Motilal Oswal Healthcare Report PDF

Thematic | March 2015
Healthcare
Fortified capabilities,
sustained growth
Arvind Bothra ([email protected]);+91 22 3982 5584
Amey Chalke([email protected]);+91 22 3982 5423
Healthcare | Fortified capabilities, sustained growth
Index
Fortified capabilities, sustained growth

Bullish outlook on Indian generics: ARBP, SUNP, TRP our top bets
Page No.
Summary……………………………………………………………………………………………………………………………….. 3
Sector to continue commanding premium…..………………………………………………………………………….. 6-10
US: Cornerstone for growth...……..…….……………………...…………………………………………………………… 11-30

India: Structural drivers in place.……..……………………………………………………………………………………… 31-37
Case study: New product launches (CY10-14)……………………...….………………………………..……………… 38-42
RoW: High potential, but needs measured approach…..…………………………………………………………… 43-49
Sector Financial Outlook: Earnings momentum persisting…………………….………………………………….. 50-52
Selective stock picking to identify outperformers ……………………………………………………................. 53-56
Company section……………………………………………………………………………………………………………………. 57-139

1. Sun Pharma 58
2. Aurobindo 67
3. Torrent Pharma 83
4. Cadila Healthcare 90
5. Lupin 97
6. Dr Reddy's 105
7. Glenmark 112
8. Alembic Pharma 119
9. Cipla 126
10. IPCA 132
Appendix 1: Glossary of key terms ……………………………………………………….……………………………….. 140

Appendix 2: Outperformance of healthcare stocks ………………………………………………………………….. 141
Appendix 3: Key risks to sector outlook ……………………………………………….………………………………….. 146
Appendix 4: Company Snapshot (India Business) ………………..……………….………………………………….. 148
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
30 March 2015 2
Ipca Laboratories
19 March 2015 10
Healthcare
Indian generics: Fortified capabilities, sustained growth

Bullish outlook on Indian generics: ARBP, SUNP, and TRP our top bets
n Focus on complex generic opportunities in US, thrust on enriching domestic portfolio

mix and potential upside from M&A would drive strong growth for Indian generic
players (forecast 23% EPS CAGR). We attempt to identify winners in this space.
n Outlook for the domestic business remains robust, while measured expansion in RoW
markets would accrue long term benefit (presence in high growth markets).
n In our view, the sector merits premium multiples justified by predictable earnings
quality (free cash generation) and improving return ratios (high capital efficiency).
n We prefer Sun Pharma (SUNP – the leader marches ahead) among large caps, while
Aurobindo (ARBP – business transformation, deleveraging prospects) and Torrent (TRP
– upsides from acquisition not fully factored in) are our midcap favorites.
Unabated earnings acceleration led by improvement of business mix

Over the last five years, our coverage universe has registered core profit growth of
23%. High visibility on US complex generic portfolio launches, sustained strength in
domestic business and operating leverage from RoW scale-up would drive EPS
growth of 23% over FY15-17 for the sector. This would be backed by 18% revenue
growth and improved product mix, driving cumulative margin expansion of 70bp.
Growth visibility, higher capital efficiency justify valuation premium

Stronger earnings growth, improving capital efficiency, and healthy cash generation
have helped consistently re-rate Indian Pharma sector, which trades at 40.7%
premium to the broader market. We expect sector valuations to persist at current
levels (21x 1-year forward EPS), with divergence between companies attributable to
(a) earnings growth visibility, (b) execution success and (c) differentiation in product
pipeline offering better earnings predictability. SUNP and LPC emerge strongest in
the above criteria and hence merit premium multiples.
US: Focus on differentiated pipeline to help achieve 20% growth (FY15-17E)

Indian players still have significant headroom for growth in the US (USD 50b market),
with their current volume share limited to 22% (12% value share). Their deep
pipeline (~790 pending ANDAs) focused on differentiated products (50% of market)
would fuel market share gain. Incremental growth would be led by (a) complex
generic portfolio (mainly injectables), (b) participation in USD 50b worth patent
expirations, and (c) market share gains in existing portfolio.
India: Structural driver’s intact, execution the differentiator

Low penetration, and growing awareness and affordability would continue to drive
12-14% growth in domestic market. With impact of revised pricing policy behind, we
expect large companies to grow ahead of industry (17% CAGR), led by (a) focus on
chronic segments, (b) field force productivity, and (c) superior branding skills.
30 March 2015 4
RoW: Currency volatility poses headwind, long-term outlook robust

Turmoil in key emerging market currencies (Russia, Latam) would impede near-term
growth. However, Indian companies would grow sustainably (15-18%)in RoW
markets, led by (a) focus on select markets and profitability, (b) expansion of
product portfolio, and (c) widening geographic reach, led by bolt-on acquisitions.
Regulatory risks persist

Our positive stance on the sector remains subject to (a) maintenance of high quality
standards, as intensity of regulatory oversight (USFDA) increases, (b) increased span
of coverage of price control, affecting outlook on domestic market, and (c) impact on
US launches due to longer USFDA approval timeline (32 months now).
Exhibit 1: Valuation comparables

CAGR % (FY15E-17E) P/E (x) ROIC (%)
CMP Mkt Cap TP Up/Downside
Company (INR) (USD b) Rating (INR) (%) Sales EBITDA PAT FY15E FY16E FY17E FY15E FY16E FY17E
Indian Generics (Large Caps)
SUNP 1028 35 Buy 1220 19% 18 18 19 32 29 23 48 48 53
LPC 1975 14 Buy 2275 15% 19 25 28 39 29 24 29 33 37
DRRD 3449 10 Buy 3870 12% 12 16 16 27 24 20 15 17 19
CIPLA 701 9 Neutral 730 4% 19 28 39 46 32 24 12 17 21
Mean (Large Caps) 17 22 26 36 28 23 26 29 33
Indian Generics (Mid Caps)
ARBP 1136 5 Buy 1645 45% 16 23 26 22 17 14 20 21 24
CDH 1661 6 Buy 1980 19% 20 27 29 31 23 18 20 24 26
GNP 792 4 Buy 950 20% 21 25 25 27 22 17 18 18 21
IPCA 648 1 Neutral 725 12% 16 24 31 25 18 14 13 15 17
TRP 1135 3 Buy 1410 24% 19 25 25 28 22 18 22 22 26
ALPM 447 1 Buy 500 12% 24 32 33 29 21 16 32 36 37
Mean (Mid Caps) 19 26 28 27 21 16 21 23 25
CRAMS
DIVI 1804 4 Neutral 1910 6% 21 22 20 27 23 19 25 26 27
BIOS 432 1 Sell 410 -5% 17 16 12 21 19 17 9 9 9
Mean (CRAMS) 19 19 16 24 21 18 17 17 18
MNCs
GLXO 3256 5 Neutral 3300 1% 16 30 30 66 45 39 318 165 163
AVEN 3266 1 Neutral 3800 16% 14 22 28 38 29 23 22 29 31
Mean (MNCs) 15 26 29 52 37 31 170 97 97
Mean (Coverage – w/o MNCs) 18 24 26 33 25 20 20 23 25
Prices as on March 26, 2015 Source: Company, MOSL
30 March 2015 5
Sector to continue commanding premium

Earnings momentum and strong capital efficiency drive multiple re-rating
n The Indian Pharma sector has consistently outperformed the broader market (Sensex)
for the last five years. The sector average P/E multiple has expanded from 16-18x five
years ago to 21-22x now.
n Large part of this outperformance can be attributed to strong earnings CAGR of 23%
over FY09-14, with steady improvement in profitability/return ratios.
n For midcaps, we have observed that as they gain critical revenue size of USD 775m+,
backed by consistent earnings, they start getting compared with large peers and
undergo structural re-rating (CDH, TRP, ARBP for instance).
n We believe premium multiples for the sector are likely to persist, and expect strong
earnings visibility and improving cash flows to support valuations.
Sector outlook bullish; stock selection key to outperformance

We are constructive on the prospects of Indian generics players on the back of:
1. Huge growth opportunity in the underpenetrated complex generics space in the
US (50% of USD 50b market), which would help Indian companies to bridge the
gap between their volume share (22%) and value share (12%) in the US
2. Structural drivers persisting for the domestic formulations market, leading to 12-
14% long-term growth
3. Strong financial health (low leverage, high return ratios) and stable cash flows,
lending valuation support
Despite five years of outperformance, we believe selective stock-picking is the key to

identify winners.
Forecast 23% EPS CAGR for the sector over FY15-17

For our coverage names, we project earnings CAGR of 23% over FY15-17, supported
by robust revenue visibility (18% CAGR, 73% of EPS growth) and cumulative EBITDA
margin expansion of 70bp (19% of EPS growth). In addition, upside from one-off
opportunities (first to files) would provide tailwind to earnings and cashflows.
Exhibit 2: Sector earnings outlook remains strong Exhibit 3: Dissecting earnings levers over FY15-17E (INR b)
PAT (INR b) PAT growth (%) Percentage contribution to growth
34 35
29 72 % 19 % 9%
26 24
23
17
10
289
189
-2
50 63 84 92 108 140 189 232 289 PAT (FY15E) Sales Gr. Margin Imp. Financial PAT (FY17E)
Lev.
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Source: Company, MOSL Source: Company, MOSL
Bias towards earnings visibility, execution success

Our stock preference is largely predicated on two factors: (a) earnings visibility led
by depth and quality of pipeline and (b) execution capability evidenced by financial
discipline and return ratios. We believe the US (33% of sector revenues) would
30 March 2015 6
continue to be pivotal growth driver for Indian companies, given that pipeline built
in complex generic areas would likely get monetized. India business continues to
provide steady cash flows and profitability. Despite seemingly high valuations
(compared to market), the Pharma sector is likely to continue trading at premium
multiples (21x one-year forward EPS).We dissect the underlying drivers.
Exhibit 4: Indian generics (coverage snapshot)
Up/Dow Target
Company Rating TP nside (%) P/E Vs Sector Rationale
Sector leading RoIC (45 %+), Differentiated US portfolio,
SUNP Buy 1,220 19% 27x 25% premium leadership in India business justify valuation premium.
Successful integration of RBXY is the next big catalyst.
LPC Buy 2,275 15% 27x 25% premium Strong execution track record, potential earning upgrades
emanating from US pipeline and high capital efficiency.
DRRD Buy 3,870 12% 22x In line Large cap stock, but in line with sector multiple due to
relatively slower EPS growth
Strong earnings recovery + Potential monetization of high
CIPLA Neutral 730 4% 24x 10% premium value Inhaler portfolio in US/EU. Includes INR 25/sh value for
Inhaler portfolio.
Factoring re-rating on the back of strong growth visibility and
ARBP Buy 1,645 45% 20x In line
deleveraging prospects
Strong core earnings growth of 29%, Improving return ratios
CDH Buy 1,980 19% 22x In line
and potential deleveraging.
Pick-up in US growth led by high impact Para IV launches
GNP Buy 950 20% 21x In line (gZetia, gFinacea), gradual reduction in gross debt and
turnaround in LatAm business
Regulatory issues affecting US business poses near-term
IPCA Neutral 725 12% 16x 25% discount overhang, hence valuation discount. Business model remains
robust and earnings growth likely from India, RoW.
Higher than expected synergies from Elder brands portfolio to
TRP Buy 1,410 24% 22x In line boost profitability. Ramp-up of US sales would also aid
operating leverage. Expect reduction in debt levels
Focus on right business mix in India and continued execution
ALPM Buy 500 12% 18x 10% discount in US launches would drive earnings upside. Valuation re-
rating justified by high EPS growth (31% CAGR)
Source: MOSL
Large caps to command premium valuations, but mid-caps
catching up
Shrinkage of valuation gap between large caps and midcap stocks in the last 12
months reflects increased scale of operations and improving pipeline quality in US
achieved by mid-cap companies. We believe that premium valuations (vs sector) for
large cap stocks is justified, given that large caps have a successful execution track
record, stronger RoIC and a formidable business built over the years, lending
predictable growth. SUNP and LPC are our preferred picks in large cap space.
Among midcaps, we like companies that are scaling up fast, have achieved sizeable
revenues (USD 750m+) and possess the potential to surprise on earnings, with
higher profitability translating into stronger free cash generation (hence,
deleveraging). In the midcap space, we like ARBP and TRP the most.
Sun Pharma (SUNP): Our target price of INR1,220 is based on 27x FY17E EPS, which
is at 25% premium to the sector (in line with current FY16 multiple). This is well
supported by (a) consistent earnings beat and execution, (b) differentiated product
focus, both in the US (derma, oncology) as well as India (dominant chronic
30 March 2015 7
franchise), (c) high focus on capital efficiency (FY15E RoIC at 47.6%, rising to 53.3% in
FY17E), and (d) potential synergies from RBXY merger (EPS accretive in FY17E).
Lupin (LPC): We expect LPC to trade at premium to sector average on strong

earnings outlook (28% CAGR), led by (a) unfolding of a differentiated US generics
pipeline (oral contraceptives, ophthalmology, other Para IVs), (b) continued market
share gain in domestic market, and (c) improvement of above industry RoIC (from
29% to 37% in FY17E). Our target price of INR2,275 is based on 27x FY17E EPS.
Aurobindo Pharma (ARBP): We expect ARBP’s valuation gap with peers (~30%) to
narrow on the back of (a) high earnings visibility (26% EPS CAGR) led by high-margin
injectables, penems launches in US, (b) potential turnaround of EU operations (30%
of sales) and (c) higher free cash generation resulting in deleveraging (D/E to reduce
to 0.3x by FY17E). Our target price of INR 1,645 (20x FY17E EPS), implies 45% upside.
Torrent Pharma (TRP): We expect TRP to be valued at higher PE multiple than its
historic average owing to (a) strong synergies with Elder brands driving margin
expansion, (b) robust US pipeline growing at a smaller base and (c) RoIC expansion of
420bp over FY15-17E. Strong earnings outlook (25% CAGR) and improved cash flows
(INR 10b free cash flow over FY15-17E) would aid deleveraging prospects.
Structural growth drivers position Indian players in sweet spot

Rising fiscal pressure necessitating higher push for generic products, economic
prosperity, rising awareness driving increased healthcare spend in emerging markets
bode well for long term growth prospects for Indian generic players. Implementation
of GDUFA would reduce ANDA approval timelines, while incremental launches in the
complex generics space would bolster growth prospects in the US, with improved
profitability.
US to be pivotal to profitable growth

With a well-diversified revenue base, Indian generic companies are likely to grow
their revenues at 20% CAGR, higher than respective industry growth trends, and
improve their market share sustainably. We analyze the dynamics of each major
geographical revenue source for Indian companies separately and assert that the US
would remain the key growth driver for our coverage universe, accounting for 38%
of revenue growth over FY15-17, followed by India (25%).
Exhibit 5: Dissecting revenue growth drivers (INR b) Exhibit 6: Rising share of US (as % of total sales)
Percentage contribution to growth
FY09 32 18 17 32
FY10 32 17 18 33
25 % 38 % 17 % 20 %
FY11 32 19 18 31
FY12 31 22 19 28
FY13 28 27 19 25
1,460 FY14 26 33 19 22
1,054
FY15E 25 33 18 23
FY16E 25 34 18 23
Sales India USA Row API & Sales FY17E 25 34 18 22
(FY15E) Others (FY17E)
India USA RoW API/Others
Source: MOSL, Company Source: MOSL, Company
30 March 2015 8
US (33% of sales): Gaining market share with focus on complex generics

We believe Indian companies have significant scope to bridge the gap between their
value share (12%) and volume share (22%) in the US generics market (USD 50b) over
the next five years. After strong revenue ramp-up over the last five years (US sales
grew at 34% CAGR), we expect growth in the US market to sustain at 20% CAGR over
the forecast period (FY15-17E), still significantly ahead of industry growth (7-8%).
This would be achieved through:
Exhibit 7: Key enablers
Thrust on
complex Deep ANDA
generics to pipeline and
help improving
differentiate execution
US portfolio
Potential
USD 55b
M&A
patent
opportunities
expiration in
to add
next 3 years
capabilities
Source: MOSL
n Focus on complex generic products, enabling sustainable high growth with

improving profitability: Over the last five years, Indian companies have directed
their R&D efforts towards building pipeline in complex generic products.
Complex generics include areas like transdermals, inhalational products,
injectables, dermatology, etc, which together account for almost 50% of the US
generics market value, with 6-8 players in the market, currently (against 15+ in
commoditized products). Product development in these areas takes long and is
expensive, implying high entry barriers and faster growth prospects (2x industry
growth). As these complex generic products get materialized over the next 3-5
years, we expect higher revenue/ANDA and better profitability for companies
that are well-positioned.
n Participation in patent expiration opportunities: Despite reduced number of
patent expiration opportunities, we still expect USD 55b worth patent
expirations over the next 3 years. With high success in Para IV launches, Indian
companies would participate in the additional generic market (USD 2-3b
annually) aiding growth. Companies with first-to file status in patent expirations
would get a one-time boost to their profitability/cash flows.
n Deep ANDA pipeline lending revenue visibility: Within our coverage universe,
~790 ANDAs await approval from USFDA, with elongated approval timeline
impacting near-term revenue ramp-up. Implementation of GDUFA is likely to
lend higher visibility and predictability to revenue growth in the US.
30 March 2015 9
We believe strong backward integration of Indian players places them favorably to

address the likely pricing pressure from channel consolidation in the US (at
distributor level). Risks from increased regulatory oversight remain critical for the
sector’s ability to sustain valuation premium. With rising share of global ANDA filings
and relevance in the US market, this is likely to persist. Companies with successful
track record of remediating compliance issues in a timely manner and higher focus
on the same are better placed to address the risk.
India (25% of sales): Policy risks behind, growth to accelerate

Domestic business has been a key source of profitability for Indian companies,
generating higher share of profits than revenue contribution. We expect the Indian
pharmaceuticals market to remain one of the fastest growing globally (after China)
at 12-14% per year over the medium term. Favorable macro environment, and rising
income levels and awareness would remain the structural pillars of growth. The new
pricing policy had resulted in a one-time hit on industry growth in FY14 (6% versus
an average of 12% for the last 10 years).
SUNP, LPC, GNP emerge winners in domestic market

We have analyzed the critical success factors for the domestic market. We conclude
that strong execution, led by focus on the right product mix (tilt towards chronic
therapies), brand-building ability, and high field force productivity have helped
companies like SUNP, GNP, and LPC to consistently outperform their peers.
Regulatory delays and the new patent regime have led to dwindling of new product
introductions in the market (accounting for 29% of growth). We have analyzed the
new launch strategy of players in the domestic market in a separate case study.
RoW (18% of sales): Fx headwind a near-term challenge, outlook

robust
Rest of the world (RoW; excluding US, India and Europe) has witnessed strong
growth in the last five years (23% CAGR), as companies adopted the inorganic route
to expand reach while low base amplified growth. The recent depreciation in key
emerging market currencies like RUB (Russia), BRL (Brazil), etc, has posed growth
headwind for companies. However, the underlying growth drivers remain unaffected
and we are optimistic on the broader market opportunity (worth USD180b, ex-India)
for Indian companies. We continue to expect 15-25% growth in the RoW market for
our coverage companies, as they leverage on their presence and branding built over
the last 5-7 years.
30 March 2015 10
US: Cornerstone for growth

Gaining scale in world’s largest generics market
n Indian players still have significant headroom for growth in the US (USD 50b market),
with their current volume share limited to 22% (12% value share).
n Their deep pipeline (~790 pending ANDAs) focused on differentiated products (50% of
market) would fuel market share gain.
n Incremental growth would be led by (a) complex generics portfolio, (b) participation in
USD 55b worth patent expirations, and (c) market share gains in existing portfolio.
US generics have been at the forefront of growth for Indian companies, and in our
view, would remain a prominent earnings driver. The US is the world’s largest
generics market (USD 50b) and Indian companies have increased their market share
in US generics from 16% in 2008 to 22%+ now (total prescriptions – TRx), still leaving
scope for further inroads. The US now accounts for 33% of overall revenues for
Indian companies, having grown at 34% CAGR over the last five years (FY09-14),
buoyed by patent expirations (including exclusivities) and steady market share gains
on new products.
Exhibit 8: US growth to sustain at 20% CAGR(FY15-17E) for our coverage universe
Coverage US sales (INR b) 502

422
350
298
200
133
72 96
70
Source: Company, MOSL

We expect growth in US business for our coverage companies to persist at 20%
CAGR over FY15-17E, constrained by high base. Interestingly, incremental growth is
likely to be driven by complex generic products wherein Indian companies have
invested heavily over the last few years. This would be the biggest driver for
reducing the gap between Indian companies’ value share (12%) and volume share
(22%) in the US generics market.
Pipeline catalysts to drive EPS upside: SUNP, LPC, ARBP well positioned
Going forward, we believe sector EPS upgrades would be driven by execution
success and pipeline catalysts in the US market. Increased thrust on complex
generics (especially for large caps) would be the driver for the next wave of growth,
as me-too generics opportunities may not help achieve high-teens growth on a
larger base. While high R&D spends is a lead indicator of the quality of pipeline,
superior revenue/ANDA denotes effective execution as well as product selection.
Companies with fledgling presence in the US would continue to expand rapidly,
thanks to a favorable base, backed by strong backward integration (providing cost
advantage). Hence, this segment remains critical for justification of premium
30 March 2015 11
multiples for the sector. We believe SUNP, LPC, CDH and ARBP are the best plays in
the rising US generic story, as evidenced from the key metrics below.
Exhibit 9: US business (key monitorables)

FY14 CAGR ANDAs FY14
US Sales Annual Revenue/ R&D spend
Company % of total FY09-14 FY15-17E Total Pending
(USDm) filing ANDA (% of sales)
SUNP 1,621 60 37 17 489 131 20-25 7 6.5
LPC 799 44 25 21 203 95 18-20 12 8.2
DRRD 912 42 16 14 220 68 12-15 12 9.4
ARBP 567 41 36 18 374 182 40-50 5 5.0
CDH 357 30 33 26 255 157 25-30 7 5.0
GNP 336 35 16 25 169 75 10-15 5 9.0
TRP 127 14 84 17 72 19 8-10 5 3.0
IPCA 42 9 51 11 42 24 NA 4 3.0
Rapid expansion in US business over the last five years

Indian companies have benefited from a wave of patent expirations in the last five
years as well as a favorable base, resulting in 34% growth over FY09-14. Combined
US sales for our coverage (ex-RBXY) universe in the US market have increased from
USD1.4b in FY09 to USD5b in FY14. Consequently, the contribution of US sales has
increased from 18% in FY09 to 33% in FY14. Interestingly, expansion in the scale of
US business has also resulted in sharp improvement in profitability for the
companies. This can be attributed to:
n Strengthening of relationships with distributors, enabling increasing market
share with broadening of product portfolio
n Upside from exclusivity (FTF) opportunities, providing one-off boost
n Gradual foray into limited competition products, enabling better pricing as well
as sticky revenue stream
n Increase in overall share of generics in US pharmaceuticals market (83% now)
due to rising cost of healthcare, patent expirations
Exhibit 10: Rising share of Indian companies Exhibit 11: Generics: 83%+ of US market (by volumes)
Generic market (USD b) Brands (%) Generics (%)
Market share of leading Indian cos (%) 83
74 77 81
68 71
9.5 10.3
8.4
6.8
5.6 5.2 32 30
4.5 4.7 26 23 19 17
27.0 29.0 31.7 34.0 37.8 40.0 43.2 50.0
2006 2007 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013
MOSL, Company, IMS Health MOSL, Company, IMS Health
30 March 2015 12
Exhibit 12: US biz achieved scale… (sales in USD m) Exhibit 13: …but growth moderating off a high base
FY09 FY14 FY17E Taro Acq. FY09-14 (%) FY15-17E (%)

2,483 Cymbalta 84
upside
1,621
1,369 1,401
933 875 912 36 33 37
547 799 26
567 25 25 21
357 336 127 18 16 14 16 17 17
121 87 432 161 259 337 6 190
ARBP CDH DRRD GNP LPC SUNP TRP

ARBP CDH DRRD GNP LPC SUNP TRP
Growth prospects remain bright

We believe that structural growth drivers for the US generics market are intact and
Indian companies would continue to scale-up their business (estimate 18% CAGR),
albeit at a slower pace than the last five years, as they have achieved significant
scale. We believe the key drivers to sustain healthy growth in the US would be:
n Our coverage companies account for 18% market share in terms of total
prescriptions and 12% in terms of value (2013). Overall, Indian companies have
so far targeted products worth USD26b in sales of the total US generics market
size of USD 50b. US market penetration of Indian players is still much lower than
large global generics players (with 60-70% penetration).
n Accelerated pace of ANDA filings (680+ ANDAs filed) by Indian companies over
the last four years should bear fruit, as we expect healthy pace of launches in
the next 2-3 years.
Exhibit 14: Large part of generics market untapped by Indian Exhibit 15: Strong ramp-up in total ANDA filings by Indian
players so far (market size in USD b) players to bear fruit
Generic market (USD b) FY10 9MFY15
Market share of leading Indian cos (%) 489
10.3 374
9.5
8.4
6.8 255
5.6 220 228 207
5.2 203
4.5 4.7 172 158 169 204
106 103 127
66 72
25 42 45
27.0 29.0 31.7 34.0 37.8 40.0 43.2 50.0 16
2006 2007 2008 2009 2010 2011 2012 2013 ALPM ARBP CDH DRRD GNP IPCA LPC RBXY SUNP TRP
Source: MOSL, IMS Health. Industry sources Source: MOSL, IMS Health. Industry sources
n There is increased thrust on complex generics, which account for almost 50% of
the US generics pie and currently contribute less than 20% for Indian players.
Growth in complex generics is at twice the pace of commoditized generics.
n Sustained growth of 5-7% in US generics market would expand the market
opportunity. This would be driven by value growth in existing products (also
aided by benign price erosion) and annualized addition of USD 1.5b-2b due to
patent expirations (worth USD 65b over next five years).
30 March 2015 13
Exhibit 16: Volume penetration of Indian companies is still

below 25% (%) Exhibit 17: Value share is even lower 10% (%)
CY09 CY13 CY09 CY13
5.4 2.9
5.0
4.1
3.8
1.9
2.8 3.0 1.7 1.8
2.5 1.4 1.5
2.5 1.2
1.9 1.8 0.9 0.9
1.41.4 1.3 0.8 0.7
1.1 0.5 0.6
0.4
CDH DRRD GNP LPC RBXY SUNP Others CDH DRRD GNP LPC RBXY SUNP Others
Exhibit 18: Key enablers
Thrust on
complex Deep ANDA
generics to pipeline and
help improving
differentiate execution
US portfolio
Potential
USD 55b
M&A
patent
opportunities
expiration in
to add
next 3 years
capabilities
Source: MOSL
Focus on complex generics enabling sustainable growth

Indian pharmaceuticals companies have been cognizant of (a) reduced number of
Thrust on
complex new generics opportunities due to tapering of patent expirations for small
generics to help molecules, and (b) expanded scale of operations, rendering incremental growth
differentiate US
challenging. Over the last 3-5 years, most of the incremental R&D efforts have been
portfolio
towards complex generics opportunities such as injectables, oral contraceptives,
transdermals, and NDDS-based products. Complex generics account for ~50% of the
US generics market (worth USD 50b), exhibiting 2x the growth rates (vs overall
market. However, less than 15% of current US sales of Indian companies are derived
from these product segments currently. Incrementally, we expect over 40% of sales
to emanate from differentiated products or complex generics, which would help
Indian companies to grow at a healthy pace and improve their profitability. We
believe SUNP, LPC, DRRD, and CDH are best positioned to tap growth in these niches
or complex generics.
30 March 2015 14
Complex generics have high entry barriers

Of the US generics market size of USD 50b (as per IMS Health), the share of complex
generics has increased from 33% in 2008 to as high as 50% (USD 25b value) now.
Moreover, competitive intensity in these products is fairly low (4-7 in each product),
implying higher pricing and market share.
Long gestation, higher development costs constrained filings in this area

Indian companies’ exposure to the US generics market has been limited due to high
development costs and dedicated capacity requirement. Moreover, on a relatively
small base, the risk-reward for foray into complex generics appeared to be skewed
towards risk, earlier. As Indian companies ramped up their US business, aided by
slew of patent expirations and improved execution (better supply chain,
relationships and broader portfolio), their cash flows have been reinvested in
developing complex products. This is validated by higher R&D spend per ANDA filed
for most companies.
Exhibit 19: Sharp increase in R&D spend per ANDA filed by our coverage names
R&D/ANDA (INR m)
213
200
164
136
99
FY10 FY11 FY12 FY13 FY14
Companies like SUNP, LPC, ARBP and CDH appear to be strongly positioned to
benefit from incremental product approvals in these niche segments. This would be
crucial for them to sustain mid to high teens growth on their formidable scale in the
US as well as to improve on profitability.
Exhibit 20: Exhibit 20: Gearing up for complex generic opportunities

Generic Patented
market Market SUNP+RBXY DRRD GNP LPC Cipla CDH ARBP
Niche / Complex Generics (USD b) (USD b)
Dermatology 4 6
Transdermals 1 4
Ophthalmology 1 5
Oral Contraceptive 2 2
Respiratory / Inhalers 2 11
Nasal Spray s 1 2
Controlled Substance 3 5
Injectables 8 10
Modified Release 6 17
Biosimilar 0 40
Marketed In Pipeline Source: MOSL, Company, IMS Health
30 March 2015 15
What is complex about complex generics?

Complex generics include product segments that require:
n technically difficult formulation technology, like liposomes, nanoparticles,
microspheres, etc.
n difficult to synthesize/scale-up APIs, namely, peptides, low molecular weight
heparins, chiral chemistry, etc.
n differentiated route of delivery, like ophthalmic, locally acting drugs, injectables
n complex drug device combinations such as inhalers (DPI, MDI), nasal sprays,
transdermals.
Complex generics segments are attractive because of the low competitive intensity
currently, which implies better pricing as well as ability to garner market share. This
is evidenced by the fact that in most complex generics segments, the generics
market share is concentrated among the top five players. We believe complex
generics have significant entry barriers due to:
n Elongated product development timeline: For instance, we believe it took SUNP

more than seven years to develop liposomal doxorubicin (Doxil)
n Dedicated capacity requirement, necessitating upfront capex: LPC has put up a
dedicated facility for ophthalmic and oral contraceptives in Indore. Similarly,
DRRD has invested in a large injectables facility in Vizag.
n High costs of clinical development, sometimes requiring clinical trials as well:
This puts additional cost for developing the product (less than USD 5m vs less
than USD1m for simple product).
n Strong distribution reach/relationship: Some complex generics require branding
(like OC) or need to be distributed through the institutional channel
(government tender, hospitals, etc).
Exhibit 21: Complex generics have low competition

Share of top 5 players Generic mkt size (USD m)
Neuro 93% 2750

Controlled substance 92% 1000
Derma 88% 4500
Hormones 86% 900
Injectibles 77% 2600
Nasal 75% 820
Ophthal 70% 3700
Contraceptives 62% 1400
Transdermals 56% 7400
Source: MOSL, Company, IMS Health
R&D spends likely to remain elevated

R&D investments by Indian healthcare companies under our coverage have
accelerated significantly in the last five years. This can be largely attributed to shift in
focus of US filings towards the complex generics portfolio. This is evidenced by 32%
growth in R&D spend for the sector over the last four years compared to 21%
growth in topline during the same period.
30 March 2015 16
Exhibit 22: Ramp-up of R&D spend reflects focus on complex generics

FY10 (INR m) FY14 (INR m)
12,403
10,418
9,294
5,385
4,050 3,592 3,793 3,570
1,232 1,380
1,698 1,660 2,083
1,200 573 1,200
ARBP CDH DRRD GNP IPCA LPC SUNP TRP

Source: MOSL, Company
For companies that derive high proportion of business from the US, R&D spend is as
high as 8-10% of sales (LPC, DRRD, SUNP, etc). On an absolute basis, bigger
companies like DRRD, LPC and SUNP spend in excess of USD150m in R&D activities.
SUNP also benefits from R&D work on complex formulations by group company,
SPARC; hence it spends lower on R&D as a proportion of sales, despite its greater
presence in the US.
We expect R&D expenditure for Indian companies to intensify further as:

n Indian companies continue to focus on high-cost and complex generics
opportunities.
n USFDA has increased its batch requirement (to three per strength versus one
earlier) as well as accelerated stability data requirement (six months now versus
three months earlier). This would raise the cost of filing ANDAs in the US and the
impact would be felt more by smaller companies (ALPM, TRP) that want to scale
up US filings, aggressively.
n GDUFA fees for each ANDA/DMF as well as for facilities would further add to US
filing costs.
Exhibit 23: Investments in R&D continue to rise Exhibit 24: Focus on differentiated US filings visible
Total R&D (INR b)
R&D as % of sales
48
6.89
33
5.95
24 5.76
20 5.52 5.57
16

30 March 2015 17
Revenue per ANDA likely to shore up on improved product-mix

We believe that the efforts of higher focus on improving product mix (towards
complex products) would bear fruit over the next three years. Consequently, we
anticipate that per-ANDA revenues for Indian companies are likely to inch up from
USD 7m to USD 8m-9m over the next 2-3 years. In fact, increase in revenue per
marketed ANDA from USD5.1m to USD7.1m over FY10-14 is a testimony of
execution success (higher market share) as well as uplift from limited competition
products.
LPC, SUNP, DRRD at the forefront of execution in US

We expect LPC to continue focusing on larger product opportunities and capturing
high market share in each molecule getting marketed. DRRD and SUNP would likely
leverage their pipeline strength to launch low competition, high technological
barrier based products. CIPLA boasts of strong capabilities in the inhaler space and
has filed for key products in the US, which upon launch (FY18 onwards) could be a
huge opportunity for the company. ARBP’s product pipeline in US is incrementally
focused on niches like injectables (40+ filings), penems, controlled substance, etc
which would position it strongly among large players (compared to current portfolio
thrust on cephalosporin products).
Mid-sized companies are, however, building scale and are still in nascent stage of
pipeline differentiation. CDH would continue to benefit from high number of ANDA
filings getting approved while its niche transdermal portfolio would unravel from
FY16 onwards. Among the relatively late entrants, ALPM has shown a highly
differentiated strategy of focusing on fewer but complex products.
Exhibit 26: Limited competition products boost revenue /

Exhibit 25: Increased R&D to result in higher revenues ANDA
14.0 FY14 (USD m) FY10 (USD m)
12.0 LPC DRRD ARBP 4.9
Revenues/ANDA (US$ m)
3.2
10.0 CDH 7.0
5.4 FY14 average - 7.5
8.0 CDH
SUNP DRRD 12.2
6.0 6.7
ARBP 5.0
4.0 GNP 4.1
TRP
IPCA 12.3
2.0 LPC 14.5
GNP
0.0 SUNP 7.1
2.3
- 500 1,000 1,500
TRP 4.5
2.4
R&D /ANDA filed (INR m)
Potential from existing approvals

An analysis of commercialization rate, that is, launch of approved ANDA in the
market reveals that LPC, GNP, ALPM have been very prudent in their product
selection. However, in many instances, companies have had to withdraw products
from the market owing to lack of commercial success/viability. Continued increase in
the list of FDA shortage products may present opportunities for players with ready
approval. For instance, regulatory issues at WPL and RBXY led to shortage of
products in the cephalosporin space, which benefited ARBP and LPC, significantly. A
similar situation helped SUNP to capitalize on Doxycycline. We believe SUNP’s
30 March 2015 18
approval list contains many products (30+) from the URL portfolio, which can be re-
introduced in the market and surprise positively.
Exhibit 27: Potential commercialization of approved products can surprise positively
Approved Launched
358
192 228
148
98 94 108
111 69 81
36 68 53
28 18 74 31
11
ALPM ARBP CDH DRRD GNP IPCA LPC SUNP TRP
Deep ANDA pipeline lends revenue visibility

For our coverage universe, there are ~790 ANDAs pending approval, which include
250+ Para IVs and 45+ known FTF opportunities, implying strong growth visibility
over the next three years (assuming 15-18 new launches for large players annually).
The pace of approvals can increase substantially if GDUFA commitments for reducing
timeline for approval are met. Among these, LPC and DRRD’s pipelines appear the
strongest, with 32%+ of their pending ANDA applications being Para IVs. While full
details of SUNP’s pipeline are not known, there could be a higher number of
differentiated launches (more than 30 known).
Exhibit 28: High focus on Para IV filings indicate quality of filings

Company Total Pending Para IVs Para IVs as % of
ALPM 66 36 15 42
ARBP 374 182 50+ 27
CDH 255 157 15 10
DRRD 220 68 43 63
GNP 169 75 30 40
IPCA 42 24 2 8
LPC 203 95 55 58
SUNP 489 131 25+ 20+
TRP 72 19 3 16
Total 1,890 787 257 33
Indian companies have a proven track record of successes in litigations/patent

challenges in the last five years. The leading names in this regard are RBXY, SUNP,
LPC and DRRD. This is particularly significant, since ability to monetize upcoming
patent expirations (worth USD65b over the next five years) would help achieve
accelerated growth. Companies with a strong Para IV/FTF pipeline would stand to
gain from high margin 180-day exclusivity opportunities.
30 March 2015 19
Some of the high impact launches in the US market that would meaningfully add to
profitability are listed below:
Exhibit 29: High impact launches in US
Company Timeline Brand Molecule Size (USD m) Nature of launch
ARBP FY16 Nexium Esomeprazole 2,300 Limited competition
FY17 Crestor Rosuvastatin 3,100 Competitive
FY17 Abilify Aripiprazole 1,500 Competitive
FY18 Truvada Emtricitabine + tenofovir 2,000 Limited Competition
FY16-17 Namenda Memantine 1,800 Competitive
FY17-18 Reyataz Atazanavir 769 Limited Competition
FY18 Viread Tenofovir Disporoxil 570 Limited Competition
FY17 Norvir Ritonavir 500 Limited Competition
CDH FY16 Abilify Aripiprazole 1,500 Competitive
FY16 Pristiq Desvenlafaxine 500 Competitive
FY16 Lialda Mesalazine 380 Potential FTF
FY16 Lipoderm Lidocaine topical patch 1,200 Limited Competition
FT18 Strattera Atomoxetinehcl 380 Limited Competition
FY18 Solodyn Minocycline hcl 370 Limited Competition
DRRD FY15 Valcyte Valganciclovir hydrochloride 400 Limited Competition
FY15 Nexium Esomeprazole 2,300 Possible early launch
FY16 Aloxi Palonosetron hydrochloride 450 FTF opportunity
FY16 Copaxone 20mg Glatiramer Acetate 1,500 Limited Competition
FY17 Copaxone 40mg Glatiramer Acetate 1,500 FTF opportunity
GNP FY15 Tarka Trandolapril and Verapamil 70 Limited Competition
FY16 Welchol Colesevelam 300 Competitive
FY17 Zetia Ezetimibe 1,300 Settlement
FY17 Multaq Dronedarone 300 Potential FTF
FY18 Strattera Atomoxetine hcl 380 Limited Competition
LPC FY15 Apriso Mesalamine 80 FTF opportunity
FY16 Nexium Esomeprazole 2,300 Limited competition
FY16 Celebrex Celecoxib 1,900 AG launch
FY16 Renvela Sevelamer hydrochloride 450 Shared FTF
FY16 Glumetza Metformin 70 FTF opportunity
FY16 Welcholsusp Colesevelam hcl FTF opportunity
FY17 Prezista Darunavir 800 Shared FTF opportunity
FY17 Coreg CR Carvedilol Phosphate 300 Limited Competition
FY17 Epzicom Abacavir sulfate and lamivudine 490 Limited Competition
FY18 Tykerb Lapatinib 114 FTF opportunity
FY18 Viread TenofovirDisoproxilFumarate 570 Limited Competition
FY18 Truvada Emtricitabine and Tenofovir 2,000 Limited Competition
SUNP FY16 Coreg CR Carvedilol Phosphate 300 FTF opportunity
FY16 Gleevec Imatinib mesylate 1,900 FTF opportunity
FY16 Crestor Rosuvastatin calcium 3.100 Shared FTF
FY16 Abilify Aripiprazole 2,300 Shared FTF
FY17 Alimta Pemetrxed disodium heptahydrate 1,041 Limited comp.
FY17 Strattera Atomoxetine 380 Shared excl.
Inorganic route adopted to add capabilities

Owing to the complexity involved in development, certain skillsets/capabilities in
complex generics have a long gestation period. Several Indian companies adopted
the inorganic expansion route, identifying assets or companies that have a
differentiating technology or portfolio. Interestingly, most of these acquisitions have
been low ticket (sub USD 200m), implying lesser management bandwidth required
for integration. Moreover, post-acquisition, Indian companies can help accelerate
30 March 2015 20
R&D project development and commercialize the R&D pipeline quicker, given their
financial backing and distribution reach.
SUNP, LPC have strong track record
Among Indian companies, SUNP has an enviable track record in respect of
acquisition turnaround and synergies. This instills confidence on their ability to
generate synergies/value out of their largest and most complex acquisition (RBXY).
LPC has demonstrated an ability to identify niche assets that have helped it get a
differentiating edge (branded business in US, entry in Japan generics) over its peers.
With a much stronger balance sheet and revenue base now, LPC is in a strong
position to execute large size acquisitions and generate shareholder value.
CIPLA is currently undergoing a transformation phase, where it has been trying to
build its frontend presence in key export markets. While it would commence its own
frontend operations in 2015, we believe it may acquire companies in the US to
bolster its nascent pipeline as well as enhance distribution capabilities.
We expect the revenue impact of recent acquisitions by Indian companies in the US

to be visible only over the next 2-3 years. The acquisitions position them well to
leverage on the complex generics opportunity.
Exhibit 30: Inorganic route adopted by Indian players to boost capabilities in complex products
Size
Year Company Target Capability Rationale (USD) Type
To add sterile injectable capacity in US,
Jul'14 SUNP Pharmalucence Injectables supported by strong R&D capabilities NA Acquisition
To develop controllable gene-based
therapies for the treatment of ocular Joint
Oct'13 SUNP Intrexon Ophthalmology diseases NA Venture
Patented product Levulan and Blu-U
Dec'12 SUNP Dusa Pharma Dermatology device device based application 230m Acquisition
Acquired generic portfolio of 107 products
Dec'12 SUNP URL Pharma Generic portfolio (approved), including Doxycycline NA Acquisition
Patented technology platform for complex
Feb'14 LPC Nanomi B. V. Complex injectables injectables NA Acquisition
Direct access to Mexican mkt and
Mar'14 LPC Grin Lab Ophthalmology potential use of technology for US mkt. NA Acquisition
Promote and market Alinia oral Distribution
Aug'13 LPC Alinia Branded drug suspension brand in US NA rights
Acquired rights for Locoid lotion in US to Distribution
Sep'13 LPC Locoid lotion Branded drug strengthen branded business (pediatrics) NA rights
Acquired brand from Novartis to boost
presence in OTC segment (~20% of US Brand
Dec'14 DRRD Habitrol Brand OTC-Transdermals business) NA Acquisition
Advanced Drug
delivery system and Acquired Netherland based Octoplus with
Feb'13 DRRD Octoplus Injectables R&D base in Netherlands 32m Acquisition
Microbix/Cadila to re-launch Urokinase, a
critical care therapy in US. Launch likely in
Jan'12 CDH Urokinase Brand Critical care 2015. NA Alliance
Controlled Acquisition includes Nesher's ANDAs, Asset
Jun'11 CDH Nesher substances manufacturing facilities and R&D lab 60m purchase
Acquired 100% stake in Natrol to add
Dec'14 ARBP Natrol Nutraceuticals nutraceutical OTC products in its portfolio. 132.5m Acquisition
30 March 2015 21
Fortifying portfolios through specialty route

Over the last five years, Indian companies have also shown their desire and
capabilities to build a specialty portfolio (organically or through JV/partnership). This
has been achieved by launching products through the 505 (b) (2) route or by
launching products with differentiating delivery systems or formulations. Product
development in this area is at a nascent stage for Indian companies and can scale up
(depending on R&D success) materially over time. This route costs much less than a
novel molecule, as the differentiation largely lies on formulation and not on the
molecule; hence, clinical trial data of the innovator can be used.
IMS Health estimates that the value of such products in the US would be USD16b-
18b, which can scale up to USD25b by 2018. We estimate that some part of the
enhanced R&D budget is getting allocated towards the specialty portfolio and is
likely to gain meaningful scale for large players like SUNP, LPC, and DRRD in the next
five years. Some of the key successes in this regard are highlighted below:
Exhibit 31: Differentiated product launches in US - testimony of R&D strength

Company Molecule Brand Differentiation Status Therapeutic area Remarks
Outlicensed to Ranbaxy for
ALPM Desvenlafaxine ER Pristiq 505 (b) (2) Launched Anti-depressant commercialisation. Limited
success (less than 2% mkt share)
Cipla responsible for formulation
Azelastine + Better patient
CIPLA Dymista Launched Allergic rhinitis while Meda to commercialise and
Fluticasone compliance/tolerance
develop the product.
Suprax NDDS-Improved To be Brand extension of Suprax
LPC Cefixime Anti-biotic
drops compliance relaunched franchise
Ranbaxy markets the product,
Improved compliance
RBXY Isotretinoin Absorica Launched Dermatology developed by Cipher. It’s a
(no meal requirement)
USD100m+ brand for RBXY now.
Novel treatment for non-nodular
To be
RBXY Minocycline Ximino NDDS Dermatology acne. RBXY to launch the products
launched
in 2015.
To be launched from SPARC's
Higher dose extended Awaiting
SUNP Levetiracetam XR Keppra XR CNS technology strength (wrap matrix
release approval
technology)
Latanoprost BAK Preservative free Awaiting Under development by SPARC,
SUNP Ophthalmology
free solution approval SUNP can market in US.
To be launched from SPARC's
Better compliance and Trials technology strength (GRID
SUNP Baclofen GRS CNS
efficacy ongoing technology). Can get 10% market
from IR version (worth USD 587m)
Patent expirations worth USD 55b over next three years

We are not perturbed by the “patent cliff” in the US, as we believe that on a
recurring basis, there would still be products worth USD14b facing generic
competition every year. This would potentially result in addition of USD1.5b-2b
generics market opportunity (3% growth) on an annualized basis. However, some of
the blockbuster products that faced generic competition recently saw steep price
erosion post 180-day exclusivity (like Lipitor, Plavix, etc) implying short-term upside,
at best.
30 March 2015 22
Incrementally, higher share of products facing patent expiration would be

differentiated generics, also referred to as complex generics, with higher barriers to
entry. We estimate that 65-70% of global patent expirations in the coming years
would pertain to the US market. Envisaging this situation, most Indian players had
already spruced up their R&D efforts in the recent past to be able to capture the
upside from patent expiries. The focus would shift to quality of product pipeline
rather than sheer volume/number of products.
Exhibit 33: More differentiated generics face patent

Exhibit 32: Dwindling US patent expirations expirations globally over the next five years
Small molecule patent expirations (US$ b) oral solids differentiated generics
29
22 4
22
18 19 19
17 15 14 14 37
11
7 6 55 22
20 22 26
15
27 9
16 22 15 19
14 11 10
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: MOSL, Industry Source: Evaluate Pharma, MOSL
Exhibit 34: Challenges to be countered
Vertical integration for cost

competitiveness
Channel consolidation
Delay in GDUFA timelines
Increased relevance of regulatory

compliance
Vertical integration aids competitiveness

Over the last five years, Indian companies have strengthened their vertically
integrated business model, significantly. This has manifested in lower proportion of
revenues emanating from API (bulk drug) sales over the years. As Indian companies
continue to expand in competitive regulated markets (US, EU, etc), having a strong
backward linkage becomes critical for cost-competitiveness. As such, while
capacities have consistently been added in API, utilization has been directed towards
captive consumption incrementally.
30 March 2015 23
Exhibit 35: Share of API in total revenues continues to decline

54 FY09 FY14
38
35
27 27
22
18 18
11 12 11
8 7 9 8 9
5 5
ALPM ARBP CDH CIPLA DRRD GNP IPCA LPC SUNP
Expansion of DMF portfolio to aid backward integration

Indian companies continue to be aggressive filers of USDMF (drug master files) for
new API product opportunities. Share of Indian companies in global DMFs filed has
remained high: 45% in 2009 and 44% in 2014 (September). However, absolute
number of DMFs filed with USFDA has been shrinking over the years, highlighting
fewer new opportunities getting identified by generics players.
An analysis of Indian players with reasonably strong presence in the US reveals that
most of them have sufficiently high level of backward integration. In this criterion,
DRRD, LPC and CDH appear formidable.
Exhibit 37: Strong focus on backward integration

Exhibit 36: DMF filings by Indian companies on the rise (DMF/ANDA)
FY10 9MFY15 FY10 9MFY15
231 116
191 105
188
153 106 84 85 82
145 140 146 92
75
55
90 94 104 99 51 56 48
70 75 45 40
45 49 44 36
30 38 42
29 18
ALPM ARBP CDH DRRD GNP IPCA LPC SUNP TRP ALPM ARBP CDH DRRD GNP IPCA LPC SUNP TRP
Source: MOSL, Company, FDA Source: MOSL, Company, FDA
In case of products with complex formulation technology, where the quantity of API
required is low (such as injectables, dermatology products, etc), backward
integration is not necessarily needed for high profitability. This is particularly
applicable for companies with high niche product concentration (like SUNP).
Channel consolidation unlikely to have long-term impact

Unlike many pharmaceuticals markets worldwide, the US pharmaceuticals supply
chain is highly concentrated. The top 5-6 distributors and pharmacy chains combined
account for over 70% of the market (v/s 60% in 2008), highlighting the significance of
strong trade relationships. Interestingly, the pace of consolidation in the supply
chain has intensified over the last 18 months, accentuated by recent M&A/JVs. This
30 March 2015 24
has resulted in enhanced bargaining power for the trade and implies potentially
higher price concessions from drug manufacturers.
Exhibit 39: Market share of top six pharmacies over last five
Exhibit 38: US pharmacies market share (%) years (%)
Independent Pharmacies Share of Top 6 pharmacies
CVS Caremark- Retail 72
18% 62 64 63 65
15% 60
CVS Caremerk Pharmacy
3% Walgreen
6% 16%
Express Scripts
6% Wal-mart
7%
13% Rite Aid
16%
The Kroger Co
All other chains 2008 2010 2011 2012 2013 Sep-2014
Source: IMS Health, MOSL Source: IMS Health, MOSL
Large generics companies may offset pricing impact with increased volumes
We believe a substantial portion of pricing pressure can be offset by large players
through higher volume share (as highlighted by Indian companies). Buyer
consolidation would imply preference for fewer suppliers so that negotiation terms
are better. Hence, incumbents are likely to see minimal impact (overall) as new
players would find it increasingly more challenging to break into the US generics
market. Companies with broad-based product portfolio, strong focus on quality,
efficient supply chain systems in the US, and focus on specialty/differentiated
portfolio are likely to stay largely unaffected. SUNP, DRRD, LPC and CDH (in our
coverage) should be able to protect their positioning owing to long-standing
relationships (and execution track record) with distributors.
Potentially, companies with weaker front-end (or small product portfolio) or those
operating in the US through partners would have to rejig their US strategy in the
wake of higher bargaining power in the hands of the buyer.
Exhibit 40: Recent consolidation in US supply chain

Supply Chain Consolidation Announced Date Effective Cost Savings
Express Scripts - NextRx subsidiaries 4/13/2009 12/1/2009 N/A
Walgreen - Duane Reade Holdings 2/17/2010 4/9/2010 USD 120-130m
Walgreen - Lang's Pharmaceutical Assets 5/11/2012 3/13/2012 N/A
Express Scripts - Medco Health 7/21/2011 4/2/2012 USD1b
Catamaran – Catalyst Health Solutions 4/18/2012 7/3/2012 USD125m
Walgreens - Alliance Boots 6/19/2012 9/1/2012 USD1b
Walgreens/Alliance Boots - AmerisourceBergen JV 3/19/2013 9/1/2013 N/A
CVS Caremark - Cardinal Health 12/10/2013 7/1/2014 USD 435m
Celesio AG - McKesson 10/23/2013 Pending USD 300m
PharMerica – BGS Pharmacy 12/31/2013 1/10/2014 N/A
Source: Industry, MOSL
30 March 2015 25
GDUFA implementation to improve pace of product approvals

The US government introduced GDUFA (Generic Drug User Fee Act) in 2011 to help
USFDA build capacities to expedite regulatory approvals and increase the frequency
of manufacturing facility inspection. GDUFA essentially requires generics companies
to pay additional user fees to help cover rising costs of reviewing generic drug
applications and strengthen USFDA’s team size. USFDA’s objective is to eliminate
ANDA backlog within five years of GDUFA implementation (September 2017). The
benefit of this program is likely to be felt over the medium to long term (FY17-18
onwards).Until then, product approval timeline is unlikely to change materially.
Exhibit 41: GDUFA Snapshot
Exhibit 42: GDUFA user fees continue to rise

Total User fees (USD'000) FY13 FY14 FY15 CAGR (13-15) (%)
Facility fee
Domestic FDF 175 220 248 19
Foreign FDF 190 235 263 18
Domestic API 26 35 42 26
Foreign API 41 50 57 17
Filing fee
Original ANDA 52 64 59 7
PAS 26 32 29 7
Original DMF 21 31 27 12
Source: US FDA, MOSL
Speedier approval to enhance revenue visibility

Generics players have been impacted by sharp increase in ANDA approval timeline
by the USFDA, mainly due to disproportionate workload at their end. Product
approval timeline has increased to 33 months (average) from 18 months, five years
ago. Under GDUFA, USFDA plans to review 90% of backlog ANDAs (2,866 in
December 2013), which were pending as at October 2012 and reduce the average
approval (review) timeline to less than 10 months (versus 32 months now) by the
end of 2017. Companies under our coverage cumulatively have ~790 ANDAs pending
approval and would be well-positioned to scale-up their US business aggressively on
successful GDUFA implementation.
30 March 2015 26
Exhibit 43: GDUFA aims at sharp reduction in approval

timeline Exhibit 44: ANDA backlog continues to increase at USFDA end
33 32 ANDA backlog with USFDA

30 31
2013 2,866
26
22 2012 2,800
18 2011 2,700
16
10 2010 2,350
2009 1,900
2008 1,750
2006 2007 2008 2009 2010 2011 2012 2013 2017 2007 1,500
target 2006 1,350
Source: MOSL, FDA Source: MOSL, FDA
Improved revenue visibility more than offsets cost implications

While GDUFA entails higher costs to be incurred for product filings (both
ANDA/DMF) as well as for facility inspections, etc, we believe it would help weed out
non-serious players in the US generics space. Also, the prospect of reduced product
approval timelines would help late entrants like TRP, ALPM, etc, to scale up their
business in a shorter timespan and reduce gestation period.
Slower pace of ANDA approvals so far would constrain US sales growth

The run-rate of ANDA approvals so far (YTDFY15) is much below recent history,
implying slower growth in US business for companies that had no niche launches. In
particular, GNP and LPC have seen much lower approvals than they envisaged.
However, with increased intensity of GDUFA implementation, there is likelihood of
bunched up approvals in the next two years, reviving growth prospects.
Scrutiny on quality management to strengthen overall systems

Regulatory risks pertaining to non-compliance with cGMP norms issued by USFDA
has been an area of concern for investors. We believe heightened concerns on the
USFDA compliance readiness of Indian companies are overdone. Indian companies
account for 23% of the US pharmaceuticals market (by volumes) and 12% (in value
terms) making them the second largest supplier of generic formulations to the US.
Moreover, sustained intensity of ANDA filings (and approvals) by Indian companies
also highlights their relevance. Hence, the frequency of inspections has increased
and accordingly the regulatory action instances also seem to have been magnified.
Exhibit 45: Annual ANDA filings with USFDA on the rise Exhibit 46: Indian companies garner high share of approvals
Total approvals Approvals to Indian cos
1,221
1,103 Indian share (% of total)
998 476
880 859 893 419 418 431
793 830 813 400 392
766
37 39
34 33 33
25
142 139 144 178 154 99
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Source: MOSL, US FDA Source: MOSL, US FDA
30 March 2015 27
USFDA intends to increase frequency of overseas plant inspections

We believe that FDA has always maintained high quality/compliance standards
which it has enforced from time to time. However, due to resource constraints
(fewer manpower), they were not able to meet their targeted timeline for overseas
facility inspection (at par with US-based facilities).India has the second highest
number of USFDA approved plants (after US) and hence the relevance of Indian
facilities is high in the global context. Despite accounting for 22% of overall USFDA
approved facilities, India’s share in total cGMP-related inspections by the USFDA is
still at 6-7%. By 2017, the USFDA intends to bridge the wide gap through enhanced
budget as well as resources (opened local offices in India, China, etc). For instance, it
has increased staff strength to 19 (from 12 earlier), adding another office in
Hyderabad (already in Delhi, Mumbai).
Exhibit 47: Second highest USFDA approved plants in India Exhibit 48: Low share of Indian facilities in USFDA inspections
USFDA approved facilities % of total cGMP inspections % of Indian cGMP Inspections

496 2,046
440 6% 1,880 1,918 7%
32%
28% 338 6% 1,414
1,500
22% 5%
193
12%
2%
CY09 CY10 CY11 CY12 CY13

USA India China Others
Regulatory action not specifically directed at Indian companies alone

In recent times, quality and cGMP (good manufacturing practices) have emerged as
a significant stumbling block for generics companies. The spate of FDA action
(regulatory) on Indian companies like WPL, RBXY, SUNP, etc, over the last 12 months
has raised a question on manufacturing quality standards followed by Indian
companies. However, even global companies have come under the radar during the
same period, implying that the issue is structural and directly proportional to scale of
operations for the US market. Between 2010 and 2014, the USFDA has imposed 87
adverse regulatory actions (warning letter, import alerts) for cGMP violations, of
which 23% pertain to Indian companies (versus 23% volume share). The total
number of ANDAs pending approval from USFDA for our coverage universe is ~790,
implying 25% of ANDA backlog with USFDA. The incidence of regulatory action is
proportional to the volume of ANDAs or facilities that the country has.
30 March 2015 28
Exhibit 49: FDA enforcement action on cGMP violations (2010-2014)

2010 2011 2012 2013 2014
22
18 19 18
16
13
11
8 8
5 6 6 6
4 4 4 4 3
1 0
India China Others Total

Source: MOSL, US FDA
Nature of compliance deviation more critical than number of Form 483

observations
Our analysis suggests that the instances of Form 483 issuances in a cGMP inspection
by USFDA are fairly common. Indian companies tend to have higher cases of Form
483 issuances. However, very few of them translate into adverse action by USFDA,
implying that remediation for most cases is fairly achievable. Therefore, it is
pertinent to understand the nature of compliance gaps and to assess whether there
can be timely remediation or not.
Form 483 is simply a record of observed deviations, as noted by FDA investigators
immediately after completion of an audit. Establishment of strong quality
enforcement culture and reporting in a company ensures timely and satisfactory
resolution to the Form 483 observations, resulting in no business impact. We would
like to highlight here that despite facing enforcement action by the USFDA,
companies like SUNP, LPC and DRRD have effectively resolved the issues in a timely
manner in the past. Fallout of an adverse regulatory action is increased investment
on quality systems as well as higher awareness within the company, which helps it
handle future inspections effectively.
Large companies better placed to handle USFDA issues

Our analysis of FDA inspections at multiple sites for Indian companies suggests that
nearly 67% of all inspections result in Form 483 observations. However, adverse FDA
action (warning letter, import alert) has been only in 20 cases in the last five years.
We further analyzed the timeline for Indian companies to remediate FDA concerns,
which highlighted that larger companies with stronger quality management systems
are better placed to handle quality issues.
Exhibit 50: Number of USFDA inspections in last seven years and Form 483 issued
Lupin Sun DRL Cadila Glenmark Torrent Ipca Aurobindo
No of inspection 15 46 23 12 10 3 7 10
483 issued 9 31 13 10 9 2 4 6
% of 483 issued 60 67 57 83 90 67 57 60
Source: FDAzilla.com, MOSL
It is difficult to predict whether Indian companies can sustain their past track record
in terms of cGMP compliance. However, we believe LPC, SUNP, DRRD and CIPLA
have strong systems in place to counter any FDA issues (observations) before they
30 March 2015 29
escalate. Among midcaps, GNP and TRP stand out with their untainted track record
with the USFDA, reinforcing confidence on their systems.
Exhibit 51: History of enforcement actions taken by the FDA

Date of Resolution in
Company FDA Action Unit Nature of facility Date of action
resolution (months)
IPCA Labs Import alert Indore, MP Formulations 24-Mar-15 x NA
IPCA Labs Import alert Silvassa, MP Formulations 24-Mar-15 x NA
Aarti Drugs Import alert Palghar, MH Formulations 23-Mar-15 x NA
IPCA Labs Import alert Ratlam, MP API 23-Jan-15 x NA
Dr Reddy’s Lab Form’483 Srikakulam Formulations 25-Dec-14 x NA
Sun Pharma Form’483 Halol Formulations 29-Sep-14 x NA
Cadila Healthcare Form’483 Moraiya Formulations 1-Aug-14 x NA
Sun Pharma Import Alert Karkhadi, Gujarat API 13-Mar-14 x NA
Ranbaxy Ban Taonsa API 24-Jan-14 x NA
Ranbaxy Import Alert Mohali Formulations 13-Sep-13 x NA
Strides Arcolab Warning Letter Bangalore Injectable formulations 11-Sep-13 x NA
Wockhardt Import Alert Waluj, India Formulations 24-May-13 x NA
Jubilant Life Sciences Warning Letter Canada Formulations 27-Feb-13 x NA
Dr. Reddy's Import Alert Mexico API 6-Jul-11 27-Jul-12 12.9
Cadila Warning Letter Moraiya Formulations 6-Jun-11 17-Jul-12 13.6
Aurobindo Warning Letter Unit III Formulations 23-May-11 4-Jun-12 12.6
Aurobindo Import Alert Unit VI Formulations 27-Feb-11 28-Mar-13 25.3
Sun Pharma Warning Letter Able Labs Formulations 31-Aug-10 19-Sep-11 12.8
Ranbaxy Warning Letter Ohm Labs Formulations 24-Dec-09 x NA
Michigan,
Sun Pharma Product Seizure Formulations 26-Jun-09 28-Aug-12 38.6
Caraco
Lupin Warning Letter Mandideep Formulations 14-May-09 20-Jan-10 8.4
Cipla Form '483 Bangalore API 20-Apr-09 31-Aug-09 4.4
Ranbaxy AIP Paonta Sahib Formulations 26-Feb-09 x NA
Brampton,
Taro Pharma Warning Letter Formulations 5-Feb-09 25-Apr-11 27.0
Canada
Ranbaxy Warning Letter Batamandi API 17-Sep-08 x NA
Ranbaxy Import Alert Dewas Formulations 17-Sep-08 x NA
Source: USFDA, MOSL
30 March 2015 30
India: Structural drivers in place

Large players better placed
n Low penetration, and growing awareness and affordability would continue to drive 12-
14% growth in domestic market.
n With impact of revised pricing policy behind, we expect large companies to grow
ahead of industry (17% CAGR), led by (a) focus on chronic segments, (b) field force
productivity, and (c) superior branding skills.
The domestic pharmaceuticals market has expanded at a CAGR of 12% to INR820b in

the last 14 years and remains the most lucrative market for Indian companies after
the US. A significant proportion of this growth has been promulgated by high growth
in chronic/lifestyle therapies and increased market penetration. Low capital intensity
and high branding power also ensures superior return ratios, akin to the FMCG
business. This segment accounts for 31% of aggregate revenues for our coverage
and is likely to grow at a CAGR of 17% over FY15-17E.
Exhibit 52: Structural growth drivers
Forecast 12-14% growth for industry, led by structural drivers

We expect 12-14% growth to persist over the next 5-7 years and the domestic
market to be worth INR 1.5t by 2020. This would be led by favorable factors like:
(a) Room for increasing per capita healthcare spend at least in line with developing
countries (currently far below average),
(b) Rising income levels along with higher GDP growth outlook bodes well for higher
drug consumption, and
(c) Increased awareness of lifestyle diseases along with higher penetration of
healthcare insurance.
Regulatory hiccups unlikely to impact long-term outlook

The impact of the new pricing policy has turned out to be far lower than
anticipation, thanks to price hikes taken for products covered under the old DPCO as
well as volume uptick in NLEM-listed drugs. We believe expansion/addition of
products to the price control list resulted in a transient hiccup (FY14) and is unlikely
30 March 2015 31
to impair structural growth outlook for the domestic market. We expect volume
growth to be the key driver for the industry, as new launches and price hikes would
be lower, incrementally. We anticipate further consolidation in the highly
fragmented market and expect players with strong branding capabilities and deep
penetration/recall with customers (doctors) to emerge winners. We rank SUNP as
the best play for the domestic growth story, followed by LPC, CIPLA and GNP.
Exhibit 53: Indian pharmaceuticals market (since 2002)

IPM (INR b) YoY Growth (%) IPM 14 year CAGR (%)
21
17
15 15
12 13 13 13
12
10 9
8
6 6
4 4
181 196 204 213 246 274 310 340 410 480 605 685 729 821 1478
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2020
Source: IMS, AIOCD, MOSL
Exhibit 54: India business (key monitorables)

MR Field force
India formulation FY08-14 FY15-17E IPM Market Top 10
Company Sales (INR b) Chronic (%) strength productivity
(%of Total Sales) CAGR (%) CAGR (%) Share (%) Brands (%)
(nos.) (INR m/MR)
AVEN 74 13 9 12 51 2.5 53 3,000 4.2
ALPM 52 10 8 15 17 1.4 41 3,600 2.7
CDH 35 25 13 16 29 4.3 25 5,500 4.5
CIPLA 42 41 13 17 41 5 25 7,500 5.5
DRRD 12 16 12 14 30 2.1 32 4,162 3.8
GLXO 92 23 9 15 14 3.4 45 3,300 7.0
GNP 25 15 20 19 37 2.2 37 3,200 4.7
IPCA 30 10 14 17 28 1.8 35 4,500 2.2
LPC 22 25 17 19 46 3.3 21 5,365 4.6
RBXY 21 28 13 15 22 3.6 35 5,500 5.1
SUNP 23 37 17 19 56 5.4 21 4,000 9.2
TRP 28 12 12 24 52 2.2 31 3,800 3.1
Source: Company, AIOCD, MOSL:
Sun pharma best positioned in the Indian market ….

SUNP (including RBXY) would dominate the Indian pharmaceuticals market (IPM)
with ~9% market share. The two entities’ largely non-overlapping portfolio gives
them a significant edge over peers. SUNP’s fast growing chronic therapy brands and
RBXY’s legacy brands in the acute segment translate into a powerful combination in
the current market scenario.
Other companies that have improved their share in the last seven years are LPC,
Mankind, SANL, CIPLA, CDH and GNP, mainly led by organic growth; inorganic
expansion has aided market share of Abbott and Pfizer. We believe SUNP, LPC, CDH
and GNP are likely to outperform market growth, supported by a rich portfolio of
growing lifestyle brands. While we expect industry consolidation to gather pace
hereon, emerging companies like ALPM, IPCA and AJP would be able to strengthen
their positioning, driven by renewed focus on the chronic portfolio and improving
field force productivity.
30 March 2015 32
Exhibit 55: Top 10 companies in Indian pharmaceuticals market (last 15 years)

2000 2007 2014
Glaxo-wellcome 5.8 Glaxo Smithkline 5.1 Sun Pharma + Ranbaxy 9.0
Ranbaxy 4.9 Ranbaxy 5.1 Abbott + Piramal + Solvay 6.2
Cipla 4.4 Cipla 5.1 Cipla 5.0
Hoechst-Roussel 2.9 Nicholas Piramal 4.3 Zydus Cadila + Biochem 4.3
Zydus-Cadila 2.4 Zydus Cadila 3.5 Mankind Pharma 3.6
Wockhardt-Merind 2.4 Sun Pharma 3.2 Alkem 3.5
Sun Pharma 2.3 Alkem 3.0 Glaxo Pharma 3.5
Pfizer 2.1 Pfizer 2.6 Lupin 3.3
Lupin 2.1 Lupin 2.4 Pfizer Wyeth 3.1
Novartis India 2.1 Dr Reddys Labs 2.4 Sanofi India + Universal 2.9
Exhibit 56: Domestic business growth ( FY08-14, FY15-17E) for our coverage universe
CAGR FY08-FY14 (%) CAGR FY15-FY17E (%)

24.4
19.0 18.5 19.2

17.0 17.5
14.8 15.8 15.5 14.9
14.0
12.4
8.4 8.9 13.1 12.9 11.8 8.8 19.7 14.4 17.3 13.4 16.5 12.0
ALPM AVEN CDH CIPLA DRRD GLXO GNP IPCA LPC RBXY SUNP TRP
Factors driving success in Indian pharmaceuticals market

We have tried to analyze the key factors responsible for success in the Indian
pharmaceuticals market (IPM) for Indian companies:
1) Higher contribution from chronic segment led to outperformance

2) Focus on improving MR productivity
3) Big brands = cash cow business
4) Geographical reach (growth spread across four regions)
5) Diversified exposure
#1: Higher contribution from chronic segment led to outperformance

According to AIOCD-AWACS, 56% of SUNP’s domestic sales emanate from the
chronic segment, the highest among our coverage companies as well as the sector.
SUNP has been outperforming market growth for the last six years. The other two
companies, LPC and GNP have also exhibited superior performance, led by
incremental thrust on chronic therapies like cardiac, anti-diabetic, asthma, etc.
Companies like IPCA and ALPM, which were primarily acute therapy players, have
started outperforming, with renewed focus on chronic and specialty segments. We
prefer companies with higher share of revenues from chronic and semi-chronic
products, as these products enjoy higher growth prospects, sticky revenue stream,
as well as better profitability.
30 March 2015 33
Exhibit 57: Higher contribution from chronic segment leads to outperformance
Chronic share (%) FY08-14 CAGR (%)
19.7
17.3 16.5
14.4 13.4
13.1 12.9 12.0
11.8
8.9 8.4 8.8
51 17 29 41 30 14 37 28 46 22 56 52
AVEN ALPM CDH CIPLA DRRD GLXO GNP IPCA LPC RBXY SUNP TRP
Source: AIOCD, MOSL
SUNP dominates in key therapies it targets

Over the years, SUNP has gained significant market share in high growth chronic
therapies like CNS (23%), anti-diabetic (9%), cardiac (8%), gynecology (8%), and
ophthalmology (13%). High rankings with key opinion leaders (influential specialists)
have been key contributor to their expanded market share in a fiercely competitive
market.
Exhibit 58: Therapy-wise market share in Indian pharmaceuticals market (MAT November 2014)*
Acute/Chronic Super group SUNP CIPLA CDH RBXY GLXO LPC AVEN TRP GNP DRRD IPCA ALPM
Acute Anti-Infectives 0.1 8.3 3.8 6.6 5.8 5.1 0.8 1.1 1.9 1.1 0.8 2.5
Chronic Cardiac 8.0 5.1 5.7 4.1 0.9 6.5 3.8 5.4 4.1 2.8 2.5 1.1
Gastro
Semi-Chronic 6.8 3.2 4.9 1.9 1.9 2.2 1.0 3.0 0.4 4.2 1.3 1.7
Intestinal
Acute Vitamins 1.6 1.2 1.8 4.0 2.9 2.2 1.0 3.1 0.6 0.7 0.5 1.0
Semi-Chronic Respiratory 2.8 19.8 5.3 1.7 2.8 4.9 2.8 0.1 4.3 1.4 1.0 2.3
Chronic Anti Diabetic 8.5 0.6 0.8 1.3 0.0 4.6 7.3 1.7 2.1 2.0 1.3 0.8
Pain /
Acute 3.2 1.8 4.5 6.2 4.4 2.1 3.6 1.8 0.7 2.4 5.7 0.6
Analgesics
Chronic Neuro / CNS 23.2 2.7 1.2 2.0 0.2 2.9 3.9 5.9 0.1 0.3 1.0 0.3
Semi-Chronic Derma 0.3 2.1 5.5 6.6 12.1 0.4 0.9 0.8 11.0 2.8 1.1 0.3
Chronic Gynecological 7.8 1.6 9.3 0.1 1.1 1.7 0.2 0.9 1.0 0.1 0.0 2.4
Chronic Ophthal 13.3 9.4 0.5 0.2 5.2 1.0 0.3 0.0 2.1 0.0 0.0 1.2
Chronic Oncology 2.3 3.8 11.4 0.9 0.6 0.2 0.1 0.0 0.3 14.9 3.5 0.0
*Therapy Share: More than 5%, (2-5%) Less than 2% Source: AIOCD, MOSL
#2: Superior field force productivity

Field force (medical representatives or MR) productivity is a measure of profitability
for the field force deployed by companies in the market to promote their brands for
higher prescription generation. It is simply measured by the revenues each active
MR generates on an annualized basis. MNCs have been at the forefront of MR
productivity, thanks to premium brands in their portfolio. However, SUNP is at the
pinnacle of MR productivity industry-wide, with superior product selection and
ability to improve rankings with the targeted customer base (specialist doctors). This
is also validated by the high profitability enjoyed by the company and its ability to
generate superior returns on marketing dollar spent. Among other domestic players,
30 March 2015 34
CIPLA, LPC, CDH and GNP have higher productivity than the industry average. We
believe that incrementally, companies would aim at enhancing their MR productivity
rather than aggressive field force expansion to achieve growth, thereby raising
profitability, as well.
Exhibit 59: MR productivity is a key measure of profitability in domestic market (FY14)

India sales (INR b) MR Productivity (INR m/MR) Coverage - INR 4.7m/MR
7 9
5 5
4 4 5 5
4
3 3
2
10 13 25 41 16 23 15 10 25 28 37 12
CIPLA
AVEN
IPCA
LPC
TRP
ALPM
CDH
DRRD
RBXY
GLXO
SUNP
GNP
#3: Big brands = cash cow business

In a branded pharmaceuticals market like India, companies need to build their
brands through strong promotional activities, differentiated product offerings, and
proper detailing by the fieldforce (through training). Strong brands are a testimony
of a company’s capability and help generate superior returns, as incremental spend
on marketing for a strong brand is minimal. Legacy brands like Augmentin,
Combiflam, Mox, Atorva, and Losar have done well for their respective companies.
We have analyzed this parameter by identifying the number of brands for a
company with sizeable revenue base (annual sales exceeding INR800m and INR1b).
SUNP is in line with MNC giants like GSK and Sanofi, withfive brands above INR1b.
Exhibit 60: Number of brands above INR800m and INR1b (MAT November 2014)
INR 800m INR 1b
8
7 7 7
6
5 5 5 5 5
4
3 3
2 2 2
1 1 1 1 1
0 0 0
CIPLA
AVEN
IPCA
LPC
TRP
ALPM
CDH
DRRD
RBXY
GLXO
SUNP
GNP
Source: AIOCD, MOSL
#4: Broad-based growth (geographically) essential

One more aspect in assessing the performance of companies is dispersion of growth
across all four regions in India. This signifies geographical reach and helps identify
possible gaps in penetrating the overall market opportunity. SUNP, GNP and IPCA
have exhibited broad-based growth across all four geographies, delivering double-
digit CAGR over the last four years. CDH has underperformed in the West, with 9%
CAGR, and LPC in the North, with 8% CAGR.
30 March 2015 35
Exhibit 61: EAST ZONE – IPCA, LPC and SUNP Exhibit 62: WEST ZONE – GNP, IPCA and SUNP
% to Sales CAGR Gr (CY 10-14)
% to Sales CAGR Gr (CY 10-14)
29 29
26 25 25 24 26
24 24
20 20 21 21 21 21 21 22 21 20
18 19
15 16
11
13 11 14 5 7 5 11 30 20 10 20 11 10 13 9 8 12 1 23 17 12 8 17 10
CIPLA
CIPLA
AVEN
IPCA
LPC
TRP
AVEN
IPCA
LPC
TRP
ALPM
CDH
DRRD
CDH
DRRD
RBXY
ALPM
RBXY
GLXO
GLXO
SUNP
SUNP
GNP
GNP
Source: AIOCD, MOSL Source: AIOCD, MOSL
Exhibit 63: NORTH ZONE – GNP and SUNP Exhibit 64: SOUTH ZONE – GNP, SUNP and IPCA
% to Sales CAGR Gr (CY 10-14) % to Sales CAGR Gr (CY 10-14)
40
34 34
31 30 30 30 32
27 27 30 28
24 25 24 26 25 24
21 19 21 22 21
17
12 10 14 9 11 3 19 11 8 7 20 9 6 9 11 13 7 20 14 13 5 18 9
(7)
DRRD
ALPM
CIPLA
RBXY
GLXO
AVEN
IPCA
LPC
TRP
GNP
CDH
SUNP
CIPLA
AVEN
IPCA
LPC
TRP
ALPM
CDH
DRRD
RBXY
GLXO
SUNP
Source: AIOCD, MOSL GNP Source: AIOCD, MOSL
#5: Lower revenue concentration in top brands

MNCs and small scale companies tend to have large sales contribution from their top
10 products. Such companies are vulnerable to higher regulatory risk and
incremental competition in a specific category. Companies like SUNP, LPC, CDH and
CIPLA are well placed, with low concentration of revenues on the top 10 brands,
implying resilient portfolio spread. All these four companies have less than 25%
exposure to their top 10 products, which is much less compared to peers like RBXY,
GLXO, SANL and DRRD.
Exhibit 65: SUNP, LPC, CDH and CIPLA exhibiting lowest contribution from top-10 brands
Top 10 brands contribution (%) Top 25 brands contribution (%)
79
66
59 56 57
53 52 50 51
41 42 42 45
37 35 38 35 36
32 31
25 25 21 21
ALPM AVEN CDH CIPLA DRRD GLXO GNP IPCA LPC RBXY SUNP TRP
Source: AIOCD, MOSL
30 March 2015 36
Opportunities for new product launch dwindling

Lower contribution from top 10 drugs means higher number of successful new
launches, which have gained scale over a period of time. Though the number of
launches per year has tapered significantly for the Indian pharmaceuticals market,
we believe this will continue to be the main growth driver for Indian companies to
succeed in the branded market, as the Indian market is growing and becoming highly
competitive. Indirectly, it will also help companies to minimize their regulatory risk.
New launches now account for only 29% of growth for the industry compared to
40%+ in the last five years (average).
Exhibit 66: Contribution of new launches in total growth moderating (Growth contribution over 10 years)
Volume Price New products
36 35 24 29 31 25 29
48 45 48
6 16 14 14 18
9 24
110 10 8
125
55 58 59 57 55 58 37
41 48 46
13 10 15
-38 -20
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 YTD
Source: AIOCD, MOSL
To assess the performance of new launches, we have analyzed the last five-year
launches for companies under our coverage in the next section – Case study: New
product launches.
30 March 2015 37
Case study: New product launches (CY10-14)
We attempt to carry out a detailed analysis of the new launch strategies in the
Indian pharmaceuticals market (IPM) and their effectiveness. This is pertinent since
the number of new product introductions has been shrinking due to lesser portfolio
gaps and restrictions due to new patent regime. Consequently, mere 29% of IPM
growth is attributable to new product introductions now (YTD 2014) compared to
45% in the past (2008). Over the last five years, there have been 2,096 new product
launches for our coverage companies, generating cumulative sales of INR 37b
(2014).
Success in new product strategy would differentiate the winners from the rest in a
fiercely competitive market. Strong brand building skills and doctor reach would
determine the success of a new launch. This is also a potential entry barrier for
emerging companies with limited connect with prescribing doctors, especially given
that the incremental time spent by doctors for meeting MRs is dwindling.
Reduction in the number of new launches in IPM is a reflection of stringent patent

laws, delays in approvals and pricing policy uncertainty. Incrementally, companies
have filed for combination products, which are not easily approved by DGCI (Drug
Controller), adding to the backlog of products awaiting approval. This has resulted in
sharp drop in the number of launches by companies under our coverage from 580 in
2010 to 235 in 2014. Additionally, recent patent litigations regarding compulsory
licensing, etc, have also affected MNC’s aggression on new launches. Finally,
uncertainty over revised pricing policy and its coverage also curbed the number of
new launches by companies.
Exhibit 67: Moderation in new launches by coverage Exhibit 68: Ramp-up in cardiac/anti-infective segments (CY10-
companies 14) faster than others
No of launches
No of new launches 280
232
184 175 191
168 162
122
74
Derma
Vitamins
CNS
Anti-Infectives
Cardiac
Respiratory
Anti Diabetic
Pain
Gastro
580 456 451 374 235
2010 2011 2012 2013 2014
Source: AIOCD, MOSL Source: AIOCD, MOSL
Quality, not number of launches matters: Revenue per product

an indicator
Over the last five years, 33% of the launches have been concentrated in anti-
infective, cardiac, and gastro therapies. These launches have seen considerable
scale-up, generating combined revenues of INR4b+ in each category (2014).
However, despite few launches in the anti-diabetes therapy, the revenue realization
per product has been the highest at INR55m (annualized). This validates the
30 March 2015 38
hypothesis that identification of the right product is the recipe for success rather
than launching numerous products.
Exhibit 69: Anti-diabetic products have been more successful in generating value
Total sales (INR b) Sales/Product (INR m)

5.2 55
4.1 4.4
3.8
24 2.9 4.1 2.8
18 19 22 17 2.2 2.0
17 18
12
Vitamins
CNS
Cardiac
Respiratory
Derma
Anti-Infectives
Anti Diabetic
Pain
Gastro
*Total sales: MAT NOV’14 (AIOCD) Source: AIOCD, MOSL
We analyzed 12 companies in respect of their new launches in the IPM over the last
five years. For the purpose of our analysis, we have defined new products as
products that have been introduced in the last five years (cumulative). Predictably,
SUNP, LPC, GNP and CDH emerged as formidable and effective players in launching
new products.
#1: Contribution of new launches to total sales

GNP’s domestic sales grew in excess of 20% (FY08-14) and it benefited from
successful new launches in the recent past. The revenue contribution of new
products is the highest for GNP at 21%. On an absolute basis, SUNP has added
INR7.2b sales from new products, contributing 16% to overall sales. Other
companies that have done well in launching new products are CDH (INR545m), LPC
(INR460m), and ALPM (INR185m; 17% of sales).
Exhibit 70: Contribution of new launches to total domestic portfolio (MAT November
2014)
New product sales (INR b) % contri. to sales
21
17 17 16
15 14 13
11
9
8 7
4
1.8 1.5 5.5 2.8 1.9 1.2 3.7 2.1 4.6 4.0 7.2 1.7
APLM AVEN CDH CIPLA DRRD GLXO GNP IPCA LPC RBXY SUNP TRP
Source: AIOCD, MOSL
#2: Higher prescription generation is the key

Despite having the maximum number of new launches, LPC, CDH, CIPLA and RBXY
rank low in terms of brand creation (revenue per product). SUNP launched only 139
products in five years, but boasts the highest revenue per product at INR50m, thanks
to differentiated launches and positioning with customers.
30 March 2015 39
Exhibit 71: Number of new launches and sales per product (company-wise)
Total launches Sales/product (INR m)

357
52
301 233
272
170
76 124 139 123
119 117 65
15
20 10 22
16 18 17 17
16 15 13
Source: AIOCD, MOSL
#3: Successful branding strategy pays off

Creating successful brands is the key to profitability in the IPM, as incremental
marketing efforts for an established brand are low relative to potential sales.
In the last five years, SUNP has created 16 brands, with yearly sales above INR100m,
including five brands worth over INR300m. RBXY has also been successful in
branding and scaling up its new launches in the last five years. CDH, LPC and GNP too
have done well in creating big brands in a short time span.
Exhibit 72: Successful new launches during last five years
Products > INR 100m Products > INR 300m

16
10
9
6
5 5
4
3 3 3
2 2
1 1 1 1
0
Source: AIOCD, MOSL
Exhibit 73: Top 15 products launched since 2010

MAT sales
Company Brand Subgroup Launch Date
(2014/INR m)
Sun Pharma Istamet Anti Diabetic Aug-11 1,000
GSK Pharma Synflorix Vaccines Dec-11 510
Sun Pharma Istavel Anti Diabetic Jun-11 480
Glenmark Zitamet Anti Diabetic Mar-13 440
Ranbaxy Labs Silverex Ionic Derma Jul-11 400
ZydusCadila Pegihep Anti-Neoplastics Oct-11 380
Sun Pharma Trivolib Anti Diabetic Oct-11 350
Sun Pharma Pantocid L Gastro Intestinal Dec-10 340
Sun Pharma Metosartan Cardiac Nov-10 330
Glenmark Zita (Glenmark) Anti Diabetic Mar-13 300
Sun Pharma Fertigyn Hp-5000 Gynaecological May-12 290
Glenmark Bon K2 Vitamins Sep-10 250
Ranbaxy Rosuvas F Cardiac Jun-10 240
Lupin Cognistar Neuro / Cns Oct-11 240
Zydus Cadila Hyocimax Gastro Intestinal Jan-14 210
Source: AIOCD, MOSL
30 March 2015 40
Industry consolidation to gather pace

Globally, there has been a rush in M&A activities in the pharmaceuticals industry,
triggered by (1) desire to buy products aligned with strengths,(2) sale of non-core
assets, and (3) replenishment of drug pipeline. Declining R&D productivity is one of
the primary reasons attributable for the need to identify inorganic opportunities.
IPM could be entering a consolidation phase over the next few years. The catalysts
for M&A activities for Indian companies are likely to be (1) lack of therapy and
geographic coverage, (2) need to acquire technological assets, and (3) companies
facing succession issues or having strong brands but inefficient management could
be targets. Recent M&A activities like SUNP-RBXY, TRP-ELDP and Pfizer-Wyeth
accelerated the pace of consolidation, which we believe could intensify further.
Exhibit 74: M&A/partnerships for domestic market

Year Acquirer Target Deal size (USDm) EV/Sales (x)
2010 Abbott Ltd Piramal Healthcare 3,200 9.0
2011 Sanofi India Universal Healthcare 100 4.5
2012 Zydus Cadila Biochem 120 2.5
2014 Torrent Pharma Elder Pharma (domestic) 320 5.0
2014 Sun Pharma Ranbaxy 4,000 1.8
2014 Strides Bafna (74%) 8 2.4
In-licensing marketing deals on the rise

Typically, Pharma MNCs have been struggling to promote their global brands in India
due to smaller field force, premium pricing, and poor reach in smaller cities and
towns. We have seen several deals including Biocon-Pfizer and Lupin-Eli Lilly deals
for insulins, Wockhardt-Sinclair, and Sun-MSD deal for oral diabetic products, to
market the innovator’s brand in India. Recently, Gilead sold its marketing license for
Solvaldi to seven Indian companies. These deals increase monetary returns for
innovator companies, as they lack marketing strength in emerging markets.
Exhibit 75: In-licensing marketing deals in India

Year Brand Promoter Partners
2014 Sovaldi Gilead 7 Companies
2013 23-valent PPV (Vaccine) MSD Lupin
2011 Januvia/ Januvet MSD Sun Pharma
2011 Human insulin variants Eli Lilly Lupin
2008 Papulex/Atopiclair/Alocair/Decapinol Sinclair Wockhardt
Pricing policy impact was lower than expected; addition of new

molecules cannot be ruled out
The impact of the National Pharmaceutical Pricing Policy 2013 on the domestic
market profitability was lower than industry expectations. While MNCs bore the
maximum brunt from price erosion in their key brands, median pricing strategy by
Indian players kept them in good stead. However, some companies like LPC, RBXY
and DRRD were affected by prolonged trade disruptions in June and August last year.
30 March 2015 41
In July2014, NPPA/DPCO had also come up with another product list of 108 cardio-
diabetic drugs with different pricing formula for the ceiling price. Post court
intervention, those pricing methodologies was withdrawn. However, the matter is
still subjudice.
New drugs added to DPCO list in December 2014

In December 2014, the NPPA had announced another new list of molecules under
DPCO covering predominantly anti-infectives, followed by gastrointestinal and
vaccines categories. With this list, the scope increases predominantly in the anti-
infective space. The major impact has come in the form of Ciprofloxacin (500mgand
250mg), which is 65% of the market of the released ceiling price (CP).
Below is the impact of ceiling price declared products basket based on MRP– overall
for top companies based on Aug 2014 data on the new list.
Exhibit 76: New drugs were added to DPCO list in December 2014 (INR m)
MAT Val (MRP) Value Loss (MRP) % loss
New market Under DPCO 4,500 1,790 40.0
RBXY 880 550 61.9
CIPLA 790 460 59.1
CDH 460 200 43.1
LPC 130 20 16.5
TRP 40 20 37.5
Source: DPCO, AIOCD, MOSL
30 March 2015 42
RoW: High potential, but needs measured approach

Currency volatility poses headwind
n Turmoil in key emerging market currencies (Russia, Latam) would impede near-term
growth.
n However, Indian companies would grow sustainably (15-18%)in RoW markets, led by
(a) focus on select markets and profitability, (b) expansion of product portfolio, and (c)
widening geographic reach, led by bolt-on acquisitions.
The rest of the world (RoW) markets (excluding US, India and Europe) accounts for
19% of aggregate revenues for our coverage universe. This business segment has
witnessed strong growth in the last five years (23% CAGR); as companies adopted
the inorganic route to expand reach. A low base has also amplified growth. Recent
depreciation in key emerging market currencies like RUB (Russia), REAL (Brazil), etc,
poses a growth headwind for companies. The underlying growth drivers, however,
remain unaffected and we are optimistic on the broader market opportunity (worth
USD180b, ex-India) for Indian companies. We continue to expect 15-25% growth in
the RoW market for coverage companies, as they leverage on their presence and
branding built over the last 5-7 years.
Exhibit 77: DRRD, CIPLA and GNP have high RoW exposure Exhibit 78: Growth moderating with greater scale
Row Sales (INR b, FY14) RoW contribution (%) CAGR FY09-14 (%) CAGR FY15-17E (%)
33 51
23 22
20 21 21
14 22 23
12 18
10 9 16 15 15 16 15
7
2 16 7 33 27 14 5 23 19 9 40 13 22 23 26 13 30 38 22
(1)
ALPM ARBP CDH CIPLA DRRD GNP IPCA LPC SUNP TRP ALPM ARBP CDH CIPLA DRRD GNP IPCA LPC SUNP TRP
Attractive market dynamics favor Indian companies

From Indian companies’ standpoint, the branded formulations markets provide a
lucrative growth opportunity, with the following key attributes:
n Market dynamics similar to their home country and emphasis on brand-building
and increased reach to physicians.
n Distribution channels in most emerging markets are fragmented, and it takes
time to establish sales relationships, acting as an entry barrier for new entrants.
n Regulatory requirements are less stringent, as existing USFDA compliant facilities
can easily be made compliant to the standards prescribed.
n High out-of-pocket spending in most RoW markets, implying lower government
interference through tender/insurance reimbursement. As a result, margins are
typically strong.
n Product approval timelines are also streamlined at 18-22 months, implying
steady approval rates without expensive filing costs.
n Superior pricing power helps keep gross margins in these geographies high.
30 March 2015 43
Exhibit 79: Emerging markets profile

Mkt
Out of
Emerging size Growth Approval Local
OPM pocket Pricing Distribution n/w Companies
countries (USD potential Process competition
spend
b)
Excessive discount on major Highly conc. Top 3
Australia 14 0-5% 25% 56% Rel. Simple Top 5 - 47% Lupin
molecules (85-90%) players - 90% mkt
Torrent,
Generics ref prices @ 55% Highly conc. Top 4 Top 10 - Cadila,
Brazil 26 13% 25% 58% Slower
discount to innovators price players - 95% mkt 53% mkt Glenmark, Sun
Ph, Ranbaxy
Torrent,
Highly conc. Top 2 Top 10 -
Mexico 12 9-10% 20-25% 91% BE - new stds Free mkt pricing Cadila,
players - 70% mkt 42% mkt
Glenmark, Sun
Lupin, Cipla,
Generics ref priced vs innovator Top 10 -
South Africa 2.5 10-12% 20-25% 14% Rel. Simple Highly conc. Ranbaxy,
ref. against other countries 64% mkt
Cadila, Sun
Dr Reddy,
Fairly conc. Top 3 Top 10 - Glenmark,
Russia 15 11% 25-30% 88% Rel. Simple 30% market under pricing control
players - 90% mkt 30% mkt Ranbaxy,
Torrent
Lengthy, Less conc. Top 10 Top 10 - Sun Pharma,
China 98 20% - 78% Ref pricing based on industry avg
Complex players - 34% mkt 15% mkt Ranbaxy
RoW markets offer revenue diversification

Exposure to these markets not only ensures diversification but also leads to strong
growth visibility, driven by pricing power and higher profitability. Having an early
presence in an emerging market has already benefited some Indian companies. They
were able to diversify their business, much better than their global generics peers
whose exposure to these markets is relatively low. Share of RoW markets for our
coverage universe has increased from 12% in FY08 to 20% in FY14, partly aided by a
very low base.
Exhibit 80: RoW contribution at ~12% in FY08 Exhibit 81: RoW contribution at ~20% in FY14
India
India
10.1 USA
6.6 USA
7.5 Brazil 12.9 25.5 Brazil
35.9
Russia Russia
18.7 Europe 10.9 Europe
Japan Japan
0.5 APIs 1.5 1.6 APIs
8.1 14.5 4.9
RoW 32.9 RoW
3.1
Others
2.6 1.8 Others
DRRD, CIPLA and GNP well positioned

DRRD, CIPLA, RBXY, LPC and GNP are well placed to leverage the RoW opportunity,
with over 20% of sales coming from these markets. RoW markets for our coverage
expanded at 23% CAGR over FY09-14, aided by gradually expanding geographical
reach as well as product introductions. Interestingly, most Indian companies would
benefit from high growth in the RoW markets and increase their market share by
30 March 2015 44
growing faster than the industry. We expect Indian companies to grow their RoW
footprint at a measured pace and grow at a CAGR of 15-25% over FY15-17.
Despite sharing similar characteristics with the home market (India), each
country/region has its own peculiarities. The strategy of Indian companies in RoW
markets has not been foolproof so far, with mixed success. Part of this can be
attributed to M&A action to achieve higher scale, but backed by low management
bandwidth and focus. Most companies have now identified key RoW markets to
focus on, ensuring better capital allocation and use of management bandwidth.
DRRD has strong exposure in Russia while GNP/TRP is strong players in Latam. LPC is
one of the few players targeting the Japan generics market with a distinct strategy.
CIPLA has acquired its partner Medpro to expand reach in African market while it
continues to expand its direct presence in key emerging markets. SUNP had very low
exposure to RoW, but with the RBXY merger, this is set to change.
We have profiled two key RoW markets – Russia and Brazil, which are sizeable
markets for Indian players.
Russia: Profitability high; currency remains biggest risk

The Russian pharmaceuticals market has expanded at 16% over the last 8 years and
is now worth RUB821b (USD14b). Recent depreciation in local currency (36% in
three months) has led to sharp erosion in the opportunity size for global players.
However, fundamental growth drivers remain strong, implying a healthy 10-12%
growth to be sustained over the medium term, which would place Russia among the
five fastest growing markets. Key characteristics of the Russian market are:
n Branded generic formulations account for 75% of total volumes while patented
products contribute 25%.
n The market is highly reliant on imports (76% of volumes), with local
manufacturing capabilities limited. This enables high pricing power with foreign
players, which helps in absorbing the impact of local currency weakness.
n Government regulation of drug prices is high, with the VED list covering almost
44% of total market value.
Exhibit 82: Russian market sales Exhibit 83: Growth led by price hikes
Pharma Market (RUB b) Market growth Price Growth (%) Volume Growth (%)
41.5% 11
26.3% 27.5% 27.8%
13.4% 17.2%
11.8% 7.9% 3
5.7% 23.9%
0.4% 1 31 28 27 28 6
1
21
16 13 16
11 10 11
150 158 224 283 321 409 506 647 698 818 821 0 2,330 (2)
(11) (1)
(16)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2020
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Pharmstandard, MOSL Source: Pharmstandard, MOSL
30 March 2015 45
Exhibit 84: Imported drug share at 76% (2013) Exhibit 85: OTC market takes larger pie in value (2013)
Imported drugs (%) Locally produced (%)
21 22 26 27 28 24
40% OTC
RX
79 78 74 73 72 76 60%
2008 2009 2010 2011 2012 2013
Source: Pharmstandard, MOSL Source: Pharmstandard, MOSL
Increased focus on OTC segment could offset impact of price control

The Russian government has continued to increase the span of products under price
control, referred to as the vital and essential drugs (VED) list. This list determines
maximum price and trade markup (wholesale and retail) allowed for specific drugs.
The coverage of VED list is 44% (RUB363b) for the total Russian market in value
terms and similar share in volume terms as well. Local companies are allowed to
raise prices annually to factor inflation and rise in input costs. For foreign players,
the ceiling prices are determined based on the data of minimum prices in the whole
CIS region where the products are registered. Due to limitations on price increase,
growth in VED-listed products has lagged overall market growth.
Exhibit 86: VED list contribution falling to 44%

VED sales (Rub b) % Share
49.6 49.1 55.5 49.5
46.0 44.2
193 239 368 346 351 363
2008 2009 2010 2011 2012 2013
Source: Pharmstandard, MOSL
To counter the impact of the VED list, Indian companies have intensified their focus
on the OTC segment. While initial pricing for the OTC segment may be lower, it has
better pricing dynamics and lower competition, implying higher predictability of
revenues. The OTC segment accounts for 59% of the Russian market by value and
36% in volume terms. Among Indian companies, DRRD has strong presence in the
OTC business. Its share of the OTC business has grown from 17% in FY10 to ~34%.
Sharp currency depreciation impairs near term outlook

Russia/CIS accounts for ~10% of overall sales of the top-5 under-coverage companies
in this region. Political crisis (Ukraine-Russia) coupled with weakness in crude prices
has resulted in sharp devaluation of the local currency v/s USD (~83% since March
2014). Continued weakness in the local currency (v/s USD) would hurt revenue
growth as well as profitability, especially if INR remains stable (v/s USD).
30 March 2015 46
Exhibit 87: Russian currency depreciated 50% against dollar since June 2014
120 RUB/USD RUB/INR
100
80
60
40
Oct-14
Oct-14
Nov-14
Dec-14
Dec-14
Dec-14
Jan-15
Jan-15
Aug-14
Aug-14
Nov-14
Mar-15
Jul-14
Jul-14
Jun-14
Jun-14
Jun-14
Sep-14
Sep-14
Feb-15
Feb-15
Source: Bloomberg, MOSL
DRRD and GNP have high exposure to Russian market

Riding on high price elasticity, some Indian companies have created significant
presence in Russia. The country’s high import dependence enables higher bargaining
power for Indian companies to take price hikes, given supply constraint.
Russia imports 76% of its drugs, of which Indian companies account for ~5%. Among
Indian companies, DRRD (3% share) is well placed to capitalize the Russian market
opportunity over the next few years. Other companies that have significant presence
in the market are Ranbaxy, GNP, IPCA and TRP.
Exhibit 88: DRRD, GNP and RBXY have greater exposure Exhibit 89: DRRD RBXY and GNP to see currency impact
Russia Sales (INR b, FY14) Russia contribution (%) CAGR FY09-14 (%) CAGR FY15-17E (%)
15.0
25
21
9.9 8.6 13 13
5.1
21 33 10 18 10
2.5
20 6 2 11 1 (4)
DRRD GNP IPCA RBXY TRP DRRD GNP IPCA RBXY TRP
Exhibit 90: DRRD and other Indian cos hold 6% share
Novartis
7% Sanofi-Aventis
5% Pharmstandard
4% Bayer Healthcare
3%
73% Teva
3%
3% Dr. Reddy's
3%
Other Indian cos.
Rest of the market
Source: Pharmstandard report
30 March 2015 47
Exhibit 91: Higher OTC sales will offset currency fluctuation

CompanyRussia+CIS sales (INR b) % of total sales Comment
DRRD 20 15 OTC constitutes 34% of the business
GNP 6 10 Top 15 in Derma, OTC just started
No 1 in covered market with 13% market share
RBXY 2 9
OTC contributes 30% to Russia sales.
IPCA 11 5 None
TRP 1 2 None
Brazil: Regulatory issues showing signs of withdrawal

With its growing population of over 200m people, Brazil is the largest
pharmaceuticals market in Latin America, worth an estimated USD29b. It surpasses
second-ranked Mexico by over 80m people in population and nearly double the
market worth. Healthcare is a big business in Brazil, with 9% of gross domestic
product (GDP) directed towards healthcare expenditure. Given the increasing
healthcare costs, governments in Latin America are emphasizing the use of generic
medications and pushing for local manufacturing.
Exhibit 92: Brazil covers more than 40% Latam market Exhibit 93: Out of pocket spending highest in Brazil
Out-of-pocket Public funding
16% Brazil 16% 15% 11%

34%
Mexico 44%
6% 60%
42% Venezuela
8% 84% 85% 89%
Argentina
66%
56%
10% Colombia 40%
Other LatAm
18%
Colombia Argentina Mexico Venezuela Ecuador Brazil
Source: Pharmastandard report Source: Company, MOSL
Brazil is the second-largest market in RoW for Indian companies under our coverage
and accounts for more than 3% of their total revenues. The pharmaceuticals market
is dominated by prescription drugs, with 72% contribution. Moreover, only 25% of
total prescriptions are generics. Indian companies see great opportunity in the
growing generics pie in Brazil. Leading Indian companies with significant presence in
the market are GNP, TRP, RBXY and CDH.
30 March 2015 48
Exhibit 94: TRP with significant exposure Exhibit 95: Latam growth to pick up
Brazil Sales (INR b, FY14) Brazil contribution (%) CAGR FY09-14 (%) CAGR FY15-17E (%)
12.8
18
15 15 15
6.6 3
2
4 8 20 16
3.3 2.2 5
(3)
CDH GNP RBXY TRP CDH GNP RBXY TRP
The growth trajectory in the lucrative Brazil market has been thwarted by delays in
product approvals by the regulator, ANVISA. This has resulted in inconsistent
performance of companies like TRP and GNP, which derive 7-13% of their business
from this market. We expect focus on niches (chronic segment) would enable
companies to differentiate themselves and grow ahead of competition.
TRP and GNP are favorably positioned in Brazil

TRP has strong presence in both the generics and branded segments. It has also
established itself in the institutional segment, which has been growing fast in the last
few quarters. We believe TRP and GNP are the key Indian players in Brazil that stand
to benefit from accelerated product approvals and economic revival in Brazil.
Exhibit 96: Latam contribution

Company Latam sales (INR b) % of total sales Comment
TRP 5 13 Strong presence in Brazil (Generic and
Branded)
Cardiac and CNS portfolio
GNP 4 7 Brazil business growing slower with
delay in approvals, Mexico and
Venezuela could be the key drivers for
Latam growth
Derma and Oncology are key therapies
RBXY 3 2 Brazil sales - USD 34m. Venezuela
presence with the help of Daiichi
Sankyo.
CDH 2 3 -
30 March 2015 49
Sector Financial Outlook: Earnings momentum persisting

Forecast 23% EPS CAGR for our coverage over FY15-17
n Despite achieving a significantly larger base through growth acceleration in the last
five years, we expect EPS momentum to persist at a strong 23% over the next two
years (FY15-17E).
n This would be driven by revenue CAGR of 18% and cumulative margin expansion of
70bp during the forecast period.
Revenue visibility remains solid

Revenue for stocks under our coverage grew at 19% over FY09-14, driven by
expansion of the US portfolio as well as domestic business, lending high visibility.
While high base in the US would result in relatively slow growth, focus would be
more on quality of revenues (complex generics in the US). The impact of
differentiated filings in the US, rebound in domestic market growth (post pricing
policy impact) and scale-up of RoW sales would drive sector revenue visibility. We
expect our coverage stocks to register revenue CAGR of 18% over FY15-17, with 38%
of growth emanating from the US and 25% from domestic business.
While we do not factor inorganic expansion in our assumptions, strong balance

sheet can enable faster (and earnings accretive) growth, given the strong track
record of players like SUNP and LPC.
Exhibit 97: Coverage sales to grow at 17% Exhibit 98: Break-up of sales growth for our coverage (INR b)
Percentage contribution to growth
Coverage sales (INR b) Growth (%)
26 24 25 % 38 % 17 % 20 %
22
19 20 18
16 17
11
1,458
1,055
378 419 498 595 740 906 1,055 1,245 1,458
Sales India USA Row API & Sales
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
(FY15E) Others (FY17E)
Margins improving structurally on improved product mix

With the investment cycle moderating and revenue picking up over the medium
term, we expect the margin profile of our coverage stocks to improve further. We
project EBITDA CAGR of 19% for our coverage universe over FY15-17, driven by
cumulative margin expansion of 70bp. This factors the impact of likely erosion in US
base business (channel consolidation) and increased R&D investments. Contribution
from complex generics/Para IV filings in the US, with superior margins and favorable
operating leverage, are the key margin drivers.
30 March 2015 50
Exhibit 99: Coverage EBITDA to grow at 19% Exhibit 100: Margin to stay healthy at 22-23%
EBITDA (INR b) EBITDA growth (%) 23.6
22.9
30.1 22.5
27.0 27.0 28.2
22.6 21.5
17.7 16.3 20.5
16.0
19.7 19.6
9.3 19.2
18.7
71 90 98 114 145 186 242 280 344
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Forecast 23% EPS CAGR for our coverage over FY15-17

Robust revenue visibility and better margin outlook would result in 23% EPS CAGR
for our coverage universe. Moreover, companies continue to invest on strategic
projects, which may have long gestation period (biosimilars, transdermals, etc), but
little revenue contribution in the near term. This may also constrain near-term
profitability.
Exhibit 101: Coverage earnings to grow at 24% Exhibit 102: PAT growth (73%) to be revenue-driven (INR b)
PAT (INR b) PAT growth (%) Percentage contribution to growth
34 35
29 72 % 19 % 9%
26 24
23
17
10
289
189
-2
50 63 84 92 108 140 189 232 289 PAT (FY15E) Sales Gr. Margin Imp. Financial PAT (FY17E)
Lev.
Improving asset utilization another lever

Capex intensity for our coverage universe has been sub-optimal, with capacities
expanding at a fast pace, with significant addition in formulations capacity. This has
restricted improvement in asset turnover ratios at 1.8x (constant since FY11, ex-
MNCs), as a large part of the additions was done with a 5-7 year view. With
moderation in capex to INR324b (5-6% of sales versus 9% earlier) over FY14-FY17,
we expect fixed asset turnover ratios to improve to 2x for our coverage universe, as
high value launches in the US pan out.
30 March 2015 51
Exhibit 103: Fixed asset turnover set to increase Exhibit 104: Gross block addition as % of sales declining
2.0 Gross block addition (INR b) % of sales
10 11
1.9 10
1.9 1.9 9 9
1.9 8
1.9 1.8 6 6
1.8 5
1.8
39 27 53 59 56 83 96 73 76

Stronger RoIC implies faster cash generation

We expect faster cash generation for our coverage companies, as some of the high
value launches in the US pan out. As a result, aggregate RoIC (post-tax) would
improve from 25% to 31% by FY17. This again is a key driver of high multiples, as
cash generation boosts investor confidence on capital efficiency and execution
strength. SUNP is a clear leader based on this parameter, followed by LPC.
Exhibit 105: Coverage Return ratios continue to improve Exhibit 106: SUNP, LPC stand out in capital efficiency
ROE (%) ROIC (%) FY15 ROIC (%)
31 48
27
25 25
29
21 22
20 20 20 22
25 25 25 18
12 15 13
23 22
21 21
CIPLA
IPCA
LPC
TRP
CDH
DRRD
ARBP
SUNP
GNP
FY11 FY12 FY13 FY14 FY15E FY16E FY17E
30 March 2015 52
Selective stock picking to identify outperformers

SUNP, ARBP, TRP are our top picks
n At current valuations, we prefer companies which are trading below their fair
valuation, implying attractive valuation and have potential to surprise on the earnings
front.
n Our bias is towards companies that have (a) focus on pipeline differentiation in the US,
driving growth and profitability, (b) formidable domestic franchise, with focus on
chronic/specialty therapies, and (c) earnings momentum with improving return ratios.
SUNP, ARBP and TRP are our preferred picks

Our top picks in the Indian pharma space are SUNP, ARBP and TRP, as they score
highly on the criteria above and are available at reasonable valuations. Among other
stocks, we believe CDH and LPC would outperform, based on improved earnings
visibility. Our target P/E multiple for coverage companies is 16-28x one-year
forward, compared to the 21x average for the sector and in line with the current
(FY16E) multiples. Midcap stocks like ARBP, TRP, CDH and ALPM would trade higher
than their historic P/E bands, owing to stronger business prospects and growth
visibility, but are still likely to trade at discount to large cap peers.
Exhibit 107: Indian generics (coverage snapshot)

Up/Dow Target
Company Rating TP nside (%) P/E Vs Sector Rationale
Sector leading RoIC (45%+), Differentiated US portfolio,
SUNP Buy 1,220 19% 27x 25% premium leadership in India business justify valuation premium.
Successful integration of RBXY is the next big catalyst.
LPC Buy 2,275 15% 27x 25% premium Strong execution track record, potential earning upgrades
emanating from US pipeline and high capital efficiency.
DRRD Buy 3,870 12% 22x In line Large cap stock, but in line with sector multiple due to
relatively slower EPS growth
Strong earnings recovery + Potential monetization of high
CIPLA Neutral 730 4% 24x 10% premium value Inhaler portfolio in US/EU. Includes INR 25/sh value
for Inhaler portfolio.
Factoring re-rating on the back of strong growth visibility
ARBP Buy 1,645 45% 20x In line
and deleveraging prospects
Strong core earnings growth of 29%, Improving return
CDH Buy 1,980 19% 22x In line
ratios and potential deleveraging.
Pick-up in US growth led by high impact Para IV launches
GNP Buy 950 20% 21x In line (gZetia, gFinacea), gradual reduction in gross debt and
turnaround in Latam business
Regulatory issues affecting US business poses near-term
IPCA Neutral 725 12% 16x 25% discount overhang, hence valuation discount. Business model
remains robust and earnings growth likely from India, RoW.
Higher than expected synergies from Elder brands portfolio
TRP Buy 1,410 24% 22x In line to boost profitability. Ramp-up of US sales would also aid
operating leverage. Expect reduction in debt levels
Focus on right business mix in India and continued
ALPM Buy 500 12% 18x 10% discount execution in US launches would drive earnings upside.
Valuation re-rating justified by high EPS growth (31% CAGR)
SUNP likely to sustain premium multiples: We believe that SUNP is likely to sustain
consistent earnings outperformance and further consensus EPS upgrades justify the
premium multiples. Integration with RBXY would yield synergy benefits likely to
accrue over the next two years and beyond. Pipeline for US remains differentiated,
with Taro continuing to dominate in generic derma space. Hence, we assert that
30 March 2015 53
SUNP should maintain its premium valuations. Our target price is INR1, 220 (27x on
FY17E EPS in line with current multiple).
Improved business mix and niche US portfolio to drive ARBP’s re-rating: We

initiate coverage on ARBP with a BUY rating and target price of INR 1,645 (20x FY17E
P/E). We expect ARBP to sustain improvement in its business mix, with higher thrust
on formulations (79% of sales by FY17E vs 65% in FY14), resulting in valuation re-
rating. Strong earnings growth of 26% over FY15-17E is likely on the back of niche US
portfolio (182 pending ANDAs) focused on injectables, controlled substance,
penems, etc). Improved profitability and controlled capex would aid free cash
generation and return ratios.
TRP to benefit from synergies in domestic business: We expect TRP to be valued at

higher PE multiple than its historic average owing to (a) strong synergies with Elder
brands driving margin expansion, (b) robust US pipeline growing at a smaller base
and (c) RoIC expansion of 420bp over FY15-17E. Strong earnings outlook (25% CAGR)
and improved cash flows (INR 10b free cash flow over FY15-17E) would aid
deleveraging prospects.
LPC to command higher than sector average multiple: Both DRRD and LPC offer a
unique mix of revenues favoring branded markets along with niche product
capabilities in the US market. However, stronger earnings growth and RoIC favor LPC
more. LPC should trade at premium to the sector average (at 27x) while DRRD
deserves a multiple inline with the sector (22x) owing to slower than sector growth.
Business strategy change, potential inhaler upside to aid CIPLA valuations: CIPLA
should command premium valuations due to (a) strong management focus and
improved profitability, (b) emergence of front-end exposure in export markets,
driving long-term value, and (c) potential upside from developed market inhaler
pipeline launch. This would result in sharp earnings acceleration (39% CAGR),
meriting high multiple (24x). Likelihood of monetization of inhaler portfolio in the
EU/US could result in substantial earning upgrades. We value CIPLA based on SOTP –
base business at INR705/share (24x FY17E EPS) plus NPV of inhaler pipeline at
INR25/share to arrive at target price of INR730. However, we downgrade the stock
to Neutral (from Buy earlier), as upside to our target price is <15%.
Midcap stocks likely to sustain current multiples: Post recent run-up in the stock
prices, we believe midcap stocks have e-rated and now trade at the higher end of
their historic P/E band averages. This can be attributed to (a) uptick in select niche
product opportunities, providing substantial boost to profitability (ALPM), (b)
turnaround in business prospects, led by aggressive filings for US and their approval
(CDH), and (c) progression of novel R&D pipeline (GNP).
We believe re-rating of the midcap stocks has been structural, as many of them have
achieved sizeable revenue base and have exhibited earnings consistency and
improving capital efficiency. For instance, LPC underwent a significant re-rating in
2010 from single-digit P/E to late-teen multiples on consistent earnings growth as
well as revenue base. This resulted in it getting compared with large-cap peers on
30 March 2015 54
multiple parameters and subsequent re-rating. We believe TRP and CDH have
successfully passed a similar situation and would now be compared with large caps.
We expect our midcap coverage stocks to maintain current multiple (20-22x),

especially as their earnings outlook is robust and cash generation would help
deleverage their balance sheet in coming quarters. Our target prices for midcap
companies are based on one-year forward P/E multiple of 17-22x.
Exhibit 108: Valuation comparables

CAGR % (FY15E-17E) P/E (x) EV/ EBITDA (x)
CMP Mkt Cap TP Up/Downside
Company (INR) (USD b) Rating (INR) (%) Sales EBITDA PAT FY15E FY16E FY17E FY15E FY16E FY17E
SUNP 1028 35 Buy 1220 19% 18 18 19 32 29 23 24 20 16
LPC 1975 14 Buy 2275 15% 19 25 28 39 29 24 24 18 15
DRRD 3449 10 Buy 3870 12% 12 16 16 27 24 20 18 16 13
CIPLA 701 9 Neutral 730 4% 19 28 39 46 32 24 25 19 15
Mean (Large Caps) 17 22 26 36 28 23 23 18 15
ARBP 1136 5 Buy 1645 45% 16 23 26 22 17 14 15 12 10
CDH 1661 6 Buy 1980 19% 20 27 29 31 23 18 21 15 13
GNP 792 4 Buy 950 20% 21 25 25 27 22 17 16 13 10
IPCA 648 1 Neutral 725 12% 16 24 31 25 18 14 14 11 9
TRP 1135 3 Buy 1410 24% 19 25 25 28 22 18 19 14 12
ALPM 447 1 Buy 500 12% 24 32 33 29 21 16 13 9 7
Mean (Mid Caps) 19 26 28 27 21 16 16 13 10
CRAMS
DIVI 1804 4 Neutral 1910 6% 21 22 20 27 23 19 20 17 14
BIOS 432 1 Sell 410 -5% 17 16 12 21 19 17 13 12 10
Mean (CRAMS) 19 19 16 24 21 18 17 14 12
MNCs
GLXO 3256 5 Neutral 3300 1% 16 30 30 66 45 39 55 38 32
AVEN 3266 1 Neutral 3800 16% 14 22 28 38 29 23 20 16 13
Mean (MNCs) 15 26 29 52 37 31 37 27 23
Mean (Coverage) 18 24 26 33 25 20 21 16 13
30 March 2015 55
Exhibit 109: Financial comparables

CMP Revenue (INR b) EBITDA Margin (%) EPS (INR/share) ROIC (%)
Company (INR) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
SUNP 1028 180 212 253 47% 46% 47% 31.7 36.0 45.2 48 48 53
LPC 1975 130 155 183 28% 30% 31% 50.4 67.0 82.6 29 33 37
DRRD 3449 147 161 183 23% 24% 25% 130.0 146.7 175.8 15 17 19
CIPLA 701 112 135 157 20% 22% 23% 15.1 22.2 29.3 12 17 21
ARBP 1136 123 146 166 19% 20% 21% 51.5 65.6 82.2 20 21 24
CDH 1661 87 106 125 20% 22% 22% 54.0 72.8 90.0 20 24 26
GNP 792 69 82 100 22% 22% 23% 29.0 36.3 45.3 18 18 21
IPCA 648 32 37 43 20% 21% 22% 26.3 35.2 45.2 13 15 17
TRP 1135 47 57 67 23% 25% 26% 41.3 50.9 64.0 22 22 26
ALPM 447 21 26 32 20% 22% 23% 15.3 21.4 27.2 32 36 37
CRAMS
DIVI 1804 31 38 46 37% 37% 37% 66.1 78.4 95.3 25 26 27
BIOS 432 30 36 42 22% 22% 21% 20.4 23.2 25.6 9 9 9
MNCs
GLXO 3256 26 31 35 18% 22% 23% 49.0 72.2 82.5 318 165 163
AVEN 3266 20 23 26 17% 18% 20% 85.6 112.8 140.9 22 29 31
30 March 2015 56
Companies
BSE Sensex: 27,458 S&P CNX: 8,342 March 2015
Companies
Sun Pharma 58
Aurobindo Pharma 67
Torrent Pharma 83
Cadila Healthcare 90
Lupin 97
Dr Reddy’s 105
Glenmark Pharma 112
Alembic Pharma 119
Cipla 126
IPCA 132
30 March 2015 57
Healthcare | Fortified capabilities, sustained
30 Marchgrowth
2015
Update | Sector: Healthcare
Sun Pharma
BSE Sensex S&P CNX
CMP: INR1,028 TP: INR1,220 (+19%) Buy
27,458 8,342
Keeps shining – RBXY integration is key

Consistency in earnings surprises, our top pick in pharma space
Stock Info Successful turnaround of distressed assets and flawless execution in domestic
Bloomberg SUNP IN and US business have catapulted Sun Pharma (SUNP) to the leadership position
Equity Shares (m) 2,071.1 (by profitability). Merger with RBXY is likely to place it in an indomitable position
52-Week Range (INR) 1056/557
in IPM and also open up the fast-growing emerging markets opportunity.
1, 6, 12 Rel. Per (%) 13/25/49
SUNP’s near-term focus would be to achieve targeted USD250m synergies from
M.Cap. (INR b) 1,673.0
RBXY, largely through cost optimization and revitalizing growth. Differentiated
M.Cap. (USD b) 26.3
US portfolio could spring positive surprises, while cash rich balance sheet leaves
AvgVal(INRm)/Vol‘000 1941/2529
scope for accretive M&A. SUNP is our top pick; maintain Buy with a target price
Free float (%) 36.4
of INR1,220, implying 19% upside.
Financial Snapshot (INR b) Revenue momentum intact despite significantly larger base: SUNP’s
Y/E Mar 2015E 2016E 2017E focus on complex generic products (131 ANDAs pending) would sustain 18%
Net Sales 180.4 212.4 252.7 CAGR in the US (60% of sales) even as a favorable pricing environment has
EBITDA 85.0 97.5 118.2
boosted Taro’s sales (27% of US sales). Scale-up of Dusa franchise and re-
Adj PAT 65.7 74.6 93.7
introduction from URL portfolio to further aid US sales. Leadership in chronic/
EPS (INR) 31.7 36.0 45.2
specialty (56% of portfolio) would help outpace industry growth consistently.
Gr (%) 109.0 13.6 25.5
BV/Sh (INR)
We expect SUNP’s revenue (ex-RBXY) to register 18% CAGR over FY15E-17E.
116.2 146.4 184.6
RoE (%) 30.8 27.5 27.3 Emerging as leading player in Specialty derma space in US: After a
RoCE (%) 37.1 36.1 35.4 successful turnaround of Taro, SUNP has established itself as one of the largest
P/E (x) 32.9 29.0 23.1 generic dermatology player in the US (USD 2b mkt). Dusa (novel platform)
P/BV (x) 9.0 7.1 5.7 helped to strengthen derma product offering (device based). In-licensing of
Merck’s Phase III candidate for chronic plaque psoriasis (tildrakizumab) marks
Shareholding pattern (%) its intent to create a formidable franchise in derma space.
As on Dec-14 Sep-14 Dec-13
Promoter 63.7 63.7 63.7 Achieving USD250m synergies from RBXY appears realistic: With
DII 4.9 4.6 5.7 minimal product overlap in the US/India and addition of RBXY’s wide RoW
FII 21.7 22.8 22.5
Others 9.8 9.0 8.1
reach, SUNP would achieve healthy revenue diversification (high US
Note: FII Includes depository receipts concentration earlier). We estimate RBXY’s integration to be EPS accretive
from FY17, with a sharp improvement in core profitability likely within second
Stock Performance (1-year) year of SUNP’s takeover (core margins to expand from ~12% to 17-18%).
Sun Pharma.Inds. Resolution of USFDA issues (Dewas/Poanta Sahib) would be a key determinant
Sensex - Rebased of execution success.
1,100
950 Focus shifts to RBXY’s integration, execution to drive valuation upside
800
We believe SUNP would continue to trade at premium valuations due to
650
500
superior execution track record, high RoIC (48% v/s 35% for peers) and cash rich
balance sheet (USD 3.8b cash). We estimate EPS CAGR of 19% over FY15E-17E,
Dec-14
Mar-14
Mar-15
Jun-14
Sep-14
despite hike in R&D (novel molecule) restraining margins. Our target price of
INR1,220 is based on 27x FY17E P/E, without including RBXY. Risks: Adverse FDA
action on Halol facility (~25% of sales, Form 483 issues), devolvement of legal
liability owed by RBXY, currency fluctuation.
30 March 2015 58
Valuation and view

SUNP has historically commanded 20-25% premium to Indian pharma peers,
typically at 25-27x one-year forward P/E multiples. The stock trades at 29x FY16E
and 23x FY17E, which does not fully value its rich US pipeline and stable, cash-
generating domestic business. Consistent outperformance in the domestic market,
with market share gains and high profitability reflect management’s execution
capability (and product selection skills). Identification of value-accretive assets and
integrating them successfully has been one of the cornerstones of SUNP’s success.
We believe that the premium is likely to be maintained on the back of:

n High earnings visibility on an elevated base (forecast EPS CAGR of 19% over
FY15E-17E). Upside from FTF’s (one-offs) to provide additional (Gleevec) EPS
boost.
n Sustained improvement in RoIC, implying high capital efficiency. We expect
RoIC to expand from 48% in FY15E to 53% by FY17E (v/s 35% average for large
caps).
n Strong cash generation and healthy balance sheet. We expect SUNP to
generate INR221b free cash flows over FY15E-17E and its cash surplus to reach
INR234b (56%+ of capital employed) and,
n Impeccable execution track record. SUNP has consistently beaten its own
guidance and consensus estimates over the last five years by a margin. Greater
focus on capital efficiency and profitability (over size) has catapulted SUNP to
the current level.
Our target price implies 17% upside

We assign a target P/E of 27x to SUNP’s base business EPS for FY17E and arrive at a
target price of INR1,220, implying 19% upside from the current levels. Our target
multiple is:
n At the higher end of its historic average P/E band (one-year forward).
n At 30% premium to sector average P/E of 21x, in line with the past average.
n In line with the current trading multiple (FY16E P/E).
Key catalysts going forward are:

n We have not factored any potential acquisition that SUNP may enter (net cash
surplus) as well as positive development of its novel molecule (tildrakizumab, in-
licensed from Merck).
n RBXY financials are not factored in our estimates, pending deal closure.
However, our proforma analysis suggests the deal to be EPS accretive by FY17E.
Execution of RBXY’s integration would be a key catalyst to watch for.
n Higher-than-expected upsides from niche molecules in the US (Gleevec).
Risks to our assumptions are:

n Adverse outcome for Form 483 issued at Halol facility: SUNP received US FDA
observations (Form 483) for cGMP violations at its Halol facility (accounts for
~25% of revenue). An enforcement action (import alert, warning letter) by the
US FDA on dissatisfaction from remediation efforts could pose serious risk to our
assumptions for future growth. This is possibly reflected in the stock’s recent
underperformance.
30 March 2015 59
n Currency volatility: SUNP derives more than 73% of its revenue (and profits)
from overseas business (largely the US) and hence is affected by currency
fluctuations on an operational level. As a prudent measure though, the company
hedges ~50% of its net exposure to the USD through forward covers (<12-month
duration). A reversal in the current trend (INR appreciation) thus poses a
downside risk to estimates.
n Increased competition in US derma market: Taro accounts for 27% of SUNP’s
business and is currently benefiting from a lack of competition in the US derma
market (and price hikes). We do not expect a new player’s entry for four to five
years at least due to development timeline etc. However, if some of the
approved players (two to three) re-enter the market, there could be a risk to
pricing in the US derma market, thus affecting SUNP (Taro) adversely.
Exhibit 110: Sun Pharma PE (x) Exhibit 111: Sun Pharma PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x) Sun Pharma PE Relative to Coverage PE (%)
36 Median(x) Min(x) 140 LPA (%)
30 29.2 29.0
70
24 20.1 8.3
-0.6
0
18 19.5
14.0
12 -70
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Dec-08
Sep-12
Dec-13
Dec-08
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Sep-12
30 March 2015 60
Exhibit 112: PROFORMA INCOME STATEMENT

Sun Pharma Ranbaxy Combined
Particulars FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17
Sales 180,447 212,434 252,698 107,997 117,923 141,611 288,444 330,357 394,309
EBITDA 85,050 97,501 118,217 16,582 19,567 27,923 101,631 117,068 146,141
EBITDA margin 47.1% 45.9% 46.8% 15.4% 16.6% 19.7% 35.2% 35.4% 37.1%
Depreciation 5,604 6,822 7,186 4,111 5,102 5,529 9,715 11,925 12,715
Interest Expense 733 697 662 2,908 2,354 2,354 3,641 3,051 3,016
Other Income 4,208 7,629 10,510 685 1,420 1,562 4,893 9,049 12,072
Extraordinary Income 0 0 0 6,288 0 6,288 0 0
PBT 82,921 97,611 120,880 3,960 13,531 21,602 86,880 111,142 142,482
Tax 8,519 14,642 18,132 1,813 3,518 5,616 10,332 18,160 23,749
PAT 74,401 82,969 102,748 2,147 10,013 15,985 76,549 92,982 118,734
Minority Interest 8,718 8,331 9,044 129 250 293
Reported PAT 65,684 74,639 93,704 2,018 9,763 15,692 67,702 84,402 109,396
No of shares 2071.2 2071.2 2071.2 423.32 423.32 423.32 2409.8 2409.8 2409.8
EPS, INR 31.7 36.0 45.2 4.8 23.1 37.1 28.1 35.0 45.4
Exhibit 113: PROFORMA BALANCE SHEET

Sun Pharma Ranbaxy Combined
Particulars FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Share Capital 2,071 2,071 2,071 2,117 2,117 2,117 2,410 2,410 2,410
Networth 240,634 303,157 382,321 44,114 52,051 64,042 395,400 457,922 536,034
Debt 403 403 403 58,853 58,853 58,853 59,257 59,257 59,257
Minority Interest 27,930 36,260 45,305 886 961 1,062 28,815 37,221 46,366
DTL ( 9,110 ) (9,110 ) (9,110) (633) (633) (633) (9,743) (9,743) (9,743)
Total capital employed 259,857 330,710 418,919 103,220 111,232 123,324 473,729 544,657 631,914
NFA 46,793 48,971 50,785 43,784 45,730 47,245 90,577 94,701 98,030
Goodwill 33,191 33,191 33,191 21,818 21,818 21,818 165,660 157,723 145,733
Investment 27,860 27,860 27,860 722 722 722 28,583 28,583 28,583
Non Cash CA 118,035 137,151 157,211 62,532 75,324 79,048 180,568 212,475 236,629
Cash & Equivalents 105,086 161,400 234,039 10,292 14,831 20,087 115,378 176,231 252,965
Current Liabilities 71,109 77,863 84,168 35,929 47,194 45,597 107,038 125,057 130,026
Net CA 152,012 220,688 307,082 36,896 42,962 53,539 188,908 263,649 359,568
Total capital employed 259,857 330,710 418,918 103,220 111,232 123,324 473,728 544,656 631,914
30 March 2015 61
Story in charts
Exhibit 114: Segment mix (%) Exhibit 115: Segment growth (%)
CAGR FY12 FY13 FY14 FY15E FY16E FY17E
FY13 FY14 FY15E FY16E FY17E (15-17) India 22 2 24 20 19 20
India 26 23 24 24 25 19 USA 54 77 59 13 17 19
USA 54 60 60 60 60 18 Taro 206 31 34 18 16 15
RoW 73 37 25 5 24 22
Taro 27 26 27 26 25 16
Others 17 23 7 ( 2) 5 5
RoW 13 12 11 12 12 23 Total 40 41 42 13 18 19
Others 7 5 4 4 3 5
Total 100 100 100 100 100 18
Exhibit 117: Break-up of sales growth led by US segment

Exhibit 116: Sales to post 18% CAGR (FY15E-17E) (INRb)
Formulations (INR b) API (INR b)
26 % 37 % 23 % 15 %
9
8 142
8 398
8 256
183
8
5 6 6
5 USA
Taro
Ranbaxy
FY15E
FY17E
FY17E
India
RoW
53 75 106 154 175 207 247
39 34
Exhibit 118: EBITDA to post 18% CAGR (FY15E-17E) Exhibit 119: EBITDA margin to sustain at 46-47% levels
EBITDA (INR b) EBITDA growth (%) Gross Margin (%) EBITDA Margin (%)
63 80.0 80.8 81.6 82.7 82.8 82.3 82.0
54 72.6 76.0
44 41
20 23 21 47.3 46.1 47.0
15 43.6 40.0 44.0 43.5
34.0 34.3
-27
19 14 20 32 49 69 85 98 118
Exhibit 120: Earnings (EPS) to clock 19% CAGR Exhibit 121: Break-up of EPS growth (led by sales growth)
94% -2 % 8%
45
32
9 7 13 14 15 32 36 45
9
EPS (FY15E) Sales Gr. Margin Imp. Financial Lev. EPS (FY17E)
30 March 2015 62
Exhibit 122: Highest MR productivity among peers Exhibit 123: Industry-leading ROIC ratios
No of MRs Field force productivity (INR m/ MR) ROE (%) ROIC (%)
53.3
9 9 47.6 47.6
8 8 8 41.6
7 34.3 33.7
6 28.8
20.9
30.2 17.4 30.8
27.5 27.3
23.9 22.0
21.0 18.8
18.2
2450 2500 2600 2700 3600 3700 4000
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Exhibit 124: R&D expense set to increase… Exhibit 125: …increasing trend with complex filings in US
7 R&D expense (INR b) % of sales ANDAs/ year R&D expense/ ANDA (INR m)
6 386
6
5 5 5 284
4 4
4 195
89 114
58 69
3 2 3 4 6 10 12 16 20 47 35 30 25 20 22 27
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY08 FY09 FY10 FY11 FY12 FY13 FY14
Exhibit 126: Rich ANDAs pipeline Exhibit 127: Launched-to-approved ratio declines for SUNP
ANDA filed ANDA pending ANDA approved ANDA launched
launched/ approved (%)
478 489 358
449
397 311
377
250 261
225 216 228 228
177 190
207
177 152
123 147 138 134 131
108 79 76 83 73 64
FY09 FY10 FY11 FY12 FY13 FY14 YTD FY11 FY12 FY13 FY14 YTD
Exhibit 128: Top 5 US products (market share %) Exhibit 129: Key US launches
Size Nature of
Timeline Brand Molecule (USD m) launch
Duloxetine Hcl 9 Carvedilol
FY16 Coreg CR 300 FTF
Phosphate
Stalevo (generic) 63 FY16 Gleevec Imatinib mesylate 1900 FTF
Rosuvastatin
FY16 Crestor 3100 Shared FTF
Doxycycline Hyclate 10 calcium
Sumatriptan Succinate 15 FY16 Abilify Aripiprazole 1500 Shared FTF

Pemetrxed
Doxil (generic) 47 FY17 Alimta disodium 1041 Limited com
heptahydrate
FY17 Strattera Atomoxetine 400 Shared excl.
30 March 2015 63
Exhibit 130: Fixed asset turnover improves Exhibit 131: Therapy-wise ANDAs approval
Therapy No of ANDAs approved
Gross assets (INR b) Fixed asset turnover (x) Derma 95
3.5
3.3 CNS 88
3.2 3.2 CVS 47
Pain 30
2.6 Allergy 21
2.3 2.3 Oncology 20
1.9 Metabolism 12
1.7
19 21 39 47 56 64 73 82 91 Cough/cold 6
Urology 5
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Other 30
Exhibit 132: M&A deals over the last five years

Year Deals Country Rationale
In-licensing agreement with Merck for
2014 Global Strengthening the specialty product pipeline
Tildrakizumab a biologic for psoriasis
5th largest global specialty pharma company, No.1 Pharma
2014 Sun Pharma – Ranbaxy Merger (Proposed) US, India, EM
company in India & Strong positioning in Emerging Market
2013 Formation of Sun-Intrexon JV Global JV for ocular therapies
2013 Acquired URL’s generic business US Adds 107 products to US portfolio
2012 Acquired DUSA Pharma, Inc. US Access to branded derma product
2011 100% ownership of Caraco US Privatization
Develop and commercialize technology based combinations
2011 Formation of Sun-MSD JV EM
products
Acquired Taro Pharmaceutical Industries Dermatology & Topical Product Manufacturing Plant at Israel
2010 Israel
Ltd. & Canada
Caraco acquired some products of Forest’s
2009 US Increased generic product offerings
Inwood business
Source: Company, MOSL:
30 March 2015 64
Financials and valuations

Income Statement (INR Million)
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net Sales 40,075 57,214 80,098 112,388 160,044 180,447 212,434 252,698
Change (%) -6.2 42.8 40.0 40.3 42.4 12.7 17.7 19.0
Total Expenditure 26,441 37,648 48,152 63,326 90,787 95,397 114,933 134,481
% of Sales 66.0 65.8 60.1 56.3 56.7 52.9 54.1 53.2
EBITDA 13,633 19,566 31,947 49,063 69,257 85,050 97,501 118,217
Margin (%) 34.0 34.2 39.9 43.7 43.3 47.1 45.9 46.8
Depreciation 1,533 2,049 2,912 3,362 4,092 5,604 6,822 7,186
EBIT 12,100 17,518 29,035 45,701 65,165 79,446 90,678 111,032
Int. and Finance Charges 0 739 282 443 442 733 697 662
Other Income - Rec. 2,048 3,611 4,856 3,727 6,282 4,208 7,629 10,510
Extra-ordinary Exp 0 32 11 5,836 25,174 0 0 0
PBT 14,148 20,357 33,598 43,148 45,831 82,921 97,611 120,880
Tax 679 1,286 3,826 8,456 7,022 8,519 14,642 18,132
Tax Rate (%) 4.8 6.3 11.4 19.6 15.3 10.3 15.0 15.0
Profit after Tax 13,470 19,072 29,772 34,693 38,809 74,401 82,969 102,748
Change (%) -28.3 41.6 56.1 16.5 11.9 91.7 11.5 23.8
Margin (%) 34 33 37 31 24 41 39 41
Less: Mionrity Interest -41 913 3855 4863 7375 8718 8331 9044
Reported PAT 13,511 18,158 25,917 29,830 31,434 65,684 74,639 93,704
Balance Sheet (INR Million)

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Equity Share Capital 1,036 1,036 1,036 1,036 2,071 2,071 2,071 2,071
Total Reserves 77,254 93,798 120,628 148,862 183,178 238,563 301,085 380,250
Net Worth 78,289 94,833 121,663 149,897 185,249 240,634 303,157 382,321
Minority Interest 1,932 8,472 11,616 16,351 19,212 27,930 36,260 45,305
Deferred Liabilities -890 -3652 -5199 -7122 -9110 -9110 -9110 -9110
Total Loans 1,712 3,717 2,739 2,072 24,982 403 403 403
Capital Employed 81,042 103,370 130,820 161,197 220,333 259,857 330,710 418,919
Gross Block 20,880 39,128 46,542 56,026 63,886 72,886 81,886 90,886
Less: Accum. Deprn. 7,239 16,794 20,406 24,421 28,904 34,508 41,330 48,516
Net Fixed Assets 13,642 22,334 26,136 31,604 34,982 38,378 40,555 42,370
Capital WIP 1,448 2,355 3,447 5,626 8,415 8,415 8,415 8,415
Goodwill 5,747 10,599 13,378 24,870 33,191 33,191 33,191 33,191
Investments 31,664 22,297 22,129 24,116 27,860 27,860 27,860 27,860
Curr. Assets 36,121 61,146 90,681 113,420 177,393 223,121 298,551 391,250
Inventory 10,739 14,895 20,870 25,778 31,230 33,252 40,236 45,942
Account Receivables 11,748 11,049 19,261 27,108 22,004 30,596 36,037 42,841
Cash and Bank Balance 5,089 22,046 33,672 40,587 75,902 105,086 161,400 234,039
L & A and Others 8,546 13,156 16,878 19,948 48,257 54,188 60,878 68,427
Curr. Liability & Prov. 7,579 15,361 24,950 38,439 61,509 71,109 77,863 84,168
Account Payables 4,095 10,078 14,410 15,752 15,887 20,586 24,910 28,443
Provisions 3,484 5,283 10,541 22,687 45,622 50,523 52,953 55,725
Net Current Assets 28,542 45,785 65,730 74,981 115,884 152,012 220,688 307,082
Appl. of Funds 81,042 103,371 130,820 161,198 220,333 259,857 330,710 418,918
30 March 2015 65

Ratios
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
EPS 6.5 8.8 12.5 14.4 15.2 31.7 36.0 45.2
Fully Diluted EPS 6.5 8.8 12.5 14.4 15.2 31.7 36.0 45.2
Cash EPS 7.3 9.8 13.9 16.0 17.2 34.4 39.3 48.7
BV/Share 37.8 45.8 58.7 72.4 89.4 116.2 146.4 184.6
DPS 1.4 1.7 2.1 2.5 3.0 4.3 5.0 6.0
Payout (%) 24.7 22.1 17.2 17.5 18.7 13.8 14.6 14.2
Valuation (x)
P/E 160.2 71.4 67.7 32.4 28.5 22.7
P/BV 27.6 14.2 11.5 8.8 7.0 5.6
EV/Sales 53.1 18.4 12.8 11.1 9.1 7.4
EV/EBITDA 156.1 42.1 29.6 23.5 19.9 15.8
Dividend Yield (%) 0.1 0.2 0.3 0.4 0.5 0.6
Return Ratios (%)
RoE 18.2 21.0 23.9 22.0 18.8 30.8 27.5 27.3
RoCE 18.6 23.6 30.4 31.5 25.6 37.1 36.1 35.4
Working Capital Ratios
Fixed Asset Turnover (x) 3.0 3.2 3.3 3.9 4.8 4.9 5.4 6.1
Debtor (Days) 107 70 88 88 50 62 62 62
Inventory (Days) 98 95 95 84 71 67 69 66
Working Capital T/O (Days) 214 151 146 112 91 95 102 106
Leverage Ratio
Interest Cover Ratio 23.7 103.0 103.1 147.5 108.3 130.2 167.8
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.0
Cash Flow Statement (INR Million)

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
OP/(Loss) bef. Tax 13,633 19,534 31,935 43,227 44,083 85,050 97,501 118,217
Int./Dividends Recd. 2,048 3,611 4,856 3,727 6,282 4,208 7,629 10,510
Direct Taxes Paid -890 -4,048 -5,373 -10,379 -9,010 -8,519 -14,642 -18,132
(Inc)/Dec in WC -4,659 -286 -8,319 -2,336 -5,589 -6,943 -12,361 -13,755
CF from Operations 10,133 18,811 23,099 34,239 35,767 73,796 78,127 96,841
(inc)/dec in FA -2,920 -16,500 -10,585 -22,501 -18,580 -9,000 -9,000 -9,000

(Pur)/Sale of Invest. -13,069 9,367 169 -1,987 -3,745 0 0 0
CF from investments -15,988 -7,134 -10,416 -24,488 -22,324 -9,000 -9,000 -9,000
Change in networth -2,347 8,225 5,318 4,334 6,674 0 0 0

(Inc)/Dec in Debt -77 2,006 -978 -668 22,910 -24,578 0 0
Interest Paid 0 -739 -282 -443 -442 -733 -697 -662
Dividend Paid -3,321 -4,213 -5,115 -6,058 -7,270 -10,299 -12,116 -14,540
CF from Fin. Activity -5,746 5,280 -1,058 -2,835 21,872 -35,610 -12,813 -15,201
Inc/Dec of Cash -11,601 16,957 11,626 6,915 35,315 29,185 56,314 72,639
Add: Beginning Balance 16,690 5,089 22,046 33,672 40,587 75,902 105,086 161,400
Closing Balance 5,089 22,046 33,672 40,587 75,902 105,087 161,400 234,039
30 March 2015 66
30 March
Healthcare | Fortified capabilities, sustained 2015
growth
Initiating Coverage | Sector: Healthcare
Aurobindo Pharma
BSE Sensex S&P CNX
CMP: INR1,136 TP: INR1,645 (+45%) Buy
27,458 8,342
Growth levers firmly in place; initiate with Buy

Focus on niches in US to drive improving profitability and return ratios
We initiate coverage on Aurobindo Pharma (ARBP) with a Buy rating and target
Stock Info price of INR1,645 (45% upside). We expect ARBP’s valuation gap with peers
Bloomberg ARBP IN (~25% now) to narrow on strong earnings outlook (26.4% CAGR over FY15-17E)
Equity Shares (m) 291.1 and improving capital efficiency (RoE/RoCE to expand). This would be achieved
52-Week Range (INR) 495/228 through (a) scale-up of differentiated US pipeline (injectables, penems, and
1, 6, 12 Rel. Per (%) 13/36/103 controlled substances), (b) turnaround of EU acquisition (Actavis), and (c)
M.Cap. (INR b) 356.9 sustained deleveraging efforts (D/E at 0.3x from 0.7x now).
M.Cap. (USD b) 5.8
AvgVal(INRm)/Vol‘000 130/164 Deep US pipeline, with incremental focus on niches: We project 16.4%
Free float (%) 50.0 revenue CAGR (FY15-17) on an elevated base (post EU deal). US to be the key
growth driver (34% of sales; 19% CAGR), led by deep ANDA pipeline (182
Financial Snapshot (INR b)
pending), mostly in low competition segments like injectables, penems,
Y/E Mar 2015E 2016E 2017E ophthalmics, and controlled substances. Shift in focus from legacy anti-
Net Sales 122.9 145.6 166.4 bacterial portfolio to high value generics, backed by improving
EBITDA 23.7 29.3 35.7 execution/distribution would enhance ARBP’s margin profile and establish it as
Adj PAT 15.0 19.1 24.0 a formidable player in the US generics space.
EPS (INR) 51.5 65.6 82.2
Gr (%)
Integration of recent acquisitions would be key to success: We expect
13.0 27.5 25.3
BV/Sh (INR)
EU acquisition (23% of FY15E sales) to turn profitable by FY16-end (versus -4%
176.6 238.2 315.4
RoE (%)
margin now), driven by (a) backward integration (India manufacturing), (b)
33.7 31.6 29.7
RoCE (%) new launches from ARBP’s portfolio (high margin injectables, hospitals). Foray
25.0 26.5 28.3
P/E (x) into US nutraceutical (USD 55b market by 2020) through Natrol acquisition
23.8 18.7 14.9
P/BV (x) 6.9 5.1 3.9
(USD132m) broadens product offering, with scope for margin expansion (14%
now to ~20%) through deeper penetration in US (sharper focus) and rollout in
other markets. With increasing cash flows and potential fund raising (QIP
Shareholding pattern (%)
plans), ARBP may acquire more assets to bolster its technology capabilities.
As on Dec-14 Sep-14 Jun-14
Promoter 54.1 54.1 54.3
FII 29.7 27.7 27.6 Margins likely to improve further: Structural improvement in ARBP’s
DII 6.5 8.0 7.7 EBITDA margin profile from ~17% in FY08-13 to 19.3% now is a result of higher
Others 9.7 10.2 10.3 formulation sales (75% of sales now versus 39% in FY08) and operating
Note: FII Includes depository receipts
leverage. We expect margins to expand 220bp to 21.5% by FY17, led by (a)
launch of high margin products in the US, (b) improved profitability of recent
Stock Performance (1-year) acquisitions, and (c) reduced contribution from low margin API/ARV sales.
Aurobindo Pharma
Sensex - Rebased Earnings acceleration, potential deleveraging to drive re-rating: ARBP
1,400
trades at 17.3x FY16E and 13.8x FY17E EPS, at a steep 25% discount to the
1,150
sector average. This is likely to narrow, as high-impact US launches continue to
900
unfold and drive improved profitability and cash flows. We expect RoIC to
650
expand from 19.6% now to 23.7% by FY17. Key catalysts over the medium term
400
include (a) scale-up of injectables portfolio (~66 filings; estimated 35% CAGR),
Dec-14
Mar-14
Mar-15
Jun-14
Sep-14
(b) turnaround in EU profitability, and (c) balance sheet deleveraging. Slow pace
of ANDA approvals in the US and lower than expected margin improvement in
acquired assets pose downside risks to our assumptions.
30 March 2015 67
Investment argument
Fortified pipeline, robust outlook – initiate with BUY
We initiate coverage on ARBP with a Buy rating and a target price of INR1,645,
implying 45% upside from current levels. We assert that the company’s
transformation from a bulk drug manufacturer to a vertically integrated
formulations player is complete now. We expect unfolding of high margin products
from its deep US pipeline (182 pending ANDAs, among the highest in the industry)
and expanded geographic reach in the EU and select RoW markets to drive the next
leg of growth. Improving scale of operations and richer product mix would translate
into stronger profitability and we expect earnings to grow at 26.4% CAGR over FY15-
17 (v/s 23% for peers). We expect free cash flow generation to improve as capex
needs would be largely met by internal accruals, resulting in sustained balance sheet
deleveraging. Key catalysts to pan out over the medium term are:
n High revenue visibility as US pipeline quality continues to improve: We

expect incremental launches in the US to be in high margin and low competition
segments like injectables, controlled substances, and penems. Cumulatively,
these segments account for 50% of pending filings in the US.
n Turnaround in acquired EU acquisitions (Actavis assets) in FY16 itself on
the back of sourcing from Indian facilities, launch of new products from ARBP’s
filings in newer markets (France, Spain, Italy, etc).
n Sustenance of EBITDA margin improvement: We expect core EBITDA
margin to expand 220bp by FY17 to 21.5%, led by improved quality of US filings.
We estimate EBITDA CAGR at 23%, ahead of revenue CAGR.
Exhibit 133: EBITDA outlook strong Exhibit 134: Strong outlook for ARBP (FY15-17E) v/s peers
EBITDA (INR m) EBITDA growth (%) Gross Margins (%) EBITDA Margins (%)
148
55.5 53.0 54.0
51.9 50.0 52.5
46.8 48.9
45.5
59
47 41
24 22 26.3
17 11 23.0 21.9 21.5
19.3 20.1
16.8 14.7
13.2
-36
5 8 10 6 9 21 24 29 36
Recent stock performance reflects improving business fundamentals (148% EBITDA

growth in FY14) and sustained improvement in cash flows (lower capex).
Considerable improvement in ability to monetize pipeline assets (particularly in the
US) has raised confidence on the company’s execution capabilities.
We believe continued earnings delivery and a sharp reduction in leverage would

merit a re-look at the valuation gap with peers and result in re-rating hereon.
30 March 2015 68
Improving quality of US pipeline to drive growth

US business (33% of total revenue) has been instrumental in driving the recent
turnaround of ARBP’s operations (+5.5x in last three years). We believe ARBP’s
conscious strategy to focus on differentiated products would continue to bear fruit
over the medium term, and drive growth of 19% in this business over FY15-17.
Growth in FY14 in the US (+94%) was boosted by gCymbalta exclusivity (11% of FY14
US sales) as well as market share gains in the existing product portfolio
(cephalosporin products). However, the increased pace of ANDA filings over the last
2-3 years (139+ filed) and enhanced supply chain would enable ARBP to significantly
grow its US business over the next 3-4 years on a formidable base (USD567m as of
FY14). We forecast 20-22 new product launches in the US annually, with rising
revenue/ANDAs owing to improved quality of filings.
Exhibit 135: US business comparison (in USD m)

2000 FY10 FY11 FY12 FY13 FY14
1621
1500
912
1000 799
567 635
500 348 355 357 336 334
202 234
142 150
0
ARBP SUNP LPC DRRD CDH GNP RBXY
Exhibit 136: US growth led by improved pipeline quality Exhibit 137: ARBP has highest pending ANDAs among peers
US Revenues (USD m) Revenues/ANDA Approved Pending 358
4.1 192 182

3.6 3.8
3.4 157 148
131
2.6 98 94 75 108
2.4 68 95
2.1 2.1 36 30 53
1.8 18 24 19
121 202 264 244 325 567 672 794 933
ALPM ARBP CDH DRRD GNP IPCA LPC SUNP TRP
30 March 2015 69
Levers for US business

n Focus on differentiated areas with low competition: ARBP’s initial filings in the
US were chiefly for cephalosporin-based products and other me-too generics
opportunities (till three years ago). However, with gradual understanding of the
market and progress on the R&D front, ARBP started focusing on technically
complex and differentiated products. Over the last three years, ARBP has filed
150+ ANDAs (cumulative 378 ANDAs filed), of which 100+ ANDAs are in such
differentiated areas like injectibles (Auromedics), peptides, controlled
substances (Aurolife), ophthalmic and hormones, and this focus is likely to be
maintained over the medium term. These niche segments are technically
complex to commercialize/develop and also have entry barriers in terms of
dedicated facility required (and gestation period). Consequently, competition is
likely to be much lower and profitability per product higher.
n Strong backward integration helps competitive positioning: ARBP has invested
heavily in sprucing up its manufacturing infrastructure over the last 5-7 years. It
has 7 USFDA approved facilities (formulations), with dedicated ones for
injectables, controlled substances, betalactam products, and non-betalactam
products. Almost all (90%+) of its commercialized formulation products in the US
source APIs captively, making it highly competitive in the fiercely fought US
generics market. This has helped ARBP gain market share (in products) despite
its late entry.
Exhibit 138: Non-Betalectam accounts for 81% of
approved filings Exhibit 139: Improved product mix in pending ANDAs
Non Betalectam Non Betalectam

0% 1%
15% 1%
Injectables and Ophthalmic
Injectables and Ophthalmic
4% 32%
Cephalosporin & SSP
Cephalosporin & SSP
Penem
66%
Penem
81%
Exhibit 140: Increased filings in Injectables to drive

the business Exhibit 141: Unit-wise split up
Filed Approved Under review
Filed Approved Under review
135
276 115
100
111
66 58
35 26
155 19
4 8 11 19 0 9 17 2 0 2
121 10 1
66 8 58 30 29 1 2 0 2
Unit 7
AuroLife
Unit 3
Unit 4
Unit 12
AuroNext
Unit 6B
Non Betalectam Injectables and Cephalosporin & Penem

Ophthalmic SSP
30 March 2015 70
n Injectables/controlled substances to scale up: ARBP has dedicated marketing

units in the US to focus on two niches – controlled substances (Aurolife) and
injectables (Auromedics). The company has filed 80 injectable ANDAs, of which
12 have been approved (generating USD50m in 9MFY15). We expect the pace of
filings/approvals to improve further and project 20-25 new injectable launches
over the next two years, with more products falling in the USFDA shortage list
(implying better pricing power). We expect injectables to account for 15% of US
sales by FY17 (versus 10% now). ARBP’s subsidiary, Aurolife has filed 26 ANDAs
in the controlled substances area, of which only nine have been approved so far.
This area has restricted number of players and each product in this space has a
sticky revenue stream. We expect Aurolife to turn profitable by FY15, with more
launches to add incrementally to profitability.
Exhibit 142: Share of Injectables in total US sales to rise Exhibit 143: Injectable filings focused on niches (break-up)
Injectibles (USD m) % of US sales

Opthalmic
11%
12 5% Respiratory
10
15
6 14% Semi-synthetic penicillins
3 3% Penems
67%
10 37 70 94 141
General Parenteral
FY13 FY14 FY15E FY16E FY17E
EU acquisition to widen market reach – turnaround in FY16E

Prior to the acquisition of Actavis’ assets in Western Europe, the EU business
accounted for 8% of total revenues (USD112m). The recent deal enhances ARBP’s
reach to developed EU markets like France and Belgium, and adds USD435m+
(EUR320m) to annual sales, with 10% growth per annum. Hence, the EU would
account for 30% of sales in FY15.
Exhibit 144: EU growth bolstered by Actavis assets purchase

Base EU business (INR b) Actavis assets (INR b) YoY growth (%)
454
34
31
19 36 44 14 15
28
9 11 15
3 5 7
FY12 FY13 FY14 FY15E FY16E FY17E
30 March 2015 71
Expanded reach and scope for cross-selling

ARBP’s spend of EUR30m on this deal is justified, as it also provides an opportunity
to cross-sell its wide product portfolio developed for the EU market, but lacking a
strong distribution setup. The deal will give ARBP necessary scale to emerge among
the top 10 generics players in key EU markets. The existing setup also has a presence
in OTC and institutional sales (hospitals), channels that are crucial for the company
to successfully commercialize its high-margin injectables portfolio in the EU.
Exhibit 145: Wide product portfolio acquired… Exhibit 146: …expanding access to newer channels
Products Sales contribution (%)
44 2% Generics
34 25% Tender
22
48% Branded Generics
9% Hospitals
395 192 611
16% OTC
France Germany Others
EU operations to be profitable in FY17

While the agreement requires ARBP to source products from existing suppliers
(Actavis as well as third-party) for >1,200 products over the next 18-24 months,
ARBP can gradually start supplying products from its low-cost Indian manufacturing
units. The product portfolio of acquired assets has less than 20% overlap with ARBP’s
pipeline for EU markets. This would be instrumental in improving profitability of the
acquired assets, currently operating at losses of USD27m (-6% EBITDA margin).
Further improvement in margins is likely from focus on high-value and niche

products (like injectables, penems) over the next 12-18 months. We expect EU
operations to be EBITDA-neutral by FY16 and generate high-single-digit EBITDA
margins in FY17, largely led by improvement in gross margin (from 30% currently to
40% in 2-3 years).
Financial outlook
We forecast ARBP’s core earnings to grow at 26% CAGR over FY15-17, primarily led
by improved business mix (high margin formulations), financial leverage and
turnaround of acquired EU business. We expect revenue to grow at 16% CAGR and
EBITDA margin to expand 220bp over FY15-17 to 21.5%. We expect moderation in
capex (INR7b annually) to aid cash flow generation and deleveraging, driving
financial leverage. Revenue visibility led by US.
We expect ARBP’s revenue to grow at 16% CAGR over FY15-17, albeit on a high base
(gCymbalta). Key growth drivers are likely to be (a) scale-up of niche products in US
(19% CAGR, 34% of sales), (b) steady growth in EU business (30% of sales, 14%
CAGR), and (c) triple-dose combination products driving growth in ARV segment (9%
of sales, 15% CAGR).
30 March 2015 72
Exhibit 147: Revenue mix (%) Exhibit 148: Segment-wise growth (%)
CAGR
FY13 FY14 FY15E FY16E FY17E (15-17) FY12 FY13 FY14 FY15E FY16E FY17E
USA 30 41 33 33 34 19 USA -8 133 94 20 20 17
Natrol 0 0 1 5 5 120 Natrol 334 12
EU 8 8 30 28 29 14 EU 19 36 44 454 14 15
RoW 7 6 5 5 6 28 RoW 21 38 11 25 28 28
ARV 13 10 7 6 6 7 ARV 13 -5 12 7 7 7
APIs 43 35 25 22 21 8 APIs 14 23 13 7 8 8
Total 100 100 100 100 100 16 Total 11 27 39 52 19 14
Improved margins to aid EPS acceleration (26% CAGR over FY15-17)

High share of low-margin API business and exposure to low margin ARV business
(tender based, single dose) had restrained ARBP’s margin profile. We expect EBITDA
margin to expand 220bp over FY15-17, driven by improved scale of operations
(driving operating leverage) and scale-up of high margin US launches (injectables,
penems, etc). Near-term margin improvement would be constrained, as ARBP is
working towards turnaround of EU operations. We expect ARBP’s net profit to
expand at 26% CAGR over the next two years, mainly led by strong operating
performance (23% EBITDA CAGR) and reduced interest burden (hence, financial
leverage).
Exhibit 149: Forecast 27% EPS CAGR Exhibit 150: Break-up of EPS growth (FY15-17E)
EPS (INR/share) YoY growth (%)
233 59 % 26 % 15 %
106
81
46 82
11 13 28 25
51
(64)
10 17 18 7 14 46 51 66 82
EPS (FY15) Sales Margin expn Financial EPS (FY17E)
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Growth Leverage
Capex moderation to aid deleveraging

Historically, ARBP’s capex outlay has exceeded industry average, resulting in sub-
optimal asset utilization. However, with most of the capacities created with 5-7 year
revenue outlook in mind, we do not expect large capex plans in the near future. We
expect capex outlay to be less than INR7b annually and estimate stable working
capital requirement (post integration of EU operations), resulting in improvement in
free cash generation. Over FY15-17, we expect ARBP to generate INR29b free cash
flows, which would help reduce leverage from 0.7x currently to 0.3x by FY17. RoCE is
likely to improve from 25% now (FY15E) to 28.3% by FY17. We believe deleveraging
prospects and improved capital efficiency (return ratios) are likely to be key re-rating
catalysts for ARBP over the medium term.
30 March 2015 73
Exhibit 151: INR28b free cash flows in next 3 years Exhibit 152: Net Debt/ EBITDA improving ….
Total Debt (INR b) Net Debt/EBITDA
1.9 Free cashflow (INR m) D/E (x)
4.3 5.0
1.3 1.3 3.7
1.2
1.0 1.0 2.5 2.3
0.7 1.6 1.3
0.5 0.3 0.9
0.4
2 5 7 16
-6 -1 -7 0 -2
23 22 24 31 34 36 38 35 29
Exhibit 153: Capex plans

Units Manufactures
Old plants
Unit 4 Injectable
Unit 7 Non Betalectam
Auronext Penems
Unit XII SSP API block
Aurolife Non Betalectam
New plants
FDF facility, AP, India Oral solids
Pharmacity-Vizag
Eugia facility Hormone and oncology injectables
FDF facility, USA Oral solids
30 March 2015 74
Exhibit 154: Manufacturing facilities and regulatory approvals

Facility Locations Regulatory approvals Product type Last Inspected on
API Facilities
Unit I Medak, Telangana USFDA, UKMHRA, TGA, WHO CVS, CNS, Anti-biotics
Cephalosporins (Non-
Unit IA Medak, Telangana USFDA, UKMHRA, TGA sterile) Sep-14
Unit V Medak, Telangana CGMP SSP (Sterile & Non-sterile) Dec-14
Unit VIA Medak, Telangana USFDA, TGA SSPs
Unit VIII Medak, Telangana USFDA, UKMHRA, TGA, WHO Gastro-intestinal, ARV Apr-14
Unit XI A Srikakulam, AP USFDA, UKMHRA, WHO ARV Jun-12
Unit XIV Visakhapatnam, AP USFDA Non-sterile API
Silicon LS USFDA Penems
Intermediates
Unit IX Medak, Telangana CGMP Intermediates
Unit X Nellore, AP CGMP Intermediates
Unit XI A Srikakulam, AP CGMP Intermediates
Formulation Facilities
US FDA, INFARED, TGA,
Unit III Ranga Reddy, Telangana Health Canada, ANVISA, MCC Non Betalectam (Oral) Due for inspection
US FDA, ANVISA, INFARMED,
Unit IV Medak, Telangana GCC Injectable and Ophthalmic Sep-14
US FDA, FIMEA, TGA, ANVISA, Cephalosporin & SSP
Unit VI B Medak, Telangana Health Canada, MCC (Oral) Dec-14
US FDA, INFARED, TGA,
Health Canada, ANVISA, MCC,
Unit VII Mahaboob Nagar, Telangana KFDA Non Betalectam (Oral) Due for inspection
US FDA, MHRA, TGA, Health Cephalosporin & SSP
Unit XII Ranga Reddy, Telangana Canada, ANIVSA, MCC, FIMEA (Oral & Injectable)
AuroLife United States Non Betalectam (Oral) Oct-13
AuroNext Bhiwadi, Rajasthan USFDA, MHRA Penem (Injectable)
30 March 2015 75
Valuation and view

ARBP has outperformed most Pharma peers over the last 12 months. This has been
driven by significant improvement in operating performance post clearance of
USFDA import alert and ramp-up in US launches, including high margin gCymbalta.
With its recent acquisitions in the EU (Actavis assets) and the US (Natrol), the share
of high margin formulations in total revenues has increased to 65% (versus 54% in
FY10), positioning ARBP among large cap formulation players. Our target price of
INR1,645 discounts ARBP’s FY17E EPS at 20x, which is:
n At a premium to its three-year average P/E multiple, which is justified given
stronger business profile and earnings outlook.
n At par to midcap peers’ target P/E multiple.
n Implies a PEG of 0.66x (FY15-17E EPS CAGR of 26.4%).
We believe that the re-rating of the stock from single-digit P/E multiple to current
levels partly factors transition to formulations player, improved execution in the US
and moderation in leverage (from 1.2x D/E in FY10 to 0.7x in FY15E). However,
current valuations at 17.3x FY16E and 13.8x FY17E EPS are still at 25% discount to
the sector average, which is unjustified in our view. We argue for P/E re-rating for
ARBP due to:
n Strong EPS outlook of 26.4% CAGR, backed by 16.4% revenue growth.
n Improvement in RoCE from 25% now to 28.3% by FY17.
n Strong free cash flow generation of INR29b over FY15-17.
n Deleveraging of balance sheet, as we expect D/E to improve to 0.3x by FY17
(from 0.7x now). This implies Debt/EBITDA of 0.8x in FY17E, which is
comfortable, in our view.
n
Key catalysts to drive stock performance over the medium term
n Improvement in EU profitability (30% of business), led by deeper penetration in
existing markets and site transfer to India.
n Launch of high margin products in US including injectables (25+ launches over
next 18 months), controlled substances, etc.
n Focus on high margin triple combination ARV products in Africa (from FY16E).
Risks to our investment assumptions

n ARBP’s growth prospects are contingent upon the timely approval of its ANDAs
for the US market, particularly niche products like injectables and penems. Any
regulatory delays with authorities such as USFDA, MHRA, and THA may affect
new launches, and hence, the growth outlook.
n Worsening of pricing environment in the EU (mainly in tender markets) due to
macroeconomic issues and slower than expected rate of shift to Indian
manufacturing operations.
n ARBP derives 7% of its revenues from ARV (anti retro-virals) supplies to Africa
and other developing nations, which are subject to available grants by donor
bodies (Unicef, WHO). Furthermore, a large part of this business is tender-based
and loss of a big tender impairs revenue visibility.
n With 90%+ of revenues generated from exports, ARBP’s earnings could be
impacted by currency fluctuations both in USD and EUR terms.
30 March 2015 76
Exhibit 155: Aurobindo PE (x) Exhibit 156: Aurobindo PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x)
40 Median(x) Min(x) Aurobindo PE Relative to Coverage PE (%)
60
29.7
30
18.9 0
20
12.1 -43.3
-29.3
10 -60
11.0
0 1.5
-120
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Dec-08
Sep-12
Dec-13
Dec-08
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Sep-12
30 March 2015 77
Story in charts
Exhibit 157: EBITDA growth to exceed revenues Exhibit 158: Break-up of sales growth (FY15-17E)
EBITDA (INR m) EBITDA growth (%) 30 % 10 %

13 % 3% 44 %
148
59
47 41
17 24 22 170
11
125
-36
5 8 10 6 9 21 24 29 36

FY15E APIs ARVs US EU RoW FY17E
Exhibit 159: Forecast 27% EPS CAGR Exhibit 160: Break-up of EPS growth (FY15-17E)
EPS (INR/share) YoY growth (%)

59 % 26 % 15 %
233
106
81
46 82
11 13 28 25
51
(64)
10 17 18 7 14 46 51 66 82
EPS (FY15) Sales Margin expn Financial EPS (FY17E)
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Growth Leverage
Exhibit 161: Working capital has improved Exhibit 162: Expect improved cash flows to aid deleveraging
Total Debt (INR b) Net Debt/EBITDA
Inventory Days Debtor Days
Creditor Days Cash conv. cycle days 5.0
4.3
3.7
300 240 243 238 250 2.5
229 2.3
206 205 205 205 1.6
225 1.3 0.9
0.4
150
75
23 22 24 31 34 36 38 35 29
0
30 March 2015 78
Exhibit 163: Consensus EPS estimates constantly revised Exhibit 164: Return ratios
FY15E FY16E FY17E 48 ROE (%) ROIC (%)

100
80 82 36
63 67
60 56 24
40 34
27
12
20
0 0
FY15E
FY16E
FY17E
FY09
FY10
FY11
FY12
FY13
FY14
Oct-12
Dec-12
Dec-13
Jan-15
Nov-14
Jul-12
May-13
Nov-13
Jul-14
Sep-12
Jul-13
Feb-13
Apr-13
Feb-14
Apr-14
Jun-14
Sep-14
Sep-13
Feb-15
Exhibit 165: Regulatory filings across markets Exhibit 166: API mix shifting toward high-margin products
US FDA EU DMF CoS RoW Non-betalacatam (high value) SSP & Cephs - Sterile
Cephs - Oral SSP - Oral
415 669
502 565 627
85 34 29 23 24 24 27
295 109 106 112
97 25
242 25 30 27 20
178 81 25
74 1783 1504 1557 18 16 17
66 1395 1443 27 25
1036 24
656 810 33 33 35
17 19 22
122 133 145 154 160 172 181 184
FY08 FY09 FY10 FY11 FY12 FY13 FY14 YTD FY09 FY10 FY11 FY12 FY13 FY14
Exhibit 167: Majority of debt in forex-denominated loans

(INR m) FY11 FY12 FY13 FY14 YTD
USD/INR 44.6 50.9 52.3 59.9 63.035
Foreign currency loans 23,264 30,004 33,094 36,512 41,755
Rupee loans 118 209 549 534 348
Sales tax deferment 747 746 712 645 638
Gross debt 24,129 30,959 34,355 37,691 42,741
Cash & bank balances 1,867 709 2,085 1,807 4,830
Net debt 22,262 30,250 32,270 35,884 37,911
EBITDA (ex other income) 7,041 5,631 7,888 20,715 21,328
Net debt/EBITDA (x) 3.2 5.4 4.1 1.7 1.7
Finance costs 647 1,028 1,313 1,079 1,079
Cost of debt (%) 2.9 3.4 4.1 3.0 2.8
30 March 2015 79
Exhibit 168: Deep ANDA pipeline

Brand Product Brand sales (USD m) Launch FY
Nexium Esomeprazole 2,300 Jun-15
Aloxi Palonosetron 450 Oct-15
Emtriva Emtricitabine 25 Mar-16
Crestor Rosuvastatin 3,100 Jul-16
Zemplar Paricalcitol 300 Aug-16
Precedex Dexmedetomidine 150 2016
Epzicom Abacavir + lamivudine 490 Sep-16
Abilify Aripiprazole 1,500 Oct-16
Norvir Ritonavir 500 Dec-16
Namenda Memantine 1,800 2016
Viread Tenofovir Disporoxil 570 Jul-17
Truvada Emtricitabine + tenofovir 2,000 Jul-17
Strattera Atomoxetine 380 May-17
Reyataz Atazanavir 769 2017
Tygacil Tygecycline 132 2017
Angiomax Bivalirudin 450 Dec-19
Vigamox Moxifloxacin 266 2020
Onglyza Saxagliptin 426 2023
Kombiglyze XR Saxagliptin+metformin 165 2023
Zymaxid Gatifloxacin 65 Unknown
Livalo Pitavastatin 100 Unknown
Effient Prasugrel 377 Unknown
Solodyn Minocycline 370 Unknown
Ampyra Dalfampridine 235 Unknown
Sustiva Efavirenz 178 Unknown
Actonel Risedronate 172 Unknown
Mucinex DM Dextromethorphan HBr+Guaifenesin 90 Unknown
Doripenem Doribax 10 Unknown
30 March 2015 80
Financials and valuations (Consolidated)

Y/E March FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Total Income from Operations 35,754 43,816 46,274 58,553 80,998 122,887 145,597 166,383
Change (%) 16.2 22.5 5.6 26.5 38.3 51.7 18.5 14.3
% of Sales 77.0 78.1 86.8 85.3 73.7 80.8 79.9 78.6
EBITDA 8,231 9,598 6,101 8,610 21,328 23,656 29,265 35,689
Margin (%) 23.0 21.9 13.2 14.7 26.3 19.3 20.1 21.5
Depreciation 1,493 1,715 2,005 2,487 3,125 3,605 4,065 4,465
EBIT 6,738 7,883 4,096 6,122 18,203 20,050 25,200 31,224
Int. and Finance Charges 731 625 1,028 1,313 1,079 1,272 1,347 1,235
Other Income 443 252 247 285 232 400 610 660
PBT bef. EO Exp. 6,450 7,510 3,315 5,095 17,356 19,179 24,463 30,649
EO Items 1,095 372 -5,445 -1,353 -2,031 0 0 0
PBT after EO Exp. 7,544 7,881 -2,129 3,741 15,325 19,179 24,463 30,649
Current Tax 1,914 2,251 327 132 3,635 4,219 5,382 6,743
Deferred Tax 0 0 -1,216 695 0 0 0 0
Tax Rate (%) 25.4 28.6 41.7 22.1 23.7 22.0 22.0 22.0
Less: Mionrity Interest -3 -4 -6 -25 -38 -42 -46 -50
Reported PAT 5,634 5,634 -1,235 2,939 11,729 15,001 19,127 23,956
Adjusted PAT 4,817 5,369 1,939 3,993 13,278 15,001 19,127 23,956
Margin (%) 13.5 12.3 4.2 6.8 16.4 12.2 13.1 14.4

Equity Share Capital 279 291 291 291 292 292 292 292
Total Reserves 18,012 24,157 23,105 25,766 37,210 51,191 69,151 91,650
Net Worth 18,291 24,448 23,397 26,058 37,502 51,482 69,443 91,942
Minority Interest 43 91 102 110 257 262 267 272
Deferred Liabilities 912 1,191 -16 680 2,054 2,095 2,137 2,180
Total Loans 21,546 24,143 30,959 34,355 36,339 38,479 35,283 28,942
Gross Block 24,077 24,380 30,863 37,080 41,817 48,317 53,317 58,317
Less: Accum. Deprn. 6,968 6,994 8,916 11,246 14,371 17,977 22,042 26,507
Net Fixed Assets 17,109 17,386 21,947 25,834 27,445 30,340 31,275 31,809
Goodwill on Consolidation 0 0 0 554 764 764 764 764
Capital WIP 5,701 6,574 6,454 2,185 2,105 2,500 2,500 2,500
Total Investments 3 385 385 223 198 200 200 200
Curr. Assets, Loans&Adv. 25,059 34,334 33,536 43,982 64,386 86,597 104,915 123,995
Inventory 11,025 14,553 15,456 19,236 23,675 35,183 41,246 46,131
Cash and Bank Balance 728 1,867 709 2,085 1,786 7,163 8,885 16,100
Loans and Advances 3,747 5,604 4,972 6,692 12,559 8,900 12,900 13,900
Other Current Liabilities 684 429 572 998 3,877 3,200 3,500 3,500
Provisions 352 614 706 891 1,358 925 925 925
Appl. of Funds 40,792 49,872 54,442 61,202 76,151 92,317 107,130 123,336
E: MOSL Estimates
30 March 2015 81
Financials and valuations (Consolidated)

Ratios
Basic (INR)
EPS 17.3 18.4 6.7 13.7 45.5 51.5 65.6 82.2
Cash EPS 22.6 24.3 13.5 22.3 56.3 63.8 79.6 97.5
BV/Share 65.7 84.0 80.4 89.5 128.7 176.6 238.2 315.4
DPS 1.1 2.3 1.0 1.5 3.0 3.5 4.0 5.0
Payout (%) 5.8 12.1 -23.6 14.9 7.5 6.8 6.1 6.1
Valuation (x)
P/E 24.9 22.1 17.3 13.8
Cash P/E 20.2 17.8 14.3 11.6
P/BV 8.8 6.4 4.8 3.6
EV/Sales 4.5 2.9 2.5 2.1
EV/EBITDA 17.1 15.3 12.2 9.6
Dividend Yield (%) 0.1 0.2 0.1 0.1 0.2 0.3 0.3 0.4
FCF per share 5.6 -4.5 -24.6 -0.2 -7.9 18.7 25.2 55.4
Return Ratios (%)
RoE 31.4 25.1 8.1 16.1 41.8 33.7 31.6 29.7
RoCE 19.0 18.4 8.4 11.2 27.5 25.0 26.5 28.3
Debtor (Days) 96 100 96 97 116 102 102 102
Creditor (Days) 128 129 96 118 137 150 150 150
Working Cap. Turnover (Days) 176 197 197 189 198 153 159 158
Leverage Ratio (x)
Current Ratio 3.5 3.9 4.3 3.8 3.4 3.1 3.2 3.5
Interest Cover Ratio 9 13 4 5 17 16 19 25
Debt/Equity 1.2 1.0 1.3 1.3 1.0 0.7 0.5 0.3

OP/(Loss) before Tax 6,738 7,883 4,096 6,122 18,203 20,050 25,200 31,224
Depreciation 1,493 1,715 2,005 2,487 3,125 3,605 4,065 4,465
Interest / Dividend recieved 443 252 247 285 232 400 610 660
Direct Taxes Paid -1,914 -2,251 -327 -132 -3,635 -4,219 -5,382 -6,743
(Inc)/Dec in WC -1,339 -6,409 -1,288 -5,374 -13,533 -7,497 -12,156 -8,455
Others 1,095 372 -5,445 -1,353 -2,031 0 0 0
CF from Operating incl EO 6,516 1,562 -712 2,036 2,363 12,339 12,337 21,151
(inc)/dec in FA -4,952 -2,866 -6,446 -2,106 -4,656 -6,895 -5,000 -5,000
(Pur)/Sale of Investments 0 383 0 -163 -25 2 0 0
CF from Investments -4,952 -2,483 -6,446 -2,269 -4,681 -6,893 -5,000 -5,000
Issue of Shares 569 1,207 474 159 590 0 0 0
(Inc)/Dec in Debt -1,772 2,645 6,828 3,403 2,131 2,145 -3,190 -6,336
Interest Paid -731 -625 -1,028 -1,313 -1,079 -1,272 -1,347 -1,235
Dividend Paid -324 -684 -291 -437 -875 -1,020 -1,166 -1,458
Others 146 -483 15 -204 1,253 78 88 93
CF from Fin. Activity -2,113 2,060 5,998 1,608 2,020 -70 -5,615 -8,935
Inc/Dec of Cash -548 1,139 -1,159 1,376 -298 5,377 1,722 7,215
Opening Balance 1,277 728 1,867 709 2,085 1,786 7,163 8,885
Closing Balance 728 1,867 708 2,084 1,786 7,163 8,885 16,100
30 March 2015 82
30 Marchgrowth
2015
Torrent Pharmaceuticals
BSE Sensex S&P CNX
CMP: INR1,135 TP: INR1,410 (+24%) Buy
27,458 8,342
Earnings acceleration to drive further re-rating

Stock Info On firm footing – acquisition synergies to drive EPS upgrades
Bloomberg TRP IN
Equity Shares (m) 169.2
We expect Torrent Pharma’s (TRP) profitability to be buoyed by synergies from
52-Week Range (INR) 1,232/522 Elder’s portfolio (acquired) and ramp-up in high margin US launches. We
1, 6, 12 Rel.Per (%) 1/24/79 estimate TRP’s core earnings to post 25% CAGR, led by 19% growth in revenue
M.Cap. (INR b) 191.0 and 260bp margin expansion over FY15E-17E. Sustenance of high return ratios,
M.Cap. (USD b) 3.0 improved free cash flow generation and resultant deleveraging prospects
AvgVal(INRm)/Vol‘000 94/115 would help sustain current valuations. Reiterate Buy with a target price of
Free float (%) 28.5 INR1,410.
Fortified domestic business + US portfolio to buoy revenue visibility

Financial Snapshot (INR b) We expect TRP’s revenue mix to improve significantly on a well balanced
Y/E Mar 2015E 2016E 2017E domestic portfolio and scale-up in US business led by a robust pipeline (19
Net Sales 46.8 57.2 66.6 ANDAs pending). We estimate company’s revenue to expand at 19% CAGR
EBITDA 11.0 14.5 17.3 (FY15E-17E) led by (a) domestic business (28% of sales) to outpace industry
Adj PAT 7.0 8.6 10.8 growth at 25%, (b) US sales (19% of total) to grow at 17%, with six to eight new
EPS (INR) 41.3 50.9 64.0
launches p.a, (c) Latam/EU/RoW business to grow at 15%, impacted by EM
Growth (%) 30.2 23.3 25.9
currency weakness.
BV/Sh (INR) 143.5 176.7 218.6
RoE (%) 32.2 31.8 32.4
Potential margin gains in Elder portfolio could shorten payback period
RoCE (%) 28.4 25.4 28.2
P/E (x)
Elder’s brand acquisition offers complementary portfolio mix with minimum
27.5 22.3 17.7
P/BV (x)
overlap for TRP. TRP’s near-term focus would be to revitalize growth in top five
7.9 6.4 5.2
brands Shelcal, Chymoral and others (50% of acquired sales) and enhance MR
productivity (INR9.6m/year in three to five years v/s INR5.4m now). Higher
synergies can be achieved through cross-selling, price hike in dominant brands
and supply chain efficiency, thereby lifting EBITDA margin to ~50%+ (40% now).
Promoter 71.5 71.5 71.5 Hence, the deal payback period gets shortened to five years (v/s seven).
DII 6.5 6.5 8.1
FII 12.9 12.8 10.5 Scope for substantial margin gains exist
Others 9.1 9.1 9.8
While we model 260bp increase in EBITDA margin to 25% by FY17E, there is
possibility for further upside. This can result from (a) higher-than-expected
synergy (cross-selling, faster growth) from Elder brands acquisition, (b) better
Stock Performance (1-year)
execution, and hence faster growth in US sales. Adjusting for gCymbalta upside
Torrent Pharma. in FY15, core EPS is likely to post 25% CAGR over FY15E-17E.
Sensex - Rebased
1,250
1,100
Improving earnings trajectory to aid sustain valuation multiples
950 Despite the recent stock outperformance, we are optimistic on TRP’s prospects
800 for further re-rating due to (a) sharp increase in earnings growth at 25% CAGR
650 (v/s last two-year CAGR of 21%), (b) management’s focus on driving
500
profitability and return ratio improvement (FY17E RoE at 32.5% (v/s 32% now)
Mar-14
Mar-15
Jun-14
Sep-14
Dec-14
and (c) reduced leverage (D/E to improve to 0.6x by FY17E v/s 1x now).
Key catalysts: Margin performance due to acquisition-led synergies, execution
30 March 2015 83
in key US launches, including gAbilify, gNexium, gExforge. Risks to our

assumptions: With only one facility for US formulations, TRP can face
significant risk from an adverse outcome of a US FDA inspection. Sustained
macroeconomic/currency crisis impacting RoW growth (7% of sale).
Valuation and view

Strong traction in US business (including one-off) as well as expectations of higher
synergy benefits from Elder’s domestic portfolio acquisition has aided re-rating for
TRP over the last twelve months. We expect core earnings (excluding one-offs)
trajectory to remain strong (forecast 25% CAGR over FY15-17E) as we think margin
upside in domestic portfolio is still not fully reflected. We expect the stock trade
much above its historic P/E band due to higher revenue visibility and deleveraging
prospects.
Our TP of INR1410 implies 24% upside from current levels. Our TP discounts TRP’s
base business at 22x FY17E P/E, in line with current sector average multiple. This is
at the higher end of its historical average and in line with current multiples (22.3x
FY16E). Sustenance of high earnings growth and de-leveraging of Balance Sheet
justify upward shift of its average P/E band upwards.
Key catalysts to drive stock’s performance over the medium term are:
n Improvement in EBITDA margin, mainly on stronger contribution from Elder
brands
n Execution in key US launches including gAbilify, gNexium, gExforge
n Improved free cash generation, driving Balance Sheet deleveraging
Risks to our investment thesis:

n Regulatory delays could affect timely launch of key US launches.
n Increased span of drug price control could hurt domestic business (34% of total
sales)
Unstable currency and macroeconomic outlook for key emerging markets like
Brazil/Russia could dampen growth prospects.
Exhibit 169: Torrent Pharma PE (x) Exhibit 170: Torrent Pharma PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x) Torrent Pharma PE Relative to Coverage PE (%)
23.3
22 22.4
17 0
-16.3
12.7
12 12.7
-50 -38.5
7 3.9
2 -100
Dec-08
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Sep-12
Dec-08
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Sep-12
30 March 2015 84
Story in charts
CAGR
FY12 FY13 FY14 FY15E FY16E FY17E
FY13 FY14 FY15E FY16E FY17E (15-17)
India 9 13 13 38 32 17
India 32 28 34 37 37 2
USA 11 19 18 17 17 17 USA 89 64 119 7 15 20
LatAm 16 13 13 12 12 15 LatAm 32 5 6 13 15 15
Europe 20 22 21 20 19 15 Europe 21 20 43 5 15 15
RoW 9 9 8 8 8 15 RoW 68 31 28 1 15 15
CRAMs 9 7 6 5 5 12 CRAMs 41 1 0 - 8 12 12
Total 100 100 100 100 100 19 Total 27 19 30 12 22 16
Exhibit 173: Formulations-led sales growth Exhibit 174: Break-up of sales growth (FY15E-17E)
Formulations (INR b) CRAMS (INR b) 44 % 16 % 35 %
3
3
3
67
3
3 47
3
2 2
2
14 16 19 24 28 38 44 53 62
FY15E India USA RoW & FY17E
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Others
Exhibit 175: EBITDA growth (%) Exhibit 176: EBITDA margin

67.2 70.0 68.3 68.0 71.2 70.3 69.4 71.3 71.3
43.5 37.3
36.3 34.6 32.8 32.1
19.1
15.4
22.7 23.4 25.4 26.0
18.4 21.5 17.6 19.4 21.6
-5.1
3 4 4 5 7 10 11 15 17
30 March 2015 85
Exhibit 177: EPS growth to get stronger led by margins Exhibit 178: Break-up of EPS growth (FY15E-17E)
Core EPS (INR/ share) One off One off

34 % - 27%
93 %
0 0.4
0
3.2
3
8 64
41
1
14 16 16 19 28 32 41 51 64
-4 0 -3 -2 EPS (FY15E) Sales Gr. Margin Imp. Financial EPS (FY17E)
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Lev.
Exhibit 179: Productivity improves Exhibit 180: Incremental cash flows to reduce debt
No of MRs Field force productivity (INR m/ MR) Free cashflow (INR b) D/E
3.1 20 1.5
2.6 9 11
2.3 10 1.0
2.1 2.0 4
1.9 2 2 2
0 0.5
0 -1
-10 0.0
3364 3600 3600 3500 3300 3600 -10
-20 -0.5
FY09 FY10 FY11 FY12 FY13 FY14
0
0
Exhibit 181: ANDAs filed v/s pending Exhibit 182: Only 58% products being commercialized
ANDA approved ANDA launched
ANDA filed ANDA pending
72 launched/ approved (%)
67 70
64 73
58 57 58
56
45 50 46 46
32 29 32 31
27 24 28
21 21 19 24
17
8 8 12
11 16 26 37 43 49 53
FY09 FY10 FY11 FY12 FY13 FY14 YTD FY09 FY10 FY11 FY12 FY13 FY14 YTD
30 March 2015 86
Exhibit 183: Top 5 products in US (market share %) Exhibit 184: US pipeline (key products)
Size (USD Nature of
Timeline Brand Molecule m) launch
Pantoprazole 3
FY16 Nexium Esomeprazole 2300 Competitive
FY16 Crestor Rosuvastatin 3100 Competitive
Zolpidem Tartrate 4
FY17 Abilify Aripiprazole 1500 Competitive
Seroquel
Montelukast Sodium 2
FY17 XR Quentipine 800
Competitive
Limited
Isosorbide Mono 6 FY19 Viagra Sidenafil 1.1 comp.
Duloxetine Hcl 18
Exhibit 185: Interest cov. ratio to worsen Exhibit 186: Fixed asset turnover steadily increases
Gross Block (INR b) Fixed asset turnover (x)
18
15 3.2
14 2.8
12 2.7 2.8
11 2.7
8 2.4 2.4 2.3 2.4
7
5 6
7 8 9 11 12 13 17 20 24
Exhibit 187: Cash cycle lower with lower inv. and creditor
days Exhibit 188: Asset composition changing after Elder buy
Tangible Assets (INR b) Intangible Assets (INR b)
Creditor Days Cash Conv. Cycle Days
400 46 48
38
300 21
10 14 17
20 18
0
200 -5 0
0 0
-25 0 0
100
-35
5 6 8 9 11 14 15 16 17
0
Exhibit 189: Number of launches declines Exhibit 190: CVS, CNS portfolios cover 50% in India revenue
Anti Others
2014 10 Diabetic 6%
5%
Pain Mgmt.
2013 15 6% CVS
Anti-
30%
Infectives
2012 24
8% Vitamins
13%
2011 34 CNS
17%
2010 Gastro
40
Intestinal
15%
30 March 2015 87

Income Statement (INR million)
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net Sales 19,040 21,978 26,961 32,120 41,840 46,849 57,236 66,578
Change (%) 16.8 15.4 22.7 19.1 30.3 12.0 22.2 16.3
% of Sales 78.5 82.4 80.6 78.4 77.3 76.6 74.7 74.1
EBITDA 4,087 3,878 5,218 6,930 9,514 10,980 14,509 17,277
Margin (%) 21.5 17.6 19.4 21.6 22.7 23.4 25.4 26.0
Depreciation 661 626 817 830 870 1,890 2,318 2,491
EBIT 3,426 3,252 4,400 6,100 8,644 9,090 12,191 14,786
Int. and Finance Charges 291 391 395 340 586 1,840 2,198 2,018
Other Income - Rec. 216 347 445 430 381 2,310 900 950
PBT before EO Expense 3,352 3,208 4,451 6,190 8,439 9,560 10,893 13,719
EO Expense/(Income) -84 -168 863 370 0 0 0 0
PBT after EO Expense 3,436 3,376 3,588 5,820 8,439 9,560 10,893 13,719
Current Tax 705 751 690 1,732 2,246 2,044 2,233 2,812
Deferred Tax -74 -15 40 -262 -445 0 0 0
Tax 631 736 730 1,470 1,801 2,044 2,233 2,812
Tax Rate (%) 18.8 22.9 16.4 23.8 21.3 21.4 20.5 20.5
Reported PAT 2,805 2,640 2,858 4,350 6,638 7,516 8,660 10,906
Less: Minority Interest 0 0 23 20 0 0 0 0
Net Profit 2,805 2,640 2,835 4,330 6,638 7,516 8,660 10,906
Adj PAT 2,680 2,702 3,287 4,705 5,362 6,981 8,606 10,838
Balance Sheet (INR million)

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Total Reserves 7,887 9,801 11,515 13,796 18,178 23,441 29,061 36,139
Net Worth 8,310 10,224 11,938 14,219 19,024 24,287 29,907 36,986
Deferred liabilities 499 480 514 257 -182 275 275 275
Total Loans 5,224 5,720 5,786 7,030 11,418 25,418 23,418 21,418
Net Fixed Assets 5,411 6,355 7,968 8,198 8,753 30,978 31,702 32,732
Capital WIP 1,098 1,799 1,188 2,853 5,341 3,171 2,085 1,543
Investments 1,412 1,460 1,240 605 1,857 1,857 1,857 1,857
Curr. Assets 11,607 15,742 20,081 25,872 34,091 33,217 39,687 47,729
Inventory 3,236 5,048 5,315 9,239 10,061 10,456 12,012 13,973
Loans & Advances 1,506 2,502 2,795 3,485 5,342 5,876 6,463 7,110
Provisions 1,280 1,427 1,807 3,720 3,538 5,375 5,796 6,642
Appl. of Funds 14,033 16,440 18,274 21,510 30,265 49,923 53,544 58,622
30 March 2015 88

Ratios
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Basic EPS (INR)
EPS 15.8 16.0 19.4 27.8 31.7 41.3 50.9 64.0
Cash EPS 20.5 19.3 21.6 30.5 44.4 55.6 64.9 79.2
BV/Share 49.1 60.4 70.5 84.0 112.4 143.5 176.7 218.6
DPS 6.0 8.0 8.5 23.0 10.0 13.3 15.4 19.3
Payout (%) 21.1 29.8 29.2 52.3 29.8 35.1 35.1 35.1
Valuation (x)
P/E 40.8 35.8 27.5 22.3 17.7
Cash P/E 37.2 25.6 20.4 17.5 14.3
P/BV 13.5 10.1 7.9 6.4 5.2
EV/Sales 6.0 4.7 4.5 3.6 3.0
EV/EBITDA 27.8 20.6 19.2 14.2 11.6
Dividend Yield (%) 2.0 0.9 1.2 1.4 1.7
Return Ratios (%)

RoE 36.2 29.2 29.7 36.0 32.3 32.2 31.8 32.4
RoCE 29.3 24.4 28.8 33.5 34.9 28.4 25.4 28.2

Debtor (Days) 56 55 71 78 96 77 77 77
Inventory (Days) 62 84 72 105 88 81 77 77
Working Capital Turnover (Days) 43 34 15 41 58 54 56 54
Leverage Ratio (x)

Interest Cover Ratio 11.8 8.3 11.2 17.9 14.7 4.9 5.5 7.3
Debt/Equity 0.6 0.6 0.5 0.5 0.6 1.0 0.8 0.6
Cash Flow Statement (INR million)

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Oper. Profit/(Loss) before Tax 4,087 3,878 5,218 6,930 9,514 10,980 14,509 17,277
Interest/Dividends Recd. 216 347 445 430 381 2,310 900 950
Direct Taxes Paid -716 -755 -696 -1,728 -2,239 -1,588 -2,233 -2,812
(Inc)/Dec in WC 349 190 902 -2,449 -3,034 -252 -1,837 -1,117
EO Expense / (Income) -84 -168 863 370 0 0 0 0

CF from Operating incl EO Expense 4,021 3,828 5,006 2,813 4,622 11,450 11,340 14,297
(inc)/dec in FA -1,487 -2,214 -1,736 -2,460 -3,904 -21,665 -1,957 -2,979
(Pur)/Sale of Investments -17 -48 220 636 -1,252 0 0 0
Issue of shares 0 0 0 0 423 0 0 0

(Inc)/Dec in Debt 398 512 85 1,212 4,388 14,000 -2,000 -2,000
Interest Paid -291 -391 -395 -340 -586 -1,840 -2,198 -2,018
Dividend Paid -592 -787 -836 -2,273 -1,980 -2,638 -3,040 -3,828
Others -449 5 -390 -61 -286 45 0 0
CF from Fin. Activity -934 -661 -1,535 -1,462 1,959 9,567 -7,237 -7,846
Inc/Dec of Cash 1,583 905 1,955 -473 1,425 -647 2,145 3,473
Closing Balance 3,883 4,788 6,743 6,270 7,694 7,047 9,192 12,665
30 March 2015 89
30 Marchgrowth
2015
Cadila Health
BSE Sensex S&P CNX
27,458 8,342
CMP: INR1,661 TP: INR1,980 (+24%) Buy
Earnings turnaround underway – expect more upside

US pipeline to drive earnings growth, transdermals awaited
Cadila’s (CDH) prospects have improved by the recent spurt in US generic (38%
Stock Info
Bloomberg CDH IN
of sales) launches and we expect the unfolding of niche pipeline (Para IV,
transdermals) to hold key for future performance. Domestic formulations (31%
52-Week Range (INR) 1,760/730 of sales) have started to outpace industry, and Zydus Wellness’ outlook is
1, 6, 12 Rel.Per (%) 1/18/34 improving. We expect core EPS to grow at 29% over FY15E-17E, led by robust
M.Cap. (INR b) 340.7 revenue growth (20% CAGR) and 220bp cumulative margin expansion. We
M.Cap. (USD b) 5.4 believe strong earnings outlook, improving return ratios and de-leveraging
AvgVal(INRm)/Vol‘000 168/127 should help sustain valuations. Maintain Buy with target price of INR1,980.
Free float (%) 25.2 Deep US pipeline has potential to surprise: Recent spate of ANDA approvals
(16 in last four quarters) have instilled a fresh lease of life (growth) for CDH’s US
Financial Snapshot (INR b) business, which suffered from regulatory issues and delays in product approvals
Y/E Mar 2015E 2016E 2017E
till FY14. With 157 ANDAs pending approval, the US business is likely to post
Net Sales 86.8 105.9 125.4
28% CAGR (FY15E-17E) with key launches like Lialda, Asacol HD and
EBITDA 17.1 23.0 27.5
transdermals (FY16) to boost profitability. Domestic/RoW business (36% of
Adj PAT 11.1 14.9 18.4
EPS (INR)
sales) growth has rebounded and we expect improving productivity and pace of
54.0 72.8 90.0
Gr (%)
new launches to drive growth hereon.
34.8 34.6 23.6
BV/Sh (INR) 205.6 258.9 324.3 Improved business mix to drive 220bp margin expansion: We expect
RoE (%) 29.0 32.8 32.0 EBITDA margin to rebound to FY11 levels of ~22% by FY17E (19.7% in FY15E) led
RoCE (%) 24.1 29.6 31.0 by (a) increased scale driving operating leverage, (b) improved mix on high-
P/E (x) 30.7 22.8 18.5 margin US launches, (c) better domestic margins post pricing policy impact. We
P/BV (x) 8.1 6.4 5.1 estimate CDH’s EBITDA CAGR at 27% over FY15E-17E.
Transdermal monetization to be game changer: Over the last five years,
Shareholding pattern (%) CDH has focused on building its US pipeline in differentiated areas like
transdermals (USD2b market, four to five players, 9 filings), nasal spray
Promoter 74.1 74.1 74.1
DII 1.8 1.7 1.5 (USD400m market, 5 filings). Contribution from this niche and low competition
FII 9.6 9.4 8.7 portfolio can scale up to USD100m by FY17E (11% of US business), with 35%+
Others 14.4 14.8 15.7 margins. Regulatory approval for the same would be a key catalyst.
Capex moderation, higher profitability to aid capital efficiency: CDH has
spent INR14b in capex over the last three years to build capacities in complex
Stock Performance (1-year) areas. We expect launches from the niche portfolio to aid asset utilization and
Cadila Health. return ratios. Thus, fixed asset turnover would improve to 1.9x by FY17E,
Sensex - Rebased resulting in sharp RoIC expansion from 19.5% to 26.4%.
1,800
1,550
Valuation re-rating justified on earnings rebound, execution is key
1,300 CDH trades at 23x/19x on FY16E/17E core earnings, at a premium to its historic
1,050 average and peers. We believe this is justified noting (a) stronger EPS growth at
800 29%, (b) 700bp improvement in RoIC, (c) higher FCF to help deleveraging (from
0.5x in FY15E to 0.1x in FY17E). Execution in US launches and approval of
Mar-14
Mar-15
Jun-14
Sep-14
Dec-14
transdermals would be the key triggers. Maintain Buy with a revised target price
of INR1,980 (22x FY17E EPS).
30 March 2015 90
Valuation and view

CDH’s earnings trajectory has rebounded after successful launches in US drove
operating leverage. We believe that unfolding of niche products in US as well as
improved domestic business performance shall sustain earnings momentum. We
forecast 29% core EPS CAGR to be driven robust 20% revenue growth and
cumulative 220bp EBITDA margin expansion. Improved profitability and resultant
free cash generation would also help reduce leverage. This would help CDH sustain
current valuation multiples.
Our TP of INR 1,980 implies 19% upside from current levels. We value CDH’s base
business at 22x FY17E EPS, at par with sector average (one-year forward P/E) and at
higher end of its historic P/E band, which is justified noting:
n Strong core earnings growth of 29% (versus 23% for sector),

n Improving return ratios (RoE to expand from 29% now to 32% in FY17E)
n Potential deleveraging: We forecast Net D/E to reduce from 0.5x now to 0.1x in
FY17E as the company would generate INR 26b free cash flows in FY15-17E.
n Execution success in US approvals, especially in niche molecules
n Launch of transdermal products in US (Management has guided for FY16E)
n Recovery in Zydus Wellness business growth and profitability
Key risks to our investment thesis:

n Adverse USFDA action on its Moraiya facility, where it received Form 483
observations post recent inspection.
n Unfavorable outcome of litigation with Mylan can put risk to transdermal
portfolio in US
Cross currency risks, especially owing to RoW exposure (12% of sales)
Exhibit 191: Cadila PE (x) Exhibit 192: Cadila PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x) Cadila PE Relative to Coverage PE (%)
32.4
32
22 17.4 0 -15.4 -15.9

22.5
12 16.2
6.3
2 -70
Mar-15
Mar-05
Mar-10
Jun-06
Jun-11
Dec-13
Sep-07
Dec-08
Sep-12
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Dec-08
Sep-12
Dec-13
30 March 2015 91
Story in charts
Exhibit 193: Segment-wise revenue mix (%) Exhibit 194: Segment-wise growth (%)
FY13 FY14 FY15E FY16E FY17E (15-17E) India 17 23 6 9 18 14
India 37 34 31 30 29 16 USA 29 21 44 53 31 24
USA 24 30 38 41 43 28 Europe 8 24 5 -10 5 3
Europe 6 5 4 3 3 4
Brazil 10 -4 -1 4 15 15
Brazil 4 3 3 3 3 15
Japan 24 16 -10 NA NA NA
Japan 1 1 0 0 0 NA
RoW -5 66 20 11 26 25
RoW 5 5 5 5 5 26
APIs 5 5 4 4 4 12 APIs -18 9 13 10 13 11
Others 19 16 14 14 13 16 Others 14 20 0 8 16 16
Total 100 100 100 100 100 20 Total 15 21 15 20 22 19
Exhibit 195: Formulation-led growth Exhibit 196: Break-up of sales growth (FY15E-17E)
Formulations (INR b) API (INR b) 24 % 54 % 20 % 3%

5
4
4 126
3
3 87
3 3
2 3
22 28 33 39 48 57 70 87 121
FY15 India USA RoW & API FY17E
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E others
Exhibit 197: Scale-up of US launches driving margins Exhibit 198: EBITDA growth improves driven by US ramp-up
Gross Margin (%) EBITDA Margin (%) EBITDA (INR b) EBITDA growth (%)
36.5 37.6 37.6 42.4

32.7 34.6 34.6
32.0 31.9 31.9 32.5 33.5 34.4
26.9
19.6
21.9 22.2 21.7 21.9 5.6 3.8 6.7

20.7 20.6 19.7
17.7 16.6
6 8 10 11 11 12 17 23 27
Exhibit 199: Strong earnings growth expected ahead Exhibit 200: Break-up of EPS growth (FY15E-17E)
Core EPS (INR/ share) One Off One-Off

3
63 % 23 % 14 %
3
6
2
12 4 4 90
6 54
16 25 31 28 32 40 54 73 90
FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15E FY 16E FY 17E EPS (FY15E) Sales Gr. Margin Imp. Financial Lev. EPS (FY17E)
30 March 2015 92
Exhibit 201: R&D intensity to remain high Exhibit 202: Quality of US filings improving
R&D expense (INR b) % of sales ANDAs / year R&D / ANDA (INR m)
7 7 212
6 172
6
5 6 119
5
5 4 82 83 72
2 2 2 3 4 4 6 8 9 19 14 24 17 18 50
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY09 FY10 FY11 FY12 FY13 FY14
Exhibit 203: Deep ANDA pipeline lends revenue visibility Exhibit 204: High commercialization of approved ANDAs
ANDA launched ANDA approved
255 Launched/ Approved (%)
227
176 61 61 61
148 157 55 58
131 139 47 48 98
106 100 76 88
92 65 67
81 54
66 45
47 52
21 26 36 41 46 51 60
Exhibit 205: Top 5 products in US (market share %) Exhibit 206: Key products in US pipeline
Size Nature of
Timeline Brand Molecule (USD m) launch
Divalproex Sodium Er 8 FY16 Abilify Aripiprazole 1500 Competitive
FY16 Pristiq Desvenlafaxine 500 Competitive
Niacin Er 11 FY16 Lialda Mesalamine 380 FTF
FY16 Asacol HD Mesalamine 250 FTF
Potassium 9 Lansoprazole
FY16 Prevacid ODT 220 FTF
Divalproex Sodium 11 Fluticasone Limited
FY16 Flonase nasal 350 Comp.
Tamsulosin Hcl 21 Lidocaine Limited
FY16 Lipoderm topical patch 1200 Comp.
Limited
Source: Company, MOSL FT18 Strattera Atomoxetine 380 Comp.
Limited
FY18 Solodyn Minocycline 370 Comp.
30 March 2015 93
Exhibit 207: Zydus Wellness contribution declining Exhibit 208: Focus on improving field force productivity
Consumer segment (INR m) % of sales No of MRs Field force productivity (INR m/ share)
7.5 7.5 4 4
6.8 6.8 6.7
6.1 4 4
5.4 3
4.9 4.9
1947 2675 3355 3446 4100 4296 4589 5277 6227 4000 4700 4900 5200 5500
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY10 FY11 FY12 FY13 FY14
Exhibit 209: High intensity of launches in India formulations Exhibit 210: Specialty-led therapy mix in domestic business
CVS Anti-
2014 37 Others 15% Infectives
27% 13%
2013 78 Derma
7%
2012 89 Gastro
Intestinal
Pain / 12%
2011 76
Analgesics
7% Gynaec.
2010 77 Respiratory 10%
9%
Exhibit 211: Recovery in return ratios FY14 onwards Exhibit 212: Fixed asset turnover within a narrow band
RoE (%) RoCE (%) Gross Block (INR b) Fixed Asset turnover
37.4 2.5
35.8 2.2 2.3 2.2 2.3
32.8 32.0 2.1 2.1 2.1 2.1
27.0 27.5 29.0
23.7 25.2
30.4 29.6 31.0
26.7
23.7 22.9 24.1
17.9 18.6
13 16 18 25 29 32 42 50 59
Exhibit 213: Cash conversion cycle stable Exhibit 214: Debt to reduce with improved cash flows
Inventory Days Debtor Days Free cashflow (INR b) D/E

Thousands
Creditor Days Cash conversion cycle days

0.9 11
0.8
0.7 9
200 0.5 0.6 0.5
0.4
5 3 0.2
3 0.1
69 69 2
63 57 (0) (2)
42 45 39 45
28
(7)
0
30 March 2015 94

/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net Sales 36,868 46,306 52,633 63,579 72,241 86,801 105,910 125,417
Change (%) 25.9 25.6 13.7 20.8 13.6 20.2 22.0 18.4
% of Sales 78.1 77.8 79.4 82.3 83.4 80.3 78.3 78.1
EBITDA 8,086 10,262 10,838 11,252 12,001 17,091 22,976 27,471
Margin (%) 21.9 22.2 20.6 17.7 16.6 19.7 21.7 21.9
Depreciation 1,339 1,269 1,579 1,847 2,012 2,884 3,434 3,796
EBIT 6,747 8,993 9,259 9,405 9,989 14,206 19,541 23,674
Int. and Finance Charges 821 699 1,211 1,262 1,181 729 736 681
Other Income - Rec. 159 131 -107 -55 786 513 786 979
Extra Ordinary Expense/(Income) 38 0 0 0 172 -37 0 0
Current Tax 749 1,064 1,130 1,188 1,060 2,519 3,526 4,315
Tax 749 1,064 1,130 1,188 1,060 2,519 3,526 4,315
Tax Rate (%) 12.4 12.6 14.2 14.7 11.2 18.0 18.0 18.0
Reported PAT 5,298 7,361 6,811 6,900 8,363 11,509 16,065 19,658
Net Profit 5,051 7,110 6,525 6,536 8,037 11,101 15,595 19,118
PAT Adj for EO Items 5,084 6,333 5,660 6,536 8,208 11,064 14,898 18,420
Change (%) 52.1 24.6 -10.6 15.5 25.6 34.8 34.6 23.6
Margin (%) 13.8 13.7 10.8 10.3 11.4 12.7 14.1 14.7

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Equity Share Capital 682 1,024 1,024 1,024 1,024 1,024 1,024 1,024
Total Reserves 15,603 20,691 24,712 28,421 33,366 41,074 51,991 65,373
Net Worth 16,285 21,715 25,736 29,445 34,390 42,098 53,015 66,397
Deferred liabilities 1141 1127 1185 1005 961 961 961 961
Total Loans 10,905 11,034 21,307 27,946 23,955 21,955 20,455 18,955
Gross Block 21,498 24,004 35,612 38,726 41,380 51,338 59,816 68,306
Less: Accum. Deprn. 4,535 5,331 6,786 8,470 10,142 13,026 16,461 20,257
Net Fixed Assets 16,963 18,673 28,826 30,256 31,238 38,311 43,356 48,049
Capital WIP 2,482 3,963 4,492 7,356 8,915 4,958 2,979 1,989
Investments 207 207 242 1,145 866 866 866 866
Curr. Assets 17,901 23,263 30,232 34,965 38,845 42,014 56,195 65,678
Inventory 7,504 8,119 10,905 12,136 13,675 15,648 19,397 22,997
Loans & Advances 3,222 4,540 5,798 7,440 8,345 8,616 8,914 9,241
Provisions 1,951 2,182 2,281 2,473 2,927 4,280 6,067 7,361
Appl. of Funds 28,842 34,545 49,132 59,589 60,749 66,864 76,751 89,173
30 March 2015 95

Ratios 0.34797 0.34647 0.23647
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 24.8 30.9 27.6 31.9 40.1 54.0 72.8 90.0
Cash EPS 31.2 40.9 39.6 40.9 49.1 68.3 92.9 111.9
BV/Share 79.5 106.1 125.7 143.8 168.0 205.6 258.9 324.3
DPS 5.0 6.3 7.5 7.5 9.0 13.5 19.0 23.3
Payout (%) 23.3 20.8 27.1 30.5 27.1 28.8 29.1 29.2
Valuation (x)
P/E 66.0 53.0 59.3 52.0 41.4 30.7 22.8 18.5
Cash P/E 52.5 40.1 41.4 40.6 33.8 24.3 17.9 14.8
P/BV 20.6 15.5 13.0 11.6 9.9 8.1 6.4 5.1
EV/Sales 9.3 7.4 6.7 5.7 5.0 4.1 3.3 2.8
EV/EBITDA 42.5 33.5 32.5 32.1 29.8 21.0 15.3 12.7
Dividend Yield (%) 0.3 0.4 0.5 0.5 0.5 0.8 1.1 1.4
Return Ratios (%)

RoE 35.8 37.4 27.5 23.7 25.2 29.0 32.8 32.0
RoCE 26.7 30.4 22.9 17.9 18.6 24.1 29.6 31.0

Asset Turnover (x) 1.3 1.3 1.1 1.1 1.2 1.3 1.4 1.4
Debtor (Days) 46 60 60 54 56 62 66 66
Inventory (Days) 74 64 76 70 69 66 67 67
Leverage Ratio (x)

Debt/Equity 0.5 0.4 0.7 0.8 0.6 0.5 0.2 0.1

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Interest/Dividends Recd. 159 131 -107 -55 786 513 786 979
(Inc)/Dec in WC -504 -2,067 -2,156 -4,088 752 -5,755 -1,051 -6,733
EO Expense / (Income) 38 0 0 0 172 -36 0 0
CF from Operating incl EO Expense 6,954 7,262 7,445 5,921 12,308 9,366 19,184 17,402
(inc)/dec in FA -3,597 -4,460 -12,261 -6,141 -4,553 -6,000 -6,500 -7,500

Free Cash Flow 3,357 2,802 -4,816 -220 7,755 3,366 12,684 9,902
(Pur)/Sale of Investments 42 0 -35 -903 279 0 0 0
Change in Networth 310 -401 -945 -1,086 -1,152 -481 -470 -540
Inc/(Dec) in Debt -1,605 406 10,508 6,928 -3,741 -1,592 -1,030 -960
Interest Paid -821 -699 -1,211 -1,262 -1,181 -729 -736 -681
Dividend Paid -1,237 -1,530 -1,845 -2,105 -2,266 -3,319 -4,679 -5,735
Others -56 -132 58 -180 -44 0 0 0
CF from Fin. Activity -3,409 -2,356 6,565 2,294 -8,384 -6,121 -6,915 -7,916
Inc/Dec of Cash -10 445 1,714 1,172 -350 -2,755 5,769 1,986
Closing Balance 2,507 2,952 4,666 5,838 5,488 2,733 8,503 10,489
30 March 2015 96
23 Marchgrowth
2015
Lupin
BSE Sensex S&P CNX
CMP: INR1,975 TP: INR2,275 (+15%) Buy
27,458 8,342
Strong execution drives consistent performance

Unfolding of differentiated US launches to sustain margin expansion
Stock Info
Despite entering the US market relatively late (FY03), Lupin (LPC) has emerged
Bloomberg LPC IN
as a formidable player in the generics market (USD 800m sales, five-year CAGR
52-Week Range (INR) 1,918/904
of 25%), thanks to strong execution and identification of low completion
1, 6, 12 Rel.Per (%) 13/26/70 products. Domestic business has grown 17% sustainably, led by a thrust in
M.Cap. (INR b) 643.6 chronic therapies, while its first-mover advantage in Japan generics (12% of
M.Cap. (USD b) 10.2 sales) would create long term value. We estimate 28% EPS CAGR over FY15E-
AvgVal(INRm)/Vol‘000 821/626 17E led by 19% revenue growth and cumulative margin expansion of 310bp. We
Free float (%) 53.3 maintain Buy with a target price of INR 2,275 based on 27x FY17E (15% upside).
US generics, India hold key to revenue performance: : US generics and

Y/E Mar 2015E 2016E 2017E India (2/3rd of total sales) would be key growth contributors for LPC over FY15E-
Net Sales 129.2 153.8 182.9 17E. We expect US generics to post 21% CAGR, led by 20-25 new launches p.a.
EBITDA 35.7 44.7 55.1 Healthy pace of new launches (65-70 p.a) and entry in newer therapies (derma,
Adj PAT 22.2 28.4 35.3 opthal) would help sustain outperformance in domestic business (19% CAGR).
EPS (INR) 49.5 63.2 78.5 Japan business growth to improve post restructuring at I’rom (FY16), resulting in
Gr (%) 60.6 27.5 24.3 12% annual growth. RoW sales growth to moderate at 20% (versus 40% in last
BV/Sh (INR) 200.5 254.8 323.7 five years) due to forex fluctuation and larger scale of business now.
RoE (%) 27.9 27.8 27.1
RoCE (%) 40.9 38.9 38.6 Generics pipeline focused on niches, lower dependence on US brand biz
P/E (x) 38.8 30.4 24.5 Large part of LPC’s 95 pending ANDAs is geared towards niches like OC,
P/BV (x) 9.6 7.5 5.9 ophthalmology and other Para IVs, implying improving product mix. Filings for
topical, respiratory products are underway (likely by FY17-18), which would
Shareholding pattern (%) strengthen differentiated US pipeline. Dependence on US brands is reducing
As on Dec-14 Sep-14 Dec-13 (10% of US sales now vs 37% in FY10), implying better earnings predictability.
Promoter 45.9 45.9 45.9 Lifecycle management of Suprax brand (shift of suspension Rx to other forms)
DII 11.9 11.6 12.0
and new brands (Alinia, Locoid) should resurrect the brand business growth.
FII 22.8 24.2 25.4
Others 19.4 18.3 16.7
Margins to sustain structural uptrend: We estimate LPC’s adj. EPS to clock
28% CAGR over FY15E-17E boosted by 310bp EBITDA margin expansion (to 31%
in FY17E) due to (a) niche generic launches in US, (b) completion of I’rom
restructuring and sourcing from India to boost profitability in Japan and (c)
Lupin rebound in branded business growth to aid field force productivity in the US. We
Sensex - Rebased expect tax rates to moderate (30%) post recent budget announcement and
2,020
improved capacity utilization should drive operating leverage.
1,640
Potential inorganic expansion to enhance reach/capability: We expect
1,260
LPC to sustain industry leading return ratios and improve its RoIC further to 37%
880
by FY17E led by improved profitability and asset utilization. With net cash
500
surplus in balance sheet, LPC is well positioned to acquire mid-sized assets in
Mar-14
Mar-15
Jun-14
Sep-14
Dec-14
RoW (9% of sales) to expand its reach in high growth markets. Possible addition
of a US brand could provide fillip to the branded business.
30 March 2015 97
Premium multiples sustainable

LPC trades at 29.5x FY16E and 23.9x FY17E P/E, above its recent (three-year
average) history and large peers. We expect LPC to sustain 30% premium to the
sector average multiple due to strong execution track record, potential earning
upgrades emanating from US pipeline and high capital efficiency. Our target
price of INR 2,275 is based on 27x FY17E, implying 15% upside.
Key risks: Potential generic competition in Suprax (4% of sales), regulatory
delays and forex fluctuation.
Valuation and view

Lupin has consistently re-rated over the last five years following consistent earnings
performance, improvement in Balance Sheet health and return ratios. We believe
that it is likely to remain at the higher end of its P/E band as we remain convinced on
its execution ability, driving further earnings upgrades.
We value Lupin at 27x FY17E EPS, at par with SUNP (1 year forward P/E) and at 10%
premium to other large cap peers which is justified noting:
n Superior earnings growth of 28% (vs 22% for large peers)

n Sector leading return ratios (FY15E: RoE of 28%, RoCE of 41%)
n Strong Balance Sheet (Net cash surplus of Rs 2bn)
Key catalysts to drive stock performance over medium term are:

n Potential M&A to expand reach in RoW markets (Eastern Europe, Latam).
n Rebuilding of US branded business, with scale-up of new brands Alinia and
Locoid as well as product extensions for Suprax (life cycle management).
n Niche US generic launches like gWelchol, gNexium, gGlumetza, etc in the next 4-
6 quarters.
We believe that the following factors pose risks to our thesis:

n Regulatory delays affecting key US launches.
n Potential generic competition in Suprax suspension (USD55m+ brand).
Slower than expected turnaround of Japan business (I’rom acquisition), delaying
margin improvement.
Exhibit 215: Lupin PE (x) Exhibit 216: Lupin PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x) Lupin PE Relative to Coverage PE (%)
37.0 Median(x) Min(x) 80 LPA (%)
29.7 29.7
25.0 10.7
18.2 0 -14.0
13.0 17.7
7.0
1.0 -80
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Dec-08
Sep-12
Dec-13
Dec-08
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Sep-12
30 March 2015 98
Story in charts
Exhibit 217: Segment-wise mix (%) Exhibit 218: Segment-wise growth (%)
CAGR
FY13 FY14 FY15E FY16E FY17E FY15-17E FY12 FY13 FY14 FY15E FY16E FY17E
India 25 22 23 23 23 19 India 20 24 5 20 19 19
USA 40 44 45 47 48 21 USA 20 55 30 21 23 20
Europe 2 3 3 3 2 16 Europe 9 19 25 13 17 15
Japan 14 12 11 10 9 11 Japan 39 52 -1 7 10 12
RoW 9 9 9 9 10 22 RoW 30 36 21 16 23 21
API 10 10 9 9 8 10 API 10 0 17 9 12 10
Total 100 100 100 100 100 18 Total 21 36 17 17 19 18
Exhibit 219: Formulations lead sales growth (INR b) Exhibit 220: Sales break-up (INR b)
Formulations (INR b) API (INR b) 23 % 53 % 6% 18 %

15
14
12
11 183
9 130
9
9
5
5
31 40 49 60 85 100 118 142 168
FY15E Domestic USA Japan Row & FY17E
Others
Exhibit 221: EBITDA margin improves with product mix Exhibit 222: EBITDA growth
EBITDA (INR m) EBITDA growth (%)
Gross Margin (%) EBITDA Margin (%)
69
66.2 67.1 68.0 68.0
61.5 63.2 63.2
58.5 59.6 49
37 37
33 30
27.9 30.3 31.0 20
24.2 17
21.3 14
17.2 18.6 17.8 17.3
6 9 10 12 20 27 36 47 57
Exhibit 223: Strong earnings growth expected ahead Exhibit 224: Break-up of EPS growth (FY15E-17E)
Core EPS (INR/ share) One-off
30 % -10 %
1 80%
1
5
5
82.6
10
49
6
2
11 17 19 18 23 31 50 67 83
EPS (FY15E) Sales Gr. Margin Imp. Financial EPS (FY17E)
30 March 2015 99
Exhibit 225: US business to be driven by strong ANDA pipeline Exhibit 226: Suprax contribution reduced to 4%
Generic sales (USD m) Branded Sales (USD m) 110 Suprax sales (USD m) % of total Sales
95
8 8
82
7 7 7 7
87
145
4
143
133
127
41 65 81 87 100 120 74
221 310 367 547 712 868 1,076 1,291
FY08 FY09 FY10 FY11 FY12 FY13 FY14
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Exhibit 227: Top 5 US products (market share %) Exhibit 228: Key US launches
Size Nature of
Timeline Brand Molecule USD m launch
Cefuroxime Axetil 29.0 FY15 Apriso Mesalamine 80 FTF
Limited
Fenofibrate 20.8 FY16 Nexium Esomeprazole 2300
comp
FY16 Renvela Sevelamer hcl 450 Shared FTF
Duloxetine Hcl 16.0 FY16 Glumetza Metformin 70 FTF
FY16 Welchol susp Colesevelam hcl FTF
Niacin Er 31.3 FY17 Prezista Darunavir 800 Shared FTF
Carvedilol Limited
FY17 Coreg CR 300
Metformin Er (F) 47.0 Phos. Comp
Abacavir
Limited
FY17 Epzicom sulfate and 490
Comp
Source: Company, MOSL lamivudine
FY18 Tykerb Lapatinib 114 FTF
Tenofovir
Limited
FY18 Viread Disoproxil 570
Comp
Fumarate
Emtricitabine
FY18 Truvada 2000 Limited
and Tenofovir
Exhibit 229: ANDAs filed v/s pending Exhibit 230: ANDAs launched/approved
ANDA approved ANDA launched
192
173 176
148 66 67 69
59 60 59 60
127 74
65
90
29 38 47
21 24
58 86 100 109 98 93 95 32 41 48 64 78 97 108
30 March 2015 100

Exhibit 231: Japan sales to be driven by Kyowa Exhibit 232: Chronic therapy-led growth in India
Kyowa (INR b) I'rom (INR b) Japan growth(%)
Acute Semi chronic Chronic
52
39
3 41 41
3 50 52 52
3
16 4 3 12 6 9
7 10
1 11 12 12
(1)
53 50 39 36 36
6 8 9 10 11 12 14
FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY10 FY11 FY12 FY13 FY14
Exhibit 233: R&D cost to remain high as % of sales Exhibit 234: R&D per ANDA grows with complexity
R&D expense (INR b) % of sales
ANDAs / year R&D / ANDA (INR m)
8.6 8.9
8.4 8.4 8.4
7.9 7.5 7.5 489
6.5
338
230 209
83 96
28 37 21 25 21 19
2 4 5 5 7 9 11 13 16
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY09 FY10 FY11 FY12 FY13 FY14
Exhibit 235: Increasing productivity in India business Exhibit 236: Cash cycle increases with lower creditor days
No of MRs Field force productivity (INR m/MR)
Creditor Days Cash conv. cycle days
4.5 4.6 240
3.9 3.7 3.7 3.9
180
134 134
117
120 83 76 77 88
64 75
60
2944 3682 4238 4900 5200 5365
0
FY09 FY10 FY11 FY12 FY13 FY14 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
30 March 2015 101

Exhibit 237: Free cash flows improved over last 2 years Exhibit 238: Fixed asset turnover increases
Free cashflow (INR m) D/E
0.9 Gross Block (INR b) Fixed Asset turnover
2.9
2.7 2.8
2.7
0.5 0.4 2.5
0.4 2.5
0.2
0.1 0.1 0.1 2.2 2.1
0.0
2.0
3 7 10 12 21 28
18 21 23 33 38 41 48 56 63
0 0 -2
Exhibit 239: Industry leading return ratios

ROIC (%) RoE (%)
33.4 37.2
34.6
29.6 28.3
21.7 22.5 22.8
29.0 29.1 27.9
24.3
20.0 18.8 20.4
14.8
30 March 2015 102


Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net Sales 47,736 56,478 68,204 93,694 109,343 129,158 153,780 182,935
Change (%) 26.4 18.3 20.8 37.4 16.7 18.1 19.1 19.0
EBITDA 8,867 10,068 11,821 19,981 26,505 35,688 44,734 55,099
Margin (%) 18.6 17.8 17.3 21.3 24.2 27.6 29.1 30.1
Depreciation 1,239 1,712 2,275 3,322 2,610 4,403 4,866 5,230
EBIT 7,628 8,356 9,546 16,659 23,895 31,285 39,869 49,869
Other Income - Rec. 1,114 1,934 2,768 2,997 3,688 3,740 2,276 2,601
PBT before EO item 8,356 9,944 11,960 19,246 27,317 34,926 42,025 52,350
EO Expense/(Income) 0 0 0 0 -1,000 -847 0 0
PBT after EO item 8,356 9,944 11,960 19,246 28,317 35,773 42,025 52,350
Tax 1,360 1,149 3,086 5,842 9,622 11,005 13,028 16,228
Tax Rate (%) 16.3 11.6 25.8 30.4 34.0 30.8 31.0 31.0
Reported PAT 6,885 8,646 8,678 13,142 18,364 24,392 28,597 35,621
PAT Adj for EO items 6,885 8,646 7,917 10,347 13,831 22,246 28,373 35,256
Change (%) 36.3 25.6 -8.4 30.7 33.7 60.8 27.5 24.3
Margin (%) 14.4 15.3 11.6 11.0 12.6 17.2 18.5 19.3
Consolidated Balance Sheet (INR Million)

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Total Reserves 24,789 31,919 39,236 51,147 68,419 89,133 113,528 144,421
Net Worth 25,589 32,811 40,129 52,042 69,316 90,031 114,426 145,319
Minority Interest 344 515 723 595 669 1,045 1,445 1,945
Deferred liabilities 1,435 1,412 1,442 1,632 1,779 1,779 1,779 1,779
Total Loans 11,399 11,463 15,557 10,240 5,992 5,992 5,992 5,992
Gross Block 22,937 25,835 36,274 41,138 45,638 52,158 60,043 67,611
Less: Accum. Deprn. 7,072 9,075 14,422 16,840 19,283 23,686 28,552 33,782
Net Fixed Assets 15,865 16,760 21,852 24,298 26,355 28,472 31,492 33,829
Capital WIP 3,579 4,904 4,437 3,107 3,041 1,771 1,135 818
Investments 264 32 28 21 1,785 1,785 1,785 1,785
Goodwill & Intangibles 3,197 3,810 5,644 5,704 7,202 7,202 7,202 7,202
Curr. Assets 27,754 35,359 47,393 55,305 62,970 84,990 111,649 145,811
Inventory 9,715 12,000 17,327 19,489 21,295 25,427 30,073 35,199
Others 4,759 6,601 8,241 9,597 9,060 8,469 8,801 9,166
Provisions 2,243 2,723 3,939 4,684 4,779 5,812 6,488 7,333
Appl. of Funds 38,767 46,200 57,851 64,509 77,756 98,847 123,641 155,035
30 March 2015 103


Ratios
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
EPS (Fully Diluted) 17.2 19.4 17.7 23.1 30.8 49.5 63.2 78.5
Cash EPS (Fully Diluted) 20.3 23.2 22.8 30.5 36.7 59.4 74.0 90.2
BV/Share 64.0 73.5 89.9 116.3 154.6 200.5 254.8 323.7
DPS 3.2 3.0 3.4 4.0 6.0 7.0 8.0 9.0
Payout (%) 21.5 18.2 20.5 15.9 16.0 15.1 14.7 13.3
Valuation (x)
P/E (Fully Diluted) 96.7 105.7 85.4 64.0 39.2 29.5 23.9
Cash P/E (Fully Diluted) 80.7 82.1 64.7 53.9 32.8 25.4 21.0
P/BV 25.5 20.9 17.0 12.8 9.8 7.6 5.9
EV/Sales 15.0 12.5 9.5 8.1 6.7 5.5 4.6
EV/EBITDA 84.0 71.9 44.5 33.3 24.1 18.2 14.7
Dividend Yield (%) 0.2 0.2 0.2 0.3 0.4 0.4 0.5
FCF per share -5.1 8.1 -5.8 17.1 22.9 26.1 43.6 57.5
Return Ratios (%)

EBITDA Margins (%) 18.6 17.8 17.3 21.3 24.2 27.6 29.1 30.1
Net Profit Margins (%) 14.4 15.3 11.6 11.0 12.6 17.2 18.5 19.3
RoE 34.6 29.6 21.7 22.5 22.8 27.9 27.8 27.1
RoCE 27.6 25.3 24.6 33.3 40.1 40.9 38.9 38.6
Growth (%)
Sales 26.4 18.3 20.8 37.4 16.7 18.1 19.1 19.0
EBITDA 36.7 13.5 17.4 69.0 32.7 34.6 25.3 23.2
PAT 36.3 25.6 -8.4 30.7 33.7 60.8 27.5 24.3
Leverage Ratio
Current Ratio 2.3 2.4 2.2 2.3 2.7 3.3 3.8 4.2
Debt/Equity (x) 0.5 0.4 0.4 0.2 0.1 0.1 0.1 0.0

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Oper. Profit before Tax 8,867 10,068 11,821 19,981 26,505 35,688 44,734 55,099
Interest/Dividends Recd. 1,114 1,934 2,768 2,997 3,688 3,740 2,276 2,601
Direct Taxes Paid -1,089 -1,173 -3,055 -5,652 -9,475 -11,005 -13,028 -16,228
(Inc)/Dec in WC -4,478 -2,647 -5,370 -5,166 -4,368 -11,461 -7,171 -8,386
(inc)/dec in FA -6,457 -4,545 -8,736 -4,497 -6,098 -5,250 -7,250 -7,250

(Pur)/Sale of Investments -48 233 4 7 -1,764 0 0 0
Change in Net Worth 6,141 174 430 475 1,593 1 0 0
Inc/(Dec) in Debt -833 64 4,094 -5,317 -4,248 0 0 0
Interest Paid -385 -345 -355 -410 -267 -99 -120 -120
Dividend Paid -1,483 -1,575 -1,777 -2,095 -2,939 -3,677 -4,203 -4,728
CF from Fin. Activity 3,440 -1,682 2,392 -7,348 -5,861 -3,775 -4,322 -4,848
Inc/Dec of Cash 1,348 2,187 -177 323 3,626 8,784 15,239 20,988
Add: Beginning Balance 778 2,015 4,202 4,025 4,349 7,975 16,759 31,998
Closing Balance 2,126 4,202 4,025 4,348 7,975 16,759 31,998 52,986
30 March 2015 104

30 Marchgrowth
2015
Dr Reddy’s Labs
BSE Sensex S&P CNX
CMP: INR3,449 TP: INR3,870 (+12%) Buy
27,458 8,342
Research driven business

Stock Info Fortified base, await rewards from R&D investments
Bloomberg DRRD IN
We expect Dr Reddy’s (DRRD) strong R&D focus to build a formidable portfolio
(33% of pending US filings) of complex generics, NDDS-based proprietary
52-Week Range (INR) 3,662/2,250
products and biosimilar foray to provide sustainable growth visibility. Sharp
1, 6, 12 Rel.Per (%) 4/6/-8
depreciation in Ruble (down 38% in three months) would hurt Russian sales in
M.Cap. (INR b) 522.0
FY15E-16E. However, we estimate a rebound in earnings growth at 16% CAGR
M.Cap. (USD b) 8.3
(FY15E-17E) vs 4.5% in FY15E, led by niche launches like gCopaxone, gNexium in
Free float (%) 74.5
the US and healthy India business. Maintain Buy with target price of INR3,870.
Revenue growth to be led by US/India : Visibility on complex generic portfolio
in the US like injectibles, topical and launches like gDiprivan, gNexium and
Y/E Mar 2015E 2016E 2017E gCopaxone would drive 15% CAGR in US sales (44% of sales), on a high base.
Net Sales 147.0 161.2 183.4 Domestic business is likely to outperform industry growth on renewed focus,
EBITDA 33.5 38.3 45.4 while RoW performance would hinge on a stable currency environment. We
Adj PAT 22.1 25.0 29.9 estimate DRRD’s revenue to grow at 12% CAGR (FY15E-17E).
EPS (INR) 130.0 146.7 175.8 Russian woes limit margin expansion: We build 200bp cumulative expansion in
Growth (%) 4.5 12.8 19.8 operating margin over FY15E-17E to 24.8%, which would be achieved by (a)
BV/Sh (INR) 642.8 766.7 916.7
improved gross margin (63% in FY17E) on high impact US launches and (b)
RoE (%) 20.2 19.1 19.2
better revenue traction driving operating leverage. We build R&D spend at
RoCE (%) 16.8 17.9 18.6
10.8% of sales (highest in the industry). We model a sharp Ruble depreciation
P/E (x) 26.5 23.5 19.6
(37% versus USD in last three months) in our estimate (RUB:INR at 1.1), though
P/BV (x) 5.4 4.5 3.8
a recovery in Ruble would lend an upside risk (Russia accounts for 13% of
profits).
As on Dec-14 Sep-14 Dec-13 R&D intensity to remain high for differentiated US pipeline: DRRD spends the
Promoter 25.5 25.5 25.5 highest in R&D among large peers (USD88m). One-third of this is directed
DII 5.7 5.4 7.6 towards building pipeline in biosimilar, proprietary molecules which may not
FII 55.9 55.5 50.5 contribute meaningfully to revenue over the next two years. Generic R&D spend
Others 12.9 13.7 16.5
is also geared towards technologically complex products which have longer
gestation (clinical trials etc) and associated costs. Visibility on monetization
prospects of novel portfolio (NDDS-based) and biosimilar pipeline for developed
markets could provide an upside risk to our estimates.
Dr Reddy's Labs Compelling valuations backed by strong governance: We believe DRRD’s
Sensex - Rebased
4,400 governance standards are high due to (a) transparent and detailed disclosures
3,800 (US-listed, early IFRS adopter), (b) capable professional management team, (c)
3,200 credible board composition (80% independent directors). The current valuations
2,600 at 23.3x FY16E and 19.6x FY17E are attractive, and we believe there can be an
upside risk to our estimates on a faster pace of niche US approvals and visibility
2,000
on R&D monetization. Key risks: Adverse FDA action on Srikakulam API facility
Mar-14
Mar-15
Jun-14
Sep-14
Dec-14
(9 Form 483 observations), delays in regulatory approval affecting key launches

and currency fluctuation.
30 March 2015 105

Valuation and view

Successful monetization of several niche products (gDacogen, gVidaza) has helped
DRRD achieve a formidable base for FY14. With fewer new launches in US and
concerns on Russian market (Ruble depreciated 37% in last three months), FY15E
would be a year of consolidation for DRRD. However, we expect upside from US
portfolio and healthy domestic growth to result in 16% EPS CAGR over FY15-17E to
be driven by 12% revenue growth and cumulative 200bp operating margin
expansion.
Our TP of INR 3,870 implies 12% upside from current levels. We value DRRD at 22x
FY17E EPS, at par with sector average (one-year forward P/E) and at discount to
large peers due to:
n Relatively slower earnings growth of 16% CAGR (vs 23% for large peers)
n Potential overhang of currency depreciation/demand outlook in key emerging
markets (21% of sales)
n Healthy Balance Sheet (D/E: 0.4x) and return ratios (RoE at 20%)
n Stabilisation of emerging market economies/currency, mainly Russia/CIS (12% of
sales)
n Clearance of Form 483 issues at Srikakulam API facility
n Launch of key products like gCopaxone, gNexium, etc

n Regulatory delays affecting key US launches,
n Adverse outcome of pending FDA issues (Srikakulam API facility)
Further depreciation of Russian currency. Every 10% depreciation of Ruble hereon
(vs USD) leads to 2% downgrade in EPS estimate (annualized).
Exhibit 240: Dr Reddy’ s Labs PE (x) Exhibit 241: Dr Reddy’s Labs PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x) Dr Reddy’ s Labs PE Relative to Coverage PE (%)
48.2
Negative Negative
200
40 Earnings Earnings
Cycle Cycle
23.4 100
20.6 20.2
20 1.4 -12.8
11.2 0
0 -100
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Dec-08
Sep-12
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Dec-08
Sep-12
Dec-13
30 March 2015 106

Story in charts
Exhibit 242: Segment-wise revenue mix (%) Exhibit 243: Segment growth (%)
FY13 FY14 FY15E FY16E FY17E FY15-17E
India 11 13 8 13 14 14
India 13 12 12 13 13 14
US 68 19 46 16 17 14
US 33 42 44 46 46 15
Europe 7 5 4 4 4 1 Europe (2) (7) (10) (8) 1 0
CIS 15 15 13 9 10 (4) CIS 22 28 17 (3) (22) 19
Others 5 6 8 9 10 21 Others 16 42 33 68 17 25
PSAI 26 18 17 17 16 10 PSAI 21 29 (22) 2 11 9
Innov.
Prod. 3 2 2 2 2 15 Innov. Prod. 57 12 1 (9) 15 15
Total 100 100 100 100 100 12 Total 30 20 14 11 10 14
Exhibit 244: Revenue growth moderating on a high base Exhibit 245: Break-up of sales growth (INR b)
15 % 57 % 14 % 14 %
Formulations (INR b) API (INR b)
29
27
24
24
31 183
24 147
19 20 20
50 49 53 70 83 105 120 131 150
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY15E India USA RoW PSAI FY17E
Exhibit 246: High impact US launches to aid profitability Exhibit 247: EBITDA growth to pick up from FY16E
Gross Margin (%) EBITDA Margin (%)
127 EBITDA (INR b) Growth (%)
62.5 63.0
57.9 58.9 55.4 58.2 59.2
55.7 55.5
52
28
24.8 10 14 19
21.8 24.5 21.3 24.0 22.8 23.8 4 6
20.2 21.0 -6
15 14 16 24 25 32 34 38 45
Exhibit 248: Earnings momentum picking up Exhibit 249: Break-up of EPS growth (FY15E-17E)
94 % 11 % -5 %
Core EPS (INR/ share)
15 18 176
124
23 6 66 73 81 124 130 147 176
-31
EPS (FY14) Sales Margin Financial EPS (FY17E)
Growth expn Leverage
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
30 March 2015 107

Exhibit 250: Top 5 US products (market share %) Exhibit 251: US pipeline (key products)
Size Nature of
Timeline Brand Molecule
Tacrolimus 20 USD m launch
FY15 Valcyte Valganciclovir 400 Limited Comp.
Atorvastatin 23 Possible early
FY15 Nexium Esomeprazole 2300
launch
Azacitadine 33
FY16 Aloxi Palonosetron 450 FTF
Metoprolol Succinate 35 Copaxon Glatiramer
FY16 1500 Limited Comp.
e 20mg Acetate
Decitabine (inj) 37
Copaxon Glatiramer
FY17 1500 FTF
e 40mg Acetate
Exhibit 252: ANDAs filed v/s pending Exhibit 253: Only 50% of approved products in market
ANDA filed ANDA pending ANDA approved ANDA launched

launched/ approved (%)
220 152
209 142
187 193 128
158 170 107
138 95
85
70 70
62 61 60 57 53 49
68 73 75 80 65 62 68 49 53 58 64 73 75 75
FY09 FY10 FY11 FY12 FY13 FY14 YTD FY09 FY10 FY11 FY12 FY13 FY14 FY15E
Exhibit 255: Thrust on chronic segments to fuel

Exhibit 254: Field force productivity stable domestic growth
Gastro
No of MRs Field force productivity (INR m)
Others Intestinal
Anti
19% 22%
Diabetic
4 4 7%
4 4 4 Cardiac
3 3 16%
Derma
8%
Anti- Anti-
1950 2248 3165 3700 3600 3559 4162 Neoplastics
Infectives
8% 12%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 Pain mgmt
8%
30 March 2015 108

Exhibit 256: R&D expense higher due to novel research Exhibit 257: OTC share grows in Russia sales
R&D expense (INR b) % of sales
Rx (USD m) OTC (USD m) OTC ( % of sales )
11.2 10.8 10.8
9.4 88 105
67
51
6.8 6.7 27
5.8 6.1 39
5.4
34
18 29
26
4 4 5 6 8 12 16 17 20 125 145 165 170 165
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY10 FY11 FY12 FY13 FY14

Exhibit 258: Cash cycle days increase with higher inv. days Exhibit 259: Free cash flows to lower debt
Creditor Days Cash Conv. Cycle Days 0.5 0.6
0.5 0.5 0.5
186 179 0.4 0.3
200 161 159 166 177 0.3 0.3
133 135 140
150
8 1 14 14 17
100
-1 0 -3 -5
50
FY15E
FY16E
FY17E
FY09
FY10
FY11
FY12
FY13
FY14
Exhibit 260: Return ratios to improve hereon Exhibit 261: Capacity added from long-term perspective
RoE (%) RoCE (%) Gross block (INR b) Fixed Asset turnover
24.1 23.3 2.6
21.6 20.2
18.7 19.1 19.2
2.4
19.7 18.1 17.9 18.6 2.2 2.2
16.8 17.2 16.8 2.1
-2.4 2.5 2.0
1.9 1.9 1.9
3.1
26 30 38 44 53 63 74 85 96
-12.3
30 March 2015 109


Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net Sales 70,277 74,693 96,738 116,266 132,171 147,024 161,159 183,422
Change (%) 1.2 6.3 29.5 20.2 13.7 11.2 9.6 13.8
Other Income 1,058 1,118 1,669 3,634 953 2,409 1,880 2,110
EBITDA 14,202 15,660 23,742 24,763 31,699 33,505 38,275 45,397
Change (%) -6.0 10.3 51.6 4.3 28.0 5.7 14.2 18.6
Margin (%) 20.2 21.0 24.5 21.3 24.0 22.8 23.8 24.8
Depreciation & Amort. 12,763 4,147 6,254 6,237 7,085 8,020 8,541 9,721
EBIT 1,439 11,513 17,488 18,526 24,614 25,485 29,734 35,676
Net Interest Exp 372 189 118 -636 -750 413 413
Forex (Gains)/Losses 72 0 0 365 -400 0 0 0
Tax 985 1,403 4,204 4,900 5,093 6,524 6,240 7,474
Tax Rate (%) 48.0 11.3 21.9 22.6 19.1 22.8 20.0 20.0
Reported PAT 1,068 11,039 14,953 16,777 21,510 22,119 24,960 29,898
Adjusted Net Profit 1,068 11,099 12,428 13,682 21,174 22,119 24,960 29,898
Change (%) -120.7 939.2 12.0 10.1 54.8 4.5 12.8 19.8
Margin (%) 1.5 14.9 12.8 11.8 16.0 15.0 15.5 16.3

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Reserves 42,075 45,144 56,596 72,256 89,950 108,488 129,566 155,083
Net Worth 42,915 45,990 57,444 73,105 90,801 109,338 130,417 155,934
Loans 14,656 23,503 32,210 36,678 44,742 41,347 41,347 41,347
Deferred Liabilities/Tax 1,438 87 -833 -1,669 -3,310 -3,310 -3,310 -3,310
Gross Block 29,679 38,359 44,064 52,958 63,444 73,782 85,119 96,457
Less: Accum. Deprn. 12,087 14,714 18,086 21,213 25,695 30,504 35,965 42,014
Net Fixed Assets 22,459 29,642 33,246 37,814 44,424 49,953 55,829 61,117
Investments 4,153 622 11,558 18,131 26,384 20,330 20,330 20,330
Goodwill/Intangibles 13,973 15,246 13,529 14,021 14,697 12,266 12,266 12,266
Curr. Assets 38,463 47,560 59,179 68,751 78,664 94,261 109,916 133,927
Inventory 13,371 16,059 19,352 21,600 23,992 27,874 28,102 31,558
Others 6,548 8,157 7,109 10,043 13,184 14,702 16,116 18,342
Other Current Liabilities 10,717 15,010 19,189 18,741 21,433 17,981 18,339 20,702
Appl. of Funds 59,009 69,580 88,821 108,114 132,233 147,376 168,454 193,971
30 March 2015 110


Ratios 0.56509 0.5321
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 6.4 65.6 73.3 80.6 124.5 130.0 146.7 175.8
Cash EPS 82.4 90.1 110.2 117.3 166.1 177.2 197.0 232.9
BV/Share 255.6 271.8 338.7 430.5 533.8 642.8 766.7 916.7
DPS 11.3 11.2 13.7 13.8 18.0 19.5 22.0 26.4
Payout (%) 207.4 20.2 18.2 16.3 16.7 17.6 17.6 17.6
Valuation (x)
P/E 46.8 42.8 27.7 26.5 23.5 19.6
Cash P/E 31.1 29.4 20.8 19.5 17.5 14.8
P/BV 10.1 8.0 6.5 5.4 4.5 3.8
EV/Sales 6.2 5.2 4.5 4.0 3.6 3.1
EV/EBITDA 25.1 24.2 18.8 17.7 15.2 12.5
Dividend Yield (%) 0.4 0.4 0.5 0.6 0.6 0.8
Return Ratios (%)

RoE 2.5 24.1 21.6 18.7 23.3 20.2 19.1 19.2
RoCE 3.1 16.8 19.7 17.2 18.1 16.8 17.9 18.6

Debtor (Days) 62 86 96 100 91 90 90 90
Inventory (Days) 69 78 73 68 66 69 64 63
Working Capital (Days) 61 90 87 104 106 123 122 122
Leverage Ratio
Current Ratio (x) 1.9 2.0 2.1 2.2 2.5 3.2 3.7 4.0
Debt/Equity (x) 0.3 0.5 0.6 0.5 0.5 0.4 0.3 0.3

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Op. Profit/(Loss) before Tax 14,202 15,660 23,742 24,763 31,699 33,505 38,275 45,397
Interest/Dividends Recd. 614 929 1,669 3,151 1,989 3,159 1,467 1,697
(Inc)/Dec in WC 3,450 -6,501 -4,768 -9,903 -5,265 -11,074 -4,670 -7,383
(inc)/dec in FA -6,134 -12,603 -8,141 -11,297 -14,371 -11,118 -14,417 -15,010

(Pur)/Sale of Investments -3,161 3,531 -10,936 -6,573 -8,253 6,054 0 0
Change in networth 2,019 -5,740 -780 1,620 -233 300 499 867
(Inc)/Dec in Debt -4,827 8,847 8,707 4,468 8,064 -3,395 0 0
Other Items -1,974 -1,351 -920 -836 -1,640 0 0 0
Dividend Paid -2,216 -2,224 -2,719 -2,736 -3,581 -3,882 -4,381 -5,247
CF from Fin. Activity -6,998 -468 4,288 2,516 2,610 -6,976 -3,882 -4,381
Inc/Dec of Cash 988 -855 1,650 -2,243 3,315 7,025 10,532 12,846
Closing Balance 6,584 5,729 7,379 5,136 8,451 15,476 26,008 38,854
30 March 2015 111

30 Marchgrowth
2015
Glenmark Pharma
BSE Sensex S&P CNX
CMP: INR792 TP: INR950 (+20%) Buy
27,458 8,342
US launches to accelerate, novel pipeline can surprise

Forecast 23% core EPS growth led by all-round performance
Increased pace of US approvals, including Para IV launches, continued strength
Stock Info
Bloomberg GNP IN
in domestic business and scale-up of RoW/Latam business would drive growth
Equity Shares (m) 271.3 over FY15E-17E. We estimate 21% revenue CAGR, driving 25% core EPS CAGR
52-Week Range (INR) 865/510 (ex-one offs). Recent turmoil in emerging market currencies would impair FY15
1, 6, 12 Rel.Per (%) 9/1/18 outlook (4-5%), but underlying demand remains robust. Improvement in cash
M.Cap. (INR b) 223.4 generation and deleveraging (D/E stands at 0.9x) would be key to re-rating
M.Cap. (USD b) 3.7 hereon. Maintain Buy with a target price of INR950 (21x FY17E core EPS).
AvgVal(INRm)/Vol ‘000 524/754 Para IV launches in US to propel growth, India/RoW outlook healthy:
Free float (%) 51.7 We estimate GNP’s revenue to post 21% CAGR (FY15E-17E). This would be led
by (a) incremental launches in areas like derma, controlled substance, oncology
Financial Snapshot (INR b) (50% of pending 75 ANDAs) to drive 26% CAGR in the US (versus 13% in last two
Y/E Mar 2015E 2016E 2017E
years), (b) thrust on specialty/chronic segments (37% of portfolio) to help
Net Sales 68.5 82.2 99.8
sustain 19% growth in domestic business (12% for industry) and (c) new
EBITDA 14.9 18.4 23.2
Adj PAT
launches to drive growth in RoW/Latam (15% CAGR). Para IV launches like
7.9 9.8 12.3
EPS (INR)
gFinacea/gZetia (FY16/17) to drive one-time revenue boost with high margins.
29.0 36.3 45.3
Growth (%) 16.9 25.2 24.8 Margins to expand despite higher R&D intensity: Despite rising R&D spend
BV/Sh (INR) 136.9 171.9 220.5 (9.5% of sales), as the novel pipeline advances into clinics, we expect GNP’s
RoE (%) 21.2 21.1 20.5 margin profile to improve. We estimate EBITDA margin to scale up to 23% by
RoCE (%) 18.5 21.5 24.7 FY17E on (a) niche US launches, (b) turnaround in Latam business (FY16) and (c)
P/E (x) 27.3 21.8 17.5 better mix in domestic business (chronic focus).
P/BV (x) 5.8 4.6 3.6 Novel pipeline could spring surprises, no valuation ascribed: GNP spends
over 40% of its R&D (or ~3.5% of revenue) towards novel pipeline, with seven
molecules (3 NCE, 4 NBE) in clinical trials or likely to enter trials soon. Company
Promoter 48.3 48.3 48.3
has already recovered most of its R&D spent towards novel pipeline through
DII 6.4 5.9 7.5 outlicensing with partners, generating over USD200m so far. However, we have
FII 34.6 35.1 33.1 not ascribed any valuation to GNP’s novel research pipeline in our target price.
Others 10.7 10.7 11.1 Any potential outlicensing possibility of key molecules (GBR 900/GRC 17536)
presents upside risk to our assumptions and a stock catalyst.
Stock Performance (1-year) Reasonable valuations, improving cash flows to drive further re-rating:
We value GNP solely on its base business, as predicting outcome of novel
Glenmark Pharma.
Sensex - Rebased
research is fraught with uncertainty. Our target price of INR950 values GNP’s
900 base business as 21x FY17E P/E, in line with current sector average multiple.
800 This is justified given (a) potential earnings surprises from Para IV launches
700 (gZetia, gFinacea launches), (b) turnaround of Latam business (11% of sales), (c)
600 upside from NCE pipeline (not valued) could boost cash flows and aid debt
500 reduction. We expect GNP’s leverage to moderate from 0.9x in FY15E to 0.4x in
FY17E on steady working capital cycle (135-140 days) and improved profitability.
Dec-14
Mar-14
Mar-15
Jun-14
Sep-14
30 March 2015 112

Valuation and view

Slower pace of new launches and currency crisis in key emerging markets would
hinder growth for GNP in FY15E. However, domestic franchise continues to deliver
strong returns (ahead of peers). We expect uptick from niche US launches (Para IV’s
like gTarka, gFinacea and gZetia) to fuel growth in US generics (31% of sales).
Moreover, GNP’s portfolio of novel products could spring positive surprises through
milestone achievement or new out licensing deal, not valued in our assumptions. We
forecast 25% core EPS CAGR to be driven by 21% revenue growth over FY15E-17E.
Upside from one-offs like gZetia (INR 7/sh EPS in FY17E) would be further addition.
Moderation in capex and improving cash flows would help GNP trade in line with
sector.
Our TP of INR950 implies 20% upside from current levels. Our TP discounts GNP’s
base business as 21x FY17E P/E, in line with 5 year average P/E multiple of 21x (1
year forward). This is below its current forward multiple of 21.8x.
n Monetisation of key Para IVs like gTarka, gFinacea and gZetia (FY15-17E).
n Gradual reduction in gross debt, as cash flows improves. We expect D/E to
moderate from 0.9x in FY15E to 0.4x in FY17E.
n Turnaround in Latam business (targeted by FY16 end)

n Any adverse US FDA action upon inspection of US facilities
Developmental setbacks in the novel research pipeline.
Exhibit 262: Glenmark Pharma PE (x) Exhibit 263: Glenmark Pharma PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x) Glenmark Pharma PE Relative to Coverage PE (%)
168.1
150 600
400
100
200 65.0
50 12.5 34.6 0 -15.3
22.3 22.7
0 -200
Dec-08
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Sep-12
Dec-08
Dec-13
Mar-15
Mar-05
Mar-10
Jun-06
Jun-11
Sep-07
Sep-12
30 March 2015 113

Story in charts
Exhibit 264: Segment-wise mix (%) Exhibit 265: Segment-wise growth (%)
FY13 FY14 FY15E FY16E FY17E 15-17 India 19 31 15 17 19 19
India 26 25 26 25 25 19 US 45 39 20 5 28 25
US 34 34 31 33 34 26 Europe 45 24 36 30 30 25
Europe 7 8 10 10 11 28
LatAm 30 15 17 84 17 20
LatAm 7 7 11 11 10 18
SRM 46 37 22 - 9 7 20
SRM 16 16 13 12 12 13
API 12 29 35 19 15 15
API 8 9 9 9 8 15
Other
Other inc 1 1 0 - - inc 183 (81) (26) (18 ) NA NA
Total 100 100 100 100 100 21 Total 36 25 20 14 20 21
Exhibit 266: Formulations lead sales growth (INR b) Exhibit 267: Sales break-up (%)
Formulations (INR b) API (INR b) 23 % 40 % 31 % 6%
100
69
19 22 25 34 45 54 62 75 91
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY14 India USA RoW API & Others FY17E
Exhibit 268: EBITDA margin improves with product mix Exhibit 269: EBITDA growth
88
76 66
68.5 67.3 66.4 66.5 67.0 68.7 68.4 69.1 69.5
21 16 24
-1 8
24.2 24.5 21.2 21.5 21.7 22.4 23.3 -58

16.2 20.1
8 3 6 6 10 11 13 15 18

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
30 March 2015 114

Exhibit 270: Strong earnings growth expected ahead Exhibit 271: Earning levers
Core EPS (INR/ share) One off One-off

63% 14% 23 %
7 7.2
2
1 1.4
45
4 29
0 4 5
4 12 13 12 18 25 29 36 45
-7
Exhibit 272: R&D expense higher due to NCE research Exhibit 273: R&D per ANDA increases with filings
R&D Expense (INR b) % of sales ANDAs/ year R&D / ANDA (INR m)
9.5 9.3 9.3 330

9.0 283
7.7 277
6.6 194
4.8 4.7
4.2
67
40
22 18 5 8 20 19
0.9 1.2 1.4 2.6 3.9 5.4 6.5 7.6 9.2
FY09 FY10 FY11 FY12 FY13 FY14
Exhibit 274: Cash cycle lower due to higher creditor days Exhibit 275: Debt lowers with improved cash flows
Creditor Days Cash conv. cycle Days 8
375 6
232 241 1.3 2 2 2 2
250 185 1
1.0 1.1
1.0 1.0
95 0 0.9
125 43 0.8
10 14 0.7 0.7
-4 -10
0 -9
FY15E
FY16E
FY17E
FY09
FY10
FY11
FY12
FY13
FY14
-125
30 March 2015 115

Exhibit 276: Therapy mix concentrated in Derma and CVS Exhibit 277: Field force productivity
Pain Mgmt. Others No of MRs Field force productivity (INR m/MR)
Vitamins 2% 7% 5
5
3%
4 4
Anti Diab. Derma 3 3
7% 29%
2900 3200
Anti- 2500 2700
1882 2078
Infectives
14% Cardiac
Respiratory 23%
15% FY09 FY10 FY11 FY12 FY13 FY14
Exhibit 278: ANDAs filed v/s pending Exhibit 279: ANDAs launched/approved
ANDA filed ANDA pending ANDA launched ANDA approved
155
136 81
70 72 73 74 72
108 116
103 58
85
75
65 94
50 53 83 90
40 41 38 78
67
45 53
26 37 54 56 61 67 68
Exhibit 280: NCE/NBE pipeline Exhibit 281: US Pipeline focused on niches

Candidates Therapy area Stage Niche/ focus area In pipeline
GRC 17536 Neuropathic pain Phase 2a Total pending 65
GRC 27864 Pain management Phase 1 Para IVs 32
Vatelizumab (GBR Immediate Release 29
500) Multiple sclerosis Phase 2
Hormones 13
GBR 900 Chronic pain Phase 1
Modified Release 5
Autoimmune
GBR 830 disease Phase 1 Dermatology 8
GBR 1302 Oncology Preclinical Complex Injectables 1
Crofelemer Diarrhea Filed Immuno-suppressants 2
Source: Company, MOSL Controlled Substances 0
Oncology - Injectables 6
Exhibit 282: Return ratios likely to remain high Exhibit 283: Fixed asset turnover
RoE (%) RoCE (%) Gross block (INR b) Fixed asset turnover (x)
1.8
22.6 24.7
21.2 21.1 1.7
17.4 18.1 1.6 1.6
1.5
14.1 13.5 21.5 20.5
18.8 18.5 1.4
16.1
7.0 13.4
12.7 11.4 1.1 1.1 1.1
8.0 18 22 26 29 34 38 44 49 55
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E
30 March 2015 116


Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net Sales 24,616 29,490 40,204 50,123 59,839 68,529 82,228 99,845
Change (%) 18.0 19.8 36.3 24.7 19.4 14.5 20.0 21.4
EBITDA 5,963 5,922 9,858 10,610 12,870 14,901 18,432 23,248
Change (%) 76.4 -0.7 66.5 7.6 21.3 15.8 23.7 26.1
Margin (%) 24.2 20.1 24.5 21.2 21.5 21.7 22.4 23.3
Adjusted EBITDA 5,963 5,027 7,323 10,116 12,752 14,586 18,432 23,248
Margin (%) 24.2 17.6 19.4 20.4 21.4 21.4 22.4 23.3
Depreciation 1,206 947 979 1,270 2,168 2,655 3,033 3,407
EBIT 4,757 4,975 8,879 9,340 10,702 12,245 15,399 19,842
Interest 1,640 1,566 1,466 1,600 1,886 2,004 1,981 1,709
OI & forex gains/losses 722 1,405 -1,218 -403 328 146 175 202
PBT after EO Exp. 3,839 4,815 4,878 7,337 6,969 10,387 13,594 18,335
Tax 529 237 238 1,107 1,513 2,148 3,059 4,107
Tax Rate (%) 13.8 4.9 4.9 15.1 21.7 20.7 22.5 22.4
Reported PAT 3,310 4,578 4,640 6,230 5,456 8,239 10,535 14,228
Adj PAT** 3,310 3,547 3,242 4,991 6,729 7,865 9,846 12,286
Change (%) 194.3 7.2 -8.6 54.0 34.8 16.9 25.2 24.8
Margin (%) 13.4 12.4 8.6 10.1 11.3 11.5 12.0 12.3
11.95
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Reserves 23,282 20,102 23,746 27,359 29,562 36,848 46,356 59,532
Net Worth 23,551 20,372 24,016 27,630 29,833 37,120 46,628 59,803
Loans 18,693 21,258 23,225 28,500 33,191 33,191 30,710 26,245
Deferred liabilities 710 -1081 -2674 -3803 -5142 -5142 -5142 -5142
Gross Block 21,586 25,899 29,027 33,609 38,408 43,908 49,408 55,408
Less: Accum. Deprn. 3,929 4,876 4,137 5,286 7,430 10,085 13,118 16,524
Net Fixed Assets 17,656 21,023 24,235 26,634 30,181 33,823 36,291 38,884
Capital WIP 6,224 1,100 656 1,689 798 798 798 798
Investments 181 309 298 323 331 331 331 331
Intangibles (net) 7,259 9,723 11,253 12,136 12,729 12,729 12,729 12,729
Curr. Assets 24,210 25,988 29,472 37,493 47,814 51,625 58,938 69,881
Inventory 7,085 8,070 7,877 8,435 9,329 11,265 14,643 17,781
Others 5,273 4,651 5,958 6,605 8,974 10,326 12,391 15,045
Provisions 200 44 509 1,011 3,569 2,500 1,500 1,500
Appl. of Funds 43,085 40,816 44,817 52,571 58,015 65,301 72,329 81,039
30 March 2015 117

Financials and Valuations

Ratios
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS (Fully diluted)* 12.2 13.1 12 18.4 24.8 29.0 36.3 45.3
Cash EPS 16.7 16.6 15.6 23.1 32.8 38.8 47.5 57.9
BV/Share 87.6 75.4 88.8 102.0 110.0 136.9 171.9 220.5
DPS 0.4 0.7 2.0 2.0 2.0 3.0 3.0 3.0
Payout (%) 3.8 5.2 13.6 10.2 11.6 11.6 9.0 6.7
Valuation (x)
P/E (Fully diluted) 64.3 43.0 31.9 27.3 21.8 17.5
PEG (x) 9.0 0.0 0.8 0.9 1.6 0.9 0.7
Cash P/E 50.8 54.1 34.3 24.1 20.4 16.7 13.7
P/BV 11.2 9.5 7.8 7.2 5.8 4.6 3.6
EV/Sales 8.4 6.2 4.7 4.0 3.5 3.0 2.4
EV/EBITDA 41.8 25.2 22.4 18.6 16.3 13.2 10.3
Dividend Yield (%) 0.1 0.2 0.3 0.3 0.4 0.4 0.4
Return Ratios (%)

RoE 14.1 17.4 13.5 18.1 22.6 21.2 21.1 20.5
RoCE 12.7 13.4 11.4 16.1 18.8 18.5 21.5 24.7

Debtor (Days) 160 140 113 119 132 130 130 130
Inventory (Days) 105 100 72 61 57 60 65 65
Leverage Ratio (x)

Current Ratio 4.7 3.4 3.0 2.8 2.3 2.4 2.5 2.4
Debt/Equity 0.8 1.0 1.0 1.0 1.1 0.9 0.7 0.4

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Interest/Dividends Recd. 722 1,405 -1,218 -403 328 146 175 202
(Inc)/Dec in WC -2,441 1,530 -3 -1,445 -885 -5,967 -7,568 -7,240
EO Expense 0 0 1,317 0 2,175 0 0 0
CF frm Op.incl EO Exp. 3,857 6,828 5,489 6,526 7,286 6,932 7,980 12,103
(Inc)/Dec in FA -3,970 810 -3,746 -4,703 -4,824 -6,298 -5,500 -6,000

(Pur)/Sale of Investments 0 -128 11 -25 -7 0 0 0
CF from Investments -3,970 682 -3,735 -4,728 -4,831 -6,298 -5,500 -6,000
Change in Networth 4,386 -7,520 -364 -1,982 -2,619 -1 -75 -100

Inc/(Dec) in Debt -2,151 2,701 1,950 5,268 4,581 0 -2,481 -4,465
Interest Paid -1,640 -1,566 -1,466 -1,600 -1,886 -2,004 -1,981 -1,709
Dividend Paid -126 -236 -633 -634 -635 -952 -952 -952
CF from Fin. Activity 468 -6,621 -512 1,052 -559 -2,957 -5,489 -7,226
Inc/Dec of Cash 354 890 1,242 2,851 1,896 -2,322 -3,008 -1,123
Add: Beginning Balance 715 1,069 1,959 3,201 6,052 7,948 5,626 2,617
Closing Balance 1,069 1,959 3,201 6,052 7,948 5,626 2,617 1,494
30 March 2015 118

30 March
Healthcare | Fortified capabilities, sustained 2015
growth
Alembic Pharmaceuticals
BSE Sensex S&P CNX
CMP: INR448 TP: INR500 (+12%) Buy
27,458 8,342
Taking the right steps

Improving business mix to drive profitable growth
Stock Info
High quality product filings in the US and thrust on chronic segment growth in
Bloomberg ALPM IN
India is likely to sustain Alembic’s (ALPM) strong march. We expect ALPM to be
among the fastest-growing mid-cap pharma companies, exhibiting 33% EPS
CAGR over FY15E-17E on the back of 24% revenue growth. We expect
1, 6, 12 Rel.Per (%) 7/0/28
M.Cap. (INR b) 84.9
management’s near-term focus to be on (a) successful monetization of niche
M.Cap. (USD b) 1.3 products through own front-end in the US (versus partnership earlier), (b)
AvgVal(INRm)/Vol‘000 98/273 improved productivity of domestic field force (recently expanded) and (c)
Free float (%) 25.9 sustaining above-industry return ratios (RoE/RoCE at 37/39%). We maintain a
Buy with a target price of INR500 (12% upside).
Financial Snapshot (INR b) US business to double by FY17, supported by niche portfolio: We expect
Y/E MARCH 2015E 2016E 2017E ALPM’s revenue mix to improve in favor of formulations business (from 82% in
Net Sales 20.8 26.3 32.1 FY15E to 87% in FY17E), particularly exports. US generics would be the key
EBITDA INR b 4.1 5.8 7.2 driver in exports growth (49%). We model contribution from US sales to
Net Profit 2.9 4.0 5.1
increase from 18% now to 29% by FY17E (48% CAGR). This would be led by six
EPS 15.3 21.4 27.2
to eight new launches per annum backed by a healthy ANDA pipeline (30
EPS Growth 22.3 39.8 27.1
(%) pending), of which 50% are Para IVs (highest among mid-sized peers).
BV/Sh (INR) 46.4 62.0 82.1
RoE (%) 37.1 39.4 37.7 Specialty focus to drive outperformance in domestic business: We
RoCE (%) 38.8 42.5 42.5 expect domestic business to outpace industry growth, posting 15% CAGR over
P/E (x) 29.2 20.9 16.4 FY15E-17E. This would be driven by increased share of specialty segments like
P/BV (x) 9.6 7.2 5.4 Diabetology, CVS, Opthalmology, Gastro and Gynecology from 52% now to
57% by FY17. We expect the accelerated pace of new launches in these high
Shareholding pattern (%) growth segments (15-20 per annum) to result in lower dependence on legacy
As on Dec-14 Sep-14 Dec-13 brands (top three account for 24% of sales) and provide sustainable growth.
Promoter 74.1 74.1 74.1
DII 1.8 1.7 1.5
Margins to sustain upward trajectory: Improvement in business mix in
FII 9.6 9.4 8.7 favor of high margin formulations and contribution from niche US products
Others 14.4 14.8 15.7 would drive 260bp expansion in EBITDA margin over the forecast period. Other
Note: FII Includes depository receipts enablers of margin improvement would be (a) own front end in the US to help
capture better value in supply chain and (b) rising field force productivity.
Stock Performance (1-year) Hence, we estimate EBITDA CAGR over FY15E-17E at 32%.
Alembic Pharma Strong earnings momentum, superior return ratios merit re-rating:
Sensex - Rebased Despite the 65% stock performance in the last one year, we believe current
500
valuations at 19x FY16E and 15x FY17E EPS leave room for upside noting (a)
425
faster EPS growth of 33% (versus 24% for peers), (b) strong free cash
350 generation resulting in deleveraged balance sheet by FY17, (c) high return
275 ratios. Our target price of INR 500 is based on 18x FY17E, at 15% discount to
200 sector average, noting the risk relating to execution and smaller scale. Key risks
Mar-14
Mar-15
Jun-14
Sep-14
Dec-14
to our investment assumptions include: (a) regulatory delays affecting US

business scale-up, (b) compliance issue at any manufacturing unit, (c) widened
DPCO coverage affecting sales.
30 March 2015 119

Valuation and view

We believe that ALPM’s business profile has undergone a transformation led by
renewed efforts by management team to invigorate domestic growth and rapid
expansion in export front. This has resulted in marked improvement in profitability
and return ratios, likely to sustain over medium term. However, the re-rating
undergone over the past 12 months does not adequately reflect this improvement.
With increased earnings growth visibility and strengthening balance sheet, we

ascribe a PE multiple of 18x, which is still at discount to the sector average noting
smaller scale of operations and associated execution risks. This is higher than the
historic P/E average, but we believe the company should be looked at differently
now, given substantial change in governance standards and business outlook.
Our TP of INR 500 implies 12% upside from current levels. We see further room for
further re-rating from current levels as the company becomes net-debt free and
achieves sizeable scale in US generics and Indian formulations market.
n Establishment of own front-end operations in US and its execution on key
launches.
n Continued improvement in domestic product mix in favor of chronic/specialty
segments which would help outperform industry growth rates.
n Improved free cash flow generation to help company turn debt free by FY17E.
n
n Any adverse US FDA action upon inspection of its US facilities
Increased coverage of DPCO impacting domestic business (price erosion).
Exhibit 284: Alembic Pharma PE (x) Exhibit 285: Alembic Pharma PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x) Alembic Pharma PE Relative to Coverage PE (%)
Median(x) Min(x) 23.1 LPA (%)
22 0
18 21.1 -20 -21.4
14 11.8 -40 -45.8

10 -60
10.0
6 -80
2 4.3 -100
Dec-12
Dec-13
Jan-12
Nov-14
May-12
Aug-13
Mar-14
Jul-14
Mar-15
Apr-13
Sep-12
Sep-11
Dec-12
Dec-13
Jan-12
Nov-14
Mar-15
May-12
Aug-13
Mar-14
Jul-14
Apr-13
Sep-12
Sep-11
30 March 2015 120

Story in charts
Exhibit 286: Revenue mix turning in favor of exports (%) Exhibit 287: Exports drive topline growth (%)
FY13 FY14 FY15E FY16E FY17E 15-17
India 13 13 10 13 15 15
India 58 52 52 48 45 15
Branded Ex. 13 -22 67 -1 32 30
Branded Ex. 3 4 3 4 4 31 Generics
Ex. 39 -2 99 16 63 39
Generics Ex. 15 25 26 34 38 51
Exports
Exports (B+G) 18 29 29 37 42 49 (B+G) 33 -6 94 14 60 39
APIs 23 18 17 14 12 4 APIs 36 -6 -3 7 4 4
Total 100 100 100 100 100 24 Total 22 4 22 12 26 22
Exhibit 288: Revenue momentum to accelerate Exhibit 289: Drivers of sales growth (FY15E-17E)
Formulations (INR b) API (INR b) 31 % 5% 61 % 2%

4
4
4
32
3
4 4 21
4 4 3
7 7 9 11 12 15 17 22 28
FY15E India Branded Int. APIs FY17E
exports generics
Exhibit 290: Sustained growth in profitability Exhibit 291: Margin expansion led by better business mix
70
61.7 65.4 63.3 63.5
37 42 40
53.4 55.2
25 50.6 50.9 51.7
16 15 16
19.2 19.9 22.0 22.5

13.3 15.0 16.6
-45 7.4 9.2
1 1 2 2 3 4 4 6 7
30 March 2015 121

Exhibit 292: Likely to outpace industry growth (EPS) Exhibit 293: Break-up of EPS growth (sales driven)
Core EPS (INR/ share) 26 % 4%

70 %
27
49
0.5 1.5 4.5 6.9 8.8 12.5 15.3 21.4 27.2

Exhibit 294: R&D expense to scale up with US filings Exhibit 295: Free cash flows to pile up
R&D expense (INR m) % of sales Free cashflow (INR m) D/E (x)
1.5
6.2 5.9 6.0 6.0 1.3
1.1
4.8 0.9
3.8 3.9 4.0
3.6
0.4
0.2 0.3 0.2 0.1
403 433 471 586 736 1164 1230 1575 1927 1039 382 854 1978 1473 626 1646 3143 4968
Exhibit 296: Return ratios improve with better Op. leverage Exhibit 297: Cash cycle to stay healthy
RoE (%) RoCE (%) Inventory Days Debtor Days
Creditor Days Cash Conv. Cycle Days
43.1 42.5 42.5 110
38.8 93
38 37 87 86
90
40.0 39.4 37.7
28 37.1
62 62 65 65
32 70 58 57
29
7 8 20 50
2 6
30
30 March 2015 122

Exhibit 298: Consistent ANDA filings in US Exhibit 299: Backward integration drives competitiveness
ANDA filed ANDA approved ANDAs supported by own DMFs (%)
66
57 60
45
38 36
31
26 24 100
19 88 85
18 15
8 52
4 41
25
FY09 FY10 FY11 FY12 FY13 FY14 YTD IPCA ALPM LPC CDH TRP GNP
Source: Company, USFDA, MOSL Source: Company, MOSL
Exhibit 300: Focus on brand building

(lower number of launches in India) Exhibit 301: Therapy mix in India formulations business
Others
2014 11 Anti Diab.
13% Anti-
5%
Infectives
2013 19 30%
Vitamins
6%
2012 36
Gastro Int.
14%
2011 27 Gynaec
9%
2010 26 CVS
Respiratory
10%
13%
Exhibit 302: INR3b capex over next 2 years
Gross block (INR b) Fixed asset turnover (x)

12
11
9
7 7 7
6
4 5
2.7 2.9 2.3 2.5 2.7
2.8 3.2
1.7 1.6
30 March 2015 123


Consolidated - Income Statement ( NR Million)
Y/E March (Rs mn) FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Net Sales 10,215 12,021 14,654 15,204 18,632 20,835 26,254 32,112
Change (%) -6.6 17.7 21.9 3.7 22.6 11.8 26.0 22.3
EBITDA 942 1,602 2,194 2,520 3,577 4,140 5,776 7,225
Margin (%) 9.2 13.3 15.0 16.6 19.2 19.9 22.0 22.5
Depreciation 430 296 337 350 405 460 568 655
EBIT 512 1,307 1,858 2,170 3,172 3,680 5,208 6,570
Other Income - Rec. 102 38 128 133 38 6 39 50
PBT bef. EO Exp. 234 1,068 1,610 2,063 3,106 3,662 5,098 6,482
EO Expense/(Income) 0 0 0 0 0 0 0 0
PBT after EO Exp. 234 1,068 1,610 2,063 3,106 3,662 5,098 6,482
Current Tax 38 186 312 401 685 782 1,071 1,361
Deferred Tax -10 28 -4 10 66 0 0 0
Tax Rate (%) 11.7 20.1 19.2 19.9 24.2 21.3 21.0 21.0
Reported PAT 207 854 1,301 1,653 2,355 2,880 4,027 5,120
PAT Adj for EO items 207 854 1,301 1,653 2,355 2,880 4,027 5,120
Change (%) 184.1 312.9 52.4 27.0 42.5 22.3 39.8 27.1
Margin (%) 2.0 7.1 8.9 10.9 12.6 13.8 15.3 15.9
Consolidated - Balance Sheet ( NR Million)

Total Reserves 2,890 2,590 3,573 4,652 6,379 8,377 11,301 15,098
Net Worth 3,157 2,967 3,950 5,029 6,756 8,754 11,678 15,475
Deferred Liabilities 138 54 95 139 227 227 227 227
Total Loans 4,084 3,279 3,527 1,868 1,238 2,238 2,038 1,938
Gross Block 7,123 4,335 4,629 5,725 6,541 9,041 10,541 12,041
Less: Accum. Deprn. 3,192 1,616 1,951 2,283 2,688 3,147 3,715 4,370
Net Fixed Assets 3,932 2,720 2,678 3,442 3,854 5,894 6,826 7,671
Capital WIP 39 265 582 323 323 323 323 321
Total Investments 85 33 33 33 34 34 34 34
Curr. Assets, Loans&Adv. 5,586 5,419 7,226 6,680 7,968 9,093 11,888 15,835
Inventory 2,450 2,192 2,587 2,668 3,108 2,967 4,224 5,138
Cash and Bank Balance 21 63 471 161 240 959 1,153 2,734
Loans and Advances 1,254 1,144 2,174 1,522 1,887 2,110 2,659 3,252
Other Current Liabilities 204 487 499 419 339 379 477 584
Provisions 190 264 357 623 734 977 1,218 1,463
Appl. of Funds 7,379 6,300 7,572 7,036 8,221 11,219 13,943 17,640
30 March 2015 124


Ratios
Basic (INR)
EPS 1.5 4.5 6.9 8.8 12.5 15.3 21.4 27.2
Cash EPS 4.8 6.1 8.7 10.6 14.6 17.7 24.4 30.6
BV/Share 23.7 15.7 21.0 26.7 35.8 46.4 62.0 82.1
DPS 0.4 1.0 1.4 2.5 3.0 4.0 5.0 6.0
Payout (%) 37.8 25.7 23.6 33.4 28.1 30.6 27.4 25.8
Valuation (x)
P/E 290.4 99.3 50.9 35.7 29.2 20.9 16.4
Cash P/E 94.3 73.7 42.1 30.5 25.2 18.3 14.6
P/BV 19.0 28.6 16.7 12.5 9.6 7.2 5.4
EV/Sales 8.7 7.3 5.7 4.6 4.1 3.2 2.6
EV/EBITDA 94.3 54.9 34.1 23.8 20.6 14.7 11.5
Dividend Yield (%) 0.1 0.2 0.6 0.7 0.9 1.1 1.3
Return Ratios (%)

RoE 6.4 27.9 37.6 36.8 40.0 37.1 39.4 37.7
RoCE 8.0 19.9 28.9 32.0 43.1 38.8 42.5 42.5

Inventory (Days) 87.5 66.6 64.4 64.1 60.9 52.0 58.7 58.4
Debtor (Days) 66 61 49 56 53 53 53 53
Creditor (Days) 67 42 52 58 57 49 48 47
Leverage Ratio (x)

Interest Cover Ratio 1 5 5 9 31 152 35 47
Debt/Equity 1.3 1.1 0.9 0.4 0.2 0.3 0.2 0.1
* Adjusted for treasury stocks
Consolidated - Cash Flow Statement (INR Million)
Net P /L) Bef. Tax & EO Items 236 1,068 1,610 2,064 3,106 3,662 5,098 6,482
Depreciation 430 296 337 350 405 460 568 655
Interest & Finance Charges 301 239 262 146 66 19 110 89
Direct Taxes Paid 26 178 327 387 663 782 1,071 1,361
(Inc)/Dec in WC 334 -488 -616 439 -694 -238 -1,598 -1,273
CF from Operations 1,274 938 1,265 2,611 2,221 3,121 3,107 4,591
Others 1 12 152 38 32 0 0 0
CF from Operating incl EO 1,274 950 1,418 2,648 2,253 3,121 3,107 4,591
(inc)/dec in FA -279 -624 -612 -854 -816 -2,500 -1,500 -1,499
(Pur)/Sale of Investments -1 0 0 0 0 0 0 0
Others 44 55 48 184 37 6 39 50
CF from Investments -235 -568 -564 -670 -779 -2,494 -1,461 -1,448
(Inc)/Dec in Debt -770 -305 143 -1,696 -633 1,000 -200 -100
Interest Paid -357 -164 -372 -288 -104 -24 -150 -139
Dividend Paid -54 0 -216 -304 -662 -882 -1,103 -1,323
CF from Fin. Activity -1,182 -470 -446 -2,288 -1,398 94 -1,452 -1,562
Inc/Dec of Cash -142 -88 408 -310 75 720 194 1,580
Add: Beginning Balance 163 151 63 471 161 237 957 1,150
Closing Balance 21 63 471 161 236 957 1,150 2,731
30 March 2015 125

30 Marchgrowth
2015
Cipla
BSE Sensex S&P CNX
CMP: INR701 TP: INR730 (+4%) Neutral
27,458 8,342
Earnings recovery priced in; downgrade to Neutral

Business transformation underway; inhaler opportunity holds promise
Stock Info
Bloomberg CIPLA IN Cipla (CIPLA) is undergoing a business transformation, wherein its focus on
Equity Shares (m) 802.9 front-end, aggressive promotion of domestic markets and scale-up of Medpro
52-Week Range (INR) 672/367 (SA) business would result in operational turnaround. Hence, we expect 39%
1, 6, 12 Rel.Per (%) 8/7/55
EPS CAGR over FY15E-17E (versus -12.5% in FY15E). Launch of combination
M.Cap. (INR b) 491.4
inhalers in developed markets offers long term potential. However, current
M.Cap. (USD b) 7.8
valuations (24x FY17E on core business) leave little room for execution miss and
regulatory delays which may affect key launches. We downgrade the stock to
Free float (%) 63.2
Neutral (earlier Buy), with an SOTP-based target price of INR730 (INR705/sh for
base business - 24x FY17E plus INR25/sh NPV for inhalers portfolio).
Y/E Mar 2015E 2016E 2017E Strong brand portfolio to aid domestic outperformance: We expect
Net Sales 111.6 134.7 157.4 growth in domestic business (44% of sales) to increase to 17% over FY15E-17E
EBITDA 22.2 29.1 36.2 (versus 13% in FY09-14) led by: (a) focus on power brands and brand extensions,
Adj PAT 12.1 17.8 23.5 (b) aggressive pace of new launches/in-licensing deals (45-50 pa) and (c) higher
EPS (INR) 15.1 22.2 29.3 thrust on chronic segments (30% of sales currently).
Gr (%) -12.5 47.1 31.6
Front-end strategy to yield long term value: While US front-end have just
BV/Sh (INR) 137.9 157.5 183.8
been commissioned, we expect a gradual ramp-up in US sales (USD120m now)
RoE (%) 11.0 14.1 15.9
as ANDA approvals build up. Recent ARV tender wins and alliance with Teva to
RoCE (%) 14.7 18.1 20.5
P/E (x)
help accelerate growth in Medpro operations (13% of sales). We expect CIPLA to
46.4 31.5 24.0
P/BV (x)
continue acquiring front-end operations in key export markets, thereby
5.1 4.5 3.8
ensuring full value chain for itself eventually.
Shareholding pattern (%) Credible management team to implement transformation: We believe
As on Dec-14 Sep-14 Dec-13 the new professional management team can execute CIPLA’s transformation
Promoter 36.8 36.8 36.8 into a front-end player (versus partnership driven) in export markets. However,
DII 11.4 12.1 10.6 we expect front-end costs of operations and higher R&D expenditure to yield
FII 25.7 23.7 24.9
material revenue upside only after FY17.
Others 26.2 27.4 27.7
Note: FII Includes depository receipts Monetization of inhaler portfolio to be critical: We value CIPLA’s inhaler
portfolio (Advair/Symbicort: USD 8b market) for the developed market on NPV
Stock Performance (1-year) basis at INR45/sh, assigning 50% probability to account for regulatory hurdles
and slower generic acceptability. Launch of gSeretide (mdi) in the UK (USD450m
Cipla
Sensex - Rebased
market) to be a key catalyst for the stock in the near term (FY16).
800 Fairly valued, execution risks not factored: CIPLA trades at 32x FY16E and
700
24x FY17E P/E, at a premium to large peers, and possibly factoring earnings
600
500
rebound as well as combination inhalers launch in the EU. However, potential
400 delays to scale up front-end operations (US, emerging markets) and lower
300 generic acceptance for inhaler portfolio could result in earnings miss. Improving
Mar-14
Mar-15
Jun-14
Sep-14
Dec-14
return ratios, strong and predictable domestic franchise (50% of profits) provide
valuation support. We believe the risk-reward is balanced at the current levels,
with less than 3% upside from current levels. Key risk: Earlier launch and higher
market share in EU Seretide launch.
30 March 2015 126

Valuation and view

CIPLA has sharply re-rated in the last six months on elevated expectations from
monetization of its inhaler portfolio in the developed markets. It is also transforming
its business model towards front-end exposure in exports market (vs partnership
model currently). Cipla currently trades at 31.5x FY16E and 24.0x FY17E (P/E). We
believe that earnings acceleration, potential upgrades upon successful EU inhaler
portfolio monetization would help it sustain current multiples at least (24x one year
forward P/E). However, with limited valuation upside, we downgrade our rating to
Neutral (vs Buy) with a target price of INR 730.
Revised target price implies limited upside

We value CIPLA on a sum of the parts basis, ascribing INR25/sh value to inhaler
pipeline (10 year NPV, at 50% discount) and INR 705/sh for base business. We assign
a target P/E of 24x on FY17E core EPS, at par with large cap peers (one-year forward
P/E) and its three year trading history (P/E multiple) which takes into account:
n Strong earnings recovery: 39% EPS CAGR over FY15-17E (vs -13% in FY15).
n Improvement in return ratios: RoCE up from 14.7% in FY15E to 20.5% in FY17E
n Strong balance sheet (D/E of 0.1x).
n Launch of combination inhaler in UK market (USD 450m mkt size, few players)
n Margin improvement in Medpro operations (acquired in July 2014)
Sustained strong growth in domestic formulations (42% of sales)
Exhibit 303: Cipla PE (x) Exhibit 304: Cipla PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x)
Median(x) Min(x) Cipla PE Relative to Coverage PE (%)
42 80 LPA (%)
34.6 12.8
34 32.0 40
26 0 19.6
23.5
23.0 -40
18
12.6
10 -80
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Dec-08
Sep-12
Dec-13
Dec-08
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Sep-12
30 March 2015 127

Story in charts
Exhibit 305: Revenue mix (% of total) Exhibit 306: Segment-wise growth (%)
FY13 FY14 FY15E FY16E FY17E 15-17 India
India Form. 45 42 44 43 43 17 Form. 14 15 12 16 17 17
Exp. Form. 47 50 50 52 52 22 Exp. Form. 11 27 30 11 26 18
Exp. API 8 8 6 6 5 11 Exp. API 7 -10 13 -16 18 5
Total 100 100 100 100 100 19 Total 12 17 20 11 21 17
Exhibit 307: Formulation-led sales growth Exhibit 308: Sales drivers (INR b)
Formulations (INR b) API (INR b) 39 % 58 % 3%
8
108
7 154
6
7
7
7 7
6 6
45 48 55 62 75 90 102 124 146
FY15E Domestic Exports Exports API FY17E
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E form. Form.
Exhibit 309: EBITDA growth improves with export growth Exhibit 310: EBITDA margin likely to scale-up
Gross Margin (%) EBITDA Margins (%)
46.9 EBITDA (INR b) EBITDA growth (%) 65.3
61.0 64.3 61.6 63.1 64.0
55.1 56.1 56.1
32.5 31.2
24.4
21.2
10.7 21 36
1.2 3.9 29
22 -2.9 26.5
14 17 23.4 24.1 21.7 23.6 21.1 21.6 23.0
12 19.9
14 22
Exhibit 311: Higher earnings growth ahead Exhibit 312: Break-up of EPS growth (led by sales growth)
Core EPS (INR/ share) 32 %

44 % 24 %
0.0
5.0 0.0
0.6 0.0 29.3
15.1
12.1 12.6 12.0 13.6 14.2 17.3 15.1 22.2 29.3
30 March 2015 128

Exhibit 313: Domestic field productivity to improve Exhibit 314: Better inventory management to aid cash cycle
No of MRs Field force productivity (INR m/MR) Inventory Days Debtor Days
Creditor Days Cash conv. cycle Days
7
6 6 300
6 5
5
225 177 185 184 191 192
166 157
150 117 119
75
3500 4300 5100 6500 7000 7000
0
FY09 FY10 FY11 FY12 FY13 FY14 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Exhibit 315: Interest coverage ratio remains healthy Exhibit 316: Fixed asset turnover improves with growing sales
68 Gross Block (INR b) Fixed asset turnover (x)

63 1.9
56 1.9 1.9
49 1.8
32 1.6 1.6
32
25 1.5 1.5
20 1.5
11
27 29 42 46 53 62 67 72 79
Exhibit 318: Resp. and Anti-infect. cover 60% of India

Exhibit 317: New products launched since 2010 (India biz) business
Pain / Derma Others
2014 31 Analgesics 2% 7%
CNS 3%
2013 49 3% Ophthal Respiratory
3% 31%
2012 55 Urology
4%
2011 47 Gastro Anti-
Intestinal Infectives
2010 90 7% Cardiac 27%
13%
Exhibit 319: Return ratios to remain under pressure Exhibit 320: Intangible assets due to Medpro acquisition
22.3
20.8 RoE (%) ROIC (%) 20.3 Tangible Assets (INR b) Intangible Assets (INR b)
22.4 16.4 15.5 16.6

15.3
13.1 13.7 26 26 26 26
17.2
15.9
14.4 14.3 13.8 14.1
12.7
11.0
24 27 34 36 40 43 44 44 45
30 March 2015 129


Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net Income 56,249 63,238 70,207 82,793 101,004 111,558 134,655 157,373
Change (%) 7.7 12.4 11.0 17.9 22.0 10.4 20.7 16.9
EBITDA 13,532 13,692 16,589 21,979 21,331 22,161 29,085 36,196
Change (%) 10.7 1.2 21.2 32.5 -2.9 3.9 31.2 24.4
Margin (%) 24.1 21.7 23.6 26.5 21.1 19.9 21.6 23.0
Depreciation 1,878 2,733 3,122 3,305 3,726 4,956 5,460 5,645
EBIT 11,654 10,959 13,466 18,674 17,604 17,205 23,625 30,551
Int. and Finance Charges 237 173 238 276 711 1,624 1,186 956
Other Income - Rec. 883 711 722 1,323 1,500 1,444 1,775 2,100
PBT before EO Items 12,300 11,497 13,950 19,721 18,393 17,024 24,214 31,695
Extra Ordinary Expense -808 -90 -369 -1,233 -408 0 0 0
PBT but after EO Exp. 13,107 11,586 14,319 20,954 18,800 17,024 24,214 31,695
Tax 2,293 1,914 2,907 5,443 4,634 4,304 5,811 7,607
Tax Rate (%) 17.5 16.5 20.3 26.0 24.6 25.3 24.0 24.0
Minority Interest 0.0 159.3 322.2 380.0 400.0
Income from associates -62 -123 -265 -175 -200
Reported PAT 10,815 9,673 11,412 15,449 13,884 12,133 17,848 23,488
Adj PAT 10,149 9,598 10,927 11,440 13,859 12,133 17,848 23,488
Change (%) 4.6 -5.4 13.9 4.7 21.1 -12.5 47.1 31.6
Margin (%) 18.0 15.2 15.6 13.8 13.7 10.9 13.3 14.9

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Equity Share Capital 1,606 1,606 1,606 1,606 1,606 1,606 1,606 1,606
Reserves 57,410 64,966 74,694 88,491 98,808 109,126 124,860 146,000
Net Worth 59,106 66,661 76,389 90,187 100,504 110,822 126,556 147,696
Loans 51 5,410 135 9,971 12,609 12,309 10,309 8,309
Deferred Liabilities 1792 2131 2332 2805 3090 3119 3119 3119
Minority Interst 0 0 0 496 496 496 496
Gross Block 28,973 42,406 46,269 53,279 87,604 92,604 98,104 105,104
Less: Accum. Deprn. 8,861 11,464 14,111 17,076 21,757 26,713 32,173 37,819
Net Fixed Assets 20,112 30,942 32,158 36,203 65,847 65,891 65,930 67,285
Capital WIP 6,842 2,853 3,712 3,674 3,536 3,536 3,536 3,536
Investments 2,464 5,908 12,688 25,324 7,086 7,086 7,086 7,086
Curr. Assets 43,673 46,263 44,945 51,376 57,535 78,353 97,030 119,321
Inventory 15,126 19,061 18,501 23,871 28,953 26,913 31,655 35,659
Cash and Bank Balance 621 960 905 1,430 1,752 12,701 20,115 31,890
Others 12,260 11,334 10,003 9,387 10,442 11,184 12,001 12,900
Provisions 2,164 2,203 2,432 2,824 3,424 5,453 6,441 7,574
Appl. of Funds 60,948 74,202 78,856 102,963 116,698 126,745 140,479 159,619
E: MOSL Estimates
30 March 2015 130


Ratios
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
EPS 12.6 12.0 13.6 14.2 17.3 15.1 22.2 29.3
Cash EPS 15.0 15.4 17.5 18.4 21.9 21.3 29.0 36.3
BV/Share 73.5 82.9 95.0 112.2 125.1 137.9 157.5 183.8
DPS 0.2 0.3 0.2 2.0 2.0 2.0 2.2 2.5
Payout (%) 19.8 30.8 14.4 12.2 13.5 15.5 11.8 10.0
Valuation (x)
P/E 52.2 49.2 40.6 46.4 31.5 24.0
Cash P/E 40.6 38.2 32.0 32.9 24.2 19.3
P/BV 7.5 6.2 5.6 5.1 4.5 3.8
EV/Sales 8.1 6.9 5.7 5.0 4.1 3.4
EV/EBITDA 34.3 26.0 26.9 25.4 19.0 14.9
Dividend Yield (%) 0.0 0.3 0.3 0.3 0.3 0.4
Return Ratios (%)

RoE 17.2 14.4 14.3 12.7 13.8 11.0 14.1 15.9
RoCE 20.6 15.7 18.0 19.4 16.4 14.7 18.1 20.5

Debtor (Days) 102 86 81 74 59 90 90 90
Inventory (Days) 98 110 96 105 105 88 86 83
Leverage Ratio (x)

Current Ratio 3.6 3.9 3.1 3.8 3.3 2.8 2.9 3.2
Debt/Equity 0.0 0.1 0.0 0.1 0.1 0.0 -0.1 -0.2

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Interest/Dividends Recd. 883 711 722 1,323 1,500 1,444 1,775 2,100
Direct Taxes Paid -2,143 -1,574 -2,706 -4,970 -4,349 -4,276 -5,811 -7,607
(Inc)/Dec in WC -1,310 -2,630 4,145 -6,937 -2,147 947 -6,281 -6,009
EO expense -808 -90 -369 -1,233 -408 0 0 0
CF from Oper. incl EO Expense 11,770 10,289 19,119 12,627 16,741 20,276 18,767 24,680
(inc)/dec in FA -5,244 -9,574 -5,197 -7,313 -33,232 -5,000 -5,500 -7,000

(Pur)/Sale of Investments -1,664 -3,444 -6,780 -12,636 18,239 0 0 0
Issue of Shares 6,994 866 -39 228 -1,689 64 0 0

Inc/(Dec) in Debt -9,352 5,359 -5,275 9,836 2,638 -300 -2,000 -2,000
Interest Paid -237 -173 -238 -276 -711 -1,624 -1,186 -956
Dividend Paid -2,145 -2,983 -1,645 -1,879 -1,879 -1,879 -2,114 -2,348
Others -35 -1 1 -62 213 -587 -555 -600
CF from Fin. Activity -4,775 3,068 -7,197 7,847 -1,427 -4,326 -5,854 -5,904
Inc/Dec of Cash 87 339 -55 526 321 10,950 7,413 11,776

Add: Beginning Balance 534 621 960 905 1,430 1,752 12,701 20,115
Closing Balance 621 960 905 1,430 1,751 12,701 20,115 31,890
30 March 2015 131

30 Marchgrowth
2015
Ipca Laboratories
BSE Sensex S&P CNX
CMP: INR649 TP: INR725 (+12%) Downgrade to Neutral
27,458 8,342
Resilient business model – limited valuation upside

Regulatory overhang may hinder near-term outlook
Stock Info
Import alert at all USFDA approved facilities and resulted loss of sales would
Bloomberg IPCA IN
pose an overhang on the stock. Increased competition, capacity constraints
and lower pricing would limit growth in Institutional business (10% of sales).
1, 6, 12 Rel.Per (%) 15/-10/36
Current valuations (18.4x FY16E) prices in partial resumption of US sales and
M.Cap. (INR b) 97.8 earnings turnaround (31% EPS CAGR over FY15-17E). While balance sheet
M.Cap. (USD b) 1.6 health and healthy return ratios provide valuation cushion, execution risk in US
AvgVal(INRm)/Vol‘000 192/263 & poor visibility on Institutional biz, Emerging markets (fx headwind) would
Free float (%) 54.1 limit EPS upgrades. Hence we downgrade our rating to Neutral (vs BUY),
retaining our estimates and target price of INR 725/sh (12% upside).
Earnings rebound led by India, RoW business: Disrupted US sales, slower

Y/E Mar 2015E 2016E 2017E
Institutional business offtake led to negative operating leverage, accentuated
Net Sales 32.1 36.8 43.2 by higher compliance costs in FY15. However, we expect earnings to rebound
EBITDA 6.3 7.9 9.6 led by (a) chronic segment focus and higher MR productivity driving domestic
Adj PAT 3.3 4.4 5.7 growth (18%), (b) resumed US sales (exempted products) and steady
EPS (INR) 26.3 35.2 45.2 penetration in export markets , (c) capacity constraints (await WHO re-
Growth (%) -30.6 33.9 28.4 approval) to hinder near-term growth in Institutional business. We expect
BV/Sh (INR) 177.6 207.6 246.0 EBITDA margin to revert to 22% level by FY17E (versus 19.6% in FY15E),
RoE (%) 15.8 18.3 19.9 resulting in EPS growth of 31% (also aided by favorable financial leverage).
RoCE (%) 18.7 21.2 23.1
P/E (x) 24.7 18.4 14.3 Highly focused on R&D investments – likely to pay off in the long run
P/BV (x) 3.7 3.1 2.6 We expect IPCA to enhance its R&D spend from 4% now to 6% of sales in three
years with a focus on (a) differentiated filings (Clopidogrel – 505 (b) (2)) and (b)
Shareholding pattern (%) new therapy development for India (hormones, ophthalmology). This would
As on Dec-14 Sep-14 Dec-13 help build a sustainable revenue stream.
Promoter 45.9 45.9 45.9
DII 11.9 11.6 12.0 Capex addition to strengthen vertical integration – core of IPCA’s model
FII 22.8 24.2 25.4 The strength of IPCA’s business model lies in its strong focus on vertical
Others 19.4 18.3 16.7
integration, capturing the entire value chain (intermediates to formulations).
IPCA is likely to spend INR4-5b annually on capex (versus INR3b average) to
augment API R&D (Baroda) and oncology facility in Mumbai. This would
Stock Performance (1-year) constrain free cash flow generation till FY16E.
Aurobindo Pharma
Sensex - Rebased Balanced risk-reward, earnings turnaround largely factored
1,400 At CMP, stock trades at 18.4x/14.3x FY16E/17E EPS, at a discount to sector
1,220 average and its own trading history. We believe while earnings rebound is
1,040
860
partially factored in, but execution risks owing to delays in approval (WHO)
680 persist. We value IPCA at 16x FY17E EPS, at ~30% discount to mid-cap peers
500 target P/E (22x) due to regulatory overhang, to arrive at a target price of
Mar-14
Mar-15
Jun-14
Sep-14
Dec-14
INR790 (12% upside). Key risks: Prolonged delays in resolving regulatory issues
and lower than expected market share gains in US (on exempted products).
30 March 2015 132

Valuation and view

Import alert on all its USFDA approved facilities (Ratlam-API, Silvassa/Indore-
formulations) and stoppage of US sales have led to sharp stock correction in the last
six months. While we believe that the regulatory overhang would weigh on valuation
multiples, growth in other businesses remain healthy. IPCA’s exposure to stable
domestic formulation business (35% of sales) and increasing scale-up in export
formulations (39% of sales) provide attractive growth prospects at reasonable
valuations. IPCA is currently trading at 18.4x FY16E and 14.3x FY17E EPS, at ~30%
discount to mid-size peers. We expect the valuation gap with peers to narrow on the
back of strong earnings rebound (31% EPS growth), however implied upside to our
target price is less than 10%. Hence, we downgrade our rating to Neutral (vs Buy),
factoring in the impact of recent import alert at Silvassa/Indore (2-3% cut for FY16—
17E). Accordingly, our target price is revised to INR 725 (earlier INR 790).
Our target price implies 12% upside

We value IPCA on a target 1-year forward P/E multiple basis, the same methodology
we use for other pharmaceutical stocks in our coverage. Our target price of INR 725
values the company at P/E multiple of 16x on FY17E EPS of INR45.2. This target
multiple is:
n At 25% discount to other mid-size peers target multiple (i.e 21x), factoring
overhang of regulatory issues
n Implies a PEG of 0.55x, which is better than the sector average of 0.9x
n At par with its historic multiple (5 yr average), given turnaround in profitability
and healthy balance sheet
Key catalysts to drive stock’s performance over the medium term are
n Regulatory approval clearance from other regulators (WHO, EU, TGA) post
recent inspection (in February 2015) would provide visibility on non-US
operations.
n Rebound in Institutional business (anti-malarial tender), accounting for 10% of
sales after successful cGMP clearance by WHO removing capacity bottleneck.
n Improvement in domestic business growth trajectory, with focus on new therapy
introductions in chronic segments.
Key risks to our investment thesis

n Lack of regulatory clearance by other regulators would impact export business
outlook (60% of sales).
n Continued weakness in emerging market currency could impair growth
prospects. Branded generic formulation exports account for 10% of business.
Further addition of drugs in DPCO coverage could hurt domestic business.
30 March 2015 133

Exhibit 321: IPCA Labs. PE (x) Exhibit 322: IPCA Labs. PE Relative to Coverage PE (%)
PE (x) Peak(x) Avg(x) IPCA Labs. PE Relative to Coverage PE (%)
31.9 60
33
30
20.8
23 0
14.0 -30 -32.6
13 13.5 -22.3
4.0 -60
3 -90
Dec-08
Dec-13
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Sep-12
Mar-05
Mar-10
Mar-15
Jun-06
Jun-11
Sep-07
Dec-08
Sep-12
Dec-13
30 March 2015 134

Story in charts
FY13 FY14 FY15E FY16E FY17E 15-17 India 8 17 10 17 18 18
India 32 30 36 36 37 18 Europe 5 0 29 12 22 18
Europe 11 12 14 14 14 20 US 54 21 18 -57 4 20
US 8 8 4 3 3 12 Others 28 41 20 90 3 30
Branded Biz 9 10 12 13 14 26 Branded Biz 30 26 33 14 24 27
Inst. Biz 15 14 9 9 8 11 Inst. Biz 146 33 10 -37 12 10
API 26 26 26 25 24 13 API 16 22 15 1 12 13
Total 100 100 100 100 100 17 Total 23 19 16 -1 16 17
Exhibit 325: Formulations-led sales growth Exhibit 326: Break-up of sales growth (FY15E-17E)
Formulation (INR b) API (INR b)
47 %
38 % 16 % 2%
10
9
8 8
7
6
5
4 5
9 11 14 17 20 24 23 27 32 31 43
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY15E India Europe USA Others FY17E
Exhibit 327: EBITDA margin improves with better product mix Exhibit 328: EBITDA growth to pick up in FY16E-17E
46
65.4 63.8 63.8 63.8
60.6 59.1 61.3 61.0 26 37 30 26
58.7 21 21
13
6
10
8 -23 8
21.8 22.2 24.7 22.2 5 6
20.6 21.3 19.8 19.6 21.5
3 3 4
Exhibit 329: Earnings growth to remain healthy Exhibit 330: Break-up of EPS growth (FY15E-17E)
Core EPS (INR/ share)
48 % 25 % 27 %
26 45
8 17 21 22 26 38 26 35 45
30 March 2015 135

Exhibit 331: Institutional business to recover in FY16E Exhibit 332: R&D expenses increase with US filings
Institutional Business (INR M) Growth (%) R&D Expenses (INR m) (% of sales)
352 5.0 5.0
3,985 4,370
4.2
3,417 3.9 3.7 3.8 3.7 3.9
3.4
2,996 3,106
2,774
2,140
146 33 12 10 1,825
1,220 10 -37 1,232 1,336
1,007
573 713 780
502
FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Exhibit 333: Free cash flow to reduce debt (x) Exhibit 334: Acute dominated therapy-mix in India
Free cash flow (INR m) D/E

0.7 Respiratory
0.5 4% Pain /
0.5 Others
0.4 Analgesics
0.3 Anti 14%
0.2 23%
0.2 0.2 0.2 Diabetic
6%
Anti-
71 403 762 1,197 2,022 113 837 1,582 Infectives Anti
7% Cardiac Malarials
-40 Gastro 17% 21%
Intestinal
8%
Exhibit 335: ANDAs filed v/s pending (%) Exhibit 336: Launched-to-approved ratio at 100%
ANDA launched ANDA approved
Launched/ Approved (%)
40 42
33 83 79 79 78
73
25 26 24 60
22
19
16
11 13 18
12 14 14
6 10 11
6 8 10 11 11 14
FY10 FY11 FY12 FY13 FY14 YTD FY10 FY11 FY12 FY13 FY14 YTD
30 March 2015 136

Exhibit 337: Fixed asset turnover deteriorates Exhibit 338: Return ratios decline due to US impact
Gross block (INR b) Fixed asset turnover (x) RoCE (%) RoE (%)
2 29.4
2 2 2 2 27.8 27.4
2 33
28 24.0 25.2
24 27.2 23.1
19
1 24.5 25.6 24.1 23.1 18.7
21.2
16 1
13 1 16.5
8 9 10 19.9
18.3
15.8
14.8
Exhibit 340: Drug launch rate healthy at 20s in India

Exhibit 339: Cash conversion cycle higher business%
Payable Days Cash Conv. Cycle Days
320 2014 22
240 202 201 206 211 199 197 2013 22

187
169 169
160 2012 24
80 2011 20
0 2010 36
30 March 2015 137


Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net Revenues 15,622 18,969 23,587 28,131 32,818 32,078 36,829 43,187
Change (%) 21.2 21.4 24.3 19.3 16.7 -2.3 14.8 17.3
EBITDA 3,335 3,761 5,135 6,232 8,106 6,277 7,914 9,574
Margin (%) 21.3 19.8 21.8 22.2 24.7 19.6 21.5 22.2
Depreciation 467 558 671 867 1,031 1,620 1,836 2,151
EBIT 2,868 3,203 4,464 5,365 7,074 4,657 6,078 7,423
Other Income - Rec. 88 518 -408 -488 -500 87 38 270
EO Expense/(Income) 29 0 0 0 0 0 0
Current Tax 485 770 754 927 1,357 993 1,286 1,630
Deferred Tax 142 14 127 372 167 203 117 74
Tax 627 784 881 1,299 1,524 1,196 1,403 1,704
Tax Rate (%) 23.3 23.0 24.2 28.6 24.2 26.5 24.0 23.0
Reported PAT 2,035 2,623 2,762 3,243 4,782 3,317 4,444 5,706
Less: Minority Interest -18 -5 0 0 0 0 0 0
Net Profit 2,054 2,628 2,762 3,243 4,782 3,317 4,444 5,706
Adj PAT 2,083 2,628 2,762 3,243 4,782 3,317 4,444 5,706
Adj PAT growth (%) 106.6 26.2 5.1 17.4 47.4 -30.6 33.9 28.4

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Total Reserves 8,399 10,265 12,288 15,285 19,344 22,164 25,941 30,791
Net Worth 8,649 10,516 12,540 15,538 19,597 22,416 26,193 31,043
Deferred liabilities 793 807 932 1304 1471 1674 1791 1865
Total Loans 4,545 5,308 5,326 5,234 4,379 4,379 4,595 4,844
Gross Block 8,812 9,884 13,386 15,791 19,321 24,321 28,821 33,321
Less: Accum. Deprn. 2,433 2,892 3,945 4,748 5,785 7,405 9,241 11,391
Net Fixed Assets 6,379 6,992 9,441 11,042 13,536 16,916 19,580 21,929
Capital WIP 383 1,132 945 1,292 1,649 1,649 1,649 1,649
Investments 325 408 341 90 92 92 92 92
Curr. Assets 8,992 10,586 12,547 14,545 16,827 15,876 18,219 22,241
Inventory 3,802 4,664 6,699 7,410 8,476 8,348 9,582 11,234
Cash and Bank Balance 108 104 122 582 763 148 265 956
Loans & Advances 1,201 1,182 2,235 2,374 3,093 2,812 3,127 3,902
Provisions 247 420 377 544 706 615 706 828
Appl. of Funds 13,981 16,625 18,798 22,075 25,447 28,470 32,579 37,752
E: MOSL Estimates
30 March 2015 138


Ratios (INR Million)
Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
EPS (INR) 16.6 20.9 21.9 25.7 37.9 26.3 35.2 45.2
Cash EPS 20.1 25.3 27.2 32.6 46.1 39.1 49.8 62.3
BV/Share 69.1 83.7 99.4 123.1 155.3 177.6 207.6 246.0
DPS 3.3 3.7 3.7 4.7 5.9 4.0 5.3 6.8
Payout (%) 20.1 17.9 17.0 18.1 15.4 15.0 15.0 15.0
Valuation (x)
P/E 17.1 24.7 18.4 14.3
P/BV 4.2 3.7 3.1 2.6
EV/Sales 2.6 2.7 2.3 2.0
EV/EBITDA 10.5 13.7 10.9 9.0
Dividend Yield (%) 0.9 0.6 0.8 1.0
Return Ratios (%)

RoE 27.8 27.4 24.0 23.1 27.2 15.8 18.3 19.9
RoCE 24.5 25.6 24.1 25.2 29.4 18.7 21.2 23.1

Debtor (Days) 88 87 54 54 50 52 52 52
Inventory (Days) 89 90 104 96 94 95 95 95
Leverage Ratio (x)

Debt/Equity 0.5 0.5 0.4 0.3 0.2 0.2 0.2 0.2

Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E
Interest/Dividends Recd. 88 518 -408 -488 -500 87 38 270
Direct Taxes Paid -485 -770 -757 -927 -1,357 -993 -1,286 -1,630
(Inc)/Dec in WC -1,664 -1,203 39 -1,119 -339 -258 -1,328 -2,132
CF from Oper. incl EO Exp. 1,245 2,307 4,010 3,698 5,910 5,113 5,337 6,082
(inc)/dec in FA -1,261 -1,821 -3,315 -2,752 -3,887 -5,000 -4,500 -4,500

Free Cash Flow -16 486 695 946 2,023 113 837 1,582
(Pur)/Sale of Investments 86 -83 68 251 -1 0 0 0
Issue of shares 1 1 1 0 0 0 0 0
(Inc)/Dec in Debt -50 762 25 -93 -854 0 216 248
Interest Paid -264 -314 -413 -334 -269 -231 -269 -283
Dividend Paid -409 -468 -468 -589 -738 -498 -667 -856
Others 653 -388 111 279 20 0 0 0
CF from Fin. Activity -70 -407 -744 -736 -1,841 -728 -720 -891
Inc/Dec of Cash 1 -4 18 461 180 -615 117 691

Add: Beginning Balance 107 108 104 122 582 763 148 265
Closing Balance 108 104 122 582 763 148 265 956
30 March 2015 139

Appendix 1: Glossary of key terms
n ANDA: An Abbreviated New Drug Application (ANDA) is an application for a U.S.

generic drug approval for an existing licensed medication or approved drug.
n NDA: New Drug Application is a filing done with the FDA for approval of a small
molecule drug.
n API: An active ingredient (AI) is the ingredient in a pharmaceutical drug or a
pesticide that is biologically active. The similar terms active pharmaceutical
ingredient (API) and bulk active are also used in medicine, and the term active
substance may be used for pesticide formulations.
n Pharmaceutical formulation: In pharmaceutics, is the process in which different
chemical substances, including the active drug, are combined to produce a final
medicinal product.
n CRAMS: Contract Research and Manufacturing; partnership driven model
n Generics: A generic drug (generic drugs, short: generics) is a drug defined as "a
drug product that is comparable to a brand/reference listed drug product in
dosage form, strength, quality and performance characteristics, and intended
use.
n Authorized generics: It is prescription drugs produced by brand pharmaceutical
companies and marketed under a private label, at generic prices.
n Paragraph IV: A Paragraph IV or Para IV filing is done to get approval of a generic
drug in the US when the branded version of the drug is still patent protected.
The applicant must certify that one or more patents of the branded drug are
invalid and hence not infringed by its generic version.
n 180 days exclusivity: The first generic manufacturer to file a Para IV application
for a generic drug earns 180 days of market exclusivity.
n US FDA: The Food and Drug Administration (FDA or USFDA) is a federal agency of
the United States Department of Health and Human Services, one of the United
States federal executive departments.
n Orange Book: List of patents recognized by the US FDA.
n Generic Drug User Fee Act (GDUFA): An Act that requires industry to pay user
fees to supplement the costs of reviewing generic drug applications and
inspecting facilities.
n Bio-similar: A biological medicine made by a different sponsor, similar to
another biological medicine (generally, an innovator product) whose patent and
exclusivity has expired. Compared to small molecules which consist of chemically
identical active ingredients, biologics are vastly more complex. Thus, biosimilars
require a different regulatory framework compared to small-molecule generics.
n Clinical trial: A study undertaken to check the safety or efficacy of a drug.
n Generic Drug User Fee Act (GDUFA): An Act that requires industry to pay user
fees to supplement the costs of reviewing generic drug applications and
inspecting facilities.
n DPCO: DPCO stands for Drug Price Control Order (pharmaceuticals; India).
Responsible for overseeing all aspects related to pharmaceutical regulation,
starting from clinical trials & registration and finalizing drug prices in India.
n MR: A marketing representative (MR) is a person who sells products on behalf of
a company.
30 March 2015 140

Appendix 2: Outperformance of healthcare stocks

Reasons: Growth visibility, improving capital efficiency
n Indian companies have sustainably scaled up their businesses through aggressive

ramp-up in the US and milking the domestic market opportunity.
n At the same time, capital efficiency for the sector has continued to flare up, as
reflected in the improving return ratios and profitability.
n This has resulted in strong cash flow generation as well as value creation for the
stakeholder.
n The sector’s average P/E multiple has re-rated from 18x to 21x.
Exhibit 341: Average P/E of the sector has expanded Exhibit 342: Premium valuations (v/s Sensex) to sustain
Healthcare Sector P/E (x) Peak(x) 130 Healthcare PE Relative to Sensex PE (%) Avg(x)
31 Avg(x) Min(x)
27 28.4 90
26.8
24 50 45.9
20.7 37.2
20
10
17
13.8
13 -30
Oct-11
Dec-13
Nov-12
May-07
Jul-09
Jun-08
Feb-15
Apr-06
Sep-10
Feb-05
Oct-11
Dec-13
May-07
Nov-12
Jul-09
Jun-08
Apr-06
Sep-10
Feb-05
Feb-15
Source: MOSL, Bloomberg, Company Source: MOSL, Bloomberg, Company
Healthcare stocks have outperformed Sensex consistently

Within the sector, large cap stocks would continue to trade at a premium to midcaps
owing to stronger execution and scale. Consistent earnings performance with
stronger growth has manifested in the BSE Healthcare Index outperforming the
benchmark Sensex consistently over the last five years.
Exhibit 343: Healthcare has outperformed Sensex returns… Exhibit 344: …largely on stronger earnings growth
Healthcare Index (%) Sensex Return (%) Sensex (%) Coverage (%) outperformance
Outperformance 34
23 24.2 29
88 81
19 23
12 26 17 14.3
21 11.1
13 11 10 26 19 9 10 13
8 6
6 2 9.4
2 -0.5
(10) 0.4
(26) (38) 4 (2) (2)
2009 2010 2011 2012 2013 2014 FY09 FY10 FY11 FY12 FY13 FY14
Source: MOSL, Company, Bloomberg Source: MOSL, Company, Bloomberg
Quality names have delivered higher returns

We believe improvement in earnings visibility has been critical to stock performance.
Consistent earnings surprises and a successful acquisition strategy has been the key
to SUNP’s outperformance while remarkable execution and focus on key markets
(US, India, Japan) have favored LPC’s stock performance. CIPLA, on the other hand
has seen significant re-rating on the back of improved visibility of monetizing its
30 March 2015 141
niche inhaler portfolio in the EU as well as the management team’s renewed vigor.
Among midcap names, CDH (turnaround in profitability) ARBP (resolution of USFDA
issues, niche US launches) and TRP (synergistic acquisition), which also have a
sizeable revenue base now (USD750m+) have narrowed the valuation gap with large
peers. Relatively too, SUNP and LPC have outperformed, supported by sustained
earnings upgrades.
Exhibit 345: Stock price performance of coverage names

3 mth (%) 1 yr (%) BSE Healthcare Index return - 1 yr (%)
134
117 109 111
70 76
58
83 44
23 23 27
6 (1) 13 9
3 10 9 39
(9) 33
22 5
(3) (0) 8
(21)
ALPM ARBP AVEN BIOS CDH CIPLA DRRD GLXO GNP IPCA LPC RBXY SUNP TRP
Source: MOSL, Bloomberg
Valuations still have room for upside

India’s Pharma sector has sustained its valuation premium to the Sensex over the
last five years at ~40%. This has been driven by increased scale of operations, and
consistent and predictable earnings growth along with high capital efficiency. The
average P/E multiple for our coverage stocks is 11-23x one-year forward (v/s 14-16x
for the market).
Exhibit 346: SUNP, CIPLA, LPC and DRRD trading above LPA coverage line
LPA PE multiple (1 yr fwd) Current PE multiple (1 yr fwd) Coverage
LPA PE multiple - 21
23 21 23 21
17 18 18 18
11 13 14 13
21 17 19 23 32 23 24 22 18 29 29 22
ALPM ARBP BIOS CDH CIPLA DIVI DRRD GNP IPCA LPC SUNP TRP
While we believe further expansion in healthcare P/E is unlikely, there is no reason

for a P/E de-rating as well. Within the sector, stock outperformance would depend
on specific factors (stronger growth, return ratios). We expect relative premium
(versus the Sensex) to persist, driven by expectations of strong earnings growth (24%
CAGR over FY15-17 versus 20% for market) and improving financial health.
Superior earnings visibility: Higher growth prospects compared to the broader

market justify premium multiples for the sector. In FY15, growth for the sector was
30 March 2015 142

affected by slower pace of approvals in the US as well as the impact of currency

weakness in the emerging markets. We estimate sector earnings growth of 23% in
FY16 and 24% in FY17. This compares favorably with sub-20% CAGR estimated for
the market.
Exhibit 347: Stronger earnings growth outlook for pharmaceuticals sector (%)
35 Sensex EPS Coverage
23 24
20 21
FY15E FY16E FY17E
Defensive sector: The pharmaceuticals sector is defensive, being largely immune to

macroeconomic uncertainty. The weak macro indicators (GDP growth, inflation)
have not affected the growth outlook for the Indian pharmaceuticals sector. Being
net exporters, the Indian companies would also stand to benefit from a strong USD,
as it helps their export realizations to improve. We believe SUNP stands to benefit
the most from INR weakness (70% exports), followed by LPC and DRRD. We assume
an exchange rate of INR62/USD for FY16-17. If the INR depreciates further, there
could be upside risks to our estimates and vice versa.
Higher return on capital: A lean cost structure, relatively low leverage, and
continued profitability improvement enables healthcare companies to expand their
capital efficiency, reflected in higher return ratios. Higher return ratios are also a
testimony to better execution. Higher capacity utilization (fixed asset turnover)
would also enhance capital efficiency. Average RoE/RoIC for our coverage stands at
~25%, significantly higher than the broader market. It is worthwhile to note that RoE
expansion over FY15-17 is constrained by high cash reserves with healthcare
companies, which generates below par returns (sub-8%).
Exhibit 348: RoE comparison (coverage versus Sensex) Exhibit 349: High cash reserves constrain RoE expansion
Sensex (%) Coverage (%) ROE (%) ROIC (%) 31
23 22
20 21 21 27
19
17 18 17 25 25
16 16 16
20 21 22
25 25 25
23 22
21 21
FY09 FY10 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Improving cash flows: We expect aggregate free cash flows for the sector to
improve substantially. This would be driven by (a) upside from complex generics
30 March 2015 143
launches in the US, and (b) moderation of large capex plans and working capital
optimization. With net gearing already at low levels (0.3x) for our coverage universe,
we expect higher cash flows to be used for inorganic expansion in overseas markets,
enabling faster growth and broader reach.
Exhibit 350: Free cash flows improving Exhibit 351: Reduction in debt levels for coverage (D/E)
Free cash flow (INR b) 0.43
0.29 0.30 0.31 0.29 0.30

0.23
0.18
0.14
29 45 21 33 24 114 167 217
-6
FY15E
FY16E
FY17E
FY09
FY10
FY11
FY12
FY13
FY14
Large cap stocks to sustain premium valuations

We value healthcare stocks based on forward P/E multiples, as we believe this is
most suited for the sector owing to (a) high and predictable earnings growth, (b)
efficient capital structure with overall leverage below 0.5x (hence, EV/EBITDA not
relevant), and (c) difficulty in estimation of long-term growth, given continuously
evolving business models.
We value our coverage stocks based on 16-27x one-year forward earnings plus net
present value of their first to file/niche pipeline. Historically, we have observed that
large cap stocks have maintained a valuation premium (20-25%) over mid-sized
peers. This is owing to differences in (a) earnings growth and capital efficiency, (b)
product pipeline (differentiation benefits – SUNP, LPC), (c) resilience of earnings
(higher share of domestic formulations), and (d) execution track record.
Exhibit 352: Profit growth at 23% CAGR (FY15-17E) for coverage universe
Large Caps Mid Caps Coverage
34.3 34.7
26.4 29.4
23.1 24.2
50 17.3 53
9.6
23 20 25
14 42 18 14 22 39 11 28 23
20
-4
30 March 2015 144

Exhibit 353: P/E comparison: Large caps versus midcaps
LargeCap Healthcare P/E (x) MidCap Healthcare P/E (x)

40
28.5
30
20 21.5
10
Oct-07
Dec-13
Dec-08
Jan-10
Nov-12
Dec-04
May-08
Aug-10
Mar-11
Jul-14
Mar-07
Jun-13
Jun-09
Apr-12
Feb-15
Sep-11
Jul-05
Feb-06
Sep-06
Source: MOSL, Company, Mid-caps exclude MNC players (GLXO, AVEN)
SUNP, LPC have led the multiples

We have observed SUNP leading the pack consistently owing to continued earnings
surprises led by a rich US pipeline. LPC has scaled up the value chain by identifying
niche growth segments (Japan generics, Para IVs in the US). Despite relatively slow
earnings growth over the next two years, CIPLA would trade at a high multiple (v/s
large peers) due to potential value unlocking from high margin inhaler portfolio in
developed markets and earlier than expected benefits of front-end strategy.
While we believe that large caps would trade at a premium to sector average
multiples. Differentiated pipeline, stronger balance sheet, greater scale, and hence,
bargaining power as suppliers in the US market and superior return ratios would
work in favor of large cap companies. However, prospects for some of the emerging
companies like ARBP, CDH are bright owing to deep US pipeline which would unlock
value. We expect companies that have substantially evolved their business model
and have a differentiated pipeline that aids growth visibility over the next two years
would trade at a premium to their historic average multiples. In particular, we find
re-rating prospects for ARBP, CDH and TRP to be strong.
30 March 2015 145

Appendix 3 - Key risks to sector outlook

Exhibit 354: Key risks
Delay in
regulatory
approval
Foreign Increased
currency Risks US FDA
fluctuations surveilance
HIgher than
expected
impact of
NPPA
Delay in regulatory approval: Much of our forecasted growth in the US assumes

normal approval timelines (28-30 months) by USFDA. However, due to increased
backlog or change in priorities, there could be unexpected delays in getting key
products approved. This could hurt growth prospects, as the US is the key growth
driver. We have not fully factored the likely reduction in approval timelines under
GDUFA commitment.
Increased USFDA surveillance: Of late, USFDA has been far more vigilant and
proactive in enforcing cGMP compliance, especially in foreign (non-US) locations.
While an adverse action/event on this front cannot be estimated/timed, this can
materially dampen earnings as well as valuations.
Foreign currency fluctuations: Exports forms over 60% of sales for most
pharmaceuticals companies, with the USD being the key currency of trade. Exchange
rate volatility can impact operating metrics (INR depreciation benefits companies).
30 March 2015 146

Exhibit 355: Net forex impact of further 5% INR depreciation (@ USD/INR = 65)
10.3
8.9 9.4
8.7
8.2
7.6
6.7 6.8 7.0
3.6
1.7
ALPM BIOS CDH CIPLA DIVI DRRD GNP LPC SUNP TRP IPCA
Higher than expected impact of NPPP: While the new pharmaceutical pricing policy
(NPPP) is already implemented, the National Pharmaceutical Pricing Authority
(NPPA) continues to work on the list of products to be brought under price control.
This has raised uncertainty over the limit of price control coverage. This is pertinent,
as India is one of the largest and most profitable segments for most companies.
30 March 2015 147

Appendix 4: Company Snapshot (India Business)

India
formula- Field force
Sales Acute & Market sh Key therapies Portfolio concentration MR strength
Company tions % of productivity
(INR m) Chronic (%) (%) (%) (nos.)
total (INRm/MR)
business
ALPM 52 10 83/17 1.4 Anti-infective: 30% Top 10 brands: 41.4% 3600 2.7
GI: 14% 11-25 brands: 17.5%
Respiratory: 13% 26-50 brands: 15.8%
CVS: 10% Above 50 brands: 25.4%
Gynaec: 9%
CDH 35 25 71/29 4.4 CVS: 16% Top 10 brands: 24.7% 5500 4.5
Anti-infective: 14% 11-25 brands: 16.9%
GI: 13% 26-50 brands: 14.9%
Gynaec: 11% Above 50 brands: 43.5%
Respiratory: 9%
CIPLA 42 41 59/41 5.0 Respiratory: 30% Top 10 brands: 24.6% 7500 5.5
Anti-infective: 25% 11-25 brands: 16.9%
CVS: 12% 26-50 brands: 16.0%
Gynaec: 10% Above 50 brands: 42.5%
GI: 8%
DRRD 12 16 70/30 2.1 GI: 22% Top 10 brands: 31.9% 4162 3.8
CVS: 16% 11-25 brands: 20.4%
Anti-neoplastics: 11% 26-50 brands: 16.0%
Pain: 8% Above 50 brands: 31.7%
Anti-infectives: 8%
GLXO 92 23 86/14 3.4 Anti-infective: 28% Top 10 brands: 45.7% 3300 7.0
Derma: 20% 11-25 brands: 20.9%
Pain: 9% 26-50 brands: 16.1%
Vitamins: 8% Above 50 brands: 17.2%
Hormones: 7%
GNP 25 15 63/37 2.2 Derma: 29% Top 10 brands: 36.6% 3200 4.7
CVS: 23% 11-25 brands: 18.9%
Anti-infective: 14% Above 50 brands: 27.9%
Anti-diabetic: 7%
IPCA 30 10 72/28 1.8 Anti-malaria: 23% Top 10 brands: 34.5% 4500 2.2
Pain: 21% 11-25 brands: 22.0%
CVS: 17% 26-50 brands: 18.5%
GI: 8% Above 50 brands: 24.9%
Anti-infectives: 7%
LPC 22 25 54/46 3.3 Anti-infective: 25% Top 10 brands: 20.5% 5365 4.6
CVS: 24% 11-25 brands: 16.8%
Anti-diabetic: 10% Above 50 brands: 45.1%
GI: 8%
RBXY 21 28 78/22 3.7 Anti-infective: 29% Top 10 brands: 35.1% 5500 5.1
Pain: 14% 11-25 brands: 15.0%
Derma: 12% 26-50 brands: 14.0%
CVS: 11% Above 50 brands: 35.9%
Vitamins: 10%
30 March 2015 148

India
formula- Field force
Sales Acute & Market sh Key therapies Portfolio concentration MR strength
Company tions % of productivity
(INR m) Chronic (%) (%) (%) (nos.)
total (INRm/MR)
business
AVEN 74 13 49/51 2.5 CVS: 22% Top 10 brands: 53.2% 3000 4.2
Anti-diabetic: 19% 11-25 brands: 25.7%
Pain: 13% 26-50 brands: 12.6%
CNS: 11% Above 50 brands: 8.4%
Respiratory: 10%
SUNP 23 37 44/56 5.4 CNS: 27% Top 10 brands: 20.9% 4000 9.2
CVS: 18% 11-25 brands: 15.0%
GI: 14% 26-50 brands: 14.8%
Anti-diabetic: 12% Above 50 brands: 49.2%
Gynaec: 7%
TRP 28 12 48/52 2.2 CVS: 30% Top 10 brands: 31.1% 3800 3.1
CNS: 17% 11-25 brands: 19.5%
GI: 15% 26-50 brands: 16.2%
Vitamin: 13% Above 50 brands: 33.2%
Anti-infective: 8%
30 March 2015 149

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Thematic | March 2015

Fortified capabilities, sustained growth

US: Cornerstone for growth...……..…….……………………...…………………………………………………………… 11-30

Company section……………………………………………………………………………………………………………………. 57-139

Appendix 1: Glossary of key terms ……………………………………………………….……………………………….. 140

Indian generics: Fortified capabilities, sustained growth

n Focus on complex generic opportunities in US, thrust on enriching domestic portfolio

Unabated earnings acceleration led by improvement of business mix

Growth visibility, higher capital efficiency justify valuation premium

US: Focus on differentiated pipeline to help achieve 20% growth (FY15-17E)

India: Structural driver’s intact, execution the differentiator

RoW: Currency volatility poses headwind, long-term outlook robust

Regulatory risks persist

Exhibit 1: Valuation comparables

Sector to continue commanding premium

Sector outlook bullish; stock selection key to outperformance

Despite five years of outperformance, we believe selective stock-picking is the key to

Forecast 23% EPS CAGR for the sector over FY15-17

PAT (INR b) PAT growth (%) Percentage contribution to growth

Source: Company, MOSL Source: Company, MOSL

Bias towards earnings visibility, execution success

Lupin (LPC): We expect LPC to trade at premium to sector average on strong

Structural growth drivers position Indian players in sweet spot

US to be pivotal to profitable growth

US (33% of sales): Gaining market share with focus on complex generics

n Focus on complex generic products, enabling sustainable high growth with

We believe strong backward integration of Indian players places them favorably to

India (25% of sales): Policy risks behind, growth to accelerate

SUNP, LPC, GNP emerge winners in domestic market

RoW (18% of sales): Fx headwind a near-term challenge, outlook

US: Cornerstone for growth

Exhibit 8: US growth to sustain at 20% CAGR(FY15-17E) for our coverage universe

Coverage US sales (INR b) 502

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Source: Company, MOSL

Exhibit 9: US business (key monitorables)

Rapid expansion in US business over the last five years

27.0 29.0 31.7 34.0 37.8 40.0 43.2 50.0

MOSL, Company, IMS Health MOSL, Company, IMS Health

FY09 FY14 FY17E Taro Acq. FY09-14 (%) FY15-17E (%)

ARBP CDH DRRD GNP LPC SUNP TRP

Growth prospects remain bright

Exhibit 16: Volume penetration of Indian companies is still

Source: MOSL, Company Source: MOSL, Company

Exhibit 18: Key enablers

Focus on complex generics enabling sustainable growth

Complex generics have high entry barriers

Long gestation, higher development costs constrained filings in this area

FY10 FY11 FY12 FY13 FY14

Source: Company, MOSL

Exhibit 20: Exhibit 20: Gearing up for complex generic opportunities

What is complex about complex generics?

n Elongated product development timeline: For instance, we believe it took SUNP

Exhibit 21: Complex generics have low competition

Neuro 93% 2750

Source: MOSL, Company, IMS Health

R&D spends likely to remain elevated

Exhibit 22: Ramp-up of R&D spend reflects focus on complex generics

ARBP CDH DRRD GNP IPCA LPC SUNP TRP