Lupin NEUTRAL. Performance Highlights CMP. `448 Target Price - 2QFY2011 Result Update Pharmaceutical. Investment Period -

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1 2QFY2011 Result Update Pharmaceutical November 8, 2010 Lupin Performance Highlights Y/E March (` cr) 2QFY11 1QFY11 % chg qoq 2QFY10 % chg yoy Net Sales 1,405 1, , Other Income (46.5) Operating Profit Interest (4.1) Net Profit Lupin reported strong 2QFY2011 results driven by the US generic (Lotrel and increase in market share of existing products) and Japan business. However, the launch of Allernaze quite unlikely in the foreseeable future is marginally disappointing. The company expects to register 25-30% growth in top-line and bp yoy expansion in EBITDA margin going forward. We maintain Neutral on the stock. Strong results: For 2QFY2011, Lupin reported net sales of `1,405cr (`1,115cr), which was higher than our estimates driven by the US generic and Japan business. Sales in the advanced markets grew by a stellar 39.7% yoy to `673cr (`482cr). The company reported OPM of 19.2% (14.7%), up by 446bp yoy on the back of favourable product mix. Gross margins came in at 60.9% (55.0%) due to strong growth in the US business (favourable product mix- Suprax, Antara and traction in US generic business). Lupin reported net profit of `214cr (`161cr), up 33.6% driven by top-line growth and OPM expansion. Outlook and Valuation: We expect net sales and earnings to post CAGR of 17.8% and 23.2% to `6,579cr and `23.3 respectively, over FY The stock is currently trading at 24.0x and 19.3x FY2011E and FY2012E earnings, respectively. We maintain Neutral on the stock. Key Financials (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E Net Sales 3,776 4,741 5,645 6,579 % chg Net Profit ,034 % chg EPS (`) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) ; Note: Price as on November 4, 2010 NEUTRAL CMP `448 Target Price - Investment Period - Stock Info Sector Pharmaceutical Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume 19, / Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code 2 20,894 6,282 LUPN.BO LPC@IN Shareholding Pattern (%) Promoters 47.0 MF / Banks / Indian Fls 22.2 FII / NRIs / OCBs 20.8 Indian Public / Others 10.0 Abs. (%) 3m 1yr 3yr Sensex Lupin Sarabjit Kour Nangra Ext: 343 sarabjit@angelbroking.com Sushant Dalmia, CFA Ext: 320 sushant.dalmia@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 2QFY2011 performance Y/E March (` cr) 2QFY11 1QFY11 % chg (qoq) 1QFY10 % chg (yoy) 1HFY2011 1HFY2010 % chg Net Sales 1,405 1, , ,717 2, Other Income (46.5) (30.9) Total Income 1,434 1, , ,769 2, Gross profit Gross margins Operating profit OPM (%) Interest (4.1) (14.8) Dep & Amortisation PBT Provision for Taxation (22.4) Reported Net Profit Less : Exceptional Items MI & Share in Associates 5 6 (16.4) PAT after Exceptional Items EPS (`) Exhibit 2: 2QFY2011 Actual v/s Angel estimates (` cr) Actual Estimates Variation (%) Net Sales 1,405 1, Other Income Operating Profit Interest Tax Net Profit Revenue growth continues to surprise: Lupin reported net sales of `1,405cr (`1,115cr), and was higher than estimated driven by US generic and Japan business. Sales in the advanced markets grew by a stellar 39.7% yoy to `673cr (` 482cr). In the US, while the company s generic business recorded a stellar 53% growth driven by Lotrel and increase in market share in existing products, the branded generic business grew 24% (after one-time accounting adjustment) as the company is now witnessing up-tick in Antara prescriptions. Japan sales grew by a robust 22.2% to `157cr (`128cr). November 8,

3 Exhibit 3: Advanced markets sales trend (` cr) QFY2010 3QFY2010 4QFY2010 1QFY2011 2QFY2011 However, the domestic formulation segment grew below the industry average at 15.9% yoy to `419cr (`363cr). Exhibit 4: Domestic formulation sales trend (` cr) QFY2010 3QFY2010 4QFY2010 1QFY2011 2QFY2011 OPM expands on favourable product mix: The company reported OPM of 19.2% (14.7%), up by 446bp yoy on the back of a favourable product mix. Gross margins came in at 60.9% (55.0%) on due to strong growth in the US business (favourable product mix - Suprax, Antara - and traction in the US generic business). Employee expenses increased 36.3% to `192cr (`141cr) as the company has beefed up its sales force in the domestic and US markets. November 8,

4 Exhibit 5: OPM trend (%) QFY2010 3QFY2010 4QFY2010 1QFY2011 2QFY2011 Net profit ahead of estimates: Lupin reported net profit of `214cr (`161cr), up 33.6% driven by top-line growth and OPM expansion. Further, tax charge at 11% was lower than estimated on the back of higher R&D weighted deduction. Exhibit 6: Net profit trend (` cr) QFY2010 3QFY2010 4QFY2010 1QFY2011 2QFY2011 November 8,

5 Concall takeaways In the US, the company was unable to launch Allernaze in October 2010 due to certain manufacturing issues and currently the time frame of the launch hangs fire. On the other hand, Lupin received approval for the chewable tablet form of Suprax and has made applications for the drops, which is likely to boost its sales further. On the generic front, the company expects the first batch (4-5 products) of OC products to be launched by 3QFY2012. In Japan, post launch of one new product in May 2010, the company now plans to launch additional four new products in November The company expects 25-30% top-line growth and EBITDA margin expansion by bp yoy going forward. Lupin plans to incur capex of ` cr each year over the next three years. The tax rate for FY2011 is expected to be in the range of 12-15%. Lupin continues to scout for acquisitions (areas: US branded space, access to Latam market or to strengthen R&D pipeline). November 8,

6 Recommendation Rationale US market the key driver: The high-margin branded generic business has been the key differentiator for Lupin in the Indian pharma space. The company has further cemented its position in the segment by acquiring rights for Antara. With this, Lupin clocked sales of US $127mn in FY2010, up 72% yoy and higher OPM. The company currently has a sales force of 160 personnel in the US. On the generic turf, Lupin is currently the fifth largest player in the US in terms of prescriptions and 26 out of its 28 products figuring among the top-3 in terms of market share. In the OC segment, Lupin has filed 22 ANDAs and expects approvals to commence from 2HFY2012. As per management, OC could contribute US $100mn to top-line over the next twothree years. As on 1HFY2011, cumulative filings stood at 132, of which 45 have been approved. Lupin plans to launch 6 products in the US in FY2011, and another 80 products over the next three years. Lupin now has 34 Para IV s, of which 11 are FTFs (the company is the exclusive holder in three of them: Glumetza, Fortamet and Cipro DS) addressing a market size of US $8bn. Domestic formulations on strong footing: Lupin continues to make strides in the Indian market. Currently, it ranks No.5 climbing up from being No.11 six years ago. Lupin has been the fastest growing company among the top-5 players in the domestic formulation space, registering strong CAGR of 20.0% over the last three years. Six of its products figure among the top-300 brands in the country. Lupin introduced 42 new products in the Indian market in FY2010 and has a strong field force of 3,700 MRs. First mover advantage in Japan: With Kyowa s acquisition in FY2008, Lupin figures among the few Indian companies with a formidable presence in the world s second largest pharma market, Japan. The Japanese government has introduced a new policy and regulatory reforms to increase the generic drugs contribution from a relatively low 17% in CY2007 to 30% of prescriptions by CY2012. This is estimated to open up a US $10bn opportunity for the global generic players. We expect Lupin to post a CAGR of 20% over FY in the Japanese market and the region is likely to contribute 12% of its FY2012 total sales. Outlook and Valuation Though the unlikely launch of Allernaze in the near future is disappointing, our estimates are unlikely to be impacted, as shortfall in contribution from branded generic segment would be offset by the strong growth in US generic segment. We expect net sales and earnings to log CAGR of 17.8% and 23.2% to `6,579cr and `23.3 over FY , respectively. The stock is currently trading at 24.0x and 19.3x FY2011E and FY2012E earnings, respectively. We maintain Neutral on the stock. November 8,

7 Exhibit 7: Key assumptions FY2011E FY2012E Domestic Sales Growth (%) Export Sales Growth (%) Growth in Employee Expenses (%) R&D as % of Sales Operating Margins (%) Capex (`) Net Debt/Equity (x) Exhibit 8: One-year forward PE 500 (`) Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 20x 15x 10x 5x November 8,

8 Exhibit 9: Recommendation summary Company Reco CMP Tgt Price Upside FY2012E FY10-12E FY2012E (`) (`) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE RoE Alembic Neutral Aurobindo Pharma Neutral 1, Aventis* Neutral 1, Cadila Healthcare Neutral Cipla Neutral Dr Reddy's Neutral 1, Dishman Pharma Under review GSK Pharma* Under review 2, Indoco Remedies Accumulate Ipca labs Neutral Lupin Neutral Orchid Chemicals Neutral Piramal Healthcare Neutral Ranbaxy* Neutral Sun Pharma Neutral 2, ; Note: * December year ending November 8,

9 Profit & Loss Statement (Consolidated) Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Gross sales 2,072 2,773 3,824 4,768 5,708 6,652 Less: Excise duty Net Sales 2,014 2,706 3,776 4,741 5,645 6,579 Other operating income Total operating income 2,153 2,872 3,860 4,871 5,747 6,710 % chg Total Expenditure 1,721 2,271 3,127 3,887 4,578 5,296 Net Raw Materials 932 1,164 1,604 1,969 2,348 2,730 Other Mfg costs , Personnel Other ,118 EBITDA ,067 1,283 % chg (% of Net Sales) Depreciation& Amortisation EBIT ,119 % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT ,004 1,242 % chg Extraordinary Expense/(Inc.) PBT (reported) ,004 1,242 Tax (% of PBT) PAT (reported) ,034.4 Add: Share of earnings of asso Less: Minority interest (MI) Prior period items PAT after MI (reported) ,034 ADJ. PAT ,034 % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (64.3) November 8,

10 Balance Sheet (Consolidated) Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E SOURCES OF FUNDS Equity Share Capital Reserves& Surplus 793 1,198 1,342 2,198 2,832 3,625 Shareholders Funds 873 1,280 1,425 2,287 2,921 3,714 Minority Interest Total Loans 865 1,203 1,223 1,003 1,040 1,204 Deferred Tax Liability Total Liabilities 1,841 2,603 2,779 3,478 4,190 5,186 APPLICATION OF FUNDS Gross Block 953 1,486 1,820 2,456 2,956 3,455 Less: Acc. Depreciation ,041 Net Block 715 1,016 1,201 1,720 2,079 2,415 Capital Work-in-Progress Goodwill Investments Current Assets 1,463 2,044 2,348 2,814 3,460 4,112 Cash Loans & Advances Other 834 1,533 1,992 2,370 2,855 3,339 Current liabilities ,333 1,619 1,912 1,905 Net Current Assets 1,041 1,297 1,015 1,195 1,548 2,208 Mis. Exp. not written off Total Assets 1,841 2,603 2,779 3,478 4,190 5,186 November 8,

11 Cash Flow Statement (Consolidated) Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Profit before tax ,004 1,242 Depreciation (Inc)/Dec in Working Capital (202) (259) (174) (145) (238) (537) Less: Other income Direct taxes paid (77) (109) (107) (96) (136) (168) Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (177) (234) (339) (450) (500) (500) (Inc.)/Dec. in Investments - (0) (18) Other income Cash Flow from Investing (177) (235) (357) (450) (500) (500) Issue of Equity Inc./(Dec.) in loans (46) 163 (25) Dividend Paid (Incl. Tax) (26) (41) (98) (164) (194) (242) Others (14) (237) (135) (187) - - Cash Flow from Financing (83) (112) (253) (234) (156) (79) Inc./(Dec.) in Cash (85) (110) (196) Opening Cash balances Closing Cash balances November 8,

12 Key Ratios Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) November 8,

13 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Lupin 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors. Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) November 8,