Peer Groups CMP Market Cap EPS P/E (x) P/BV(x) Dividend Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

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1 HOLD CMP Target Price NEULAND LABORATORIES LTD Result Update: Q4 FY13 July 8 th, 2013 ISIN: INE794A01010 Index Details Stock Data Sector Pharmaceuticals BSE Code Face Value wk. High / Low (Rs.) /80.10 Volume (2wk. Avg ) Market Cap ( Rs in mn ) Annual Estimated Results (A*: Actual / E*: Estimated) Years FY13A FY14E FY15E Net Sales EBITDA Net Profit EPS P/E Shareholding Pattern (%) 1 Year Comparative Graph SYNOPSIS We initiated coverage of Neuland Laboratories Ltd and set a target price of Rs for Medium term Investment. Neuland Laboratories is a Pharmaceutical company which manufactures APIs (Active Pharmaceutical Ingredients) and provides end-to-end solutions for the pharmaceutical industry for chemistry related services. Neuland Laboratories Ltd has entered into manufacturing collaboration with Tokyobased API Corporation (APIC). The strength of the company lies in its ability to partner with several companies across the globe. Neuland Laboratories achieved a turnover of Rs million for the 4 th quarter of the current year as against Rs millions in the corresponding quarter of the previous year. Neuland Laboratories Ltd has recommended payment of dividend of Rs per share of a face value of Rs. 10 each for the FY Net Sales and PAT of the company are expected to grow at a CAGR of 4% and 98% over 2012 to 2015E respectively. BSE SENSEX NEULAND LABORATORIES LTD Peer Groups CMP Market Cap EPS P/E (x) P/BV(x) Dividend Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%) Neuland Laboratories Ltd Dr Reddys Lab Ltd , Vivimed Labs Ltd Amrutanjan Health Care Ltd

2 Investment Highlights STANDALONE Results updates- Q4 FY13, Neuland Laboratories is a Pharmaceutical company which manufactures APIs (Active Pharmaceutical Ingredients) and provides end-to-end solutions for the pharmaceutical industry for chemistry related services. It reported its financial results for the quarter ended 31 March, Months MAR-13 MAR-12 % Change Net Sales (2.29) PAT (27.99) EPS (48.98) EBITDA (20.44) Neuland Laboratories achieved a turnover of Rs million for the 4 th quarter of the current year as against Rs millions in the corresponding quarter of the previous year. The company has reported an EBITDA of Rs millions and a net profit of Rs million for the Q4 FY13 against Rs million in the corresponding quarter of the previous year. The company has reported an EPS of Rs for the 4 th quarter as against an EPS of Rs in the corresponding quarter of the previous year. Expenditure : Break up of Expenditure Q4 FY13 Rs. In Million Q4 FY12 Consumption of Raw Materials Depreciation Employees Benefit Expenses Other Expenditure Manufacturing Expenses Total Expenditure Total expenditure of the company has decreased from Rs million for fourth quarter of FY12 to Rs million of fourth quarter of FY13 which indicates that the management of the company is working efficiently.

3 Latest updates Neuland Laboratories Ltd has recommended payment of dividend of Rs per share of a face value of Rs. 10 each for the financial year Neuland Laboratories Ltd has entered into manufacturing collaboration with Tokyo-based API Corporation (APIC), a healthcare unit of Mitsubishi Chemical Holdings Group that produces APIs, intermediates and investigational new drugs, along with fine chemicals and reagents. Under the terms of the agreement, API Corporation is making an investment in Neuland s facilities that will provide APIC with dedicated capacity for meeting the needs of its customers. Neuland Laboratories Ltd has entered into an agreement with Concept Public Relation India Limited for providing strategic communication services which include advertising and publicity. Company Profile Neuland is a Hyderabad-based pharmaceutical company which manufactures APIs (Active Pharmaceutical Ingredients) and provides end-to-end solutions for the pharmaceutical industry for chemistry related services. From over two decades company has been at the forefront of facilitating and accelerating drug development and cgmp manufacturing of APIs. The technical and scientific team of the company has been providing reliable solutions and services to the global pharmaceutical industry. The manufacturing facilities for the APIs comply with stringent guidelines & requirements of Good Manufacturing Practices (GMP) and have been inspected by international health and regulatory agencies such as the USFDA, EDQM, BfArM (Germany), KFDA (Korea) and PMDA (Japan). The Company has filed 33 DMFs with the USFDA and over 350 DMFs with various health authorities in Europe, Canada, Japan, Korea and Australia. The biggest strength of the organization lies in its ability to partner with several companies (across the globe) from the early stage and throughout the life cycle of the product, with speed and efficiency to be ahead of its competitors. Business of the Company The company performs its business operations in three different categories they are Manufacturing of APIs, Contract Research and Contract Manufacturing and Clinical Research.

4 Manufacturing of APIs: The company has developed processes for over 50 APIs across various therapeutic categories in the laboratory and scaled them up to plant scale, and selling them to over 700 customers in 80 countries. Since the last decade, they have been selling in the regulated markets. Contract Research & Contract Manufacturing Services These services serve the pharmaceutical industry and provide clients with comprehensive services from drug development through manufacture. Since 2000, Neuland has been offering Contract Research & Contract Manufacturing Services. Neuland s customers include Large MNC's; mid-sized pharmaceutical companies; standalone Research organizations as well as large Generic companies. Currently the company is working with more than 20 companies worldwide. Clinical Research Clinical research services are being developed as a joint venture with US-based Cato Research Inc. to conduct clinical trials in India. Cato Research has some of the best names in the pharmaceutical industry as its clients, and Neuland would be supporting the execution of the clinical trials. Initially, the joint venture company will conduct phase II and III trials in areas such as diabetes, dermatology, oncology and other therapeutic segments. R & D of the Company The R&D works with a strategy of producing high-margin products with a pipeline of new products every year and these are at different stages of development. The R&D and manufacturing teams of the company carry out their work with various cost control and process enhancement initiatives. To further add, the company had strengthened its product-mix with launch of five new products during the year. With the efficiency to produce new products, we can expect that the company profits may increase in the future. Strategy of the Company The company is planning to produce as many as 19 new products in short to medium term pipeline with a strategy to maintain an intense launch calendar and do an efficient life cycle management of the portfolio apart from that the company continues to remain focused on process and efficiency enhancement together with other measures of cost control. A big source of strength for Neuland is also its long-standing customers that prefer Neuland because of its noconflict business model. Apart from achieving significant penetration in APIs in generic space, Neuland has also achieved its critical mass of business from Contract Manufacturing. From this we can expect that Company will be able to achieve profitability in the fiercely competitive business of APIs.

5 Neuland Labs Collaboration with API Corporation Neuland labs strengthens its access to Japanese market with new manufacturing collaboration with Mitsubishi Healthcare Unit APIC that produces APIs, intermediates and investigational new drugs, along with fine chemicals and reagents. Neuland also intends to continue to independently expand its already-sizeable business in Japan, building on its significant customer base for both generic API manufacturing and contract manufacturing of APIs and intermediates. This collaboration with APIC has already been valuable in increasing the understanding of the unique requirements of the Japanese market. Diversification in other Geographies The Company serves some of the largest pharmaceutical companies in the world and export to Europe and North America among others. Quality and Control The company believes in providing the quality that the customer wants. Its continuous improvement of products and process and commitment to quality has led to enhanced attention to detail for products sold in all markets. The manufacturing facilities ensure compliance and care is taken to continuously monitor the cgmp guidelines established by ICH (Q7A) and relevant requirements of FDA, ICH, EMEA and EDQM. Stringent controls are built in to ensure that every single product meets the specification of all pharmacopeias and our customer requirements. Manufacturing Infrastructure Neuland has two world-class API manufacturing units close to the city of Hyderabad, capable of handling complex and hazardous reactions. The manufacturing facilities comply with stringent guidelines & requirements of Good Manufacturing Practices (GMP) and are successfully inspected/approved by international health and regulatory agencies.

6 Unit 1 In keeping with its commitment to provide assured quality, the manufacturing facility at Bonthapally (Unit I), Hyderabad adheres to stringent guidelines & requirements of Good Manufacturing Practices (GMP) and is approved by international health and regulatory agencies such as US FDA, TGA (Australia), PMDA (Japan) and WHO. Unit 2 Unit-II situated at Pashamylaram is about 45 kilometers from Hyderabad airport. The facilities are built in a total area of 36,800 sq.mts and consist of three main production blocks, engineering workshop and four warehouses. There is a High volume facility with dedicated production blocks for range of products available in this unit. Product line includes Fluoroquinlones, Anti-Ulcerants, and Prostaglandins.

7 Financial Highlight STANDALONE (A*- Actual, E* -Estimations & Rs. In Millions) Annual Profit & Loss Statement for the period of 2012 to 2015E Value(Rs.in.mn) FY12A FY13A FY14E FY15E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Reserves Face value EPS Quarterly Profit & Loss Statement for the period of 30 SEP, 2012 to 30 JUNE, 2013E Value(Rs.in.mn) 30-Sep Dec Mar Jun-13E Description 3m 3m 3m 3m Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Face value EPS

8 Ratio Analysis Particulars FY12A FY13A FY14E FY15E EPS (Rs.) EBITDA Margin (%) 10.75% 13.25% 13.32% 13.53% PBT Margin (%) 0.04% 3.34% 3.50% 3.58% PAT Margin (%) 0.45% 2.94% 3.07% 3.14% P/E Ratio (x) ROE (%) 2.75% 13.98% 13.28% 12.37% ROCE (%) 24.15% 26.79% 25.89% 25.08% Debt Equity Ratio EV/EBITDA (x) Book Value (Rs.) P/BV Charts

9 Outlook and Conclusion At the current market price of Rs , the stock P/E ratio is at 5.94 x FY14E and 5.59 x FY15E respectively. Earning per share (EPS) of the company for FY14E and FY15E is seen at Rs and Rs respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 4% and 98% over 2012 to 2015E respectively. On the basis of EV/EBITDA, the stock trades at 1.37 x for FY14E and 1.29 x for FY15E. Price to Book Value of the stock is expected to be at 0.79 x and 0.69 x respectively for FY14E and FY15E. We recommend HOLD in this particular scrip with a target price of Rs for Medium term investment. Industry Overview India is now among the top five pharmaceutical emerging markets. The Indian pharma industry has been growing at a compounded annual growth rate (CAGR) of more than 15 per cent over the last five years and has significant growth opportunities. The Indian pharmaceutical sector is expected to grow five-fold to reach Rs 5 lakh crore (US$ billion) by 2020, as per Dr A J V Prasad, Joint Secretary, Department of Pharmaceuticals (DoP). The industry, particularly, has been the front runner in a wide range of specialties involving complex drugs' manufacture, development, and technology. With the advantage of being a highly organized sector, the number of pharmaceutical companies are increasing their operations in India. The pharmaceutical industry in India is an extremely fragmented market with severe price competition and government price control. The industry meets around 70 per cent of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals, and injectables. Sector Structure/ Market Size The domestic pharmaceutical market is expected to register a strong double-digit growth of per cent in 2013 on back of increasing sales of generic medicines, continued growth in chronic therapies and a greater penetration in rural markets.

10 The cumulative drugs and pharmaceuticals sector has attracted foreign direct investments (FDI) worth US$ 10, million during April 2000 to February 2013, according to the latest data published by Department of Industrial Policy and Promotion (DIPP). Growth Drug sales to retailers in India registered a growth of 7.7 per cent in February 2013, according to a data compiled by market research firm AIOCD AWACS. This was probably due to a high base given the strong performance last year and higher substitution of branded drugs with their unbranded equivalents. Among the listed companies, ZydusCadila topped the list, recording 25.3 per cent growth in February. Other companies that managed to grow faster than the industry include Sun Pharma (14.8 per cent), JB Chemicals (13.7 per cent), IPCA Labs (13 per cent), Lupin (11.6 per cent), Glenmark (10.3 per cent) and Cipla (9 per cent). Exports The Ministry of Commerce has targeted Indian pharma sector exports at US$ 25 billion by 2014 at an annual growth rate of 25 per cent. Last year, the industry registered exports of US$ 13 billion at a growth rate of 30 per cent, as per Dr P V Appaji, Director-General, Pharmaceutical Exports Council of India (Pharmexcil). The Government has also planned a Pharma India brand promotion action plan spanning over a three-year period to give an impetus to generic exports. Of the export markets, Indian pharma will focus on the US market which presents significant opportunities for the next two years for generics, due to patent cliffs and recent changes in healthcare policies, said the India Ratings report on outlook for Indian pharmaceuticals for Generics Generics will continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the pie till 2015, according to McKinsey report 'India Pharma Unlocking the potential of Indian Pharmaceuticals market'. Dr Reddy's Laboratories Ltd has launched Finasteride tablets, a bio-equivalent generic version of Propecia (Finasteride) tablets, in the US market. The tablets are used for treating male pattern hair loss.

11 Diagnostics Outsourcing/ Clinical Trials Indian diagnostics and labs test services, in view of its growth potential, is expected to reach Rs billion (US$ 2.93 billion) by The Indian market for both therapeutic and diagnostic antibodies is expected to grow exponentially in the coming years. Findings from the report by Corporate Catalyst India suggest that more than 60 per cent of the total antibodies market is currently dominated by diagnostic antibodies. According to new RNCOs report, Booming Clinical Trials Market in India, the number of clinical studies by domestic and global players has sharply risen. Besides, availability of skilled manpower and good medical infrastructure will augment the number of clinical trials from 1300 in 2009 to more than 1900 by Further, the report also indicates that, India, over the last decade, has developed significant capabilities in clinical trials, along with certain capabilities in project management and data management. The country is able to provide significant cost savings of per cent for clinical trials. Investments Some of the investments in the sector are: Orchid Chemicals and Pharmaceuticals has entered into a partnership with Europe-based Allecra Therapeutics to develop antibiotics to treat multi-drug resistant bacterial infections Ranbaxy Pharmaceuticals Inc has entered into an in-licensing agreement with Alembic Pharmaceuticals to exclusively market desvenlafaxine base extended release tablets in the US. The drug is used for treatment of major depressive disorder Biocon has entered into an agreement with Mylan for the global development and commercialisation of Biocon's generic insulin analog products (long lasting insulins), which has a global addressable market of US$ 11.5 billion ZydusCadila has received tentative approval for Doxepin Hcl tablets from the US drug authorities. Cadila will launch the drug in 2020 after original drug maker's patent expires Aurobindo Pharma Ltd has received US Food and Drug Administration (USFDA) approval to manufacture and market Tamsulosin Hydrochloride Capsules and Clindamycin Palmitate Hydrochloride for oral solution Sun Pharma has received a tentative approval from the US Food and Drug Administration (USFDA) for a generic version of Januvia. Sun Pharma is expected to launch the drug in 2022.

12 Government Initiatives FDI, up to 100 per cent, under the automatic route, would continue to be permitted for Greenfield investments in the Pharmaceuticals sector. 100 Per cent FDI is also permitted for Brownfield investment (i.e. investments in existing companies), under the Government approval route. According to the Union Budget , investment allowance of 15 per cent on new plant and machinery has been allowed. The allowance is expected to increase investments in new projects while simultaneously providing tax benefit to the industry. The Department of Pharmaceuticals has prepared a 'Pharma Vision 2020' document for making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose, the department provides requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and such other measures. Road Ahead In order to encourage production of drugs by indigenous industries, the 12th Five Year Plan ( ) has recommended capacity building of private sector to meet WHO-GMP standards and other international manufacturing standards. The pharmaceutical companies such as Cipla, Ranbaxy, Dr Reddy's Labs and Lupin might soon be part of the government's ambitious 'Jan Aushadhi' project. In an attempt to commercialise the project, the Government is likely to rope in the private sector to bulk-procure generic drugs from them. There are 117 Jan Aushadhi stores across the country and the plan is to expand to at least 600 in the next two years and 3,000 by Further, India will see the largest number of merger and acquisitions (M&A) in the pharmaceutical and healthcare sector, according to consulting firm Grant Thornton. A survey conducted across 100 companies has revealed that one-fourth of the respondents were optimistic about acquisitions in the pharmaceutical sector. Exchange rate used INR 1= US$ as on May 14, 2013 References: Consolidated FDI Policy, Department of Industrial Policy & Promotion (DIPP), Press Information Bureau (PIB), Media Reports, Pharmaceuticals Export Promotion Council

13 Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates 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. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

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