suppl i es t o Teva w oul d l ead t o 22%
ear ni ngs CAGR - Upgr ade t o Hol d w i t h a t ar get pr i c e of Rs282
(16xFY13 EPS)
Domestic sales to remain subdued over FY11-13
Cipla' s domestic business has grown below industry growth rate at 12% in FY11.
Growth was hampered by intense competition from local players and MNCs. Despite
being a market leader (MS 5.4%), Cipla's growth has lagged industry in the past few
quarters.
In the domestic business the company plans to launch 25-30 new products every
year, however, there are imminent signs of increased competitive pressure. We expect
domestic sales to grow at 10% CAGR over FY11-13 to Rs34bn
Further, the company's low risk, low return export model, which has worked well for
them in the past, is also lacking major near term growth drivers. Moreover, launch of
combination inhalers in EU markets is also getting delayed
API supplies to Teva are the key performance drivers
Commencement of supplies of two APIs to Teva during FY12, where Teva has an FTF
would lead to improvement in margins and earnings profile of the company
Indore SEZ is expected to generate Rs6bn revenue in FY12, resulting in improvement
in margins going forward
Aggressive expansion fails to yield desired results
Cipla has spent close to Rs25bn in expanding capacities during FY05-10. While this
was taken positively by the street, the same has not been reflected in revenue growth.
Asset turnover has declined from 2.6x in FY05 to 1.8x in FY11.
The company will further invest Rs6bn to develop API facilities and 2 research centers
in Mumbai. With the capex intensity on the rise, we expect asset turnover to remain
under pressure.
Valuation
We expect Cipla to report 14% revenue growth in FY12 and 17% in FY13. We expect
company's EBITDA margins to improve from 21.2% in FY11 to 21.5% in FY12 and 22.5%
in FY13 as utilization of recently created manufacturing capacities increases. We value
the company at 16XFY13 EPS to arrive at a target price of Rs282 with a Hold rating. At CMP,
the stock is trading at 23x FY12E and 18x FY13E earnings.
250
280
310
340
370
400
Rs
-10
-4
2
8
14
20 %
Cipla(LHS) Rel to Nifty (RHS)
Pharma Sector
42
Ci pla's - Domestic Metrics
Cipla's therapeutic growth Field force productivity
FY11% MAT MAT YoY
Respiratory 28.2% 860.7 757.4 13.6%
Anti-infective 21.1% 643.6 591.6 8.8%
Gynecology 9.8% 299.5 230.2 30.1%
CVS 12.0% 367.4 332.8 10.4%
Gastro 7.8% 237.7 217.4 9.3%
NSAIDS 2.7% 83.4 76.7 8.7%
CNS 2.4% 73.62 62.37 18.0%
Dermatology 1.6% 47.8 43.2 10.8%
Anti-diabetes 0.7% 20.1 17.1 17.0%
Others 13.7% 419.5 376.0 11.6%
Acut e 59.6% 1818.6 1612.2 12.8%
Chr oni c 40.4% 1234.7 1092.5 13.0%
Total Sal es 100.0% 3053.4 2704.7 12.9%
Jun' 11 MAT growth for Ci pl a has been i n-l i ne wi th i ndustry
aver age
Acute segment which contributes 60% grew by 15%
The company has hired ~500-1000 in Q1FY12. Total MR strength
is 6500-7000
MR productivity declined due to higher base of MRs and lower
growth in the domestic market
Cipla's growth for the period was below industry growth due to
sharp decrease in prices & lack of new product launches.
This was mainly due to increased competition in the domestic
market both from local peers as well as MNCs
MTP Kit registered strong growth with revenues almost doubling to
Rs1bn
Rs Cr Ther api es MATJun' 10 MATJun' 11 YoY Gr.
Seroflo Resp 127 142 11.5%
Novamax Resp 102 114 11.5%
MT Pill Gynaec 56 107 91.6%
Asthalin Resp 76 95 25.3%
Aerocart AI 92 93 0.2%
Foracort AI 83 90 8.3%
Ciplox Resp 78 85 9.8%
Budecort Gynaec 88 80 -8.9%
Amlopres AT Resp 57 66 14.8%
MTP Kit Resp 55 63 15.2%
Total 814.9 935.3 14.8%
Cipla Ltd
5.7 5.7
5.0 5.1 4.8
16.4
13.3
14.7
10.2
28
12.2
14
23
31
32
2000
3000
4000
5000
6000
3
10
17
24
31
Field force Productivity
Dom. Gr (%) New launches
0.6
2.6
1.5
5.5
6.5
10.8
Cipla Industry
Vol Gr. Price Gr. New launches
Total Gr. 12.9%
Total Gr. 14.5%
Pharma Sector
43
Cipla Ltd
Financial Overview
Rs mn FY10 FY11 YoY Gr. FY12E YoY Gr. FY13E YoY Gr.
Domestic 25111 28178 12% 31032 10% 34036 10%
Export 23205 26756 15% 30769 15% 36734 19%
Formulation 48316 54933 14% 61801 13% 70770 15%
API 5801 6792 17% 8817 30% 11067 26%
Gross Sal es 54117 61726 14% 70619 14% 81837 16%
Less: Excise 522 487 -7% 647 33% 745 15%
Net Sal es 53595 61238 14% 69972 14% 81093 16%
Technology Income1538 637 -59% 400 -37% 400 0%
Other Operating Income924 1304 41% 1465 12% 1769 21%
Total Sal es 56057 63180 13% 71837 14% 83261 16%
EBITDA 13742 13375 -3% 15444 15% 18765 22%
EBITDA margin 24.5% 21.2% 21.5% 22.5%
EBITDA 12204 12738 4% 15044 18% 18365 22%
(excl . Tech. i nc)
EBITDA margin 22.4% 20.4% 21.1% 22.2%
PAT 10545 9564 -9% 11395 19% 14169 24%
EPS 13.1 12.1 -8% 14.2 17.6 24%
PE @ CMP 21.6 23.5 20.0 16.1
Pharma Sector
44
Financial Tables
Net Sal es 56,057 63,180 71,863 83,325
Growth (%) 7.1 12.7 13.7 16.0
Expendi t ure 42,315 49,805 56,418 64,560
Raw Materials 24,530 29,146 32,829 37,170
SGA 10,975 15,250 13,370 15,663
Employee Cost 3,191 5,410 5,460 6,087
Other Exp 3,620 0 4,760 5,640
EBITDA 13,742 13,375 15,444 18,765
Growth (%) 12.5 -2.7 15.5 21.5
EBITDA margi n (%) 24.5 21.2 21.5 22.5
Depreciation 1,671 2,536 2,770 2,926
EBIT 12,071 10,838 12,675 15,839
EBIT margi n (%) 21.5 17.2 17.6 19.0
Other Income 1,075 794 1,397 1,544
PBT 13,263 11,709 13,728 17,071
Tax 2,435 1,910 2,334 2,902
Adj usted PAT 10,545 9,692 11,395 14,169
(Profit)/loss from JV's/Ass/MI 0 0 0 0
Growth (%) 8.5 -8.1 17.6 24.3
Net Margi n (%) 18.8 15.3 15.9 17.0
E/O items 346 128 0 0
Reported PAT 10,828 9,799 11,395 14,169
Growth (%) 40.4 -9.5 16.3 24.3
Equity share capital 1,606 1,606 1,606 1,606
Net wort h 59,105 66,661 75,791 86,644
Mi nor i t y Int er est 0 0 0 0
Secured Loans 4 480 480 480
Unsecured Loans 47 5,239 5,239 4,239
Loan Funds 51 5,719 5,719 4,719
Gross Block 28,973 42,411 44,487 52,982
Net bl ock 20,112 30,946 30,208 35,285
Invest ment 2,464 5,904 5,904 5,904
Cur r ent Asset s 43,673 46,599 56,998 63,875
Inventories 15,126 19,062 22,320 24,331
Sundry debtors 15,666 14,908 17,500 19,478
Cash & bank balance 621 1,010 1,079 1,400
Loans & advances 12,260 11,619 16,100 18,666
Current l i a & Prov 12,143 11,791 12,322 14,423
Provisions 2,164 2,210 2,776 3,093
Tot al Asset s 60,948 74,511 83,641 93,495
Key Ratios
EBITDA Margin 24.5 21.2 21.5 22.5
Net Margin 18.8 15.3 15.9 17.0
ROCE 22.8 17.2 17.8 19.6
ROE 21.1 15.6 16.0 17.5
RoIC 24.1 18.8 18.3 20.2
Per Share Data (Rs)
EPS 13.1 12.1 14.2 17.6
CEPS 14.8 15.1 17.6 21.3
BVPS 73.5 82.9 94.3 107.8
DPS 2.3 2.1 3.3 4.1
Val uati ons (x)
PER 24.7 27.2 22.8 18.4
P/CEPS 19.2 18.8 16.1 13.3
P/BV 3.9 3.4 3.0 2.6
EV / Sales 4.1 3.7 3.2 2.8
EV / EBITDA 16.6 17.4 15.1 12.3
Dividend payout (%) 17.3 15.0 20.0 20.0
Geari ng Rati o (x)
Net Debt/ Equity -1.0 7.1 6.1 3.8
Cash Fl ow (Rs. Mn)
Depreciation 1,671 2,536 2,770 2,926
Chg in working cap -1,310 -2,889 -9,799 -4,111
Tax paid -2,285 -1,910 -2,334 -2,902
Free Cash Fl ow 5,456 -678 -2,389 5,253
Other income 1,075 794 1,397 1,544
Investments -1,664 -3,440 0 0
Equity Capital Raised 6,656 293 -293 1
Loans Taken / (Repaid) -9,352 5,668 0 -1,000
Interest Paid -230 -51 -343 -313
Others 0 -500 4,363 0
Fi nanci ng Cashf l ow -4,781 3,713 1,060 -4,628
Net chg i n cash 88 390 69 2,169
Opening cash position 533 621 1,010 1,079
Cl osi ng cash posi ti on 621 1,010 1,079 3,248
Cipla Ltd
FY10 70,310 15,762 22.4 8,435 50.0 101.9 9.6 29.7 16.4 6.6
FY11 76,558 17,121 22.4 12,314 72.8 10.8 30.6 20.4 15.6 5.9
FY12E 86,552 18,008 20.8 11,695 69.1 45.6 24.6 21.5 14.4 4.8
FY13E 97,044 22,407 23.1 15,374 90.9 (5.0) 26.3 16.4 11.1 3.9
Val uation table
Dr. Reddy's Lab

Moderate growth Outlook - Hold
Reco Previous Reco
Hold Accumulat e
CMP Target Price
Rs1,486 Rs1,583
EPS change FY12E/13E (%) -2 / -7
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute 3 (0) (4) (0)
Rel. to Nifty 3 9 11 22
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg DRRD@IN
Face Value (Rs) 5
52 Week H/L (Rs) 1,855/1,387
Promoters 25.6 25.7 25.7
FII/NRI 45.4 46.3 48.3
Public 8.6 8.6 8.5
Source: Capitaline
Dr. Reddy t o w i t ness modest gr ow t h of ~12% CAGR (FY11-
FY13) i n domest i c mar k et , due t o i ssues i n pai n management
and ant i i nf ec t i ve t her apy
New l aunc hes, gai n i n mar k et shar e i n ex i st i ng pr oduc t s &
l i mi t ed c ompet i t i on oppor t uni t i es t o dr i ve t he gr ow t h i n US.
Upsi de f r om Par a I V i n FY12 and FY13 i s Rs 7.2 and Rs 14.5
r espec t i vel y, mai nl y dr i ven by l aunc hes l i ke zi pr asi done,
f i nast er i de, r i vast i gmi ne, ol anzi pi ne, and c l opi dogr el
Rat e t he st oc k as Hol d wi t h a pr i c e t ar get of Rs1583
Domestic business to witness gradual recovery and Russian business
to show strong growth
DRL has been witnessing slower growth in the Indian market due to controversy
related to one of its key brand in pain management i.e Nise. Though there has been
favorable ruling by DCGI, but it will take some time to regain lost market share. However
if we exclude, this impact than the domestic business grew at a healthy rate of ~15%
compared to industry rate of 12-14%
Russia & CIS which contributes 15%, to grow by 18% on back of significant volume
growth in key brands and acquisition of JB Chemicals Rx Russian business
Revenue growth to be led by US business
North American business which contributes 29%, to witness growth of ~17% CAGR
(FY11- FY13) due to new product launches and increase in market share of existing
products
Already launched 9 new products including 4 SKU' s from its Bristols penicilli n
facility acquired from GSK in Sept'11
Market share gains in key products - Fondaparinux & Fexofinadine OTC
Para - IV's such as -
Olanzipine (20mg) - Market size of US$500 mn, expected launch in Oct 11'
(180-days unshared exclusivity)
Desloratidine (ER, ODT & 5mg) - MS of US$400mn, expected launch in Jan 12'
Finasteride- Market size of US$500mn, expected launch in Jan 12'
Ziprazidone - Market Size US$800m, expected in Mar 12' (Shared with 2 cos.)
Clopidogrel - Market size US$6666mn, expected in May 12' (No Exclusivity
exists, expected day 1 launch with atleast 5 generic companies)
Valuation
We expect Dr. Reddy to report 13%% revenue growth in FY12E and 12% growth in FY13E.
We expect EBIDTA margins to move from 19.9% in FY11 to 20.8% in FY12 and 23.1%% in
FY13. Earnings will grow by 12% CAGR over FY11-13E. We revise our target price on the
stock to Rs1583 (20x base business earnings of Rs77 + NPV of Rs54 from Para IVs) with
an Hold rating. At CMP, the stock is trading at 21.5x FY12E and 16.4x FY13E earnings.
1400
1490
1580
1670
1760
1850
Rs
-10
-2
6
14
22
30 %
Dr. Reddy's Lab(LHS) Rel to Nifty (RHS)
Pharma Sector
46
Dr. Reddy's - Domestic Met rics
Dr. Reddy's therapeutic growth Field force productivity
FY11% MAT MAT YoY
Gastro 24.5% 293.9 262.5 11.9%
CVS 19.2% 229.9 210.2 9.4%
Pain Mgmt 11.4% 137.2 139.8 -1.9%
Anti-infective 9.1% 109.6 104.0 5.4%
Anti-diabetic 6.2% 74.1 63.8 16.1%
Respiratory 2.7% 32.8 24.4 34.6%
Dermatology 6.0% 71.9 52.7 36.4%
Gynecology 1.2% 15.0 15.2 -1.9%
CNS 0.9% 10.7 10.1 6.2%
Others 18.7% 224.4 208.6 7.6%
Acut e 69.9% 838.7 765.8 9.5%
Chr oni c 30.1% 360.9 325.6 10.8%
Total Sal es 100.0% 1199.5 1091.4 9.9%
Jul ' 11 MAT growth for Dr. Reddy has been l ower at 10%
The company has hired ~600 people during FY11
MR productivity declined due to higher attrition rate, which has
also affected domestic growth
Dr. Reddy's underperformed industry due to no volume growth in
existing brands during MAT Jul'11
This was mainly due to increased competition and high attrition
rate in its field force
Competition is further expected to intensify in the company's top
selling brand Nice
Rs Cr Ther api es MATJul ' 10 MATJul ' 11 YoY Gr.
Omez Anti-Infective 107.5 117.5 9.2%
Nise Pain 86.2 77.7 -9.9%
Stamlo CVS 54.3 55.3 2.0%
Omez D Anti-Infective 35.2 40.4 14.9%
Stamlo Beta CVS 36.4 38.3 5.3%
Atocor CVS 31.3 35.0 11.7%
Razo Anti-Infective 31.0 33.5 8.3%
Mintop Derma 22.9 27.9 22.2%
Clamp Anti-Infective 21.1 25.6 21.2%
Econorm CVS 21.2 25.4 19.9%
Total 447.1 476.7 6.6%
Dr. Reddy's Lab
2.8
2.6
7.11
5.5
6.5
Dr. Reddy Industry
Total Gr. 9.9%
Total Gr. 14.5%
5.2 5.2
4.5
5.1
4.5
15.7
19.8
15.1
5.2
16.7
0
500
1000
1500
2000
2500
3000
0
5
10
15
20
25
Field force Productivity Dom Gr. (%)
Pharma Sector
47
Dr. Reddy's Lab
Financial snapshot
(Rs mn) FY11 FY12E YoY % FY13E YoY %
Gl obal Generi cs 53,340 61,064 14% 68,932 13%
NA 18,996 22,984 21% 25,542 11%
Europe 8,431 8,361 -1% 8,599 3%
India 11,690 12,911 10% 14,744 14%
Russia & Other CIS 10,858 12,769 18% 14,997 17%
Others 3366 4039 20% 5049 25%
PSAI 19,647 21,409 9% 23,541 10%
North America 3170 3329 5% 3528 6%
Europe 7,020 7,792 11% 8,727 12%
India 2619 2698 3% 2860 6%
RoW 6,838 7,591 11% 8,426 11%
Pr opr i et ary product s 675 844 25% 1013 20%
Others 1030 1184 15% 1303 10%
Gross Revenues 74,692 84,501 13% 94,788 12%
FTF 4,677 3,730 -20% 5,163 38%
Base business 70,015 80,771 15% 89,625 11%
EBITDA 17,121 18,008 5% 22,407 24%
EBITDA % 22.9% 21.3% -161 23.6% 233
FTF - EBITDA 3,180 1,421 -55% 2,855 101%
Base business - EBITDA 13,941 16,586 19% 19,552 18%
Base EBITDA % 19.9% 20.5% - 21.8% -
PAT 12,314 11,695 -5% 15,374 31%
PAT % 16.5% 13.8% -265 16.2% 238
FTF - PAT 1,590 1,222 -23% 2,455 101%
Base business - PAT 10,724 10,472 -2% 12,919 23%
EPS 72.8 69.1 -5% 90.9 31%
FTF - EPS 9.4 7.2 - 14.5 -
Base - EPS 63.5 62.0 -2% 76.4 23%
PE @ CMP 20.4 21.5 - 16.4 -
Base PE @ CMP 23.4 24.0 - 19.4 -
FTF/ Para-IV Opportunities
Pr oduct Gener i c Name EPS Sal es EPS Sal es Expected Branded Sal es Excl usi vi ty
2012 ($ Mn) FY12 2013 ($ Mn) FY13 Launch Date ($ Mn)
Gemzar Gemcitabine 0.4 3.6 0.0 0.0 Launched 634 10+
Effexor XR Venlafaxine HCL 0.9 7.7 0.0 0.0 Launched 2300 10+
Exelon Rivastigmine 0.7 5.3 0.2 1.7 Launched 100 Shared
Zyprexa (20mg) Olanzipine 3.9 24.1 1.0 6.3 Oct-11 500 Sole
Geodon Ziprasidone 0.6 3.6 3.3 20.1 Mar-11 800 Shared
Clarinex Desloratidine 0.5 4.8 0.6 5.3 Jan -12 * 400 Shared
Propecia Finasteride 0.0 0.0 2.8 16.8 Jan-12 500 Sole
Avandia Rosiglitazone 0.1 0.8 0.9 9.1 Mar-12 400 Shared
Boniva Ibandronate 0.1 0.6 0.6 6.8 Mar-12 500 Shared
Plavix Clopidogrel 0.0 0.0 3.9 33.3 May-12 6666 Many
Lexapro Escitlopram 0.0 0.0 0.8 6.9 Sep-12 2300 10+
Actos Pioglitazone 0.0 0.0 0.5 3.9 Jan-13 3100 10+
Total 7.2 50.3 14.5 110.2 15545
*Company will launch 5mg in FY13 Shared exclusivity for Clarinex ODT, Unshared Exclusivity for Clarinx ER, 5mg non FTF
Pharma Sector
48
Financial Tables
Net Sal es 70,310 76,558 86,552 97,044
Growth (%) 2.2 8.9 13.1 12.1
Expendi t ure 54,549 59,437 68,545 74,637
Raw Materials 22,688 21,987 26,024 30,221
SGA 18,179 21,576 24,421 25,551
Employee Cost 10,948 12,786 14,189 14,692
Other Exp 2,734 3,088 3,912 4,174
EBITDA 15,762 17,121 18,008 22,407
Growth (%) 6.9 8.6 5.2 24.4
EBITDA margi n (%) 22.4 22.4 20.8 23.1
Depreciation 4,131 3,981 4,366 4,756
EBIT 11,631 13,140 13,642 17,651
EBIT margi n (%) 16.5 17.2 15.8 18.2
Other Income 1,014 1,259 1,415 1,916
PBT 6,183 14,153 14,262 18,748
Tax 2,668 1,839 2,567 3,375
Adj usted PAT 8,435 12,314 11,695 15,374
Growth (%) 11.0 46.0 -5.0 31.5
Net Margi n (%) 12.0 16.1 13.5 15.8
E/O items -6,150 0 0 0
Reported PAT 3,515 12,314 11,695 15,374
Growth (%) -138.3 250.3 -5.0 31.5
Equity share capital 844 846 846 846
Net wort h 37,768 42,643 52,339 64,743
Secured Loans 9,275 14,394 13,394 11,894
Unsecured Loans 5,568 9,311 8,311 7,311
Loan Funds 14,843 23,705 21,705 19,205
Net deferred tax liability 71 -224 -224 -224
Gross Block 64,469 79,752 84,752 89,752
Net bl ock 23,522 33,855 34,522 34,766
Invest ment 3,580 9 9 9
Cur r ent Asset s 38,202 49,842 57,437 70,139
Inventories 13,394 15,992 16,106 17,877
Sundry debtors 11,599 16,507 16,900 18,958
Loans & advances 0 0 0 0
Other current assets 6,609 9,267 10,140 11,375
Current l i a & Prov 20,245 23,628 23,233 26,575
Provisions 3,499 3,440 3,296 4,221
Tot al Asset s 52,682 66,124 73,820 83,724
Key Ratios
EBITDA Margin 22.4 22.4 20.8 23.1
Net Margin 12.0 16.1 13.5 15.8
ROCE 23.4 24.2 21.4 24.8
ROE 9.6 30.6 24.6 26.3
RoIC 13.8 21.9 19.0 23.8
Per Share Data (Rs)
EPS 50.0 72.8 69.1 90.9
CEPS 110.9 96.3 94.9 119.0
BVPS 223.7 252.0 309.3 382.6
DPS 11.3 11.3 10.0 15.0
Val uati ons (x)
PER 29.7 20.4 21.5 16.4
P/CEPS 13.4 15.4 15.7 12.5
P/BV 6.6 5.9 4.8 3.9
EV / Sales 3.7 3.5 3.0 2.6
EV / EBITDA 16.4 15.6 14.4 11.1
Dividend Yield (%) 0.8 0.8 0.7 1.0
Geari ng Rati o (x)
Net Debt/EBIDTA 0.5 0.9 0.4 -0.1
Cash Fl ow (Rs. Mn)
Depreciation 4,131 3,981 4,366 4,756
Chg in working cap 4,709 -6,784 -1,794 -1,721
Tax paid -2,668 -1,839 -2,567 -3,375
Free Cash Fl ow 9,944 -4,239 9,574 12,012
Other income 1,014 1,259 1,415 1,916
Investments -3,057 3,571 0 0
Loans Taken / (Repaid) -5,133 8,862 -2,000 -2,500
Interest Paid -312 -246 -795 -818
Others 511 -5,757 0 0
Fi nanci ng Cashf l ow -6,924 885 -4,774 -6,288
Net chg i n cash 977 1,476 6,215 7,640
Dr. Reddy's Lab
FY10 24848 6196 24.9 3287 12.2 8.3 15.6 26.3 15.6 3.7
FY11 29491 5923 20.1 4532 16.8 37.9 20.9 19.1 18.2 4.3
FY12E 36475 9520 26.1 6477 24.0 42.9 27.9 13.4 10.5 3.3
FY13E 39323 9437 24.0 6413 23.8 -1.0 22.0 13.5 10.4 2.7
Val uation table
Glenmark Pharma
Robust Growth Outlook - Maintain Buy
Reco Previous Reco
Buy Buy
CMP Target Price
Rs321 Rs401
EPS change FY12E/13E (%) NA
Target price change (%) NA
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute 1 2 15 14
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg GNP@IN
Face Value (Rs) 1
52 Week H/L (Rs) 390/242
Promoters 48.3 48.3 48.3
FII/NRI 31.9 31.2 31.9
Public 10.7 11.0 10.8
Source: Capitaline
Domest i c oper at i ons ar e c ash c ow f or t he c ompany. Foc us on
spec i al t i es l i ke der ma, r espi r at or y, CVS & gynaec w i l l l ead t o
16-18% r evenue CAGR over FY11-13E
I n US, st r ong ANDA basket c oupl ed w i t h l i mi t ed c ompet i t i on
l aunc hes suc h as t he Mal or ene, Cut i vat e and Ox yc odone
w oul d l ead t o 15% r evenue CAGR over FY11-13E
Post r est r uc t ur i ng of oper at i ons (r educ i ng w or k i ng c api t al ) i n
t he SRM mar k et s, w e ex pec t SRM sal es t o gr ow at 18% CAGR
over FY11-13E
On ac c ount of good moment um i n key busi ness ver t i c al s, we
mai nt ai n Buy r at i ng on t he st oc k w i t h a t ar get pr i c e of Rs401
(18x FY12 Base Busi ness EPS + Adj ust ed NPV of Rs45)
India business - On a strong footing
Glenmark is gaining market share in the domestic market driven by steady volume
growth and new product introductions. Focused approach on key specialty segments
like dermatology, cardiology, respiratory, analgesics and gynecology has led to
improvement in overall margins.
Indian operations are cash cow for the company. Strong performance from key
specialties, new product launches coupled with recent addition to the filed force would
lead to 16-18%+ growth in the Indian business. Total MR strength is ~2400
US Generics - Strong portfolio with limited competition opportunities
ANDA basket consists of 69 generic products authorized for distribution with 40 pending
for approval with the USFDA including 13 Para IV filings till date
Malorene - expected launch in Q3FY12 and Cutivate - expected launch in Q4FY12 are
key upside triggers for the stock
Management has guided for launch of 7 new products in the OCs, oral solids and
semi solids space, as well as exclusive launches. It has already launched 5 OC
products. We expect US business to clock 15% revenue CAGR over FY11-13E
Glenmark's NCE pipeline lends credibility to its research capabilities
Glenmark currentl y has a pipe-line of 5 NCE & NBE mol ecul es which are under
various stages of clinical development. This includes Crofelemer, which has been in-
licensed by Glenmark from Napo Pharma
Glenmark has been successful in monetizing part of its NCE pipeline. While it has
suffered a few setbacks in the past, we believe that overall, Glenmark's ability to derive
value from the NCE pipeline has been credible
Valuation
We expect Glenmark Pharma to report 24% revenue growth in FY12E and 8% growth in
FY13E. We expect EBIDTA margins to move from 20.1% in FY11 to 26.1% in FY12 and
23.8% in FY13. Earnings will grow by 19% CAGR over FY11-13E. Maintain our target price
on the stock at Rs401 (18x FY12 base business earnings + adjusted NPV of Rs45) with
Buy rating. At CMP, the stock is trading at 13.4xFY12E & 13.5x FY13E EPS
250
280
310
340
370
400
Rs
-10
2
14
26
38
50 %
Glenmark Pharma (LHS) Rel to Nifty (RHS)
Pharma Sector
50
Glenmark Pharma
Gl enmark Pharma - Domestic Metrics
Glenmark Pharma's - therapeutic growth Field force productivity
FY11% MAT MAT YoY
Derma 30.8% 306.6 259.3 18.2%
Respiratory 15.9% 158.7 126.9 25.1%
CVS 17.8% 177.3 128.9 37.5%
Anti-Daibetic 4.8% 48.2 50.2 -3.9%
Anti-infective 15.5% 154.7 141.9 9.0%
Gastro 2.5% 25.3 21.4 18.4%
Gynaec 2.4% 23.9 21.0 13.6%
Opthalmology 2.2% 22.2 18.6 19.6%
Pain 5.3% 52.8 49.1 7.6%
Others 2.7% 26.5 17.3 53.3%
Acute 75.8% 755.4 644.2 17.3%
Chronic 24.2% 240.8 190.3 26.5%
Total Sal es 100.0% 996.2 834.5 19.4%
Jul ' 11 MAT growth for Gl enmark has been strong at 19%
The company has hired ~300 people during last year. Attrition rate
stood at 18-20% for Glenmark
MR productivity hovers around 3.5 - 3.8x for the last 3 years
Glenmark out-performed industry due to healthy increase in price
coupled with good growth in new brands during MAT Jun'11
Telma, Telma-H and the derma brands clocked healthy growth
Telma CVS 45.0 60.0 33.3%
Telma h CVS 43.8 58.2 32.8%
Candid-b Derma 43.5 50.3 15.5%
Ascoril plus Respiratory 40.3 45.9 13.8%
Candid Derma 30.3 35.6 17.4%
Ascoril Resp 28.4 34.9 22.7%
Lizolid Anti-Infective 26.5 22.8 -14.0%
Alex Resp 20.3 21.7 7.0%
Altacef Anti-Infective 17.5 21.1 20.6%
Elovera Derma 17.2 19.1 10.6%
Total 312.8 369.4 18.1%
2.4
2.7
3.5 3.7 3.8
9.0
27.1
16.8
18.1
12.2
0
500
1000
1500
2000
2500
1
6
11
16
21
26
Field f orce Productivity Dom Gr (%)
6.5
6.3
2.6
7.5
5.5
5.5
Glenmark Industry
Total Gr. 19.4%
Total Gr. 14.9%
Pharma Sector
51
Glenmark Pharma
Financial snapshot
(Rs mn) FY10 FY11 YoY % FY12E YoY % FY13E YoY %
US Base Business 7230 8352 16% 9578 15% 11069 16%
Limited Competition 677 492 -27% 500 2% 1327 165%
Tarka 0 492 - 0 - 0 -
Malorene 0 0 - 500 - 1001 -
Cutivate 0 0 - 0 - 326 -
Europe 299 544 82% 652 20% 783 20%
Latin America (Argentina) 343 401 17% 421 5% 442 5%
API 2627 3337 27% 3683 10% 4039 10%
1. Total Generi cs Busi ness 10500 12633 20% 14835 17% 17659 19%
Latin America ( Brazil & Others) 1361 1919 41% 2311 20% 2718 18%
Semi Regulated Markets 3864 4070 5% 4878 20% 5622 15%
Europe 1363 1528 12% 1742 14% 2055 18%
India 7529 8447 12% 9784 16% 11268 15%
2. Speci al i ty Busi ness 14116 15963 13% 18716 17% 21663 16%
Recurring Revenues ( 1 + 2 ) 24616 28596 16% 33550 17% 39323 17%
3. Out-l i censi ng Revenues 232 895 - 2925 - 0 -
Medicis Pharma 232 0 - 0 - 0 -
GRC 15300 (Sanofi) 0 895 - 0 - 0 -
GBR 500 (Sanofi) 0 0 - 2925 - 0 -
Consol i dated Revenues ( 1 + 2 + 3 ) 24848 29491 19% 36475 24% 39323 8%
Limited competition 677 492 - 500 - 1327 -
Licensing Revenues 232 895 - 2925 - 0 -
Base (Excl- limited competition) 23939 28103 17% 33050 18% 37996 15%
Reported EBITDA 6,196 5,923 -4% 9,520 61% 9,437 -1%
EBITDA margi ns % 24.9% 20.1% 26.1% 24.0%
EBITDA - Limited Competition 542 246 - 350 - 1061 -
EBITDA - Licensing Income 186 448 - 1901 - 0 -
EBITDA - Base business 5468 5229 -4% 7269 39% 8376 15%
EBITDA % - Base Business 22.8% 18.6% 22.0% 22.0%
Reported PAT 3,287 4,532 38% 6,477 43% 6,413 -1%
PAT margi ns % 13.2 15.4 17.8 16.3
PAT - Limited Competition 271 123 - 140 - 424 -
PAT - Licensing Income 74 179 - 1141 - 0 -
PAT - Base business 2942 4230 44% 5197 23% 5989 15%
PAT % - Base Business 12.3% 15.1% 15.7% 15.8%
EPS 12.2 16.8 38% 24.0 43% 23.8 -1%
- Limited Competition 1.0 0.5 - 0.5 - 1.6 -
- Licensing Income 0.3 0.7 - 4.2 - 0.0 -
- Base business 10.9 15.7 44% 19.2 23% 22.2 15%
Total Base EPS 11.9 16.1 35% 19.8 23% 23.8 20%
PE @ CMP 26.4 19.1 13.4 13.5
PE - base 27.0 19.9 16.2 13.5
Pharma Sector
52
Financial Tables
Net Sal es 24,848 29,491 36,475 39,323
Growth (%) 17.4 18.7 23.7 7.8
Expendi t ure 18,653 23,568 26,955 29,885
Raw Materials 8,061 9,918 11,782 12,623
SGA 4,583 5,009 6,493 6,999
Employee Cost 3,425 5,103 4,851 5,505
Other Exp 2,583 3,538 3,830 4,758
EBITDA 6,196 5,923 9,520 9,437
Growth (%) 47.3 -11.6 68.7 -0.3
EBITDA margi n (%) 24.9 20.1 26.1 24.0
Depreciation 1,206 947 1,015 1,130
EBIT 4,990 4,976 8,505 8,308
EBIT margi n (%) 20.1 16.9 23.3 21.1
Other Income 507 1,359 473 529
Interest expenses 1,640 1,566 1,490 1,291
PBT 3,857 4,770 7,488 7,545
Tax 569 237 1,011 1,132
Adj usted PAT 3,287 4,532 6,477 6,413
Growth (%) 8.3 37.9 42.9 -1.0
Net Margi n (%) 13.2 15.4 17.8 16.3
E/O items -249 0 0 0
Reported PAT 3,038 4,532 6,477 6,413
Growth (%) 58.5 49.2 42.9 -1.0
Net wort h 23,288 20,372 26,375 32,314
Minority Interest 130 267 267 267
Secured Loans 14,926 14,802 13,302 12,302
Unsecured Loans 3,768 6,314 5,314 4,314
Loan Funds 18,694 21,116 18,616 16,616
Net deferred tax liability 710 -1,081 -1,081 -1,081
Gross Block 21,755 26,952 29,452 31,952
Net bl ock 17,873 22,123 23,608 24,978
Capital work in progress 6,008 0 0 0
Invest ment 181 319 319 319
Cur r ent Asset s 24,211 25,978 26,443 29,674
Inventories 7,085 8,070 7,886 8,732
Sundry debtors 10,783 11,308 12,706 13,697
Cash & bank balance 1,070 1,949 927 1,936
Loans & advances 5,273 4,651 4,924 5,309
Current l i a & Prov 5,451 7,746 6,192 6,855
Provisions 200 185 365 393
Tot al Asset s 42,822 40,674 44,177 48,117
Key Ratios
EBITDA Margin 24.9 20.1 26.1 24.0
Net Margin 13.2 15.4 17.8 16.3
ROCE 13.5 11.5 20.0 18.2
ROE 15.6 20.9 27.9 22.0
RoIC 16.2 12.9 20.9 18.9
Per Share Data (Rs)
EPS 12.2 16.8 24.0 23.8
CEPS 17.7 20.3 27.8 28.0
BVPS 86.0 74.8 97.0 119.0
DPS 0.4 0.5 1.5 1.5
Val uati ons (x)
PER 26.3 19.1 13.4 13.5
P/CEPS 18.1 15.8 11.6 11.5
P/BV 3.7 4.3 3.3 2.7
EV / Sales 4.2 3.7 2.9 2.6
EV / EBITDA 15.6 18.2 10.5 10.4
Dividend Yield (%) 0.1 0.2 0.5 0.5
Geari ng Rati o (x)
Cash Fl ow (Rs. Mn)
Depreciation 1,206 947 1,015 1,130
Interest Provided 1,640 1,566 1,490 1,291
Chg in working cap -2,441 1,670 -2,927 -1,560
Tax paid -392 -237 -1,123 -1,132
Free Cash Fl ow -897 4,356 2,969 4,246
Other income 507 1,359 473 529
Investments 0 -138 0 0
Equity Capital Raised 4,092 396 0 0
Interest Paid -1,640 -1,566 -1,490 -1,291
Dividend paid (incl tax) -126 -158 -474 -474
Others 405 -5,529 0 0
Fi nanci ng Cashf l ow 745 -4,699 -4,464 -3,766
Net chg i n cash 355 879 -1,022 1,009
Opening cash position 715 1,070 1,949 927
Cl osi ng cash posi ti on 1,070 1,949 927 1,936
Glenmark Pharma
Y/E, Mar Net EBIDTA EBIDTA APAT AEPS EPS RoE P/E EV / P/BV
CY09 19,078 6,741 35.3 5,005 59.1 8.1 30.2 34.0 19.6 9.5
CY10 21,511 7,586 35.3 5,783 68.3 15.5 30.0 29.4 16.9 8.7
CY11E 24,229 8,638 35.7 6,566 77.5 13.5 32.3 25.9 14.8 8.1
CY12E 27,080 9,735 36.0 7,406 86.4 11.5 33.7 23.2 13.1 7.5
Source: AIOCD AWCAS, Emkay Research
Val uation table
Steady growth ahead - Maintain Hold
Reco Previous Reco
Hold Hold
CMP Target Price
Rs2,006 Rs2,161
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute (7) (14) (4) (3)
Rel. to Nifty (6) (6) 11 18
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg GLXO@IN
Face Value (Rs) 10
52 Week H/L (Rs) 2,475/1,905
Promoters 50.7 50.7 50.7
FII/NRI 17.1 17.0 16.3
Public 14.5 14.6 15.0
Source: Capitaline
Revenue gr ow t h t o be dr i ven by st r ong gr ow t h i n t he domest i c
f or mul at i ons busi ness l ed by der mat ol ogy, vac c i nes &
onc ol ogy segment
GSK has l aunc hed 2 pat ent ed pr oduc t s f r om i t s par ent GSK
PLCs por t f ol i o namel y Revol ade and Vot r i ent . Wi t h suc c ess of
Tyk er b i n I ndi a, w e ex pec t t hese pr oduc t s t o l ead t he gr ow t h
Suc c essf ul i nt r oduc t i on of new pr oduc t s and ex pansi on i n f i el d
f or c e w i l l l ead t o f ur t her ac c el er at i on i n t op-l i ne
Val uat i ons l eave l i t t l e r oom f or upsi des - Mai nt ai n Hol d on t he
st oc k w i t h a t ar get pr i c e of Rs2,161. Per for manc e of Revol ade
& Vot r i ent ar e key upsi de t r i gger s
Domestic business has strong parent backing
GSK has access to its parent's product pipeline which is focussed on vaccines and
oncology products. In MAT'Jul 2011, new products accounted for 12.3% of the
incremental growth, with anti-infetives accounting for a large share of the incremental
growth.
GSK maintain leadership position in the Indian Vaccines segment (6% of total sales,
Source: AIOCD). The increased share of vaccines can be attributed to new launches,
including Boostrix, Infanrix, Rotarix and Cervarix over the past two years.
GSK has launched 2 patented products from its parent's portfolio i.e. Revolade (drug
for low platelets) and Votrient (metastatic renal cell carcinoma) in the oncology segment.
Earlier, GSK had successfully launched an Onco product Tykerb in India in May 2008.
Within the first year of its launch, the product clocked revenue of Rs70-80mn, according
to management and is expected to ramp up further.
However, with launch of patented products in India, the raw material cost is expected to go
up as a result of which margin expansion may be limited
Strong balance sheet with healthy cash
GSK has a strong balance sheet with almost zero debt on books and RoE's in excess
of 30%
It has healthy cash accumulation of Rs21bn translating into cash per share of Rs250
per share. We believe with strong cash on books, the company is well placed to carry
out an acquisition
Valuation
Going ahead, we expect busi ness momentum to be led by 5-6 new launches in the
branded generics space and the recent launch of oncology products from GSK pipeline.
We expect GSK to report 13% revenue growth in FY12 and 12% growth in FY13. We expect
EBIDTA margins to improve from 35.31% in CY10 to 35.7% in CY11 and 36% in CY12.
Earnings will grow at a CAGR of 13% to Rs7.4bn. We maintain our target on the stock at
Rs2,161 with a Hold rating. At CMP, the stock is trading at 26x/23x CY11E/CY12E earnings
respectively. We believe, GSK deserves premium valuations due to its strong product
pipeline and brand-building ability.
2000
2095
2190
2285
2380
2475
Rs
0
8
16
24
32
40 %
GlaxoSmithkline Pharma (LHS) Rel to Nifty (RHS)
Pharma Sector
54
GSK Pharma - Domestic Metrics
GSK Pharma - Therapeutic growth Field force productivity
FY11% MAT MAT YoY
Anti-infectives 25.8% 666.0 603.5 10.3%
Dermatology 15.8% 407.4 353.1 15.4%
Pain Mgmt. 10.7% 276.2 252.3 9.5%
Vitamins 8.8% 227.3 203.4 11.7%
Respiratory 7.9% 204.2 182.4 11.9%
Hormones 6.9% 178.4 172.6 3.4%
Vaccines 5.7% 147.46 96.51 52.8%
Gastro 6.4% 164.2 152.6 7.6%
CVS 3.0% 76.9 66.1 16.3%
Others 9.0% 232.4 215.5 7.9%
Acute 94.6% 2442.0 2174.6 12.3%
Chronic 5.4% 138.3 123.4 12.1%
Total Sal es 100.0% 2580.3 2298.1 12.3%
Jul ' 11 MAT growth for GSK has been l ower at 12%
The company has hired ~550 people during CY10
Sales to grow at a higher clip once the MR productivity improves
GSK's underperformance to the industry was due to lack of new
product launches during MAT Jun'11
With its strong field force and strong product pipeline we expect
the domestic business to sustain 14-15% growth
Augmentin CVS 167.0 177.2 6.1%
Calpol CVS 128.6 137.4 6.8%
Zinetac Derma 111.0 116.9 5.3%
Ceftum Respiratory 95.5 106.3 11.3%
Betnesol Derma 66.5 81.1 22.0%
Phexin Resp 86.7 80.5 -7.1%
Eltroxin Anti-Infective 72.4 79.1 9.3%
Neosporin Resp 64.5 70.8 9.9%
Betnovate c Anti-Infective 59.5 70.6 18.6%
Augmentin duo Derma 57.7 66.5 15.2%
Total 909.3 986.3 8.5%
0.5
2.6
1.3
5.5
6.5
10.5
GSK Industry
Total Gr. 12.3%
Total Gr. 14.5%
6.5
6.8
7.2
6.6
6.7
9.0
10.0
14.1
0
500
1000
1500
2000
2500
3000
CY07 CY08 CY09 CY10
0
2
4
6
8
10
12
14
16
Field force Productivity Dom Gr (%)
Pharma Sector
55
Financial Tables
Y/E, Dec (Rs. mn) CY09 CY10 CY11E CY12E
Net Sal es 19,078 21,511 24,229 27,080
Growth (%) 12.7 12.8 12.6 11.8
Expendi t ure 12,337 13,924 15,591 17,345
Raw Materials 7,022 7,881 9,134 10,209
SGA 1,045 1,359 1,320 1,273
Employee Cost 2,093 2,409 2,447 2,735
Other Exp 2,176 2,275 2,689 3,128
EBITDA 6,741 7,586 8,638 9,735
Growth (%) 8.4 14.4 12.3 12.7
EBITDA margi n (%) 35.3 35.3 35.7 36.0
Depreciation 164 176 186 200
EBIT 6,577 7,410 8,451 9,535
EBIT margi n (%) 34.5 34.4 34.9 35.2
Other Income 1,034 1,306 1,349 1,519
PBT 7,686 8,539 9,800 11,054
Tax 2,607 2,934 3,234 3,648
Adj usted PAT 5,005 5,783 6,566 7,406
Growth (%) 8.1 15.5 13.5 12.8
Net Margi n (%) 26.2 26.9 27.1 27.3
E/O items 74 -177 0 0
Reported PAT 5,079 5,606 6,566 7,406
Growth (%) -14.1 10.4 17.1 12.8
Net wort h 17,861 19,516 21,105 22,898
Unsecured Loans 0 0 0 0
Loan Funds 54 52 52 52
Net deferred tax liability -449 -566 -566 -566
Gross Block 3,333 3,625 3,833 4,083
Net bl ock 928 1,090 1,069 1,119
Capital work in progress 214 87 87 87
Invest ment 1,485 1,179 1,179 1,179
Cur r ent Asset s 21,827 25,096 27,783 30,698
Inventories 2,573 2,856 3,216 3,595
Sundry debtors 537 470 530 592
Loans & advances 1,074 1,203 1,355 1,514
Current l i a & Prov 6,987 8,450 9,528 10,700
Provisions 3,815 4,868 5,691 6,412
Tot al Asset s 17,466 19,002 20,591 22,384
Key Ratios
EBITDA Margin 35.3 35.3 35.7 36.0
Net Margin 26.2 26.9 27.1 27.3
ROCE 45.1 46.5 48.1 50.1
ROE 30.2 30.0 32.3 33.7
Per Share Data (Rs)
EPS 59.1 68.3 77.5 86.4
CEPS 61.9 68.3 79.7 89.8
BVPS 210.9 230.4 249.2 267.2
DPS 30.0 40.0 50.4 56.8
Val uati ons (x)
PER 34.0 29.4 25.9 23.2
P/CEPS 32.4 29.4 25.2 22.3
P/BV 9.5 8.7 8.1 7.5
EV / Sales 8.0 7.0 6.1 5.5
EV / EBITDA 19.6 16.9 14.8 13.1
Dividend Yield (%) 1.5 2.0 2.5 2.8
Geari ng Rati o (x)
Net Debt/ Equity -1.0 -1.0 -1.0 -1.1
Net Debt/EBIDTA -2.2 -2.2 -2.2 -2.2
Working Cap Cycle (days) 25.0 25.0 28.0 28.0
Cash Fl ow (Rs. Mn)
Chg in working cap 147 884 438 501
Tax paid -2,607 -2,934 -3,234 -3,648
Capital expenditure -302 -211 -166 -250
Free Cash Fl ow 4,053 5,149 5,676 6,339
Other income 1,034 1,306 1,349 1,519
Investments 5,811 306 0 0
Invest i ng Cashf l ow 6,543 1,400 1,183 1,269
Loans Taken / (Repaid) -2 -3 0 0
Interest Paid 0 0 0 0
Others -151 -117 0 0
Fi nanci ng Cashf l ow -3,126 -4,070 -4,977 -5,614
Net chg i n cash 7,772 2,690 2,048 2,244
FY10 15,596 3,236 20.7 1,991 16.0 20.4 26.6 16.9 11.8 3.9
FY11 18,825 3,598 19.1 2,294 18.4 15.2 23.9 14.7 10.8 3.2
FY12E 21,506 4,276 19.9 2,760 22.2 20.4 23.6 12.2 9.2 2.6
FY13E 25,567 5,336 20.9 3,489 28.0 26.4 24.1 9.6 7.4 2.1
Val uation table

Stable Business, Reasonable Valuations - Maintain Buy
Reco Previous Reco
Buy Buy
CMP Target Price
Rs270 Rs392
EPS change FY12E/13E (%) -4 / -4
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute (12) (17) (7) (11)
Rel. to Nifty (11) (9) 8 9
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg IPCA@IN
Face Value (Rs) 2
52 Week H/L (Rs) 351/255
Market Cap (Rs bn/USD mn) 34/687
Promoters 46.1 46.1 46.1
FII/NRI 10.4 9.1 9.8
Public 11.6 11.8 11.7
Source: Capitaline
Pr i c i ng pr essur e, i nc r eased c ompet i t i ve i nt ensi t y & l ow er ant i -
mal ar i a sal es w oul d l ead t o 12% r evenue CAGR i n t he domest i c
f or mul at i ons busi ness
I ndor e SEZ USFDA appr oval r emai n key upsi de c at al yst -
appr oval w oul d pave w ay f or i mpr oved pr of i t abi l i t y and
r evenue vi si bi l i t y
I n t he ex por t s busi ness, gr ow t h w i l l be l ed by t ender busi ness
i n Af r i c a and br anded for mul at i ons busi ness i n CI S, Af r i c a and
Aust r al i a
Mai nt ai n Buy w i t h a t ar get of Rs392 (14x FY13 EPS)
Field force addition and focus on new launches to boost domestic
growth
IPCA has doubled its domestic formulations field force in the last two years to 4500
now mainly in key therapies of Pain and CVS segment.
We expect domestic formulation business to clock 10% growth rates over medium
term. However, as the new field force becomes productive, growth would be back on
track at 15% in FY13 thereby aiding 180bps expansion in EBITDA margins.
USFDA approval for Indore SEZ plant remains the key trigger
The company is expecting USFDA to visit its Indore SEZ plant post the monsoon and
expects approval by Q4FY12. Till date, Ipca has 24 filings in the US with 13 pending
approvals
Post the approval, Ipca expects 4-5 launches from this facility in the initial year with
peak revenue potential of Rs3-4bn over the next 2-3 years
Momentum in branded business & anti-malarial tender to drive exports
Anti malarial business to grow from Rs1.2bn last year to Rs2bn this year and with the
prequalification of Artisunate, company will further be able to participate in the rest of
the 20% of anti malarial tender business (total market $250-$300mn)
Brnaded business to witness 35% revenue CAGR led by new launches
Future growth drivers
For FY12, the management has guided for top-line growth of ~18-20% and expects
EBITDA margins to improve from FY11 levels. However, with domestic growth slowing
down top-line would grow at 14% over FY11-12E. Moreover, volatile currency movement
remain the key risk for margin improvements going forward
Valuation
We expect Ipca to report 14% growth in revenues in FY12E and 19% growth in FY13E.
EBIDTA margins are expected to increase from 19.1% in FY11 to 19.9% in FY12E and
20.9% in FY13E. Earnings will grow by 23% CAGR over FY11-13E. Maintain Buy rating on
the stock with a target price of Rs392 (14xFY13E earnings). At CMP, IPCA trades at 12x
FY12E and 10x FY13E EPS.
250
270
290
310
330
350
Rs
-10
-2
6
14
22
30 %
IpcaLab(LHS) Rel to Nifty (RHS)
Pharma Sector
57
Ipca Labs - Domestic Metrics
Ipca Labs therapeutic growth Field force productivity
FY11% MAT MAT YoY
Rs Cr Cont ri but i on Jun' 11 Jun' 10 Gr. %
Anti-Malarial 24.2% 235.8 190.8 23.6%
Gastro 7.7% 75.4 61.0 23.5%
Pain Mgmt 18.9% 183.8 134.7 36.5%
CVS 18.8% 183.5 159.5 15.1%
Anti-diabetic 6.4% 62.6 52.9 18.3%
CNS 3.7% 36.3 36.0 0.8%
Respiratory 3.6% 35.4 29.2 21.4%
Derma 2.4% 23.5 19.4 21.1%
Anti-Infective 9.0% 87.9 88.7 -0.9%
Others 5.2% 50.3 32.6 54.4%
Acute 70.7% 688.8 554.2 24.3%
Chronic 29.3% 285.8 250.5 14.1%
Total Sal es 100.0% 974.6 804.7 21.1%
Jul'11 MAT growth for Ipca has been above industry rate at 21%
Ipca has added 600 people to its field force during FY11
MR productivity declined due to higher MR additions which are yet
to contribute meaningfully to the top line
Ipca's out-performance to the industry was due to strong volume
uptake in existing brands coupled with price increase and 4.6%
growth from new launches during MAT Jun'11
HCQS, Zerodol and Larinate clocked growth in excess of 20%
Lariago Anti-Marial 62.0 65.5 5.6%
Hcqs Anti-Marial 36.0 44.2 22.7%
Zerodol p CNS 25.1 36.0 43.3%
Rapither-ab Anti-Marial 31.7 36.0 13.5%
Larinate Anti-Marial 17.8 33.6 88.7%
Perinorm Gastro 30.1 32.9 9.3%
Zerodol sp CNS 14.1 24.7 75.4%
Zerodol CNS 17.7 23.5 33.0%
Glycinorm m Anti-Diab 20.6 23.5 14.5%
Lumerax Anti-Marial 12.3 21.6 75.8%
Total 267.4 341.5 27.7%
3.2
2.6
4.8
5.5
6.5
13.2
Ipca Industry
Total Gr. 21.1%
Total Gr. 14.9%
1.5 1.7 1.5 1.4 1.4
22.0
10.3
25.4
16.5
21.5
0
900
1800
2700
3600
4500
0.9
3.9
6.9
9.9
12.9
15.9
18.9
21.9
24.9
27.9
Pharma Sector
58
Financial snapshot
FY11 FY12E YoY % FY13E YoY %
For mul at i ons 13,881 16,490 18.8% 20,604 25.0%
Domest i c 6,964 7,669 10.1% 8,797 14.7%
Export s 6,917 8,820 27.5% 11,807 33.9%
Branded 1,500 2,010 34.0% 2,833 41.0%
Generics 5418 6811 25.7% 8974 31.8%
Europe 3121 3410 9.2% 4203 23.3%
America 1072 1401 30.6% 2455 75.3%
Malaria tender 1224 2000 63.4% 2000 0.0%
APIs 4778 5017 5.0% 5278 5.2%
Domestic 1,443 1,515 5.0% 1,637 8.0%
Exports 3,335 3,501 5.0% 3,641 4.0%
Other Income 166 0 - 0 -
Total Sal es 18,825 21,506 14.2% 25,882 20.3%
EBITDA 3,598 4,276 18.9% 5,336 24.8%
EBITDA margins 19.1 19.9 20.9
APAT 2,294 2,760 20.4% 3,489 26.4%
PAT margins 12.2 12.8 13.6
EPS 18.4 22.2 20.4% 28.0 26.4%
PE @CMP 14.7 12.2 9.6
Pharma Sector
59
Financial Tables
Net Sal es 15,596 18,825 21,506 25,567
Growth (%) 20.6 20.7 14.2 18.9
Expendi t ure 12,360 15,227 17,230 20,231
Raw Materials 6,456 7,764 8,585 10,048
SGA 3,697 4,800 5,570 6,530
Employee Cost 2,207 2,663 3,075 3,653
Other Exp 0 0 0 0
EBITDA 3,236 3,598 4,276 5,336
Growth (%) 21.9 11.2 18.9 24.8
EBITDA margi n (%) 20.7 19.1 19.9 20.9
EBIT 2,768 3,040 3,658 4,576
EBIT margi n (%) 17.7 16.1 17.0 17.9
Other Income 161 246 244 275
PBT 2,663 3,407 3,539 4,473
Tax 627 784 778 984
Adj usted PAT 2,009 2,299 2,760 3,489
Growth (%) 20.4 15.2 20.4 26.4
Net Margi n (%) 12.8 12.2 12.8 13.6
E/O items 63 434 0 0
Reported PAT 2,054 2,628 2,760 3,489
Growth (%) 104.2 28.0 5.0 26.4
Net wort h 8,649 10,516 12,902 16,019
Secured Loans 3,791 4,554 4,854 4,754
Loan Funds 4,545 5,308 5,808 5,708
Net deferred tax liability 793 807 807 807
Gross Block 8,812 9,884 12,384 14,384
Net bl ock 6,379 6,992 8,874 10,114
Capital work in progress 383 1,132 1,132 1,132
Invest ment 325 408 408 408
Cur r ent Asset s 8,992 10,593 12,256 14,490
Inventories 3,802 4,664 5,355 6,297
Sundry debtors 3,880 4,644 5,355 6,297
Cash & bank balance 108 104 256 361
Loans & advances 1,201 1,182 1,290 1,534
Current l i ab & Prov 0 0 0 0
Provisions 1,850 2,073 2,677 3,101
Net cur r ent asset s 241 420 474 508
Misc. exp & Def. Assets 6,900 8,099 9,104 10,880
Tot al Asset s 13,987 16,631 19,518 22,534
Key Ratios
EBITDA Margin 20.7 19.1 19.9 20.9
Net Margin 12.8 12.2 12.8 13.6
ROCE 22.7 21.3 21.4 22.9
ROE 26.6 23.9 23.6 24.1
RoIC 22.9 21.5 22.3 23.8
Per Share Data (Rs)
EPS 16.0 18.4 22.2 28.0
CEPS 19.2 19.4 27.1 34.1
BVPS 69.5 84.5 103.6 128.7
DPS 3.3 3.5 3.5 3.5
Val uati ons (x)
PER 16.9 14.7 12.2 9.6
P/CEPS 14.0 13.9 10.0 7.9
P/BV 3.9 3.2 2.6 2.1
EV / Sales 2.4 2.1 1.8 1.5
EV / EBITDA 11.8 10.8 9.2 7.4
Dividend Yield (%) 1.2 1.3 1.3 1.3
Geari ng Rati o (x)
WC Cycle 159 155 152 153
Cash Fl ow (Rs. Mn)
Y/E, Mar (Rs. mn) FY10 FY11P FY12E FY13E
Chg in working cap -1,664 -1,210 -788 -1,607
Tax paid -485 -784 -778 -984
Free Cash Fl ow -167 119 210 744
Other income 161 246 244 275
Investments 86 -83 0 0
Loans Taken / (Repaid) -54 763 500 -100
Interest Paid -329 -314 -364 -377
Others 662 -338 0 0
Fi nanci ng Cashf l ow -86 -286 -301 -914
Net chg i n cash -5 -4 153 105
Opening cash position 113 108 104 256
Cl osi ng cash posi ti on 108 104 256 361
FY10 48,359 9,728 20.1 6,845 15.4 20.0 34.0 30.9 22.2 8.2
FY11 58,320 11,911 20.4 8,625 19.3 25.6 30.1 24.6 18.6 6.5
FY12E 67,682 13,322 19.7 9,825 22.0 13.9 26.6 21.6 15.0 5.0
FY13E 82,022 16,680 20.3 11,435 25.6 16.4 24.6 18.5 13.0 4.1
Val uation table
Lupin Ltd.
Opportunities outweigh Risks - Accumulate
Reco Previous Reco
Accumulat e Buy
CMP Target Price
Rs475 Rs513
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute 6 11 17 19
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg LPC@IN
Face Value (Rs) 2
52 Week H/L (Rs) 520/363
Promoters 47.0 47.0 47.0
FII/NRI 23.9 22.3 23.5
Public 9.0 9.8 9.4
Source: Capitaline
Domest i c busi ness t o gr ow at 18% CAGR over FY11-13E on
ac c ount of 40 new l aunc hes, f oc us on bui l di ng st r ong br ands
and t ar get i ng new t her api es
US busi ness t o c l oc k gr ow t h of ~24% CAGR (FY11-FY13) dr i ven
by l aunc h of 10 ANDA' s i nc l udi ng 3-4 OCs and 2 FTFs i n US.
Among t hese l aunc hes, Zi pr asi done w i l l be t he most l uc r at i ve
oppor t uni t y
We ex pec t an EPS of Rs1.5 & Rs4.0 f r om i t s Par a I V
oppor t uni t i es for FY12 and FY13 r espec t i vel y
Rec ommend Ac c umul at e w i t h a t ar get pr i c e of Rs513
Domestic business to continue robust growth
Domestic business to grow at 16% CAGR over FY11-13E led by new launches, focus
on building strong brands and targeting new therapies.
Lupin's deal with Lilly will further fuel the domestic growth.
US business to gain momentum in H2FY12
Launch of 10 new ANDAs (including 3 OCs) for FY12.
Fortamet (FTF) - US$40mn, likely launch in H2FY12, Company has confirmed the
launch in FY12
Ziprasidone (FTF) - US$ 800m, likely launch in Mar 2012. Shared with two other
generic players
Ultram XR - US$ 200mn Lupin holds approval, launch can be expected anytime. 2
Companies have already launched generics
Clarinex (5mg tablet)- Launch with many other generic player
Other Para IVs like Requip XL (US branded Sales US$ 10mn), Ambien CR, (US branded
Sales US$ 547mn) and Asacol (US branded Sales US$ 400mn) can bring surprises.
We have not factored in upside from these opportunities in our financials.
Deal with Medicis will directly inject revenues of ~$20m for the FY12.
The company's productivity is highest ~approx $10mn per product, vs industry average
of ~$5mn-$6mn per product. (company has launched ~30 products till date in US).
Such high productivity is due to niche launches done by the company.
Only risk to the US business is its branded portfolio (contributing ~30% of the sales),
viz Antara and Suprax. We belive these brands will soon witness margin pressures on
the back of increase in sales force and probable generic competition.
Valuations
We expect Lupin to report 16.1% revenue growth in FY12E and 21.2% growth in FY13E.
We expect EBIDTA margins to move from 20.4% in FY11 to 19.7% in FY12 and 20.3% in
FY13. Earnings will grow by 15% CAGR over FY11-13E. Recommend Accumulate with a
target price of Rs513. At CMP, the stock is trading at 21.6x FY12E and 18.5x FY13E earnings.
350
385
420
455
490
525
Rs
-10
2
14
26
38
50 %
Lupin (LHS) Rel to Nifty (RHS)
Pharma Sector
61
Lupi n' s - Domestic Met rics
Lupin' s therapeutic growth Field force productivity
FY11% MAT MAT YoY
Rs Cr Cont ri but i on Jun' 11 Jun' 10 Gr. %
Gastro 6.8% 114.7 95.3 20.4%
CVS 23.6% 401.1 314.1 27.7%
Pain Mgmt 3.3% 55.6 39.9 39.4%
Anti-infective 18.6% 316.2 298.5 5.9%
Anti-diabetic 7.5% 126.7 96.4 31.4%
Respiratory 11.6% 197.8 164.7 20.1%
Dermatology 0.4% 6.9 9.0 -23.1%
Gynecology 0.5% 7.9 4.9 61.4%
CNS 5.3% 90.4 71.2 27.0%
Others 22.4% 381.3 293.2 30.0%
Acute 53.0% 901.1 763.4 18.0%
Chronic 47.0% 797.5 623.8 27.8%
Total Sal es 100.0% 1698.6 1387.2 22.5%
Jun' 11 MAT growth for Dr. Reddy has been l ower at 10%
The company has hired ~1400 people during FY11
MR productivity declined due to higher MR additions which are yet
to contribute meaningfully to the top line
Lupin's out-performance to the industry was due to strong volume
uptake in existing brands and 9% growth from new launches
during MAT Jun'11
However, price growth was muted during the same period
Top 5 products continue to register strong growth in excess of
20%
Tonact CVS 51.67 64.66 25.1%
Gluconorm G Anti-Diab 25.72 38.36 49.1%
Ramistar CVS 29.77 35.18 18.2%
R-cinex Anti-Infective 28.12 34.19 21.6%
Budamate Resp 26.15 33.83 29.3%
L cin Anti-Infective 29.97 31.62 5.5%
Lupenox CVS 28.76 31.34 9.0%
Tazar Anti-Infective 24.88 29.61 19.0%
Esiflo Resp 24.53 28.41 15.8%
Akt 4 Anti-Infective 22.55 27.37 21.3%
Total 292.1 354.6 21.4%
Lupin Ltd.
0.3
2.6
8.9
5.5
6.5
13.2
Lupin Industry
Total Gr. 22.5%
Total Gr. 14.5%
4.1
4.7 4.9
4.6
3.6
23.9
20.2
18.3
14.9
22.9
0
900
1800
2700
3600
4500
0
5
10
15
20
25
30
Pharma Sector
62
Financial snapshot
(Rs mn) FY11 YoY % FY12E YoY % FY13E YoY %
For mul at i ons 48479 18.2% 57788 19.2% 71207 23.2%
Domestic 15509 14.9% 18456 19.0% 21778 18.0%
US 20201 20.1% 23964 18.6% 31104 29.8%
Europe 1816 -16.5% 2361 30.0% 2951 25.0%
Japan 6212 16.3% 7082 14.0% 8144 15.0%
SRM 4741 49.3% 5926 25.0% 7230 22.0%
API' s 8589 10.5% 9756 13.6% 10749 10.2%
Domestic - API 2431 10.0% 2674 10.0% 2888 8.0%
Export - API 6158 10.7% 7082 15.0% 7861 11.0%
Oper at i ng i ncome 1252 137.5 -89.0% 66.2 -51.9%
Total Sal es 58320 19.6% 67682 16.1% 82022 21.2%
FTF Sales 0 - 1392 - 3393 -
Base Sales 58320 19.6% 66289 13.7% 78629 18.6%
EBITDA 11,911 22.4% 13,322 11.8% 16,680 25.2%
EBITDA % 20.4% 19.7% 20.3%
FTF EBITDA 0 - 817 - 2,225 -
Base EBITDA 0 - 12,505 - 14,455 15.6%
Base EBITDA % 20.4% 18.9% 18.4%
PAT 8,625 26.0% 9,825 13.9% 11,435 16.4%
PAT% 14.8% 14.5% 13.9%
FTF - PAT 0 - 654 - 1780 -
Base - PAT 8625 - 9171 6.3% 9655 5.3%
EPS 19.3 25.6% 22.0 13.9% 25.6 16.4%
FTF - EPS 0.0 - 1.5 - 4.0 -
Base - EPS 19.3 - 20.6 - 21.6 -
PE @ CMP 24.6 - 21.6 - 18.5 -
Lupin Ltd.
Pr oduct Gener i c Sal es EPS Sal es EPS Expect ed Br anded Excl usi vi ty
Name ($ Mn) 2012 ($ Mn) 2013 Launch Date Sal es ($ Mn)
EEffexor XR Venlaflaxin HCL 7.7 0.3 2.3 0.0 Launched 2300 10+
Geodon Ziprasidone HCL 5.5 0.4 60.4 3.9 Mar-12 800 3+
Clarinex 5mg Desloratidine 2.3 0.0 2.3 0.1 Jul-12 150 10+
Ultram ER Tramadol ER 10.5 0.6 10.5 0.0 FY12 200 3+
Fortamet Metformin 5.0 0.2 0.0 0.0 FY12 40 Unshared
Total 30.9 1.5 75.4 4.0 3490
Pharma Sector
63
Financial Tables
Net Sal es 48,359 58,320 67,682 82,022
Growth (%) 25.5 20.6 16.1 21.2
Expendi t ure 38,631 46,410 54,360 65,342
Raw Materials 19,694 22,379 27,413 32,792
SGA 11,830 16,353 16,341 19,675
Employee Cost 5,872 7,677 9,338 11,336
Other Exp 1,236 0 1,267 1,538
EBITDA 9,728 11,911 13,322 16,680
Growth (%) 29.4 19.9 23.1 14.8
EBITDA margi n (%) 20.1 20.4 19.7 20.3
Depreciation 1,239 1,712 2,046 2,169
EBIT 8,489 10,199 11,276 14,511
EBIT margi n (%) 17.6 17.5 16.7 17.7
Other Income 282 89 1,447 271
PBT 8,148 9,963 12,468 14,512
Tax 1,360 1,169 2,494 2,902
Adj usted PAT 6,665 8,457 9,675 11,261
(Profit)/loss from JV's/Ass/MI -180 -168 -150 -174
Growth (%) 28.9 26.0 13.9 16.4
Net Margi n (%) 14.2 14.8 14.5 13.9
E/O items -238 0 0 0
Reported PAT 6,607 8,625 9,825 11,435
Growth (%) 31.7 30.5 13.9 16.4
Net wort h 25,673 32,811 42,179 52,308
Secured Loans 2,848 3,348 2,848 2,348
Unsecured Loans 8,551 8,277 7,277 5,777
Loan Funds 11,399 11,624 10,124 8,124
Gross Block 26,134 26,389 34,143 39,143
Net bl ock 19,062 17,313 23,332 26,163
Invest ment 264 32 676 676
Cur r ent Asset s 27,755 34,967 46,686 56,424
Inventories 9,715 12,000 16,875 20,485
Sundry debtors 11,266 12,558 18,142 22,023
Loans & advances 4,759 6,208 6,336 6,963
Current l i a & Prov 11,898 14,518 21,640 25,907
Provisions 2,249 2,718 2,965 3,235
Tot al Asset s 38,761 46,361 54,379 62,682
Key Ratios
EBITDA Margin 20.1 20.4 19.7 20.3
Net Margin 14.2 14.8 14.5 13.9
ROCE 26.2 24.0 25.1 25.1
ROE 34.0 30.1 26.6 24.6
RoIC 30.3 29.3 31.6 31.7
Per Share Data (Rs)
EPS 15.4 19.3 22.0 25.6
CEPS 88.5 116.2 139.6 139.6
BVPS 57.7 73.6 94.5 117.2
DPS 2.9 3.7 4.5 5.2
Val uati ons (x)
PER 30.9 24.6 21.6 18.5
P/CEPS 4.7 3.6 3.0 3.0
P/BV 8.2 6.5 5.0 4.1
EV / Sales 4.1 3.3 2.8 0.0
EV / EBITDA 22.2 18.6 15.0 13.0
Dividend Yield (%) 0.6 0.8 0.9 1.1
Geari ng Rati o (x)
Cash Fl ow (Rs. Mn)
Depreciation 1,239 1,712 2,046 2,169
Chg in working cap -4,478 -2,401 -3,465 -3,852
Tax paid -1,360 -1,169 -2,494 -2,902
Free Cash Fl ow -2,779 3,446 2,554 4,925
Other income 282 89 1,447 271
Investments -72 175 -645 0
Equity Capital Raised 3,506 138 0 0
Loans Taken / (Repaid) -834 226 -1,500 -2,000
Interest Paid -385 -325 -255 -270
Dividend paid (incl tax) -1,483 -1,658 -470 -1,306
Others 3,003 95 0 1
Fi nanci ng Cashf l ow 3,806 -1,524 -2,224 -3,576
Net chg i n cash 1,238 2,186 1,132 1,621
Opening cash position 778 2,015 4,201 5,333
Lupin Ltd.
CY09 7,944 1,559 19.6 1,445 48.4 (1.0) 14.4 27.9 22.5 4.1
FY11(16m)*12,446 2,589 20.8 2,294 57.6 19.0 15.7 23.5 17.8 3.5
FY12E 10,642 2,299 21.6 1,974 66.2 14.8 15.9 20.4 14.5 3.1
FY13E 12,345 2,728 22.1 2,349 78.7 19.0 16.7 17.2 11.9 2.7
* Note: Company has changed its results year ended November to year ended March 31st. As a result Q1FY12
numbers are not comparable with the reported period YoY
Val uation table
Pfizer Ltd
Sustainable growth trajectory - Maintain Accumulate
Reco Previous Reco
Accumulat e Accumul ate
CMP Target Price
Rs1,353 Rs1,574
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute (2) (4) 14 24
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg PFIZ@IN
Face Value (Rs) 10
52 Week H/L (Rs) 1,636/1,030
Promoters 70.8 70.8 70.8
FII/NRI 2.7 2.7 2.5
Public 17.9 18.2 18.9
Source: Capitaline
Revenue gr ow t h of 15% CAGR over FY11-13E w i l l be l ead by
domest i c f or mul at i ons gr ow i ng above i ndust r y r at e and
i nc r easi ng f i el d f or c e pr oduc t i vi t y
Ant i -i nf ec t i ves, CVS, Gast r o, NSAI D & CNS c ont i nue t o gr ow at
a st r ong r at e (Sour c e: AI OCD). Moment um t o c ont i nue l ead by
addi t i on of 300 MRs ac r oss 2 new di vi si ons - CNS & Di abet es
Most of t he gr ow t h i n t he domest i c f or mul at i on busi ness w i l l
be on ac c ount of st r ong vol ume upt ak e
On bac k of good gr ow t h i n f or mul at i ons busi ness & l aunch of
Bi oc on' s I nsul i n i n c omi ng quar t er s, mai nt ai n ac c umul at e w i t h
a t ar get pr i c e t o Rs1574 (20x FY13 EPS of Rs78.7)
Growth will ramp up going forward
Company has added 100% field force in last one and a half year to 2500, which has
still to produce the results. While growth in existing products would primarily be volume-
driven, overall growth would be propelled by new product launches across therapeutic
segments and expansion into tier-II and tier-III cities.
The company has launched two new divisions - CNS and Diabetes and has added
300 people across two divisions. The company has guided for launch of insulin products
from Biocon's portfolio in next quarter. This will help the company to focus on branded
generics and fill the gaps in its portfolio.
Pfizer is focusing on 4-5 new launches per quarter to sustain 14-15% growth in the
formul ations business.
Improved sales force productivity to aid margin expansion
Pfizer has aggressively increased its field force in the past in order to expand its reach
to tier-II & tier-III cities. With improving field force productivity, EBITDA margin are expected
to increase by ~500bps YoY to 22.1% in FY13E
ROE' s to improve going ahead
Pfizer's return ratios have been subdued over the past years mainly due to inefficient
capital deployment. We believe that a strong earnings growth woul d lead to an
improvement in return ratios from FY12E/FY13E onwards although at the lower end
Valuation
We expect Pfizer to report 14% revenue growth in FY12E and 16 % in FY13E. We expect
company's EBITDA to improve from 20.8% in FY11 to 21.6% in FY12 and further improve
to 22.1% in FY13. We value Pfizer at 20x FY13 EPS of Rs78.7 to arrive at a target price of
Rs1574 and maintain accumulate rating. At CMP of Rs1471, the stock is trading at 20x
FY12E and 17x FY13E earnings respectively.
1000
1110
1220
1330
1440
1550
Rs
-10
4
18
32
46
60 %
Pfizer (LHS) Rel to Nifty (RHS)
Pharma Sector
65
Pfizer Ltd
Pf izer India - Domestic Met rics
Therapeutic growth Field force productivity
FY11% MAT MAT YoY
Respiratory 20.8% 258.6 244.9 5.6%
Anti-Infectives 17.7% 220.6 173.7 27.0%
Vitamins 12.1% 151.0 130.7 15.6%
CVS 9.2% 114.6 93.4 22.6%
Gastro 9.0% 111.7 90.7 23.1%
Hormones 7.9% 98.9 76.0 30.1%
Pain Mgmt 6.9% 85.8 68.1 26.0%
Gynaecology 3.9% 49.1 40.9 20.0%
CNS 3.4% 42.2 31.0 36.0%
Others 9.0% 111.6 80.6 38.5%
Acute 86.7% 1078.7 898.1 20.1%
Chronic 13.3% 165.4 131.9 25.4%
Total Sal es 100.0% 1244.1 1030.0 20.8%
Jul'11 MAT growth for Pfizer has been above industry average
The company has hired ~1800 people during the last 2 years. Total
MR strength is 4500
MR productivity declined due to higher base of MRs and
restructuring in the domestic business
Pfizer's growth for the last 12 months was above industry growth
led by strong volume uptake in the Acute portfolio
The company's top selling product Corex witnessed flat growth
and Becosules is been promoted with lot of marketing push
Corex Resp 209.87 209.46 -0.2%
Becosules Vitamins 105.14 119.25 13.4%
Magnex Anti-Infective 68.22 87.55 28.3%
Gelusil mps Gastro 72.72 86.28 18.6%
Dolonex Pain 63.53 75.06 18.2%
Minipress xl CVS 45.84 55.92 22.0%
Solu medrol Hormones 38.65 53.87 39.4%
Dalacin c Anti-Infective 36.16 37.25 3.0%
Claribid Leprosy 18.10 27.30 50.8%
Corex dx Resp 16.45 26.95 63.8%
Total 674.7 778.9 15.4%
3.3
2.6
2.9
5.5
14.5
6.5
Pfizer India Industry
Total Gr. 20.8 %
Total Gr. 14.9%
4.4
3.4
10.6
4.8
3.6 3.9
13.3
13.6
1.5
0.7
0
500
1000
1500
2000
2500
3000
-2
0
2
4
6
8
10
12
14
16
Field force Productivity Dom Gr (%)
Pharma Sector
66
Financial Tables
Y/E, Mar (Rs. mn) CY09 FY11(16m)* FY12E FY13E
Net Sal es 7,944 12,446 10,642 12,345
Growth (%) 12.9 18 14 16
Expendi t ure 6,385 9,857 8,343 9,616
Raw Materials 2,877 3,905 3,384 3,864
SGA 925 0 0 0
Employee Cost 1,239 2,270 1,873 2,173
Other Exp 1,344 3,682 3,086 3,580
EBITDA 1,559 2,589 2,299 2,728
Growth (%) 3.0 25 18 19
EBITDA margi n (%) 19.6 20.8 21.6 22.1
EBIT 1,477 2,469 2,192 2,615
EBIT margi n (%) 18.6 19.8 20.6 21.2
Other Income 733 1,007 800 891
PBT 2,209 3,446 2,992 3,505
Tax 840 1,183 1,017 1,157
Adj usted PAT 1,445 2,294 1,974 2,349
Growth (%) 1.4 19 15 19
Net Margi n (%) 18.2 18.4 18.6 19.0
E/O items 0 -30 0 0
Reported PAT 1,369 2,263 1,974 2,349
Growth (%) -1.9 24 16 19
Net wort h 9,943 11,634 13,147 14,946
Loan Funds 0 0 0 0
Net deferred tax liability -275 -355 -356 -355
Gross Block 1,878 1,927 2,078 2,178
Less: Depreciation 953 1,073 1,160 1,273
Net bl ock 925 854 918 905
Invest ment 5 0 0 0
Cur r ent Asset s 10,821 12,617 13,965 16,211
Inventories 1,134 1,593 1,617 1,887
Sundry debtors 644 982 1,011 1,180
Loans & advances 3,721 4,213 4,346 5,072
Current l i a & Prov 2,090 2,200 2,100 2,533
Provisions 761 628 669 881
Tot al Asset s 9,668 11,279 12,791 14,591
Key Ratios
Y/E, Mar CY09 FY11(16m)* FY12E FY13E
EBITDA Margin 19.6 20.8 21.6 22.1
Net Margin 18.2 18.4 18.6 19.0
ROCE 15.6 17.2 17.7 18.6
ROE 14.4 15.7 15.9 16.7
RoIC 37.4 35.2 36.4 39.8
Per Share Data (Rs)
EPS 48.4 57.6 66.2 78.7
CEPS 51.2 61.4 69.8 82.5
BVPS 333.2 389.9 440.6 500.9
DPS 12.5 16.5 13.2 15.7
Val uati ons (x)
PER 27.9 23.5 20.4 17.2
P/CEPS 26.4 22.0 19.4 16.4
P/BV 4.1 3.5 3.1 2.7
EV / Sales 4.4 3.7 3.1 2.6
EV / EBITDA 22.5 17.8 14.5 11.9
Dividend Yield (%) 0.9 1.2 1.0 1.2
Geari ng Rati o (x)
Net Debt/ Equity -0.5 -0.5 -0.5 -0.5
Net Debt/EBIDTA -3.4 -2.2 -3.0 -2.9
Cash Fl ow (Rs. Mn)
Chg in working cap -945 -1,190 -318 -785
Tax paid -780 -1,183 -1,017 -1,157
Operat i ng Cashf l ow 568 1,193 1,763 1,677
Capital expenditure -185 -49 -171 -100
Free Cash Fl ow 383 1,144 1,592 1,577
Exceptional items 109 0 0 0
Investments 0 5 0 0
Invest i ng Cashf l ow 492 1,149 1,592 1,577
Loans Taken / (Repaid) 0 0 0 0
Others -218 8 41 0
Fi nanci ng Cashf l ow -655 -653 -422 -550
Net chg i n cash -162 496 1,170 1,027
Pfizer Ltd
CY09 73,294 22,165 30.2 3,622 8.6 62.4 7.2 55.0 70.5 4.6
CY10 85,355 14,136 16.6 10,347 24.6 185.7 35.0 19.3 14.9 3.6
CY11E 97,660 18,602 19.0 13,147 31.3 27.1 21.0 15.2 9.6 2.8
CY12E 118,963 24,310 20.4 17,206 40.9 30.9 22.1 11.6 8.3 2.3
Val uation table
Ranbaxy Labs
Lipitor ready to strike - Upgrade to Hold
Reco Previous Reco
Hold Reduce
CMP Target Price
Rs474 Rs513
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute 1 (7) 8 (16)
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg RBXY@IN
Face Value (Rs) 5
52 Week H/L (Rs) 625/414
Promoters 63.8 63.8 63.8
FII/NRI 10.5 9.1 9.8
Public 11.3 11.8 11.6
Source: Capitaline
Domest i c busi ness t o gr ow by 13% CAGR on bac k of gr adual
r amp-up f r om Pr oj ec t Vi r aat . Ant i -i nf ec t i ve & Gast r o t her api es
w i l l w i t nessed c ompet i t i on f r om i t s peer s
Base busi ness (ex c l . FTFs) t o gr ow at 13% CAGR over FY11-
13E l ed by 13% gr ow t h i n domest i c busi ness, 27% gr ow t h i n
base US busi ness & 17%/ 11% gr ow t h i n Af r i c a/ Asi a
Cur r ent val uat i ons f ul l y f ac t or - i n t he f ut ur e pot ent i al of FTF
oppor t uni t i es
Wi t h Li pi t or get t i ng r eady t o st r i k e, w e upgr ade t he st oc k t o
Hol d w i t h a r evi sed t ar get pr i c e of Rs513 (20x base busi ness
ear ni ngs + Rs82 Par a-I V NPV)
Strong FTF opportunities - All eyes on Lipitor launch
Ranbaxy has been successful in monetizing the FTF opportunities in the past - Valtrex,
Aricept (on time launch), Imitrex, Prava 80mg, Zocor 80mg (delayed launch but exclusivity
retained) & Flomax (no launch but settled with Impax)
We believe this has led the street to believe on Ranbaxy's ability to launch Lipitor. With
only the innovator and AG Watson in the market, we believe Lipitor launch can rake in
US$400-500mn in revenues, if Ranbaxy manages an on-ti me launch i.e. Nov' 11,
however, this gain will largely be off-set by the penalty imposed by USFDA
Going forward, generic Lipitor is expected to rake-in US$100mn in annual revenues
India business to regain momentum with Project Vi raat
India business (contributes 20%) has been growing below industry growth rate for the
past 2 quarters. Lower performance was mainly led by anti-infective, Gastro and Anti
Infective segment which witnessed increased competition from its peers
Unless company grows the domestic business above industry growth rate of 12-14%,
base business will continue to witness margin pressure. Under Project Viraat,
management has guided for improved growth in the coming quarters
Europe & EMs growth momentum to continue
Europe business (contributes 15%) to grow at a steady rate of 6% driven by its Romania
operations
Asia/CIS/Africa (contributes 24%) to grow at a healthy rate of 11%/ 13%/ 17% over
CY10-12E, clocking combined sales of US$567mn
Nexium approval by USFDA is expect ed in H2'11and post approval the supply to
AstraZeneca will start
Valuation
We expect Ranbaxy to report 21% base business revenue CAGR over CY10-12E. Base
EBIDTA margins are expected to increase from 10.5% in CY10 to 12.3% in CY11E &
14.9% in CY12E. Base Earnings are expected to register 60% CAGR over CY10-12E to
Rs9.1bn clocking an EPS of Rs21.5 in CY12E. We value the company at 20x CY12E base
business EPS & NPV of P-IV opportunities at Rs82 to arrive at a target price of Rs513. At
CMP, the stock trades at 15x & 12x CY12/13E EPS.
400
445
490
535
580
625
Rs
-20
-14
-8
-2
4
10 %
RanbaxyLabs (LHS) Rel to Nifty (RHS)
Pharma Sector
68
Ranbaxy Labs
Ranbaxy - Domestic Met rics
Therapeutic growth Field force productivity
FY11% MAT MAT YoY
Anti-infectives 32.7% 864.3 767.4 12.6%
CVS 14.5% 383.5 322.0 19.1%
Pain Mgmt 10.6% 280.1 206.9 35.4%
Dermatology 8.6% 227.7 189.9 19.9%
Gastro 6.0% 159.0 155.8 2.1%
CNS 4.1% 107.7 101.3 6.4%
Respiratory 3.7% 99.01 86.09 15.0%
Anti-diabetic 2.9% 77.6 63.9 21.3%
Gynaecology 2.0% 53.2 38.0 40.0%
Others 14.8% 391.6 335.1 16.8%
Acute 76.4% 2019.0 1729.4 16.7%
Chronic 23.6% 624.6 536.9 16.3%
Total Sal es 100.0% 2643.7 2266.3 16.7%
Jul ' 11 MAT growth for Ranbaxy has been i n-l i ne wi th i ndustry
aver age
The company has hired ~1800 people during the last 2 years. Total
MR strength is 4500
MR productivity declined due to higher base of MRs and restructuring
in the domestic business
Ranbaxy's growth for the last 12 months was in-line with industry
growth led by volume uptake and new product launches
The company's anti-biotic products - Mox & Cifran continue to report
de-growth in sales during MAT Jul'11 period (similar trend witnessed
in MAT'Jun 11)
Revital Vitamins 136.3 150.6 10.5%
Storvas CVS 128.3 138.0 7.6%
Volini Pain 83.8 129.7 54.7%
Mox Anti-Infective 117.2 114.7 -2.1%
Cifran Anti-Infective 106.0 101.0 -4.7%
Zanocin Anti-Infective 60.4 68.8 13.9%
Cepodem Anti-Infective 51.5 68.8 33.5%
Rosuvas CVS 43.3 64.4 48.6%
Sporidex Anti-Infective 60.3 61.5 1.9%
Cilanem Anti-Infective 37.6 56.9 51.3%
Total 824.8 954.3 15.7%
6.5
1.7
2.6
6
5.5
8.9
Ranbaxy Industry
Total Gr. 16.7%
Total Gr. 14.5%
5.6
4.0 3.9
11.1
7.6
6.0
5.9
1.2
11.0
8.2
900
1900
2900
3900
CY06 CY07 CY08 CY09 CY10
0
4
8
12
16
20
Pharma Sector
69
Ranbaxy Labs
Financial snapshot
(Rs mn) CY10 CY11E YoY % CY12E YoY %
Sal es 85355 97660 14% 118963 22%
Base 70904 82934 17% 103675 25%
FTF 14604 14903 2% 15511 4%
EBITDA 18389 20604 12% 26312 28%
Base 7437 10172 37% 15455 52%
Base EBITDA % 10.5% 12.3% 324 bps 14.9% 200 bps
FTF 10953 10432 -5% 10858 4%
PAT 11733 13147 12% 17206 31%
Base 3519 5323 51% 9063 70%
FTF 8214 7824 -5% 8143 4%
EPS 27.9 31.2 12% 40.9 31%
Base 8.4 12.6 51% 21.5 70%
FTF 19.5 18.6 -5% 19.3 4%
PE 17.0 15.2 11.6
Base 46.9 31.0 18.2
Pharma Sector
70
Financial Tables
Net Sal es 73,294 85,355 97,660 118,963
Growth (%) 1.2 16.5 14.4 21.8
Expendi t ure 51,130 71,219 79,058 94,653
Raw Materials 32,080 31,528 36,148 42,999
SGA 4,875 5,021 4,976 5,702
Employee Cost 10,105 15,060 17,615 21,588
Other Exp 4,070 19,610 20,319 24,364
EBITDA 22,165 14,136 18,602 24,310
Growth (%) -1.1 346.5 31.6 30.7
EBITDA margi n (%) 30.2 16.6 19.0 20.4
Depreciation 2,676 3,717 4,034 4,307
EBIT 19,489 10,419 14,567 20,002
EBIT margi n (%) 26.6 12.2 14.9 16.8
Other Income 5,078 7,116 3,915 3,915
PBT 10,098 23,217 17,761 23,211
Tax 6,991 5,849 4,440 5,803
Adj usted PAT 3,480 17,369 12,974 17,004
(Profit)/loss from JV's/Ass/MI -142 -2,401 -173 -202
Growth (%) 62.4 185.7 27.1 30.9
Net Margi n (%) 4.9 12.1 13.5 14.5
E/O items 5,240 6,365 0 0
Reported PAT 2,965 14,968 13,147 17,206
Growth (%) -131.2 404.7 -12.2 30.9
Net wort h 43,432 56,046 70,803 87,003
Mi nor i t y Int er est 533 647 820 1,022
Secured Loans 34,109 40,979 16,421 12,421
Unsecured Loans 2,187 2,369 2,369 1,869
Loan Funds 36,295 43,348 18,790 14,290
Net deferred tax liability -4,746 -227 -227 -227
Gross Block 62,786 67,050 72,145 78,000
Net bl ock 44,906 45,479 49,293 52,140
Invest ment 5,407 4,985 4,985 4,985
Cur r ent Asset s 60,086 86,932 91,804 91,843
Inventories 18,407 21,926 21,478 31,394
Sundry debtors 18,399 16,052 21,926 27,642
Other current assets 10,863 16,309 8,106 21,635
Current l i ab & Prov 41,115 41,399 59,049 50,033
Provisions 8,604 9,534 5,191 6,078
Tot al Asset s 75,515 99,814 90,186 102,088
Key Ratios
Y/E, Dec CY09 CY10 CY11E CY12E
EBITDA Margin 30.2 16.6 19.0 20.4
Net Margin 4.9 12.1 13.5 14.5
ROCE 4 16.8 17.5 22.9
ROE 7.2 35.0 21.0 22.1
RoIC 1.1 19.0 29.1 32.2
Per Share Data (Rs)
EPS 8.6 24.6 31.3 40.9
CEPS 2.5 18.3 40.9 51.2
BVPS 103.1 133.2 168.3 206.8
DPS 0.0 0.0 0.0 2.4
Val uati ons (x)
PER 55.0 19.3 15.2 11.6
P/CEPS 2.5 18.3 40.9 51.2
P/BV 4.6 3.6 2.8 2.3
EV / Sales 3.0 2.5 1.8 1.7
EV / EBITDA 70.5 14.9 9.6 8.3
Dividend Yield (%) 0.0% 0.0% 0.0% 0.5%
Geari ng Rati o (x)
Net Debt/ Equity 0.6 0.2 -0.3 0.0
Net Debt/EBIDTA 4.1 0.6 -1.0 0.1
Cash Fl ow (Rs. Mn)
Depreciation 2,676 3,717 4,034 4,307
Chg in working cap -11,296 -6,332 20,427 -38,176
Tax paid -6,991 -5,849 -4,440 -5,803
Operat i ng Cashf l ow -7,205 10,357 36,591 -17,666
Free Cash Fl ow -11,410 7,656 30,232 -24,821
Other income 2,402 2,795 1,912 1,912
Investments 24 423 0 0
Invest i ng Cashf l ow -1,779 516 -4,448 -5,243
Equity Capital Raised 0 -1,691 0 0
Interest Paid -710 -614 -722 -707
Dividend paid (incl tax) 0 0 0 -1,006
Others 4,707 4,607 785 0
Fi nanci ng Cashf l ow -2,557 9,355 -24,494 -6,212
Net chg i n cash -11,540 20,228 7,649 -29,121
Ranbaxy Labs
FY10 40,103 13,662 34.1 12,590 12.2 (30.7) 18.1 38.5 35.2 6.2
FY11 57,214 19,890 34.8 18,386 17.8 46.0 22.2 26.4 23.5 5.1
FY12E 73,135 25,204 34.5 22,365 21.6 21.6 22.6 21.7 18.5 4.3
FY13E 88,099 32,364 36.7 28,250 27.3 26.3 23.8 17.2 14.1 3.6
Val uation table
Sun Pharma
Going Strong - Upgrade to Accumulate
Reco Previous Reco
Accumulat e Hold
CMP Target Price
Rs468 Rs513
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute 1 (4) 2 24
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg SUNP@IN
Face Value (Rs) 1
52 Week H/L (Rs) 538/374
Promoters 63.7 63.7 63.7
FII/NRI 18.6 18.5 19.1
Public 5.5 5.6 5.5
Source: Capitaline
Domest i c for mul at i on t o gr ow at 17% CAGR on bac k of new
l aunc hes i n FY12 & l eader shi p i n c hr oni c t her api es
(psychi at r i st s, neur o, c ar di o, opht ho and or t ho)
Nor t h Amer i c an Busi ness t o show r obust gr ow t h of CAGR of
30.5%, on t he bac k of Par a I V oppor t uni t i es l i ke Tax ot er e,
Consol i dat i on of Tar o and Launc h of r ec ent l y appr oved 7
ANDAs.
We ex pec t an EPS of Rs1.6 & Rs5.2 f r om i t s Par a I V
oppor t uni t i es for FY12 and FY13 r espec t i vel y, maj or bei ng
Repagl i ni de, Cl opi dogr el and Car bi dopa, Ent ac apone,
Levodopa (St al evo)
Upgr ade t o Ac c umul at e w i t h a t ar get pr i c e of Rs513(23x FY13
Cor e EPS of Rs22.1 + NPV of Rs5)
Domestic business - Focus on Chronic Therapies
Domestic formulation (contributes ~40%) is expected to grow at 18% CAGR (FY11-
FY13) on back of new sustained product launches and leadership in chronic therapy.
Sun has already launched Sitagliptin under the Sun-Merck JV and plans to launch
Sitagliptin + Metformin combination in Q2FY12
North America - Revenues from Taxotere and growth in Taro are the
key drivers
Sun Pharma launched Taxotere generics during the current year. We expect sales of
~ $40m for full year for SUNP. (Assuming current generic market size of $200m with 4
generic players) Large part of US generics growth is dependent upon the revenue
from this product.
Integration of Taro's US business would add a well-established portfolio of dermatology
and pediatric products to Sun's portfolio which do not overlap with Sun's core portfolio.
We have not factored in any synergy due to SUNP's acquition, thus any developments
for Taro will add additional upside to our projections.
Further, if there is a USFDA clearance to Caraco (Warning letter given in 2008) there
will be further upside in our projections. Historically Sun has been able to resolve the
warning letters issued to its Cranbur y facil ity and Taro's Canadian facility. These
instances vindicates sooner clearance of Caraco facility as well.
It is pertinent to note that the company has 382 ANDA filings (including 6 ANDAs filed
this quarter) till date with 151 ANDAs pending for approval, highest number of filings by
an Indian pharma company. Management has guided for 25 ANDA filings during FY12
Valuation
We expect Sun Pharma to report 26% growth in revenues in FY12E and 20.7% growth in
FY13E. EBIDTA margins are expected to increase from 28.8% in FY11 to 33.4% in FY12E
and 33.8% in FY13E. Earnings will grow by 30% CAGR over FY11-13E. We maintain target
price of Rs 513 (23x FY13E core earnings of Rs22.1). At CMP, the stock trades at 22x
FY12E and 17x FY13E EPS.
350
390
430
470
510
550
Rs
0
12
24
36
48
60 %
Sun Pharma(LHS) Rel to Nifty (RHS)
Pharma Sector
72
Sun Pharma - Domestic Metrics
Sun Pharma - Therapeutic growth Field Force Productivity
FY11% MAT MAT YoY
CNS 27.6% 686.1 581.0 18.1%
CVS 19.5% 484.8 390.8 24.1%
Gastro 13.7% 340.8 270.7 25.9%
Gynecology 8.3% 206.4 176.0 17.3%
Pain Mgmt 5.1% 127.1 94.6 34.4%
Respiratory 4.3% 106.0 92.4 14.8%
Ophthalmology 4.8% 120.4 98.6 22.1%
Anti-Neoplastics 0.1% 2.6 2.8 -9.8%
Anti-diabetic 9.2% 227.6 177.3 28.3%
Others 7.3% 181.7 143.0 27.1%
Acute 40.7% 1011.0 818.1 23.6%
Chronic 59.3% 1472.5 1209.1 21.8%
Total Sal es 100.0% 2483.5 2027.2 22.5%
Jul ' 11 MAT growth for Sun Pharma has been above i ndustry
rate at 23%
Sun Pharma has added just 100 people to its field force during FY11
Higher MR productivity has resulted into industry out-performance
Sun has the highest MR productivity amongst its Indian peers
Sun Pharma
Rs Cr Ther api es MAT MAT YoY
Jun' 10 Jun' 11 Gr.
Pantocid CNS 64.10 77.68 21.2%
Susten Gynaec 54.47 60.20 10.5%
Aztor CVS 48.91 58.38 19.4%
Glucored Anti-Diabetes 52.07 56.51 8.5%
Gemer Anti-Diabetes 38.43 50.69 31.9%
Pantocid DSR CNS 32.86 40.67 23.8%
Oxetol CNS 29.75 36.35 22.2%
Clopilet CVS 28.08 34.31 22.2%
Cardivas CVS 26.86 32.43 20.7%
Encorate chronoCVS 30.03 32.20 7.2%
Total 405.6 479.4 18.2%
Sun Pharma's out-performance was due to strong volume uptake
in existing brands coupled with 8% growth from new launches
during MAT Jul'11
Pantocid,, Oxetol, Aztor & Cardiva S clocked 20%+ growth during
the period leading to 18% growth from the top 10 brands
1.7
2.6
8
5.5
6.5
12.8
Sun Industry
Total Gr. 22.5%
Total Gr. 14.5%
6.2
7.4 7.8
7.0
8.8
19.2
48
37
43
48
38
17.2
15.4
25.0
23.1
0
1000
2000
3000
-6
1
8
15
22
29
36
43
50
Field force Productivity
Dom Gr (%) New launches
Pharma Sector
73
Sun Pharma
Financial Snapshot
Rs mn FY11 YoY % FY12E YoY % FY13E YoY %
A. Formul ati ons ( 1 + 2 + 3 ) 52783 49.9% 66923 26.8% 80990 21.0%
1. Domestic 23801 30.1% 27440 15.3% 32350 17.9%
2. US ( a + b ) 23954 117.5% 33197 38.6% 40782 22.8%
a. Taro 10062 - 20531 104.0% 22585 10.0%
b. Caraco 13892 26.1% 12666 -8.8% 18197 43.7%
- Base 6148 47.0% 9619 56.5% 8886 -7.6%
- FTF 7743 - 3046 - 9311 -
3. RoW 5029 -14.7% 6286 25.0% 7858 25.0%
B. API 5212 -5.1% 6119 17.4% 7221 18.0%
Domestic 1130 10.6% 1220 8.0% 1342 10.0%
Exports 4082 -8.7% 4899 20.0% 5879 20.0%
C. Ot hers 70 -9.4% 93 32.5% 95 2.0%
Consol i dated Revenues ( A + B + C ) 58066 42.4% 73135 26.0% 88306 20.7%
FTF 7743 13.4% 3046 -60.7% 9311 205.6%
Taro 10062 - 20531 104.0% 22585 10.0%
Base (Exlc - FTF) 40261 18.6% 49558 23.1% 56410 13.8%
Reported EBITDA 19,890 45.6% 25,204 26.7% 32,364 28.4%
EBITDA % 34.8% 34.5% 36.7%
- FTF EBITDA 5420 - 1791 - 5875 -
- Taro EBITDA 2516 - 5954 136.7% 6775 13.8%
- Sun Base EBITDA 11954 33.0% 17458 46.0% 19714 12.9%
Total Base EBITDA 14,470 61.0% 23,412 61.8% 26,490 13.1%
EBITDA % - Base Busi ness 28.8% 33.4% 33.5%
Reported PAT 18,386 46.0% 22,365 21.6% 28,250 26.3%
PAT % 32.1% 30.6% 32.1%
- FTF PAT 4987 - 1648 - 5405 -
- Taro PAT 2365 - 5749 143.1% 6324 10.0%
- Sun PAT 11034 21.4% 14968 35.6% 16522 10.4%
Total Base PAT 13399 47.5% 20717 54.6% 22846 10.3%
PAT % - Base Busi ness 26.6% 29.6% 28.9%
Reported EPS 17.8 46.0% 21.6 21.6% 27.3 26.3%
- FTF EPS 4.8 - 1.6 - 5.2 -
- Taro EPS 2.3 - 5.6 143.1% 6.1 10.0%
- Sun EPS 10.7 21.4% 14.5 35.6% 16.0 10.4%
EPS - Base Busi ness 12.9 47.5% 20.0 54.6% 22.1 10.3%
PE @ CMP 26.4 21.7 17.2
Base PE @ CMP 36.2 23.4 21.2
Pharma Sector
74
Pr oduct Sal es for Sal es for Expect ed Br anded
Gener i c SUNP FY12 SUNP FY13 Launch Sal es
Name ($ Mi l i on) EPS 2012 ($ Mi l i on) EPS 2013 Date ($ Mi l l i on) Excl usi vi ty
Gemzar Gemcitabine 3.57 0.07 0.00 0.00 Launched 634 10+
Taxotere Docetaxel 40.33 1.05 20.17 0.52 Launched 1100 5
Uroxatral Al fuzosi n 6.25 0.15 0.00 0.00 Launched 250 8
Exelon Rivastigmine 15.0 0.3 4.5 0.1 Launched 93 2+
Eloxatin Oxaliplatin 0.00 0.00 60.00 1.68 Aug-12 1500 7
Boniva Injectible Ibandronate Sodium 0.00 0.00 3.55 0.15 Aug-12 71 5+
Gabitril (2mg & 4mg) Tiagabine HCL 1.08 0.02 0.00 0.00 Oct-12 18 Unshared
Stalevo Carbidopa, 0.00 0.00 28.70 0.80 Apr-12 205 Unshared
Entacapone, Levodopa
Lexapro Escitalopram Oxalate 0.00 0.00 11.50 0.30 FY13 2300 4+
Plavix Clopidogrel Bisulfate 0.00 0.00 50.00 1.00 May-13 6666 7+
Prandin Repaglinide 0.00 0.00 24.00 0.67 FY13 200 Unshared
Total 66.2 1.6 202.4 5.2 13037
Sun Pharma
Pharma Sector
75
Financial Tables
Net Sal es 40,103 57,214 73,135 88,099
Growth (%) -4.2 42.7 27.8 20.5
Expendi t ure 26,441 37,324 47,932 55,734
Raw Materials 10,977 14,607 19,399 23,963
SGA 9,146 11,695 15,197 16,789
Employee Cost 4,008 7,996 9,115 10,482
Other Exp 2,311 3,027 4,221 4,500
EBITDA 13,662 19,890 25,204 32,364
Growth (%) -26.8 45.6 26.7 28.4
EBITDA margi n (%) 34.1 34.8 34.5 36.7
Depreciation 1,533 2,041 2,557 2,871
EBIT 12,129 17,850 22,647 29,493
EBIT margi n (%) 30.2 31.2 31.0 33.5
Other Income 1,686 2,733 2,942 2,830
PBT 14,148 20,583 25,589 32,323
Tax 679 1,284 2,047 2,586
Adj usted PAT 13,552 17,472 21,188 26,764
(Profit)/loss from JV's/Ass/MI 962 -913 -1,177 -1,487
Growth (%) -30.7 46.0 21.6 26.3
Net Margi n (%) 31.4 32.1 30.6 32.1
E/O items 334 0 0 0
Reported PAT 13,511 18,386 22,365 28,250
Growth (%) -25.7 36.1 21.6 26.3
Net wort h 78,289 95,208 113,442 136,473
Mi nor i t y Int er est 1,932 8,472 9,649 11,135
Secured Loans 479 1,179 679 179
Unsecured Loans 1,233 3,077 2,577 2,077
Loan Funds 1,712 4,256 3,256 2,256
Net deferred tax liability -890 -3,652 -3,652 -3,652
Gross Block 27,401 43,947 48,447 53,447
Net bl ock 19,388 33,660 35,603 37,732
Invest ment 30,664 22,310 22,310 22,310
Cur r ent Asset s 37,121 60,622 79,507 103,655
Inventories 10,739 14,794 18,284 25,549
Sundry debtors 11,748 11,716 24,135 31,716
Loans & advances 8,562 11,726 14,701 16,902
Current l i ab & Prov 7,579 14,308 16,726 18,485
Provisions 3,484 5,105 5,943 6,638
Tot al Asset s 81,042 104,284 122,694 146,212
Key Ratios
EBITDA Margin 34.1 34.8 34.5 36.7
Net Margin 31.4 32.1 30.6 32.1
ROCE 18 22 22 23
ROE 18 22 23 24
RoIC 29.9 34.0 32.1 33.4
Per Share Data (Rs)
EPS 12.2 17.8 21.6 27.3
CEPS 13.3 19.7 24.1 30.1
BVPS 75.6 91.9 109.5 131.8
DPS 3.2 4.7 5.4 6.0
Val uati ons (x)
PER 38.5 26.4 21.7 17.2
P/CEPS 35.1 23.7 19.4 15.6
P/BV 6.2 5.1 4.3 3.6
EV / Sales 12.0 8.2 6.4 5.2
EV / EBITDA 35.2 23.5 18.5 14.1
Dividend Yield (%) 0.7 1.0 1.2 1.3
Geari ng Rati o (x)
Net Debt/ Equity -0.1 -0.2 -0.2 -0.2
Net Debt/EBIDTA -0.3 -0.8 -0.7 -0.8
Cash Fl ow (Rs. Mn)
Depreciation 1,533 2,041 2,557 2,871
Chg in working cap -4,675 -458 -16,466 -15,288
Tax paid -1,106 -1,284 -2,047 -2,586
Free Cash Fl ow 5,295 4,943 2,191 10,491
Other income 1,686 2,733 2,942 2,830
Investments -12,069 8,354 0 0
Loans Taken / (Repaid) -77 2,544 -1,000 -1,000
Others -2,131 1,126 0 0
Fi nanci ng Cashf l ow -5,529 283 -5,132 -6,219
Net chg i n cash -10,618 16,314 1 7,102
Sun Pharma
FY10 18,890 3,937 20.8 2,665 31.5 13.7 31.2 20.4 14.1 6.5
FY11 21,825 3,652 16.7 2,536 30.0 (4.9) 29.2 21.4 15.1 5.3
FY12E 24,201 4,470 18.5 3,051 36.1 20.3 30.2 17.8 13.0 4.8
FY13E 28,242 5,352 19.0 3,738 44.2 22.5 31.1 14.5 11.0 4.2
Val uation table
Torrent Pharma
Fairly Valued - Maintain Hold
Reco Previous Reco
Hold Hold
CMP Target Price
Rs576 Rs618
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute (2) (6) 10 2
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg TRP@IN
Face Value (Rs) 5
52 Week H/L (Rs) 687/497
Promoters 71.5 71.5 71.5
FII/NRI 4.3 3.7 3.5
Public 7.7 7.9 7.9
Source: Capitaline
Tor r ent ' s Phar ma domest i c busi ness t o gr ow by 13% CAGR
over FY11-13E l ed by r ec ent ex pansi on i n f i el d f or c e, bet t er
c ont r i but i on of chr oni c por t f ol i o and 35-40 new l aunches
US busi ness t o gr ow by 38% CAGR over FY11-13E on ac c ount
of 7-8 new l uanhc es per year. Tor r ent has 32 ANDAs pendi ng
appr oval and 22 mor e ar e under devel opment
For mul at i on suppl y agr eement s w i t h Ast r a Zenec a and
anot her MNCs f or br anded emer gi ng mar k et s ar e ex pec t ed t o
r amp up over t he nex t 2-3 year s
Mai nt ai n Hol d w i t h a t ar get pr i c e of Rs618 (14x FY13 ear ni ngs
of Rs44.2)
Domestic formulations - higher chronic exposure to aid margin erosion
Domestic formulations (contributes 40%) to grow by 13% CAGR over FY11-13E -
Recent expansion in field force, higher concentration of chronic portfolio and 35-40
new launches in FY12E
The chronic portfolio (CVS, CNS & anti-diabetic constitute 60%), which contributes
60% of domestic portfolio will help Torrent to protect margin erosion as the
company's acute portfolio is witnessing pricing pressure due to increased
competition mainly in anti-infective & pain segments
MNC tie-ups for branded generics adds to long-term growth potential
Over the last two years, Torrent Pharma has entered into tie-ups for formulation supplies
with two MNCs, one being AstraZeneca. The agreement with Astra, signed in Mar
2010, involves supply of 18 products for sale in nine branded generic markets
Both the deals involve milestone payments. We expect material contribution to take at
least a couple of years to fructify
Torrent also has a tie-up with Novo Nordisk to manufacture and supply human insulin
for Indian markets. Increased capacity for Insulin manufacturing will lead higher revenue
traction from this deal
US & EMs - New launches to aid revenue momentum
In the US, the company has 60 ANDA filings with 32 pending for approvals and 22
under development. 7-8 new launches expected in FY12E/13E
Ramp-up in key markets of Brazil and RoW will lead to 13% CAGR in export revenues
over FY11-13E
Valuation
We expect Torrent to report 11% revenue growth in FY12E and 17% growth in FY13E.
EBIDTA margins are expected to increase from 16.7% in FY11 (adjusted margins 18.5%)
to 18.5% in FY12E and 19% in FY13E. Earnings will grow by 21% CAGR over FY11-13E.
Maintain Hold with a target price of Rs618 (14xFY13E EPS of Rs44.2). At CMP, Torrent
trades at 18x FY12E and 15x FY13E EPS.
500
540
580
620
660
700
Rs
-10
0
10
20
30
40 %
Torrent Pharma (LHS) Rel to Nifty (RHS)
Pharma Sector
77
2.6
5.8
5.5
13.5
6.5
Torrent Industry
Total Gr. 19%
Total Gr. 14.5%
Torrent Pharma Domestic Met rics
Torrent Pharma - Domestic Metrics Field force productivity
FY11% MAT MAT YoY
Cardiac 31.9 282.4 249.6 13.1
Gastro 18.7 165.6 142.5 16.2
CNS 20.9 185.1 157.4 17.6
Anti-Infective 14.4 127.3 92.9 37.1
Anti-Diabetic 5.7 50.3 43.5 15.6
Pain 3.0 26.1 22.1 18.4
Vit/ Minerals 1.6 14.2 11.5 23.0
Respiratory 0.6 5.0 4.6 9.3
Derma 1.0 9.2 7.4 23.3
Others 2.2 19.2 11.9 61.7
Acute 41.1 363.2 288.2 26.0
Chronic 58.9 521.1 455.2 14.5
Total Sal es 100.0 884.3 743.4 19.0
Jul ' 11 MAT growth for Torrent has been strong at 19%
The company has hired ~900 people during the last 2 years
MR productivity declined due to higher attrition rate in FY11
Jun' 10 Jun' 11 Gr.
Alprax CNS 33.14 36.95 11.5%
Topcef Anti-Infective 23.73 34.06 43.5%
Nikoran Gynaec 29.18 32.61 11.8%
Dilzem CVS 29.96 31.37 4.7%
Domstal CVS 27.56 29.84 8.3%
Nebicard Gastro 17.95 21.56 20.1%
Droxyl Anti-Infective 19.45 20.49 5.3%
Azulix-mf Anti-Diabetics 14.40 18.75 30.2%
Nexpro rd Gastro 12.82 18.32 43.0%
Deplatt-a CVS 14.51 16.71 15.2%
Total 222.7 260.6 17.0%
Torrent's growth during MAT Jul'11 was led by strong volume
uptake and new product launches. The company witnessed
intense pricing pressure from local peers during the period
Torrent Pharma
5.4
5.2 5.2
4.5
5.1
16.7
5.2
15.7
19.8
0
500
1000
1500
2000
2500
0
5
10
15
20
25
Pharma Sector
78
Financial Snapshot
Rs mn FY11 FY12E YoY % FY13E YoY %
For mul at i ons 19371 21485 10.9% 24561 14.3%
Domest i c 8416 9425 12.0% 10745 14.0%
Expor t s 10955 12060 10.1% 13816 14.6%
Brazil 3551 3977 12.0% 4574 15.0%
Heumann 2812 2812 0.0% 2952 5.0%
Europe (Without Heumann) 1476 1697 15.0% 1952 15.0%
US 1143 1651 44.4% 2171 31.5%
Russia CIS 620 434 -30.0% 456 5.0%
ROW 1353 1488 10.0% 1712 15.0%
Cont ract Manufacturi ng 2199 2499 13.6% 3524 41.0%
Total Sal es 21571 23984 11.2% 28084 17.1%
Ot her s 1081 850 -21.4% 650 -23.5%
Gross Sal es 22651 24833 9.6% 28734 15.7%
Licensing Income 230 200 - 0 -
Other income 210 0 - 0 -
Cor e Revenues 22211 24633 10.9% 28734 16.6%
EBITDA 3,652 4,470 22.4% 5,352 19.7%
EBITDA % 16.7 18.5 19.0
Adjusted EBITDA % 18.2 18.5 19.0
PAT 2,536 3,051 20.3% 3,738 22.5%
PAT % 11.6 12.6 13.2
EPS 30.0 36.1 20.3% 44.2 22.5%
PE @ CMP 21.4 17.8 14.5
Torrent Pharma
Pharma Sector
79
Financial Tables
Net Sal es 18,890 21,825 24,201 28,242
Growth (%) 15.9 15.5 10.9 16.7
Expendi t ure 14,953 18,173 19,732 22,890
Raw Materials 5,710 6,965 7,914 9,235
SGA 5,406 6,553 6,861 7,871
Employee Cost 3,162 3,895 4,114 4,801
Other Exp 675 760 842 983
EBITDA 3,937 3,652 4,470 5,352
Growth (%) 31.3 -7.2 22.4 19.7
EBITDA margi n (%) 20.8 16.7 18.5 19.0
EBIT 3,331 3,026 3,799 4,622
EBIT margi n (%) 17.6 13.9 15.7 16.4
Other Income 216 81 104 104
PBT 2,942 3,427 3,964 4,559
Tax 632 725 714 821
Adj usted PAT 2,665 2,536 3,051 3,738
Growth (%) 13.7 -4.9 20.3 22.5
Net Margi n (%) 14.1 11.6 12.6 13.2
E/O items -314 440 200 0
Reported PAT 2,311 2,702 3,251 3,738
Growth (%) 25.3 16.9 20.3 15.0
Net wort h 8,310 10,224 11,306 12,768
Secured Loans 3,646 3,946 4,196 4,496
Unsecured Loans 1,578 1,774 1,899 2,049
Loan Funds 5,224 5,721 6,096 6,546
Gross Block 8,129 9,643 13,217 15,717
Net bl ock 5,412 6,355 9,192 10,962
Invest ment 1,412 1,460 1,460 1,460
Cur r ent Asset s 11,608 15,346 13,460 13,711
Inventories 3,236 5,048 4,913 4,886
Sundry debtors 2,982 3,404 4,114 4,801
Loans & advances 1,507 2,105 2,029 2,133
Current l i a & Prov 5,496 8,907 8,398 8,508
Provisions 1,280 1,427 1,358 1,415
Tot al Asset s 14,033 16,440 17,897 19,809
Key Ratios
EBITDA Margin 20.8 16.7 18.5 19.0
Net Margin 14.1 11.6 12.6 13.2
ROCE 28.5 21.1 23.4 25.7
ROE 31.2 29.2 30.2 31.1
RoIC 46.8 41.3 40.2 36.7
Per Share Data (Rs)
EPS 31.5 30.0 36.1 44.2
CEPS 34.5 32.2 41.6 52.8
BVPS 98.2 120.8 133.6 150.9
DPS 6.0 8.0 6.0 0.0
Val uati ons (x)
PER 20.4 21.4 17.8 14.5
P/CEPS 16.5 14.5 12.3 0.0
P/BV 6.5 5.3 4.8 4.2
EV / Sales 2.9 2.5 2.4 2.1
EV / EBITDA 14.1 15.1 13.0 11.0
Dividend Yield (%) 0.9 1.2 0.9 0.0
Geari ng Rati o (x)
Net Debt/ Equity 16.1 9.1 32.7 36.5
Cash Fl ow (Rs. Mn)
Chg in working cap 348 577 -1,005 -656
Tax paid -705 -725 -714 -821
Free Cash Fl ow 1,797 1,287 -556 1,376
Other income 216 81 104 104
Investments -17 -48 0 0
Equity Capital Raised 81 -1,190 -1,575 -1,682
Loans Taken / (Repaid) 398 497 375 450
Interest Paid -291 -121 -139 -167
Others -10 1,186 0 0
Fi nanci ng Cashf l ow -414 -415 -1,933 -1,992
Net chg i n cash 1,583 905 -2,385 -513
Torrent Pharma
FY10 7,473 1,730 23.2 1,249 13.9 19.6 23.4 10.3 7.6 2.3
FY11 8,240 1,500 18.2 951 10.6 (23.8) 16.1 13.5 8.9 2.1
FY12E 9,322 1,403 15.1 817 9.1 (14.1) 12.6 15.7 9.8 1.9
FY13E 10,846 1,915 17.7 1,210 13.4 48.1 16.8 10.6 7.3 1.7
Val uation table
Unichem Labs
In Restructuring Phase - Maintain Hold
Reco Previous Reco
Hold Hold
CMP Target Price
Rs143 Rs148
EPS change FY12E/13E (%) -20 / -12
Nifty 4,868
Sensex 16,162
Price Performance
(%) 1M 3M 6M 12M
Absolute (0) 0 (22) (26)
Rel. to Nifty 0 10 (9) (10)
Source: Bloomberg
26 September, 2011
Source: Bloomberg
Stock details
Bloomberg UL@IN
Face Value (Rs) 2
52 Week H/L (Rs) 269/138
Promoters 48.6 48.7 48.4
FII/NRI 7.4 7.5 5.7
Public 26.4 26.0 26.2
Source: Capitaline
Rest r uc t ur i ng i n t he domest i c mar k et , hi gher at t r i t i on r at e &
r ec r ui t ment of new MR' s w i l l t ak e a t ol l on domest i c busi ness
r esul t i ng i n 11% r evenue CAGR over FY11-13E
Out sour c i ng c ont r ac t w i t h MNC gener i c c ompany w i l l
c ommenc e i n H2FY12E; pot ent i al r evenues of Rs600mn &
Rs1.2bn i n FY12/13E r espec t i vel y
I nvent or y r at i onal i zat i on and addi t i on of new MR' s w i l l
c ont i nue t o pr essur i ze mar gi ns
Mai nt ai n Hol d w i t h a t ar get pr i c e of Rs148 (11x FY13E EPS of
Rs13.4)
Domestic formulations which contributes 70% to overall sales; will
remain subdued in FY12
Unichem is restructuring its distribution model in domestic market and moving from
distributors to C&F agents which will result in loss of one month's domestic sales in
FY12. Unichem is one of the few pharma companies, which is following distribution
model (~65% of domest ic sales) in the domest ic market . The company currently
maintains 60 days of inventory at the distributors, out of which 40 days is an unpaid
inventory. Post restructuring, inventory days will reduce to 20-30 days from current
levels resulting in loss of one -months sale
During FY11, Unichem witnessed one of the highest attrition rates in the industry i.e.
30%. This led to negative growth in domestic business in Q4FY11. Going ahead, the
company will be focusing on improving the productivity of newly recruited MRs. As a
result, domestic business will grow at subdued rate of 5% during FY12E
Exports formulations to grow at 8% CAGR over FY11-13E
Niche Generics (contri butes 8% to sales) to remain flat on account of pruni ng of
product pipeline and price erosion in the European market
US business (contributes 3% to sales) to grow at 23% CAGR over FY11-13E. Unichem
has 17 ANDA filings with 8 pending for approvals and 7 already commercialized
Commencement of outsourcing contract with MNC company in H2FY12E will generate
revenues of Rs600mn & Rs1.2bn in FY12/13E respectively
Valuation
We expect Unichem to report 13% revenue growth in FY12E and 16% growth in FY13E.
We expect EBIDTA margins to range from 18.2% in FY11 to 15% in FY12E and 17.7% in
FY13E. Earnings will grow by 13% CAGR over FY11-13E. Revise the target price on the
stock to Rs148 (11x FY13 EPS) with a Hold rating. At current price, the stock trades at 15.7x
FY12E EPS of Rs9.1 and 10.6x FY13E EPS of 13.4
100
135
170
205
240
275
Rs
-30
-16
-2
12
26
40 %
Unichem Labs (LHS) Rel to Nifty (RHS)
Pharma Sector
81
Unichem Labs
Growth drivers - Volume/ Price/ New launches
Unichem's underperformance to the industry during MAT Jul'11
was led by restructuring and key brands reporting de-growth
This was mainly due to increased competition and high attrition
rate in its field force. Attrition for Unichem stood at 25-30%
Unichem Labs - Domestic Metrics
Unichem' s therapeutic growth
FY11% MAT MAT YoY
Cardiac 46.3 299.4 262.9 13.9
Anti-Infective 15.4 99.8 101.2 -1.3
CNS 13.7 88.3 83.7 5.4
Pain 3.8 24.5 25.0 -2.1
Gastro 8.5 55.0 52.4 5.1
Anti- diabetic 3.5 22.7 21.7 4.7
Respiratory 3.0 19.5 17.4 12.1
Vit/ Minerals 2.6 16.9 19.7 -14.3
Derma 2.2 13.9 9.2 51.8
Others 1.0 6.6 5.8 13.0
Acute 36.2 233.8 228.0 2.5
Chronic 63.8 412.8 370.9 11.3
Total Sal es 100.0% 646.6 598.9 8.0%
Jun' 11 MAT growth for Uni chem has been l ower at 8%
2.9
2.6
2.2
5.5
6.5
2.9
Unichem Industry
Total Gr. 8%
Total Gr. 14.9%
Top 10 brand performance
Jun' 10 Jun' 11 Gr.
Losar h CVS 59.63 70.68 18.5
Losar CVS 56.64 63.06 11.3
Ampoxin Anti-Infective 65.48 60.60 -7.5
Trika CNS 35.62 34.90 -2.0
Unienzyme Gastro 24.76 27.01 9.1
Tg-tor CVS 16.46 16.08 -2.3
Vizylac Vitamins 15.02 15.67 4.3
Serta CNS 12.82 12.91 0.7
Telsar CVS 10.15 12.24 20.5
Telsar-H CVS 10.24 11.76 14.9
Total 306.8 324.9 5.9
Competition is expected to increase in the company's top selling
brands
Pharma Sector
82
Revenue Breakup (Consolidated)
Rs mn FY11 FY12E YoY % FY13E YoY %
For mul at i ons 7463 7893 6% 8751 11%
Domestic 5758 6072 5% 6764 11%
Asia & Africa 333 366 10% 410 12%
Europe & UK 1119 1144 2% 1195 4%
Latam 17 19 10% 22 14%
US & Canada 237 293 24% 360 23%
New cont ract s 0 600 - 1200 -
API 739 790 7% 859 9%
Others 195 38 -80% 34 -11%
Total Sal es 8397 9321 11% 10844 16%
EBITDA 1,500 1,403 -6% 1,915 36%
EBITDA margins % 18.2 15.1 17.7
APAT 951 817 -14% 1,210 48%
PAT margins % 11.5 8.8 11.2
EPS 10.6 9.1 -14% 13.4 48%
PE @CMP 13.5 15.7 - 10.6 -
Unichem Labs
Pharma Sector
83
Financial Tables
Net Sal es 7,473 8,240 9,322 10,846
Growth (%) 1.6 10.3 13.1 16.4
Expendi t ure 5,743 6,740 7,919 8,931
Raw Materials 2,579 2,761 3,339 3,997
SGA 1,952 2,353 2,642 2,887
Employee Cost 1,011 1,365 1,535 1,616
Other Exp 202 261 402 431
EBITDA 1,730 1,500 1,403 1,915
Growth (%) 64.7 21.7 -13.3 -6.5
EBITDA margi n (%) 23.2 18.2 15.1 17.7
EBIT 1,498 1,208 1,054 1,539
EBIT margi n (%) 20.0 14.7 11.3 14.2
Other Income 66 69 9 29
PBT 1,532 1,267 1,048 1,551
Tax 304 316 231 341
Adj usted PAT 1,252 951 817 1,210
Adj usted PAT after MI 1,249 951 817 1,210
Growth (%) 19.5 -23.8 -14.1 48.1
Net Margi n (%) 16.7 11.5 8.8 11.2
E/O items -22 0 0 0
Reported PAT 1,231 951 817 1,210
Growth (%) 13.9 -22.7 -14.1 48.1
Net wort h 5,629 6,177 6,823 7,549
Loan Funds 358 500 850 1,050
Gross Block 4,646 5,370 7,081 7,822
Net bl ock 3,334 3,773 5,237 5,643
Invest ment 592 213 213 213
Cur r ent Asset s 3,445 4,035 4,303 4,996
Inventories 1,095 1,503 1,773 2,047
Sundry debtors 1,670 1,857 2,004 2,316
Cash & bank balance 236 152 -66 10
Current l i a & Prov 1,673 1,758 1,880 2,071
Provisions 356 366 326 346
Tot al Asset s 6,334 7,055 8,051 8,977
Key Ratios
EBITDA Margin 23.2 18.2 15.1 17.7
Net Margin 16.7 11.5 8.8 11.2
ROCE 27.9 20.2 14.8 19.3
ROE 23.4 16.1 12.6 16.8
RoIC 21.2 14.0 11.0 14.1
Per Share Data (Rs)
EPS 13.9 10.6 9.1 13.4
CEPS 16.5 13.8 13.0 17.6
BVPS 62.5 68.6 75.8 83.9
DPS 4.0 4.0 1.6 4.6
Val uati ons (x)
PER 10.3 13.5 15.7 10.6
P/CEPS 8.7 10.4 11.0 8.1
P/BV 2.3 2.1 1.9 1.7
EV / Sales 1.8 1.6 1.5 1.3
EV / EBITDA 7.6 8.9 9.8 7.3
Dividend Yield (%) 2.8 2.8 1.1 3.2
Geari ng Rati o (x)
Cash Fl ow (Rs. Mn)
Chg in working cap -91 -591 -362 -426
Tax paid -304 -316 -231 -341
Operat i ng Cashf l ow 1,312 593 811 1,148
Capital expenditure -435 -887 -1,200 -800
Free Cash Fl ow 878 -293 -389 348
Other income 66 69 9 29
Investments -582 379 0 0
Invest i ng Cashf l ow -950 -439 -1,191 -771
Equity Capital Raised -26 18 -8 0
Loans Taken / (Repaid) -40 142 350 200
Interest Paid -10 -9 -15 -17
Others 27 30 0 0
Fi nanci ng Cashf l ow -470 -239 163 -301
Net chg i n cash -107 -85 -217 76
Opening cash position 344 236 152 -66
Cl osi ng cash posi ti on 236 152 -66 10
Unichem Labs
Pharma Sector
84
BUY Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (stock price depreciation) of upto (-)10% within the next 12-18 months.
SELL The stock is believed to under perform the broad market indices or its related universe within the next 12-18 months.
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Emkay Research 26 September, 2011

Dr. Reddy's Lab

Ipca Laboratories Ltd

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