Pharmaceuticals Value growth ahead PhillipCapital (India) Pvt. Ltd.

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1 Pharmaceuticals Value growth ahead PhillipCapital (India) Pvt. Ltd. 27 November 213 US generics to remain as important driver as earlier The Indian Pharma delivered a stellar growth performance led by robust US generics sales (>4% CAGR, 33% CAGR on constant currency) supported by the patent cliff and Rupee depreciation (18%) over last three years. Going ahead, the low market share of Indian pharma (~1%) in US generics despite dominant share in US fillings (~35% in DMFs and ~3% in ANDAs), improving prescription share and quality fillings will drive future growth. We estimate the US revenue (~ 36% of total sales) of our covered generics peers to see 24% CAGR over FY13 E. Qualitative upgrade in US fillings is the key Post the patent cliff in 212, we believe the enhanced R&D (22% CAGR in R&D spend over last three years by our covered stocks) focus of Indian peers towards differentiated generics and technology driven drugs covering specialty/complex injectables, hormones, inhalers, biosimilars etc would ensure sustainable value growth in US generics. Domestic formulations to maintain resilience We believe the adverse impact of new pricing policy on domestic formulations is momentary and would temporarily depress the growth momentum in FY14. However, we expect domestic formulations to show resilience Q4FY14 onwards and deliver an annual growth momentum of 18% which will be led by a continued trend of new product introductions, enhanced focus towards chronic portfolio and therapeutic focused market. Opportunities in pharma CRAMS seems robust for Indian Pharma As per the study of Italy based Chemical Pharmaceutical Generic Association (CPA), the global pharma out sourcing to grow at 14% CAGR over FY12 17 to $136bn and India to see maximum ramp up at >35% CAGR to $29bn (21% market share) in 217 from $6 bn(8% Market share) in 212. Divis, Dr Reddy and Biocon with a strong clientele are well placed to grab the benefits of this huge opportunity ahead. Premium valuations for Indian Pharma to sustain led by value growth ahead Indian Pharma (BSE Healthcare index) currently trades at its historic average 1 year PE multiple of ~2x and ~4% premium to benchmark index. We believe the sector will continue to maintain its premium valuations led by continued visibility for healthy formulation exports growth, robust free cash flow generation and qualitative upgrade in R&D capabilities for product/service offerings. Mid caps to outperform Sector leaders While we maintain our optimism on Indian Pharma Leaders backed by their expanded qualitative drug pipeline and balance sheet strength, multiple earning surprises in the recent past have stretched their valuations. Hence, we prefer Midcaps delivering steady progress in operational as well as financial performance. Our sector top picks are Dr Reddy (+16%), Aurobindo Pharma (+55%) and Biocon (+28%). Other buy recommendations are Glenmark (+27%) and Divs (2%). Companies Covered Aurobindo Pharma CMP Reco Target Price Biocon CMP Reco Target Price Cadila Healthcare CMP Reco Target Price Divi s Lab CMP Reco Target Price Dr Reddy CMP Reco Target Price Glenmark Pharma CMP Reco Target Price IPCA Lab CMP Reco Target Price Lupin CMP Reco Target Price Sun Pharma CMP Reco Target Price Report priced as of 26 November 213 Surya Patra ( ) spatra@phillipcapital.in Rs293 BUY Rs455 Rs372 BUY Rs475 Rs742 NEUTRAL Rs761 Rs1163 BUY Rs139 Rs247 BUY Rs28 Rs54 BUY Rs641 Rs681 NEUTRAL Rs752 Rs864 NEUTRAL Rs923 Rs573 NEUTRAL Rs65 Please refer to Disclosures and Disclaimers at the end of the Research Report.

2 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Table of Contents US generics to remain as important driver as earlier 3 Strategic Shift in Fillings to improve the quality of income 5 US patent cliff is behind us but peak patent expiry opportunities in advanced markets yet to follow 7 Domestic formulations to maintain its resilience 8 Emerging markets Offers growth visibility albeit diverse complexities 1 CRAMS offers strong growth visibility 12 Indian Pharma trades at historic average valuation multiples 14 Companies Section Aurobindo Pharma 19 Biocon 24 Cadila 3 Divi s Lab 35 Dr Reddy s Lab 39 Glenmark 44 IPCA 49 Lupin 54 Sun Pharma 6 2 of 66

3 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR US Generics to remain key growth driver as earlier Indian Pharma delivered a stellar growth performance led by robust US generics sales supported by the patent cliff over last three years. Additionally, the depreciating Rupee against US Dollar has further facilitated the growth momentum. In fact, our coverage stocks delivered a compounded annual growth of 4% over FY11 FY13 to Rs 188bn. Patent cliff coupled with Rupee depreciation strengthened Indian Pharma performance Gross US Generic Sales of our covered stocks (Rs Bn) 4% % Growth in US Generic Sales in $ mn % Growth in US Generic Sales in Rs mn % of Re depreciation FY29 FY21 FY211 FY212 FY213 1 FY21 FY211 FY212 FY213 Source: PhillipCapital India Research US generics to remain a key growth driver despite Patent cliff: US Patent cliff during 212 has certainly overpowered the growth of Indian Pharma in over last three years and there may be moderation in the patent expiry cycle. However, the relatively low share of Indian companies in the US generics market implies good long term potential. Patent Expiry trend of blockbuster drugs in US 4 35 Gross value of patents expiries ($ bn) Linear (Gross value of patents expiries 35 ($ bn) ) Source: Company, USFDA Despite having a dominant share in US DMFs fillings (~35%) and ANDA fillings (~3%) and most cost effective generic offering, the generic market share of Indian pharma is still low at ~1%. 3 of 66

4 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Steady rising dominance of Indian Pharma in US generics space both in terms of drug fillings and prescription market share Cumulative Prescription count by top 8 Indian peers in US (M n Nos) Share of top 8 Indian Peers in total Rx in US Total ANDA Approvals (Nos.) ANDA approvals for Indian peers(nos.) % Share of India (RHS) YTD Source: USFDA, IMS Health, PhillipCapital India Research Going ahead, we expect the strong ANDA pipeline as well as enhanced focus towards development and filling of niche/complex/differentiated generics by leading Indian pharma peers and increased demand for cost effective generics (forte of Indian peers) will drive increased generic market share and ultimate growth for Indian Pharma. Positioning of US generic players in terms of pending ANDA pipeline Mylan Actavis Sandoz Teva Sun Aurobindo Cadila Lupin Par Dr Reddy Glenmark Impax Apotex Source: Hikma presentation, PhillipCapital India Research Strong Pipeline of ANDAs by Indian Peers Pending ANDA fillings Total ANDA Pending Para IV Target ANDA p.a. Remarks Sun Pharma Majority of future pipeline is differentiated and technology driven drugs Dr Reddy % of future generic is differentiated Lupin ~ Majority of current and future pipeline is niche generics Cadila ~2% of the pending fillings are differentiated Glenmark Key focus being limited completion drugs in hormones, derma, Oncology Aurobindo % of pending ANDAs are injectables and over 5% of future filling would be injectables covering opthalmics, oncology and penems IPCA Complete backward integration & optimal process development is key 4 of 66

5 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Strategic Shift in Fillings to improve the quality of income Seeing the moderation in the number of big ticket patent expiry opportunities in US, Indian peers has aptly shifted their ANDA filling focus towards differentiated generics including complex drugs to develop/manufacture, limited competition drugs, drugs with improved delivery systems or led by better technology platforms, etc. In our view such uplift in product development and filling will drive the value growth for Indian pharma in medium to longer term. We believe that the enhanced investments in R&D by Indian pharma peers over the last three years to build a differentiated and valuable product pipeline will pay rich dividends in the form of high revenue visibility for the next 2 3 years at least.. Thanks to the multiple exclusive supply opportunities led by patent expiry of many blockbuster drugs in US during last few years, which helped Indian pharma to enhance its R&D focus and spend (up at CAGR of 22% during last 3 year period). Aggressive scale up in R&D spend enlightens the qualitative growth of Indian Pharma in US generics Figures in Rs Mn FY13 % of Sales R&D spend 3yr CAGR Sun Pharma % 44% Dr Reddy's Lab % % Lupin % 23% Ranbaxy 449 4% 3% Cadila % 31% Glenmark % 24% Aurobindo Pharma 262 4% 27% IPCA Lab 17 4% 21% Biocon 186 1% 27% Total % R&D Spend Rs Mn Sun Pharma Lupin Cadila Aurobindo Pharma Biocon FY9 FY1 FY11 FY12 FY13 While Dr Reddy and Lupin continued to maintain their larger focus towards developing limited competition product basket and higher R&D spend, Sun Pharma saw rapid stride in its R&D initiatives to develop various complex technology plat forms over last three year. Additionally, mid size players like Cadila, Aurobindo & Biocon also scaled up their R&D efforts meaningfully. Improving product development capability of Indian Pharma Dr Reddy's Lab Ranbaxy Glenmark IPCA Lab Biologics Biocon, Dr Reddy(DRL) Respiratory/Insulin analogs Biocon, Cipla, Sun Pharma, Cadila Delivery System Complexity Complex injectables DRL, Sun Pharma, Cadila Dermatologicals Sun Pharma, DRL, Ranbaxy Injectables and ophthalmics Aurobindo, DRL, Sun, Cadila Modified release dosage Delivery system complexity DRL, Sun Pharma High potency Sun, DRL Traditional generics ALL 5 of 66

6 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Implementation of GDUFA in US could result in volume growth; Could lead to intense price competition for plain vanilla generics: US Food and Drug Administration has implemented the Generic Drug User Fee Act (GDUFA) On Oct. 1, 212 with an objective of clearing the clearing the backlog of pending ANDA/drug approvals of over 27 ANDAs and expediting the approval (both drug and facility) timeline. Steady rising backlog of pending ANDAs extended ANDA Approval timeline beyond 3 months No of ANDAs Months Source: USFDA The set goal of GDUFA relating to ANDA backlog clearing Period of filling No of ANDAs Goal Backlog till 1st Oct 212 ~27 9% (i.e.~ 234)of backlog to be reviewed & approved by end of FY17 Filling during FY Filling during FY Focus is to expedite review of 1) Paragraph IV filed on the day 1 of NCE exclusivity, 2) Shortage based drugs applications Filling during FY 163 6% (i.e. ~6) to be reviewed & approved in months period of submission Filling during FY % (i.e. ~75) to be reviewed & approved in months period of submission Filling during FY % (i.e.~85) to be reviewed & approved in 1 months period of submission Source: USFDA As per the set GDUFA target, USFDA to clear 9% of pending ANDAs as of 1 st Oct 212 (i.e about 27) and a majority of ANDA fillings over FY13 17 will be reviewed and approved by FY17. This indicates over 5 ANDAs will be reviewed and approved over a period of 5 years (i.e FY13 to FY17), which implys about over 1 ANDAs per annum compared to about 45 annual ANDA approval over last five years. Thus the doubling rate of ANDA approvals could result in a substantial volume growth in plain vanilla US generics as we believe a major chunk of current ANDA back log is plain vanilla. This could result in more price competition. However, we believe the GDUFA implementation will favour Indian Pharma on two grounds like 1) it will reduce approval timeline of recently filled complex and limited competition drugs basket and 2) helps Indian pharma to grab better market share due to its cost competency and dominance in the share of fillings. Finally, We estimate our covered stocks would maintain a steady constant currency growth of 18% over FY13 led by strong ANDA pipeline coupled with rising share of complex and differentiated generics despite a significantly high base. More specifically, we believe Sun Pharma, Dr Reddy, Lupin and Aurobindo would outpace the industry growth. 6 of 66

7 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR US patent cliff is behind us but peak patent expiry opportunities in advanced markets yet to follow US generics market witnessed the peak value of patent expiry worth $35bn in 212, since when the genericisation opportunities have moderated. However, as per Evaluate Pharma the peak opportunity of patent expiry in various advanced markets will be observed in 2, which enlightens the generic opportunities for Indian pharma (led by their better in the near medium term. Patent expiration opportunities worth US$ 168bn over the next 3 4 years strengthens earning upside for key players Likely peak cumulative generic opportunities in global markets during 2 sustains formulation exports growth visibility for Indian Pharma 7 6 Gross value of global pharma patents expiries ($ bn) Linear (Gross value of global pharma patents expiries ($ bn) ) Source: Evaluate Pharma 7 of 66

8 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Domestic formulations to remain resilient Domestic formulation market with annual sales of Rs 72bn in FY13 has been ranked third in terms of volume and tenth in terms of value, globally. It maintained a steady growth at a CAGR of ~12.5% during the past five years despite the sluggish economic conditions. In fact, the branded focus of domestic formulation market has helped it deliver steady profitable growth over last five years despite the fact of highly fragmented nature and intense price competition in recent past. Domestic formulations growth v/s Indian GDP growth Domestic formulation growth % Indian GDP growth % FY7 FY8 FY9 FY1 FY11 FY12 FY13 Source: RBI, Industry So far as performance and positioning of Indian Peers in domestic formulation are concerned, Cipla is the undisputed leader but Sun Pharma is the most profitable leader of the space led by its leadership in chronic therapies (57%) and better than industry growth. However, Lupin and Glenmark delivered best growth over last three years led by their enhanced and therapy focused marketing in domestic formulation space. Lupin, Glenmark and Sun outpaced Indian Pharma growth Company (Fig. In Rs mn) Domestic formulation sales FY13 % of total Sales Chronic therapy share Last 3 yr CAGR Lupin Glenmark Sun Pharma Cadila Domestic Pharma Industry 14.3 IPCA Cipla Dr Reddy Ranbaxy Of Late, the uncertainty around the implementation of new pricing policy at the fag end of FY13 and trade issues related to margins and price reduction after the implementation in early FY14 has certainly moderated the domestic formulation growth. Moreover, we believe the full impact of trade issues (destocking of incrementally added product basket into NELM) on domestic formulations is yet to be seen in Q3FY14. The adverse impact of new NELM introduction on the profitability of various companies are displayed below. 8 of 66

9 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Impact of new pricing policy on Indian Pharma Company Domestic formulation sales FY13 Price impact % Absolute revenue loss (Rs mn) Impact on FY14 Margin% Cipla bps Cadila bps Lupin bps IPCA bps Dr Reddy bps Sun Pharma bps Glenmark bps In our view, Cipla and Cadila due to their relatively larger share of revenue from domestic formulation and that too from acute therapies would see maximum adverse impact on their profitability. Given the fact and relatively slow growth in acute therapy drug basket, we believe Cipla and Cadila might underperform the domestic formulation industry growth in near future. Chronic therapies outpace acute therapies in growth Growth (%) Diabetes Cardiac Neuropathy Derma Gynaecology Industry Gastro Anti invective Pain Mgt. Respiratory Vitamins Source: Sun Pharma AR Sun leads in domestic pharma in terms of prescription share Source: Sun Pharma AR However, we believe the above mentioned adverse impact of new pricing policy is just a momentary for just FY14 and would depress the growth momentum of Indian Pharma in FY14. More specifically, we expect domestic formulations to show its resilience Q4FY14 onwards and deliver an annual growth momentum of 18% which will be led by continued trend of new product introductions, enhanced focus towards chronic portfolio, therapeutic focused market. Also, the Indian macro factors like 1) rising healthcare spend, 2) rising income levels, 3) rapid urbanisation and 4) steady progressing health insurance penetration would maintain the continued growth momentum. 9 of 66

10 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Emerging markets Offers growth visibility albeit diverse complexities While the developed pharma markets seem matured led by series of patent expires and generic penetration reaching almost peak beyond 75%, the developing markets emerged as the key growth engine for global pharma. As per IMS Health, the pharmerging economies (including Brazil, Russia, China, India, Mexico and South Africa) are expected to deliver highest growth at a CAGR of 12 % to reach US$ billion in 216 from US$ billion in 211. The market size is expected to almost double during In fact, about 75% of incremental growth in global pharma during to be driven by emerging markets. The key growth drivers for these markets are rising income levels, increased access to medicines, high out of pocket spending and government focus on generics. Also the branded generic nature of the market ensures better value growth. Given the fact of rapid progress in the emerging markets, Indian pharma peers led by their strong cost advantage, better understanding of these markets( due to similarity to Indian market), rapid progress in product registrations are well placed to exploit the highest growth in the emerging markets. Selective Indian peers like Ranbaxy, Dr Reddy, Cipla, Glenmark etc have already achieved meaningful foothold in various emerging markets including Russia, South Africa, Latin American markets. Typically Out of pocket expenditure in the emerging markets is high in comparison to developed markets 12% General government expenditure Other private health expenditure Out of pocket 1% 8% 6% 4% 2% % 43% 45% 46% 55% 65% 72% 11% 16% 13% 6% 43% 46% 39% 32% 29% % 11% 13% APAC LatAm ME & Africa Europe EM USA EUS Source: IMS Health Emerging markets offer highest growth visibility Economy CAGR (%) Pharmerging China Tier Brazil Russia India Tier l Source: IMS Health 1 of 66

11 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR While there is strong growth visibility for emerging markets, the varying business dynamics of different markets are the key challenge for pharma peers. Though, the local conditions vary by country, the core challenges remain broadly comparable: understanding stakeholders and their changing needs political, economic, and intellectual property risk immature regulatory frameworks launching new products finding the right partners/distributors Hence, in order to tackle the unknown challenges and to capture the maximum growth opportunity in the emerging markets most of Indian peers have adopted partnership model. The key emerging market alliances by India pharma peers are Dr Reddy Glaxo, Sun Pharma Merck, Cipla Dr Reddy, Cadila Healthcare Abbott etc. Going ahead, we expect Indian pharma peers led by their cost competitiveness, rapid drug registrations and alliances to outpace industry growth and grow in the range on 18 2% in near future. 11 of 66

12 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR CRAMS offers strong growth visibility Custom synthesis (mainly focused on new, branded APIs) Toll manufacturing Figures in $bn Contract Manufacturing of APIs/Intmd. Packaging/labeling and other services Development of Formulations Contract Manufacturing of Formulations 3. Contract Research (CRO) Contract Manufacturing (CMO) % CAGR Total Pharma CRAMS Year % CAGR India to see maximum ramp up at >35% CAGR to $29 bn (21% market share) in 217 from $6 bn(8% Market share) in 212. Notes: Figures in parentheses indicates % share Figures in $bn Source: Chemical Pharmaceutical Generic Association (CPA), Italy, India share US' Share China' Share Others % CAGR While pharma outsourcing (on the backdrop of mounting R&D cost pressure, declining productivity on the drug discovery front, impending patent expirations, escalating pricing pressures and the ultimate falling profitability) has become the inevitable option for global pharma innovators, India (led by driven by its intrinsic competitive advantages like low cost manufacturing, enough pool of research talent and adequate research capability) has already proved to be an one of the most preferred outsourcing destinations for pharma outsourcing. Despite the given fact, the share of Indina pharma in global pharma outsourcing remained mere at $6bn (i.e.8%) in 212, primarily due to the larger focus on contract manufacturing. 12 of 66

13 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR However, with the improved focus on building R&D capability, enhanced and quality service offerings at competitive cost, Indian Pharma is well placed to grab a meaningful chunk of huge global pharma outsourcing opportunity. As per the study of Italy based Chemical Pharmaceutical Generic Association (CPA), the global pharma out sourcing to grow at 14% CAGR over FY12 17 to $136bn and India to see maximum ramp up at >35% CAGR to $29 bn (21% market share) in 217 from $6 bn(8% Market share) in 212. Given the fact, we believe Indian peers like Divi s Lab, Dr Reddy, Biocon etc led by their research capability and strong clientele base are well positioned to make the maximum out of the huge foreseeable pharma outsourcing opportunity. Additionally, better execution track record by Indian pharma peers in contract manufacturing and recent quality concerns around Chinese (key competitor of Indian Pharma) pharma operation coupled with relatively higher service charges to lead Indian pharma outpace China. 13 of 66

14 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Indian Pharma trades at historic average valuation multiples Indian Pharma represented by BSE Healthcare Index saw its dream run and has grossly outperformed the benchmark index SENSEX over last three year period. It has gradually raised its premium valuation to about 4% currently over SENSEX during the said period. In our view, 1) strong visibility of formulation exports especially to US led by patent cliff resulting in multiple exclusive supply opportunities, 2) powering free cashflow generation and 3) investment favour due to defensive nature helped Indian pharma to outbid the benchmark index. Additionally, the favouring Rupee depreciation against US Dollar further powered the earnings growth as the exports account over 5% of the gross Indian Pharma revenue. Indian Pharma currently trades at historic average PE BSE Healthcare index trades at over 4% premium to SENSEX 35 HC Index 1yr fwd PE Historic Avg PE BSE_SENSEX BSE HC Index Apr 8 Jul 8 Oct 8 Jan 9 Source: BSE, PhillipCapital India Research Apr 9 Jul 9 Oct 9 Jan 1 Apr 1 Jul 1 Oct 1 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan x Apr 13 Jul 13 Oct Jan 8 Jan 9 Jan 1 Jan 11 Jan 12 Jan 13 At the current level the pharma index is trading at its historic average 1 year PE multiple of ~2x. We believe the sector should command its premium valuation multiples led by continued visibility for healthy formulation exports growth, robust free cash flow generation and enhanced build up in R&D capability over last couple of years. Thanks to the multiple exclusive supply opportunities led by patent expiry of many blockbuster drugs in US during last few years, which helped Indian pharma to enhance its R&D focus and spend. 14 of 66

15 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR Strong operational performance backed by rapid exports led by patent cliff and resilient domestic formulations enhanced the investment interest in the sector Cipla Lupin Sun Pharma Dr Reddy Ranbaxy Total Phartma FIIs' Investment (Rs Bn) DIIs' Investment (Rs Bn) 892 Weightage in Nifty (%) FY8 FY9 FY1 FY11 FY12 FY13 Jan 8 Jan 9 Jan 1 Jan 11 Jan 12 Jan 13 Source: BSE, PhillipCapital India Research Series of patent expiry of block buster oral generics in advanced markets specifically in US has helped almost all participants in US generics to deliver strong growth in last few years. Now with the limited available generic opportunities and rising competition/complexity, we believe the era of me too fillings and easy generics is over. Going ahead, we expect the quality parameters in terms of 1) R&D capability to develop and file complex/differentiated drugs, 2) quality standards of facility & processes, 3) R&D productivity, 4) positioning in the high growth emerging markets etc would assign premium or discount to company valuations. Based on the said parameters we believe Indian leaders like Sun Pharma, Dr Reddy and Lupin have already positioned themselves well in global generic space. However, the valuations of Sun Pharma (led by unique limited period opportunity of Doxil and Doxycycline shortage in US and multiple price hike in Taro products) and Lupin (led by strongest visible pipeline for US generics for 214 ) have already got stretched and offer limited upside. Hence, considering higher visible upside potential amongst Indian Pharma leaders and likely positive surprises from its complex drug fillings in US, we initiate our coverage on Dr Reddy with a BUY rating and target price of Rs 28 Dr Reddy, Aurobindo Pharma and Biocon offers maximum valuation gap in against their respective comparable peers EV/EBITDA (x) Cadila Glenmark Lupin Dr Reddy IPCA Sun Pharma Divis Lab Biocon Aurobindo Pharma EBITDA CAGR FY13 % P/E (X) FYE Cadila Glenmark Dr Reddy Sun Pharma Lupin IPCA Divis Lab Biocon 1 Aurobindo Pharma EPS CAGR FY13 % Note: Green DOTS suggest our BUY Recommendation. Source: PhillipCapital India Research Estimates of 66

16 27 November 213 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR On the other hand, we believe steady progress in operational as well financial performance of Midcaps to outperform industry leaders. Specifically, Aurobindo pharma (led by its rapid progress into specialty/complex injectables and best ever execution in US generics) and Biocon (supported by its strongest biosimilar pipeline, enhanced prospects in core business and healthy balance sheet) are expected to deliver relatively better growth amongst it midcap peers. Hence our top pick amongst midcap pharma are Aurobindo Pharma (target price of Rs 455, 55% upside) and Biocon (target price of Rs 475, 28% upside). We also remain optimist on Glenmark pharma (led by its quality US fillings, healthy domestic formulation and monetization potential of its discovery research pipeline) and initiate BUY with target price of Rs 641, 27% upside. On the global pharma outsourcing space, Divi s Lab maintains its leadership position led by its superior chemistry skill and successful track record of project execution for global innovator. Considering the improving outlook for global pharma outsourcing (PCRAMS) and anticipated upsurge in the share (from 8% in CY212 to 21% in CY17E) of India, we believe Divis with its timely facility expansion is well placed to deliver stronger earning growth. Hence, we initiate our coverage on Divi s Lab with a BUY rating and target price of Rs 139, an upside of 2%. Comparative Valuation Mcap EBITDA CAGR EPS CAGR EPS (Rs) P/E (x) EV?EBITDA (X) ROE (%) Companies (Rs bn) FY13 % FY13 % FY14E FYE FY14E FYE FY14E FYE FY14E FYE Aurobindo Pharma Biocon Cadila Divis Lab Dr Reddy Glenmark IPCA Lupin Sun Pharma Source: PhillipCapital India Research Recommendation Summary CMP Target Price Upside Recommendation Companies (Rs) (Rs) (%) Aurobindo Pharma BUY Biocon BUY Cadila NEUTRAL Divis Lab 1, BUY Dr Reddy 2,47 2,8 16 BUY Glenmark BUY IPCA NEUTRAL Lupin NEUTRAL Sun Pharma NEUTRAL Source: PhillipCapital India Research 16 of 66

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19 Aurobindo Pharma Gaining ground in US generics PhillipCapital (India) Pvt. Ltd. PHARMACEUTICALS: Initiating Coverage 27 November 213 Best ever execution powered US generics Strong flow of ANDA approvals (almost about 8 1 per quarter over last few quarters) and improved execution helped Aurobindo to report strong 3% constant currency growth (48% on the Rupee terms) in its US sales to $32mn (5% of its consolidated formulations sales) during FY13. The US execution was primarily led by the induction Mr Ronald Quadrel (with >35 years of exp. in generic injectable business of Baxter, GSK, Roche, etc.) to look after US hospital/institutional business and Mr Bob Cunard (with >2 years experience in Teva, Mylan, etc.) to manage oral generics. US generics at inflection point; Rapid injectable fillings is the key Despite being a late entrant to the injectables, Aurobindo has shown its aggression in injectables by filling ~4 ANDAs (just ~7 are in market) in last two years. The company expects to file cumulative 1 injectable (including complex injectables covering Opthalmic, Penems and Oncology) ANDAs by FY16. Given its rapid expanding injectable portfolio and continued shortage of basket of injectables, we expect Aurobindo to report 34% CAGR in its US generics sales over FY13 e to Rs 31.48bn. Aurobindo s first set of shortage based injectables with cumulative size of >$8mn should drive near term growth. Improving product mix and rising asset utilization to result in value growth Aurobindo s enhanced focus towards high value NPNCs (accounting for >7% DMF filings and ANDA approvals) and improving asset utilization (of its injectable Units and likely ramp up in Aurolife facility) would drive earnings growth for the company in the near future. We estimate Aurobindo s EBITDA margin will expand 47bps over FY13 E to 19.9% in FYE, resulting in >36% and >47% CAGR in operating profit and net profit during FY13 E to to Rs 16.4bn and Rs 9.4bn, respectively. Key concerns addressed well With the improving execution in US generics and free cash flow turning positive in FY14, Aurobindo has addressed well the key concerns of 1) higher debt and 2) sustainability of long term growth. Aurobindo has already repaid debt worth $ 64mn (out of gross ~$ 6mn) in H1FY4 and expects to payback $mn more in H2FY14. The management guides for a focused debt reduction in subsequent period. We estimate the D/E to improve from 1.3x in FY13 to.8x in FY. Also, over long term, we expect sustained growth on the back of 1) Aurobindo s investment into complex injectables including oncology drugs, steroids, penems, peptides, etc, 2) ramp up in controlled substance and OTC operation, and 3) final approval of multiple ARVs in the advanced markets. Re rating led by strengthening earnings visibility; Initiate BUY with TP 455/share At CMP of Rs 293, the company trades at 9x FYE EPS and 7x FYE EV/EBITDA, which are ~4% and ~3% discount to its comparable peers averages. Considering the bullish growth outlook, free cash flows turning positive and guided reduction of debt, we expect steady re rating for the stock to 14x (from current 12x) and value at Rs455/share. We believe Aurobindo could be the sector outperformer in the near term. We initiate our BUY rating on Aurobindo Pharma with a Target Price of Rs 455, implying an upside of 55%. BUY ARBP IN CMP RS 293 TARGET RS 455 (+55%) Company Data O/S SHARES (MN) : 291 MARKET CAP (RSBN) : 85 MARKET CAP (USDBN) : WK HI/LO (RS) : 294 / 347 LIQUIDITY 3M (USDMN) : 1.1 FACE VALUE (RS) : 1 Share Holding Pattern, % PROMOTERS : 54.8 FII / NRI : 2.1 FI / MF : 11.6 NON PROMOTER CORP. HOLDINGS : 3.8 PUBLIC & OTHERS : 9.6 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 1 Jun 11 Aug 12 Oct 13 Aurobindo BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FYE Net Sales 58,553 71,3 82,551 EBIDTA 8,891 13,681 16,428 Net Profit 4,3 7,677 9,428 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: Phillip Capital India Research Surya Patra ( ) spatra@phillipcapital.in 19 of 66

20 27 November 213 / INDIA EQUITY RESEARCH / AUROBINDO INITIATING Best ever execution in US generics operation Robust growth in US to continue US Sales ($ mn) US Sales/ANDA ($ Mn) (rhs) FY8 FY9 FY1 FY11 FY12 FY13 H1FY US Sales (Rs bn) % Total sales (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY One of the strongest prescription performance in US Robust ANDA Pipeline Aurobindo's US Prescription Count (Rx mn) Aurobindo's US Prescription Share Final Approval Tentative Approval Pending Approval YTD Sep FY8 FY9 FY1 FY11 FY12 FY13 FY14 Source: IMS Health, Bloomberg, PhillipCapital India Research Steady margin expansion to lead healthy value growth EBITDA (Rs bn) EBITDA Margin% (rhs) FY9 FY1 FY11 FY12 FY13 FY14E FYE 2 of 66

21 27 November 213 / INDIA EQUITY RESEARCH / AUROBINDO INITIATING Revenue matrix of Aurobindo Pharma (Rs bn) FY211 FY212 FY213E FY214E FY2E US Sales ARV Formulation Europe & RoW Total Formulations % growth % of sales SSP Cephalosporins ARVs & Others Total APIs % growth % of sales Dossier sales Gross Sales % growth Robust growth in earnings over FY13 E Total Income(Rs Bn) % growth (rhs) PAT(Rs bn) % growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14E FYE FY9 FY1 FY11 FY12 FY13 FY14E FYE 8 Free positive cash flow deleverages balance sheet Rapid progress in return ratios Free Cash Flow (Rs bn) Net Debt/Equity (rhs) ROE % ROCE % FY1 FY11 FY12 FY13E FY14E FYE 1 FY1 FY11 FY12 FY13E FY14E FYE 21 of 66

22 27 November 213 / INDIA EQUITY RESEARCH / AUROBINDO INITIATING 1 yr forward band 7 6 Rs P/E 2x Rs mn EV/EBITDA 16x 5 x 2 12x x 12 8x 2 1 5x 8 4 4x Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Source: Bloomberg, PhillipCapital India Research 22 of 66

23 27 November 213 / INDIA EQUITY RESEARCH / AUROBINDO INITIATING Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FYE Net sales 46,274 58,553 71,3 82,551 Growth, % Total income 46,274 58,553 71,3 82,551 Raw material expenses,197 29,98 35,983 41,276 Employee expenses 5,357 6,633 7,624 8,75 Other Operating expenses 9,618 13,122 13,966 16,98 EBITDA (Core) 6,12 8,891 13,681 16,428 Growth, % (36.7) Margin, % Depreciation 2,5 2,487 2,898 3,139 EBIT 4,97 6,43 1,783 13,289 Growth, % (48.3) Margin, % Interest paid 1,28 1,313 1,458 1,519 Other Non Operating Income Non recurring Items 3,212 Pre tax profit 2,129 3,741 9,69 12,1 Tax provided ,922 2,662 Profit after tax 1,241 2,914 7,687 9,438 Others (Minorities, Associates) Net Profit 1,234 2,939 7,677 9,428 Growth, % (55.8) Net Profit (adjusted) 2,659 4,3 7,677 9,428 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FYE Cash & bank 79 2,85 1,43 3,533 Debtors 12,4,97 19,397 22,472 Inventory,456 19,236 23,553 27,59 Loans & advances 4,23 5,749 6,413 7,43 Other current assets Total current assets 33,536 43,982 51,58 61,236 Investments Gross fixed assets 3,863 37,635 4,764 44,487 Less: Depreciation 8,916 11,246 14,144 17,283 Add: Capital WIP 6,454 2,185 2,5 2, Net fixed assets 28,41 28,574 29,12 29,24 Total assets 62,376 72,778 8,851 9,663 Current liabilities 7,88 11,576 13,9 14,314 Total current liabilities 7,88 11,576 13,9 14,314 Non current liabilities 3,998 35,35 34,597 34,438 Total liabilities 38,878 46,611 47,687 48,752 Paid up capital Reserves & surplus 23,16,767 32,764 41,511 Shareholders equity 23,498 26,167 33,164 41,911 Total equity & liabilities 62,376 72,778 8,851 9,663 Estimates Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FYE Pre tax profit 2,129 3,741 9,69 12,1 Depreciation 2,5 2,487 2,898 3,139 Chg in working capital 1,288 5,374 6,694 6,374 Total tax paid ,922 2,662 Cash flow from operating activities 1, ,891 6,23 Capital expenditure 6,445 2,661 3,444 3,223 Chg in investments 163 Cash flow from investing activities 6,446 2,498 3,444 3,223 Free cash flow 7,469 2, ,97 Debt raised/(repaid) 6,817 3, Dividend (incl. tax) Cash flow from financing activities 7,16 3, 1, Net chg in cash 1,9 1, ,13 Valuation Ratios & Per Share Data FY12 FY13 FY14E FYE Per Share data EPS (INR) Growth, % (55.8) Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) (6.8) DPS (INR) Return ratios Return on assets (%) (1.) Return on equity (%) (5.3) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Receivable days Inventory days Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) Valuation PER (x) PEG (x) y o y growth (.6) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 66

24 Biocon Crowned with biologics PhillipCapital (India) Pvt. Ltd. PHARMACEUTICALS: Initiating Coverage 27 November 213 Enhanced growth momentum in core Biopharma Biocon s core Biopharma business (62% of total sales) including statins, insulin, immunosuppressant, Orlistat etc has already delivered strong growth of ~2% in FY13 (v/s historical growth trend of ~12 %) to Rs 14.9bn. Going forward, 1) the ramp up in insulin in emerging markets (led by capacity expansion effective from mid Q2FY14 and deeper geographic penetration into 45 emerging markets) and 2) continued limited competition in Tacrolimus coupled with likely launch of Sirolimus (company already has multiple supply tie ups) in Q3FY14 would drive steady growth of >18% CAGR over FY13, despite the flattening sales of statins. Herceptin launch could drive value growth in branded sales Biocon s strategic focus on complex formulations, brand positioning and very selective product portfolio has helped its branded formulations (14% of sales) to report 37% CAGR over last five years. Going ahead, its continued focus on differentiated drugs and brand promotion will sustain its growth momentum. Also, the likely launch of world s first biosimilar version of generic herceptin in India during Q4FY14 (Already got DCGI approval) could drive value growth for Biocon. We believe Biocon would be the only generic player for herceptin (Indian market size Rs 13mn) for ~ 18 months after its launch in India and estimate it to generate incremental domestic sales of Rs 6mn (PAT of Rs 16mn) in FY. In Addition, the huge demand for biosimilar herceptin in emerging markets (valued >$ 2bn) would be the key opportunity for Biocon in medium term. We estimate domestic formulation to report 3% CAGR over FY13 to Rs 5.9bn. Fresh stream of manufacturing revenue powers Syngene growth Biocon s Research services operation (Syngene) is the largest Indian CRO with + Scientists working for 16 of top 2 global innovators. With its continued client expansion (to about now) and improving outlook of global pharma outsourcing, we expect the company to report a growth of 28% CAGR FY13 to Rs 9.13bn. Additionally, a fresh high margin revenue stream of clinical material supply (for 6 Phase III compounds of its partners) commencing from H2FY14 would drive value growth for Syngene. Harmonised dossier filling for Rh insulin in Europe and US seems strategically best as 1) the company expects to file from the new state of art facility of Malaysia (which is expected to commence in 214 earlier than previously guided 2), 2) the existing old facility can focus on meeting emerging market demand and 3) small delay in product launch in Europe will not erode the product opportunity like in any chemical based generic drug. Unique biologic/biosimilar pipeline brightens longterm growth Biocon holds the strongest pipeline of of biosimilars (including Rh insulin, insulin analogues and five monoclonal antobodies) and biologics (including Itolizumab and IN ) amongst Indian peers. The said pipeline projects are in various stages of development and all of them are developed from internal accruals. We believe this pipeline could upgrade Biocon s financial profile substantially FY16 onwards. In fact, the target opportunities for Biocon s biosimilar insulin and MAB pipeline are $ 2bn and $35bn respectively. We expect Biocon to see gradual re rating with improved core operating performance and rising visibility of biosimilars in advanced markets going forward. We initiate our coverage on Biocon with BUY rating and a price target of Rs 475 (17x FYE). BUY BIOS IN CMP RS 372 TARGET RS 475 (+28%) Company Data O/S SHARES (MN) : 2 MARKET CAP (RSBN) : 74 MARKET CAP (USDBN) : WK HI/LO (RS) : 387 / 3 LIQUIDITY 3M (USDMN) : 3.2 FACE VALUE (RS) : 5 Share Holding Pattern, % PROMOTERS : 61. FII / NRI : 11.7 FI / MF : 7. NON PROMOTER CORP. HOLDINGS : 3.5 PUBLIC & OTHERS : 17. Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 1 Jun 11 Aug 12 Oct 13 Biocon BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FYE Net Sales 24,263 29,824 36,446 EBIDTA 5,71 6,875 8,513 Net Profit 3,483 4,371 5,65 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: Phillip Capital India Research Surya Patra ( ) spatra@phillipcapital.in 24 of 66

25 27 November 213 / INDIA EQUITY RESEARCH / BIOCON INITIATING Valuations Expect gradual re rating with improved core operating performance and rising visibility of biosimilars in advanced markets We estimate Biocon to deliver sales and profit growth at a CAGR of 21% and 26% over FY13 E to Rs 36.6bn and Rs 5.5bn, respectively in FY. We expect the margins to be maintained in the narrow range of 22 23% despite higher commitment towards discovery pipeline. At CMP of Rs 372, the company trades at 13.3x FYE EPS and 8.5x FYE EV/EBITDA, which are ~2% discount to its comparable peers averages. We we value Biocon at 17x (in line with historic valuation multiple) it s FY EPS of Rs 28., which yields us our target price of Rs 475/share (implying an upside of 28%). We initiate our coverage on Biocon with BUY rating and a price target of Rs 475. Considering its enhanced growth profile in core operations, robust pipeline of biologi/biosimilar products, likely value unlocking in Syngene by listing it separately, out licensing of Rh insulin for advanced markets and strong Balance Sheet position, we expect Biocon to see further re rating going forward. However, any substantial delay in the development of its biologic/biosimilar pipeline and any regulatory hurdle in terms of delay in clinical development or facility issues could pose as key risk to our investment thesis. 1 yr forward band 8 Rs P/E 14 Rs mn EV/EBITDA 7 24x 12 14x x 12x 6x x 8x 5x Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Source: Bloomberg, PhillipCapital India Research of 66

26 27 November 213 / INDIA EQUITY RESEARCH / BIOCON INITIATING Enhanced growth momentum in core biopharma 5 Temporary shutdown of Insulin plant for expansion impacted growth in Q4FY13 Core Biopharma Sales (Rs mn) % YoY Growth (rhs) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Rapid Progress in Branded Formulation Herceptin launch in Emerging markets offer huge opportunity, as they command > 3% of Roche s global sales Branded Formulation Sales (Rs Mn) % growth (rhs) % of total sales (rhs) FY9 FY1 FY11 FY12 FY13 FY14e FYe United States (28%) 2167 Western Europe (33%) Japan (6%) ROW (33%) Total sales Source: Roche s AR Continued healthy growth in Research services Research Services Sales (Rs Mn) % growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14e FYe of 66

27 27 November 213 / INDIA EQUITY RESEARCH / BIOCON INITIATING Robust pipeline of Biosimilas Source: Company The Biosimilar opportunity seems robust Total Insulins market ~USD 2bn* Opportunity ~USD35bn 18% 18% 2% 9% 35% Glargine ~7bn Lispro ~2bn Aspart ~5bn Detemir ~2bn Glulisine ~.3bn 28% 18% Herceptin ~68bn Avastin ~6bn Enbrel ~8bn Neulasta ~4bn rh Insulin ~3bn 12% Humira ~1bn 23% 13% 23% * Market size of innovator product MAT June 213, All figures rounded off to nearest USD bn, %ages on absolute numbers Source: Company Revenue Mix (%) Revenue Mix FY13 Licensing Income Branded Formulation Statin Insulin Immunosuppressant Research Servies income other Rs mn FY11 FY12 FY13 FY14 FY Licensing Income Branded Formulation % of total sales Core BioPharma Sales % of total sales Research Servies income % of total sales Axicorp 975 % of total sales 35. Total Consolidated income Gr Y o Y % Like to like growth% of 66

28 27 November 213 / INDIA EQUITY RESEARCH / BIOCON INITIATING Healthy progress in revenue and earnings over FY13 E Net Sales (Rs mn) % growth (Like to like) (rhs) FY11 FY12 FY13 FY14 FY Adj. Net Profit (Rs mn) % growth (Like to like) (rhs) FY11 FY12 FY13 FY14 FY Robust cash position despite rising R&D spend Net Debt 446 Free Cash flow ROCE% ROE% Rs mn FY1 FY11 FY12 FY13 FY14 FY FY1 FY11 FY12 FY13 FY14 FY 28 of 66

29 27 November 213 / INDIA EQUITY RESEARCH / BIOCON INITIATING Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FYE Net sales 2,49 24,263 29,824 36,446 Growth, % Other income Total income 2,865 24,853 3,42 37,175 Raw material expenses 8,5 1,447 12,777,614 Employee expenses 3,76 3,894 4,685 5,613 Other Operating expenses 4,11 4,811 6,84 7,435 EBITDA (Core) 5,173 5,71 6,875 8,513 Growth, % (11.8) Margin, % Depreciation 1,744 1,793 2,8 2,346 EBIT 3,429 3,98 4,717 6,167 Growth, % (2.2) Margin, % Interest paid Other Non Operating Income ,78 1,373 Non recurring Items 2,19 Pre tax profit 3,9 6,12 5,677 7,375 Tax provided ,36 1,77 Profit after tax 3,384 5,127 4,371 5,65 Others (Minorities, Associates) 38 Net Profit 3,384 5,89 4,371 5,65 Growth, % (16.6) Net Profit (adjusted) 3,131 3,483 4,371 5,65 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FYE Cash & bank 5,233 6,729 6,444 6,633 Debtors 4,917 5,97 6,334 7,741 Inventory 3,783 3,984 4,838 5,889 Loans & advances 2,744 3,297 3,955 4,833 Other current assets , 1,2 Total current assets 17,29 2,67 22,571 26,296 Investments 5,563 5,866 7,866 9,866 Gross fixed assets 21,43,693 26,978 29,327 Less: Depreciation 7,896 9,738 11,896 14,242 Add: Capital WIP 3,66 2,273 4,273 5,773 Net fixed assets 16,6 18,228 19,354 2,857 Total assets 39,372 44,161 49,791 57,19 Current liabilities 6,17 6,736 8,584 1,389 Provisions 2,1 2,55 2,283 2,341 Total current liabilities 8,285 9,241 1,867 12,73 Non current liabilities 8,324 7,321 7,645 8,134 Total liabilities 16,69 16,562 18,512 2,864 Paid up capital 1, 1, 1, 1, Reserves & surplus 21,7,947 29,626 34,52 Shareholders equity 22,763 27,6 31,279 36,5 Total equity & liabilities 39,372 44,161 49,791 57,19 Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FYE Pre tax profit 3,9 6,12 5,677 7,375 Depreciation 1,744 1,793 2,8 2,346 Chg in working capital 1,76 2,3 1,762 2,273 Total tax paid 1, ,264 1,72 Other operating activities 175 2,97 Cash flow from operating activities 6,488 8,3 4,88 5,746 Capital expenditure 2,438 3,421 3,285 3,849 Chg in investments , 2, Cash flow from investing activities 3,396 3,724 5,285 5,849 Free cash flow 2,284 4,46 2,82 2,429 Debt raised/(repaid) ,2 Dividend (incl. tax) 1,162 1,755 1,463 1,474 Cash flow from financing activities 2,272 1, Net chg in cash 819 3,5 1, Valuation Ratios & Per Share Data FY12 FY13 FY14E FYE Per Share data EPS (INR) Growth, % (16.6) Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Receivable days Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Dividend cover (x) Total debt/equity (%) Net debt/equity (%) (11.7) (.1) (9.4) (5.8) Valuation PER (x) PEG (x) y o y growth (1.4) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Estimates 29 of 66

30 Cadila Healthcare US generics seems only sweet spot PhillipCapital (India) Pvt. Ltd. PHARMACEUTICALS: Initiating Coverage 27 November 213 Improving visibility on ANDA approvals brightens FY US growth Cadila s quality and cost effective generic drug offerings have made it the 1th largest US generic players and helped it deliver 4% revenue CAGR over the last five years to Rs.1bn in FY13. At the same time, the slowing ANDA approvals despite improved ANDA fillings has been the key concern for Cadila in recent past. However, the improved visibility on drug approvals after receipt of complete response from the FDA has brightened the US growth prospects in medium term. The management expects to launch more than 2 products (v/s 7 in FY13) over the next 12 months in the US. We estimate Cadila s US generics to deliver a compounded annual growth of 21% over FY13 to Rs 22.2bn. Complex technology Initiatives ensures strong future growth but lacks visibility Cadila has rapidly increased it R&D spend at ~7% CAGR over last three years to Rs 4.7bn (7.4% of sales) in FY13, in order to upgrade its drug portfolio to complex technology class including transdermal, inhalers, controlled release drugs, biologic/biosimilars and NCEs. Such initiatives has certainly enhanced the future growth visibility of Cadila but all those lacks commercial visibility. Domestic formulations to moderated growth despite Lipaglyn launch Cadila, with a strategy to widen its foot hold in domestic formulations acquired Biochem during late FY12, which sharply reduced the share of its chronic therapy from 58% of sales in FY11 to 31% in FY13. Given the fact of lower chronic sales contribution and adverse impact of new pricing policy (~Rs 9mn) we expect moderate revenue growth of 12% CAGR over FY13 (v/s 16% CAGR over FY9 13) to Rs 29.4bn in FY. The launch of innovative drug Lipaglyn may not have any major play in near to medium term. Reducing profitability of JVs remain as a concern Super operational excellence and high profitability of its Hospira and Nycomed JV has certainly made Cadila a preffered partner for JVs. But the progressive decline in the cumulative profitability of its JVs, due to increased competition has been a a concern for Cadila in recent past. The cumulative EBITDA margin of its all JVs has, infact, declined from ~6% in FY11 to 45% in FY13. Moreover, the likely muted growth in the JV sales during FY13 is further worrisome. Lacks key earning triggers in near term; Initiate with Neutral rating and target price of Rs 761 Despite improved visibility in US generic launches, we estimate Cadila s revenue and profits to grow at a moderate CAGR of % and 14% over FY13 E. Our EPS estimates for FY14E and FYE stands at Rs 32.5 and Rs 42.2 (against Rs 31.9 in FY13), respectively. At CMP of Rs 742, the stock trades at 17.6x FYE EPS and 12.5x FYE EV/EBITDA, which is ~1% discount to its peers. We believe the discount is justified considering no major earnings trigger and concerns over profitability in near term. We value Cadila at 18x FY EPS, giving us a price target of Rs 761, implying 3% upside from current levels. We initiate with a Neutral rating and target price of Rs 761/share. NEUTRAL CDH IN CMP RS 742 TARGET RS 761 (+3%) Company Data O/S SHARES (MN) : MARKET CAP (RSBN) : 2 MARKET CAP (USDBN) : WK HI/LO (RS) : 9 / 631 LIQUIDITY 3M (USDMN) : 1.5 FACE VALUE (RS) : 5 Share Holding Pattern, % PROMOTERS : 74.8 FII / NRI : 6. FI / MF : 9. NON PROMOTER CORP. HOLDINGS : 4.6 PUBLIC & OTHERS : 5.6 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 1 Jun 11 Aug 12 Oct 13 Cadila BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FYE Net Sales 61,552 7,185 81,137 EBIDTA 11,1 11,31 14,234 Net Profit 6,71 6,664 8,635 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: Phillip Capital India Research Surya Patra ( ) spatra@phillipcapital.in 3 of 66

31 27 November 213 / INDIA EQUITY RESEARCH / CADILA HEALTHCARE INITIATING Para IV fillings in US Brand Generic Mkt Size Patent Expiry Remarks (US $mn) ABILIFY aripiprazole 39 2 Oct Competative launch after teva's 18days exclusivity ASACOLHD mesalamine 46 expired july213 Only Filler/8mg will expire in 221, expect to launch one strength soon LIALDA mesalamine 55 FY 2 first to file/3 month stay over NIASPAN niacin Mar 14 Competative launch after teva's 18days exclusivity in 16th Mar 214 OPTIVAR azelastine hcl 144 expired Limited competition, awaiting approval PHOSLOGelCap calcium acetate first to file/but Cap n tabs r already generic PRISTIQ desvenlafaxine 493 FY 216 multiple filling..no FTF SILENOR doxepin 22 late filler/settled with many player TOVIAZ fesoterodine multiple filling VIMPAT 338 stay till 216 multiple filling, Litigation on ZEGERID omeprazole / sodium bicarbonate 195 Jul 16 PAR pharma is the first to file Source: Bloomberg, PhillipCapital India Research US generics growth stabilizes around 2% Rising share of acute therapy to moderate Domestic Form growth US Revenue(Rs Mn) % Growth (rhs) Domestic formulation Sales (Rs mn) Growth % (rhs) % of Sales (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY FY9 FY1 FY11 FY12 FY13 FY14 FY JV profitability on the Wane; Also muted growth is a concern Gross revenue from JVs (Rs Mn) % Growth Cumulative EBITDA Magin of JVs % (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY of 66

32 27 November 213 / INDIA EQUITY RESEARCH / CADILA HEALTHCARE INITIATING Revenue Mix (Rs bn) FY11 FY12 FY13 FY14e FYe Formulations APIs Consumer Business Animal Health & others Domestic Sales % yoy change % yoy growth USA Europe Brazil (Nikkho) Japan Emerging markets Formulations Exports % yoy growth % of sales All JVs API Exports Animal health Bremer Total Gross Sales % yoy growth Steady Progress in Financial Performance but EBIDA margins to remain soft Total Income (Rs bn) % YoY growth (rhs) Adj. Net earnings (Rs bn) % YoY growth (rhs) EBITDA Margin % (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY FY9 FY1 FY11 FY12 FY13 FY14 FY 1 32 of 66

33 27 November 213 / INDIA EQUITY RESEARCH / CADILA HEALTHCARE INITIATING Huge spend on R&D initiatives raised leverage position in FY12 FY Free Cash flow (Rs mn) Net Debt/Equity (x) (rhs) ROCE % ROE % FY9 FY1 FY11 FY12 FY13 FY14 FY FY9 FY1 FY11 FY12 FY13 FY14 FY 1 yr forward band Rs P/E 28x Rs mn EV/EBITDA 2x x 24 2 x x 7x x 5x Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Source: Bloomberg, PhillipCapital India Research 33 of 66

34 27 November 213 / INDIA EQUITY RESEARCH / CADILA HEALTHCARE INITIATING Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FYE Net sales 5,9 61,552 7,185 81,137 Growth, % Other income 1,733 2, 2,386 2,759 Total income 52,633 63,577 72,571 83,895 Raw material expenses 16,794 23,22,763 29,363 Employee expenses 7,512 9,42 1,398 11,438 Other Operating expenses 17,489 2,82,11 28,86 EBITDA (Core) 1,839 11,1 11,31 14,234 Growth, % Margin, % Depreciation 1,579 1,847 2,132 2,474 EBIT 9,26 9,44 9,169 11,76 Growth, % (2.5) 28.3 Margin, % Interest paid 1,69 1,262 1,424 1,57 Other Non Operating Income Pre tax profit 7,942 8,87 8,3 1,693 Tax provided 1,13 1,188 1,238 1,64 Profit after tax 6,812 6,899 7, 9,89 Others (Minorities, Associates) Net Profit 6,526 6,535 6,664 8,635 Growth, % 4.2 (3.6) (.6) 29.6 Net Profit (adjusted) 6,954 6,71 6,664 8,635 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FYE Cash & bank 4,666 5,838 6,81 4,918 Debtors 8,863 9,551 11,87 12,817 Inventory 1,95 12,136 14,126 16,61 Loans & advances 5,377 6,771 7,7 8,39 Other current assets Total current assets 3,232 34,965 39,31 43,36 Investments 242 1,145 1,145 1,145 Gross fixed assets 4,229 43,762 51,993 57,533 Less: Depreciation 11,75 13,56,638 18,112 Add: Capital WIP 4,839 7,356 4,5 4,5 Net fixed assets 33,318 37,612 4,856 43,921 Total assets 63,792 73,722 81,32 88,12 Current liabilities 12,379 9,313 11,87 12,817 Provisions 3,37 3,118 3,211 3,34 Total current liabilities,416 12,431 14,298 16,121 Non current liabilities 21,75 3,711 32,655 32,44 Total liabilities 37,121 43,142 46,953 48,526 Paid up capital 1,24 1,24 1,24 1,24 Reserves & surplus 24,712 28,363 32,132 37,36 Shareholders equity 26,671 3,58 34,348 39,577 Total equity & liabilities 63,792 73,722 81,32 88,12 Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FYE Pre tax profit 7,942 8,87 8,3 1,693 Depreciation 1,579 1,847 2,132 2,474 Chg in working capital 2,19 6,546 2,227 3,74 Total tax paid 1,72 1,368 1,238 1,64 Other operating activities 2,474 2,9 Cash flow from operating activities 3, ,92 8,49 Capital expenditure 12,261 6,141 5,375 5,54 Chg in investments Cash flow from investing activities 12,296 7,44 5,375 5,54 Free cash flow 6,35 4,214 1,194 2,495 Debt raised/(repaid) 1, 9,186 1,944 1 Cash flow from financing activities 1,54 9,111 1, Net chg in cash 1,714 1,172 3,138 2,244 Valuation Ratios & Per Share Data FY12 FY13 FY14E FYE Per Share data EPS (INR) Growth, % 4.2 (3.6) (.6) 29.6 Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Receivable days Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Total debt/equity (%) Net debt/equity (%) Valuation PER (x) PEG (x) y o y growth 5.2 (6.2) (41.3).6 Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Estimates 34 of 66

35 Divi s Laboratories Well set to ride on soaring pharma outsourcing PhillipCapital (India) Pvt. Ltd. PHARMACEUTICALS: Initiating Coverage 27 November 213 Custom Synthesis to show resilience with % growth in FY Divis, led by its strong track record of project executions and long standing associations with the top 2 global innovators (45% of revenue flows from 5 key customers), commands the largest custom synthesis pipeline from India. As per Chemical Pharmaceutical Generic Association,Italy, the global pharma outsourcing is expected to grow at 14% CAGR over FY12 17 to $136bn and India is expected to see maximum ramp up at >35% CAGR to $29 bn (21% market share) from $6 bn(8% Market share) in 212. Hence, with the improving outlook on pharma outsourcing and Divi s timely facility expansion would drive sustainable growth for its custom synthesis operation. Factoring the moderated growth (%) in FY14 due to capacity constraints, we estimate 2% CAGR in its custom synthesis revenue over FY13 to Rs 14.9bn in FY. Optimal process efficiency to maintain steady Generics growth Divis, led by its focus on complex intermediates/ active ingradients, selective product approach and continuous focus on process optimisation & production efficiencies, has positioned itself as the global leader in certain products (though the company entered the market much later than the patent expiry). Similarly, it has attained market leadership in various products like Naproxen, Diltiazem and Dextromethorphan, which together contribute over 3% to the generics sales. Going ahead, we believe its continued focus on optimal process development and cost leadership will play a pivotal role in driving growth for its generics. In addition, the series of patent expires in recent past and upcoming ones enhance the growth visibility. We expect Divi s generic sales to report >18% CAGR to Rs 14.1bn in FYE. Approval of Carotenoid plant for pharma application drives growth Divi s Nutraceuticals production site in Vizag was been awarded the FSSC 22 food safety certification during Aug 213, which is essential for using its nutraceuticals in pharmaceuticals application. Till now its nutraceuticals products were allowed to be applied in foods and beverages. With this development, the management guides for a healthy growth in its nutraceuticals sales to Rs 18mn by FYE from Rs 919mn in FY13. Expansion led growth in FY Divis has set up a greenfield facility with 5 production units at an investment of Rs 35mn in Vizag DSN SEZ. It received USFDA approval for 2 units and expects the to commissioning and FDA inspection of 3 more units in Q4FY14. We believe the timely capacity expansion with a revenue potential of Rs 7mn (2x Capex) just ahead of improving global CRAMS outlook, would enhance growth momentum for Divis in the medium term. Initiate Buy with target price of Rs 139 We expect 24% earnings CAGR for Divis over FY13 E, mainly led by increased order flows and ramp up in its new facility at Vizag DSN SEZ. Looking at its debt free balance sheet, strong return ratios and controlled capex enabling healthy cash flows, we value Divis at 2x (in line with its historic average), which yields our target price of Rs 139. We initiate coverage with BUY rating. BUY DIVI IN CMP RS 1163 TARGET RS 139 (+2%) Company Data O/S SHARES (MN) : 133 MARKET CAP (RSBN) : 4 MARKET CAP (USDBN) : WK HI/LO (RS) : 1233 / 95 LIQUIDITY 3M (USDMN) : 3.9 FACE VALUE (RS) : 2 Share Holding Pattern, % PROMOTERS : 52.1 FII / NRI : 16.6 FI / MF : 12.5 NON PROMOTER CORP. HOLDINGS : 1.7 PUBLIC & OTHERS : 8.1 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 1 Jun 11 Aug 12 Oct 13 Divi's Labs BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FYE Net Sales 21,448,112 3,732 EBIDTA 8,2 9,819 12,17 Net Profit 6,4 7,357 9,29 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: Phillip Capital India Research Surya Patra ( ) spatra@phillipcapital.in 35 of 66

36 27 November 213 / INDIA EQUITY RESEARCH / DIVI S LABORATORIES INITIATING Strong Growth in Custom Synthesis Generic performance Custom Synthesis Sales (Rs Bn) 14.9 % Growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY Other Generics sales (Rs Mn) Caortenoid sales (Rs Mn) FY9 FY1 FY11 FY12 FY13 FY14 FY Revenue Mix Revenue Mix (Rs Mn) FY11 FY12 FY13 FY14 FY Custom Synthesis % Growth % of Sales Carotenoids % of Sales Other generic % of Sales Total Generics % Growth % of Sales Total Revenue % Growth Track record of healthy financial Performance Total Income(Rs Bn) % Growth (rhs) APAT(Rs Bn) EBITDA Margin% (rhs) % Growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY 3 FY9 FY1 FY11 FY12 FY13 FY14 FY 2 Source: PhillipCapital India Research 36 of 66

37 27 November 213 / INDIA EQUITY RESEARCH / DIVI S LABORATORIES INITIATING Strong Balance Sheet Free Cash Flow(Rs mn) Net Debt (Rs mn) ROCE% ROE% FY9 FY1 FY11 FY12 FY13 FY14 FY FY9 FY1 FY11 FY12 FY13 FY14 FY Source: PhillipCapital India Research 1 yr forward band 2 (Rs) P/E 3x 24x 18x (Rs mn) EV/EBITDA x 2x x 1 12x 12 1x Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Source: Bloomberg, PhillipCapital India Research 37 of 66

38 27 November 213 / INDIA EQUITY RESEARCH / DIVI S LABORATORIES INITIATING Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FYE Net sales 18,64 21,448,112 3,732 Growth, % Total income 18,64 21,448,112 3,732 Raw material expenses 7,616 7,986 8,814 1,756 Employee expenses 1,59 1,977 2,536 2,981 Other Operating expenses 2,611 3,333 3,943 4,8 EBITDA (Core) 6,94 8,2 9,819 12,17 Growth, % Margin, % Depreciation ,18 EBIT 6,283 7,382 8,887 11,62 Growth, % Margin, % Interest paid Other Non Operating Income Pre tax profit 6,86 7,812 9,555 11,959 Tax provided 1,474 1,792 2,198 2,751 Profit after tax 5,333 6,2 7,357 9,29 Net Profit 5,333 6,2 7,357 9,29 Growth, % Net Profit (adjusted) 5,32 6,4 7,357 9,29 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FYE Cash & bank ,359 3,941 Debtors 4,956 5,12 6,627 8,11 Inventory 6,79 8,357 8,496 1,312 Loans & advances 1,469 1,236 1,99 2,336 Other current assets Total current assets 13,592,188 19,481 24,789 Investments 4,77 4,78 6,78 8,78 Gross fixed assets 1,921 13,383 16,953 19,11 Less: Depreciation 3,536 4,296 5,229 6,337 Add: Capital WIP 1,82 3, Net fixed assets 9,24 12,121 12,224 13,264 Total assets 27,567 31,388 37,783 46,131 Current liabilities 3,16 2,95 4,185 5,122 Provisions 2,99 2,358 2,54 2,83 Total current liabilities 5,1 5,263 6,24 7, Non current liabilities 1,136 1, ,94 Total liabilities 6,1 6,382 7,143 8,299 Paid up capital Reserves & surplus 21,5 24,741 3,374 37,567 Shareholders equity 21,3,6 3,64 37,832 Total equity & liabilities 27,567 31,388 37,783 46,131 Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FYE Pre tax profit 6,86 7,812 9,555 11,959 Depreciation ,18 Chg in working capital 1,883 1,348 1,366 2,761 Total tax paid 1,365 1,69 2,664 2,751 Other operating activities 2,16 2,33 Cash flow from operating activities 2,163 3,295 6,457 7,556 Capital expenditure 2,882 3,687 1,35 2,148 Chg in investments , 2, Cash flow from investing activities 2,396 2,994 3,35 4,148 Free cash flow 1,23 1,764 5,888 5,48 Equity raised/(repaid) 24 Debt raised/(repaid) Cash flow from financing activities Net chg in cash ,673 3,599 Valuation Ratios & Per Share Data FY12 FY13 FY14E FYE Per Share data EPS (INR) Growth, % Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Receivable days Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Total debt/equity (%) Net debt/equity (%) 1. (.3) (5.8) (8.4) Valuation PER (x) PEG (x) y o y growth Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Estimates 38 of 66

39 Dr Reddy s Laboratories Focus on complex chemistry PhillipCapital (India) Pvt. Ltd. PHARMACEUTICALS: Initiating Coverage 27 November 213 Strong growth in US generics Dr Reddy s Laboratories (DRL), by leveraging its superior chemistry skills, early focus on complex/differentiated generics and strategic vertical integration (75% of APIs sourced internally), has powered its US generic sales at a CAGR of 37% to Rs 37.8bn over FY8 FY13. Additionally,the recent launch of niche oncology injectables with limited competition like Decitabine & azacitidine have supported its strong growth momentum with US generic sales to Rs 24.1bn in H1FY14, a growth of 4%. Going ahead, we estimate DRL s US generics sales, excluding FTFs, to grow at CAGR of 33% over FY13. Technology Platforms to aid complex generics and value growth in US More than the steady US generic growth, it is the increasing share of limited competition drug sales and focused build up of technology platforms enhances the visibility for future value growth. The management believes a good chunk of its current 62 pending ANDAs (including 39 Para IVs and 9 FTFs) and 7% of future fillings are differentiated generics or technology led drugs, which will drive value growth. The key technology platforms include Mpegs, Chiral, Biocatalysis and Polimer Technology. India, Russia and Emerging markets to maintain steady growth In H1FY14, the domestic formulation business saw a moderated growth of 5%, mainly due to the uncertainties of new NELM introduction and related trade issues. We believe the full impact of new NELM is yet to be felt in Q3FY14 (though momentary) and DRL estimates the adverse impact to be ~55mn in FY14. However, We expect DRL, led by its enhanced focus on domestic formulation in recent past, would maintain a steady growth of over % Q4FY14 onward. On the other hand, we expect Russia (one of its fastest growth engine) and ROW markets to maintain healthy growth led by expanded product basket and ramp up in DRL Glaxo alliance, respectively. PSAI business to steady progress in margins despite tapering growth The pharma Services and Active Ingredient business (26% of total sales) saw ~% compounded annual growth over FY11 13 to Rs 3.7bn led by multiple patent expirations. Going ahead, we expect moderated growth of ~1% due to limited generic opportunities but expect improving profitability led by enhanced service offerings (supported by Octoplus) and growing pharma outsourcing. Biosimilars: Shaping well to drive long term growth DRL has already proved its leadership in biosimilars by launching first ever generic monoclonal anti body (Rituximab) and darbepoetin alfa. With a biosimilar portfolio of four drugs, DRL has delivered a sales growth of 36% CAGR over FY9 13 to Rs 11mn. We foresee great long term prospects for DRL s biosimilar business led by its MAB development and commercialization pact with Merck Serono and continued penetration into emerging markets. Offers highest valuation gap compared to peers; Initiate BUY with Target Price Rs 28 strong and predictable US sales with rising share of limited completion and differentiated generics, we value Dr Reddy s at 2x (in line with the sector average) March 2e EPS of Rs 14 to arrive at our target price of Rs 28. Hence, we initiate coverage on DRL with a BUY rating and a target price of Rs 28/share. BUY DRRD IN CMP RS 247 TARGET RS 28 (+16%) Company Data O/S SHARES (MN) : 17 MARKET CAP (RSBN) : 49 MARKET CAP (USDBN) : WK HI/LO (RS) : 45 / 1721 LIQUIDITY 3M (USDMN) : 11.5 FACE VALUE (RS) : 5 Share Holding Pattern, % PROMOTERS :.5 FII / NRI : 5.8 FI / MF : 8.9 NON PROMOTER CORP. HOLDINGS : 6.9 PUBLIC & OTHERS : 7.9 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 1 Jun 11 Aug 12 Oct 13 Dr Reddy BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FYE Net Sales 116, ,93 6,764 EBIDTA 26,818 3,488 36,683 Net Profit 16,916 19,3 23,777 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: Phillip Capital India Research Surya Patra ( ) spatra@phillipcapital.in 39 of 66

40 27 November 213 / INDIA EQUITY RESEARCH / DR REDDY S INITIATING Valuations Offers highest valuation gap compared to peers Powered by the robust US generic business, we estimate DRL s revenue and earnings to grow by CAGR of 16% and 19% over FY13 to Rs5bn and Rs 23.7bn, respectively. Further, DRL s strong free cash flow generation of Rs33bn over FY13 E powers its balance sheet profile and brightens the visibility for inorganic growth. At CMP of Rs 247, the stock trades at 17.2x its FYEPS and 11.5x its FYEV/EBITDA, which are at ~2% discount to its domestic peers. Maintaining our optimism on DRL s strong and predictable US sales with rising share of limited completion and differentiated generics, we value Dr Reddy s at 2x (in line with the sector average) March 2e EPS of Rs 14 to arrive at our target price of Rs 28. Key risks to our estimates and valuations are 1) rising interventions of regulatory agencies, 2) currency fluctuations and 3) Russian Govt s plant for 5% import substitution by 22. We initiate coverage on DRL with a BUY rating and a target price of Rs 28/share. We also rate it as our top pick in the sector, on the back of the highest upside potential in our coverage universe. 1yr forward band Rs P/E x 2x x 1x Rs mn EV/EBITDA 16x 12x 8x 4x Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Source: PhillipCapital India Research 4 of 66

41 27 November 213 / INDIA EQUITY RESEARCH / DR REDDY S INITIATING Strong US sales; Limited dependence on One off sales ensures sustainable US growth Sales from One-off oprtunities (Rs Bn) US Base business sales (Rs Bn) 2 Cumulative ANDA fillings ANDA fillings FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14E FYE Upto FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 YTD FY14 Strong visibility about future US pipeline Potential Generics Mkt Size Likely Launch Remarks (US $mn) Duloxetine Hcl(Cymbalta) Dec 13 multiple filling >1, Shared FTF with several players Sirolimus(Rapamune) 2. No likely exclusivity and limited competition Esomeprazole magnesium(nexium) May 14 Dr Reddy and Teva settled to launch on on 27 May 214 Paricalcitol(Zemplar) 1. 3 Mar 14 Limited Competition.. launch after teva's 18days exclusivity in 3th Mar 214 Memantine (Namenda) Jan Settled with Amneal, Watson, Dr. Reddy's, Lupin, Mylan, Orchid, Sun, Teva, Upsher Smith, and Wockhardt Valganciclovir(Valcyte) 561. FY Ranbaxy is FTF, likely launch post exclusivity Dexlansoprazole(Dexilant) 3. takeda Glatiramer Acetate(Copaxone) 35. FY16 Likely launch post exclusivity; likely limited competition Bivalirudin(Angiomax) 1 Jun 19 Settled with Teva to launch in Jun 219 Palonosetron intravenous(aloxi) 5. FY16 Limited Competition. ZOLPIDEM TARTRATE(INTERMEZZO) Limited Competition. OMEPRAZOLE SODIUM BICARBONATE (ZEGERID) July 216 Cadila FTF Ixabepilone(IXEMPRA). Nov 218 DRL is FTF and expected to be limited competition DESVENLAFAXINE ER(Pristiq) 493. FY16 Moxifloxacin Tab(Avelox) 3. Esomeprazole/naproxen(Vimovo) 4. NA Litigation on Steady progress in Indian formulations depite NELM concerns sales from Other brands (Rs bn) 3 sales from Top 1 Brands (Rs bn) FY8 FY9 FY1 FY11 FY12 FY13 FY14E FYE Healthy growth in Russian branded business sales from Other brands (Rs bn) sales from Top 1 Brands (Rs bn) FY8 FY9 FY1 FY11 FY12 FY13 FY14E FYE 41 of 66

42 27 November 213 / INDIA EQUITY RESEARCH / DR REDDY S INITIATING Revenue Mix Global Generics (Rs mn) FY11 FY12 FY13 FY14E FYE One off US sales US Base business Europe India Russia & CIS Others Total Global Generics % growth % of sales PSAI Sales % growth % of sales Proprietary Products & others Gross Sales % growth Healthy Financial performance Base business sales (Rs bn) % growth (rhs) Adj. Net Profit (Rs Bn) PAT growth % EBITDA Margin % FY9 FY1 FY11 FY12 FY13 FY14E FYE FY8 FY9 FY1 FY11 FY12 FY13 FY14E FYE 1 5 Strengthening free cash flow enlightens inorganic growth 3. ROCE % ROE % 3 Operating CF (Rs bn) FCF (Rs Bn) Capex (Rs Bn) Linear (FCF (Rs Bn)) FY9 FY1 FY11 FY12 FY13 FY14E FYE FY9 FY1 FY11 FY12 FY13 FY14 FY 42 of 66

43 27 November 213 / INDIA EQUITY RESEARCH / DR REDDY S INITIATING Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FYE Net sales 96, , ,93 6,764 Growth, % Total income 96, , ,93 6,764 Raw material expenses 43,432 55,687 6,436 68,976 Other Operating expenses 28,8 33,761 43,978 51, EBITDA (Core) 24,56 26,818 3,488 36,683 Growth, % Margin, % Depreciation 5,214 6,237 6,268 6,775 EBIT 19,292 2,581 24,22 29,97 Growth, % Margin, % Interest paid Non recurring Items 1,4 532 Pre tax profit 18,467 21,677 24,144 3,483 Tax provided 4,24 4,9 4,829 6,76 Profit after tax 14,263 16,777 19,3 23,777 Net Profit 14,263 16,777 19,3 23,777 Growth, % Net Profit (adjusted),65 16,916 19,3 23,777 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FYE Cash & bank 7,379 5,136 7,29 12,459 Debtors,339 31,972 35,599 41,368 Inventory 19,352 21,6 26,231 3,482 Other current assets 7,19 1,43 11,52 13,1 Total current assets 59,179 68,751 8,361 97,56 Investments 1,773 16,963 2,963,963 Gross fixed assets 78,857 9,76 98,893,839 Less: Depreciation 39,35 44,94 51,28 57,984 Add: Capital WIP 7,268 6,69 4,5 4,5 Net fixed assets 46,775 51,835 52,185 52,356 Non current assets 785 1,168 1,168 1,168 Total assets 119, ,369 8,329 18,698 Current liabilities 9,52 11,944 13,572,758 Provisions 4,485 3,427 4,323 5,441 Total current liabilities 13,987,371 17,895 21,199 Non current liabilities 48,46 53,893 5,564 48,49 Total liabilities 62,33 69,264 68,459 69,69 Paid up capital Reserves & surplus 56,597 72,6 89,21 11,241 Shareholders equity 57,445 73, 89,87 111,9 Total equity & liabilities 119, ,369 8,329 18,698 Estimates Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FYE Pre tax profit 18,467 21,677 24,144 3,483 Depreciation 5,214 6,237 6,268 6,775 Chg in working capital 4,416 1,6 4,48 6,293 Total tax paid 5,673 5,421 4,346 6,36 Other operating activities 3,1 1,51 Cash flow from operating activities 1,477 1,391 21,658 24,929 Capital expenditure 7,11 11,297 6,618 6,946 Chg in investments 1,74 6,19 4, 5, Cash flow from investing activities 17,787 17,383 1,558 11,876 Free cash flow 7,41 5,43,37 17,973 Equity raised/(repaid) Debt raised/(repaid) 8,77 4,468 6,598 4,996 Cash flow from financing activities 8,96 4,749 6,598 4,996 Net chg in cash 1,65 2,243 4,52 8,57 Valuation Ratios & Per Share Data FY12 FY13 FY14E FYE Per Share data EPS (INR) Growth, % Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Receivable days Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) n/a n/a n/a Total debt/equity (%) Net debt/equity (%) Valuation PER (x) PEG (x) y o y growth Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 66

44 Glenmark Pharma Right blend of innovative R&D and global generics PhillipCapital (India) Pvt. Ltd. PHARMACEUTICALS: Initiating Coverage 27 November 213 Quality fillings ensures US generics growth Glenmark s focus on complex generics and limited competition helped it deliver 23% CAGR in its US generics sales to 16.9bn (34% of total sales) in FY13. Going ahead, we expect Glenmark s quality ANDA pipeline (53 pending approvals including 17 Para IVs) covering hormones, derma, oncology injectables etc to drive 24% revenue CAGR over FY13 to Rs.9bn. The key product opportunities in US include generic Locoid Lipocream, fluocinonide and Lunesta. Also, the likely launch of multiple Para IV opportunities (including Welchol, Coreg CR & Orthotri Cyclen) in FY16 provides enough US generic visibility. Sustained growth in domestic formulations Glenmark s domestic formulations business (26% of total sales) with 21% CAGR over last five years has outpaced Indian pharma growth of 14%. We believe Glenmarks s focused marketing of Derma, respiratory, Cardiac and gynaecology drugs would help it grow ahead of industry growth. We estimate the domestic formulation sales of Glenmark to report a compounded annual growth of 17% over FY13 to Rs 17.9bn. We expect marginal impact of new pricing policy in FY14 on the company. Monetisation of R&D pipeline could provide further upside Glenmark has already set a strong track record of monetizing its R&D pipeline by signing 7 out licensing deals, which have earned cumulative milestone receipts worth $ 26mn since 24. Currently it stands at the forefront of discovery research in India with a promising R&D pipeline of 5 novel molecules (3 NCEs and 2 NBEs) at various stages of development and any progress in its R&D pipeline could potentially trigger further milestone receipts in near to medium term. Steady progress in financial health Glenmark reported a healthy growth of 24% and 33% CAGR in its sales and net earnings over last five years to Rs 5.14bn and Rs 6.3bn respectively in FY13. We expect the company to post revenue CAGR of 19% and PAT CAGR of 2% over FY13 E on the back of quality ANDA pipeline and sustained growth in the domestic formulations. At the same time, we expect FCF generation from the core business to continue to increase over FY13E FYE, given limited capex and sustained profit growth. Initiate BUY with target price of Rs 641 At the CMP of RS 54, the stock trades at.x its FYE EPS and 1.1x its FY EV/EBITDA, which was about >% discount to its peers. We believe the discount is largely due to limited visibility of big ticket US launches and milestone from R&D pipeline. However, considering its continued focus on quality product pipeline (over 6% of its pending ANDAs are differentiated generics) we value Glenmark s core business at Rs 64 (18x its FY EPS) and its R&D pipeline of Crofelemer and GRC 3 at Rs 37/share. Our target price of Rs 641 implyes upside of 27% from current levels. Additionally, any out licensing development of its R&D pipeline would enhance the upside further. BUY GNP IN CMP RS 54 TARGET RS 641 (+27%) Company Data O/S SHARES (MN) : 271 MARKET CAP (RSBN) : 137 MARKET CAP (USDBN) : WK HI/LO (RS) : 612 / 418 LIQUIDITY 3M (USDMN) : 5.1 FACE VALUE (RS) : 1 Share Holding Pattern, % PROMOTERS : 48.3 FII / NRI : 34. FI / MF : 7.4 NON PROMOTER CORP. HOLDINGS : 1.4 PUBLIC & OTHERS : 9. Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 1 Jun 11 Aug 12 Oct 13 Glenmark BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FYE Net Sales 5,123 6,33 7,941 EBIDTA 1,62 12,19 14,83 Net Profit 6,349 7,47 9,89 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: Phillip Capital India Research Surya Patra ( ) spatra@phillipcapital.in 44 of 66

45 27 November 213 / INDIA EQUITY RESEARCH / GLENMARK PHARMA INITIATING Healthy US Sales Performance Qualitative mix of US ANDA pipeline 3 US Sales (Rs Bn) % of total sales (rhs) % Growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY Para IV Immediate Resease Hormones modified Release Dermatology Oncology Injectables Total Pending ANDAs Para IV filling of Glenmark Potential Generics Mkt Size Likely Launch Remarks (US $mn) Locoid Lipocream 34. Dec 13 Settled with Triax and Astellas to launch near end of 213. Holds 18 days exclusivity fluocinonide(vanos) 4. Dec 13 limited competion among Sun, Perrigo and Nycomed Eszopiclone(Lunesta) 8. 3 May 14 multiple settlement by glenmark, sun Sun n Mylan has already got FA Trandolapril + Verapamil(Tarka) Feb Glenmark is FTF Colesevelam(Welchol) Sep Glenmark/Impax already settled. Impax is FTF. Watson n Lupin r litigating, late entry after exclusivity expiry on 2nd Sep 2 Ambien CR (Coreg CR) 233. Dec URL is ftf n limited to 3(Lupin n Anchen), ORTHOTRI CYCLEN Dec settled with Janssen Pharma to market and distribute its copy drug under a royalty bearing license from Janssen on Dec 31, 2, rosuvastatin calcium(crestor) Jan 16 competative launch Ezetimibe(Zetia) Dec 16 GPL can launch on Dec 12, 216 with a 18D excl. Glenmark Generics and Par Pharmaceutical entered into an exclusive licensing agreement for marketing the generic version of Merck & Co's `Zetia' azelaic acid(finacea) 18 Nov 18 Glenmark is FTF Domestic formulation Sales Performance Domestic Formulation Sales (Rs Bn) % of total sales (rhs) % Growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY of 66

46 27 November 213 / INDIA EQUITY RESEARCH / GLENMARK PHARMA INITIATING Revenue Mix (Rs bn) FY11 FY12 FY13 FY14e FYe India Semiregulated Market Latin America Europe Out Licensing Revenue Total Speciality Business % of Total Revenue % Ch. YoY US (Rs mn) Europe Latin America(oncology) API Total Generic Business % of Total Revenue % Ch. YoY Other Gross Revenue % Ch. YoY Best model of discovery research from India Year Molecule out licensed Deal with Milestone received 24 Oglemilast Forest Labs $35Mn Oglemilast Teijin Pharma $6Mn 26 Melogliptin Merck KGaA $31 Mn 27 GRC 6211 Eli Lilly $45 mn 21 GRC 3 Sanofi Aventis $ Mn 211 GBR 5 Sanofi Aventis $5 Mn 212 mpges 1 Inhibitors Forest Labs $9 Mn Glenmark expects multiple Monetization activity over months from its R&D Pipeline NCE Indication licensed Current Status Remarks Crofelemer Anti diarrheal Partner Salix got USFDA approval and launched in US. Glenmark progresses its filling in 14 emerging markets. GRC 3 GRC GBR 5 Osteoarthritis pain, Neuropathic pain Neuropathic pain, Respiratory disorders Crohn's Disease, Multiple Sclerosis, Inflammatory Disorders Sanofi Aventis Sanofi Aventis Completed Phase I trials in the UK, A PhIIa proof of concept study in neuropathic pain, initiated in Q1 FY 213, has completed recruitment. Glenmark is currently recruiting patients for a Phase II proof of concept study in pain indication in Europe and India. Additionally, Glenmark has completed recruitment for a Phase I/IIa study for respiratory indications in the UK (MHRA) and expects topline data in Q3 FY 214. Glenmark has also obtained regulatory approval from MHRA, UK, for the conduct of a Phase IIa study in patients with chronic cough. Phase I studies completed in US. A PhII proof of concept study in ulcerative colitis has been initiated in Q2 FY and is currently ongoing. GBR 9 Pain Phase 1 enabling toxicity studies for GBR 9 have been completed successfully. Plans to file for a Phase I study in the current financial year. m PGES 1 inhibitor Source: Company Chronic inflammatory conditions including pain Forest Lab Glenmark has identified clinical candidates and is currently conducting pre clinical studies and other development activities required to support the initiation of first in human dosing Expect launch in emerging market during early FY Globally, this is the only reported TRPV3 specific antagonist molecule to enter clinical trials Expects topline data in Q3/Q4 FY 214 Expect data outcomes in Q1FY 46 of 66

47 27 November 213 / INDIA EQUITY RESEARCH / GLENMARK PHARMA INITIATING Financial Performance 8 7 Total Income(Rs Bn) % Growth (rhs) APAT(Rs Bn) 2% CAGR % CAGR FY9 FY1 FY11 FY12 FY13 FY14 FY FY9 FY1 FY11 FY12 FY13 FY14 FY. Steady Improvement in Balance Sheet health Working Capital Days Free Cash Flow(Rs Bn) Net Debt/Equity (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY FY9 FY1 FY11 FY12 FY13 FY14 FY 1 yr forward band Rs P/E 4x 3x 2x 1x Rs mn EV/EBITDA x 2x x 1x Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Source: Bloomberg, PhillipCapital India Research 47 of 66

48 27 November 213 / INDIA EQUITY RESEARCH / GLENMARK PHARMA INITIATING Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FYE Net sales 4,189 5,123 6,33 7,941 Growth, % Other income Total income 4,26 5,137 6,47 7,956 Raw material expenses 13,454 16,536 19,695 23,273 Employee expenses 6,289 7,882 9,247 1,927 Other Operating expenses 11,8,99 18,9 21,9 EBITDA (Core) 8,664 1,62 12,19 14,83 Growth, % Margin, % Depreciation 979 1,27 2,98 2,326 EBIT 7,685 9,35 1,92 12,54 Growth, % Margin, % Interest paid 1,377 1,6 1,55 1,277 Other Non Operating Income Pre tax profit 4,881 7,337 8,77 11,369 Tax provided 238 1,17 1,567 2,16 Profit after tax 4,643 6,23 7,14 9,29 Others (Minorities, Associates) Net Profit 4,63 6,147 7,47 9,89 Growth, % Net Profit (adjusted) 5,29 6,349 7,47 9,89 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FYE Cash & bank 3,3 6,11 4,66 5,654 Debtors 12,436 16,4 19,182 22,75 Inventory 7,877 8,435 9,92 11,637 Loans & advances 5,94 6,584 7,86 9,224 Total current assets 29,56 37,53 41,55 48,59 Investments Gross fixed assets 26,364 29,349 33,831 37,5 Less: Depreciation 4,137 5,286 7,384 9,71 Add: Capital WIP 2,629 4,223 2,5 2, Net fixed assets 24,856 28,286 28,947 29,85 Total assets 57,334 69,942 74,623 82,521 Current liabilities 1,371 13,48 16,179 19,119 Provisions 2 1,11 1,51 1,98 Total current liabilities 1,623 14,419 17,231 2,217 Non current liabilities 22,445 27,649 23,149 19,649 Total liabilities 33,68 42,68 4,379 39,865 Paid up capital Reserves & surplus 23,746 27,359 33,73 42,141 Shareholders equity 24,266 27,874 34,244 42,656 Total equity & liabilities 57,334 69,942 74,623 82,521 Estimates Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FYE Pre tax profit 4,881 7,337 8,77 11,369 Depreciation 979 1,27 2,98 2,326 Chg in working capital 622 1,371 2,659 3,59 Total tax paid 1,83 2,236 1,567 2,16 Other operating activities 995 2,598 Cash flow from operating activities 3,657 2,42 6,579 8,475 Capital expenditure 3,712 4,7 2,759 3,184 Chg in investments 17 Cash flow from investing activities 3,729 4,7 2,759 3,184 Free cash flow 2,53 1,467 3,727 5,171 Equity raised/(repaid) Debt raised/(repaid) 1,36 5,24 4,5 3,5 Cash flow from financing activities 1,339 5,18 4,593 3,62 Net chg in cash 1,267 2, ,671 Valuation Ratios & Per Share Data Per Share data FY12 FY13 FY14E FYE EPS (INR) Growth, % Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Receivable days Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Total debt/equity (%) Net debt/equity (%) Valuation PER (x) PEG (x) y o y growth Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) of 66

49 IPCA Laboratories All round growth; lacks earning surprise PhillipCapital (India) Pvt. Ltd. PHARMACEUTICALS: Initiating Coverage 27 November 213 Steady growth in domestic formulations despite concerns of new pricing policy IPCA s Domestic formulations operation (33% of total sales) holds leadership in anti malarial (34% market share) and rheumatoid arthritis. Over last five years, it has outpaced industry growth by delivering 16.6% CAGR over FY9 13 to Rs 8.8bn in FY13 vs. industry growth rate of 14.1% over the same period. Going ahead, we expect this segment to continue its formulation growth momentum led by deeper market penetration, new product introduction, and improvement in field force productivity. We expect minimal impact of pricing policy on IPCA as it has already taken price hike in non NELM products and weexpect it to maintain better than industry growth. Factoring the momentary impact of NELM introduction in FY14, we estimate >14% CAGR for IPCA domestic formulations over FY13 FY to Rs 11.5bn. FDA clearance of its green field Indore facility to boost US generics IPCA s US generic sales, led by its complete vertical integration and optimal cost offerings, jumped 8 fold over last five years to Rs1.91bn in FY13, despite its partnership model. Now, with the approval of its its greenfield Indore facility (with peak potential of Rs 4.bn) by USFDA and expanded ANDA pipeline (pending ANDA of 2 v/s currently marketed 9 ANDAs), we forecast US generics sales to grow at 32% CAGR to Rs3.35bn over FY13 E. In fact, the management expects first shipment from Indore facility in Q4FY14 (for 3 approved drugs) and 6 7 more drug launches in FY. Additionally, the company has guided for aggressive ANDA filing plans of 12 ANDAs per annum. Anti malarial business: strong visibility despite concerns of declined funding IPCA is one of the top five suppliers of anti malaria drugs in the world having WHO pre qualification for Artemether Lumfantrine (AL) and Artemether Amodiquine (AA). Supported by its vertically integrated operation, the company has rapidly enhanced its market share to ~2% for AL with sales of Rs 3.6bn in FY13, implying a CAGR 6% over FY9 13. Going ahead, we believe IPCA will grab % market share led by its cost leadership and ramp up in AA (market potential of $5mn). Also the company s initiatives to develop malaria injectable will help it grow further. We estimate IPCA s anti malarial institutional business to deliver a CAGR of 18% over FY13 to Rs 5.5bn Limited valuation gap; Initiate with Neutral rating and Target Price of Rs 752 With steadily progressive and predictable financial performance (sales CAGR 22% and profit CAGR %), cash flow turning positive, healthy balance sheet and strong return ratios, IPCA valuations have seen gradual re rating over last three years from 8x 1 year forward earnings in FY11 to the current x. At CMP of Rs 681, IPCA trades at 14.6x FYE EPS, which we believe factors almost all visible earning triggers and we don t expect further re rating in near future. However, considering its sound operational and financial performance track record, we are valuing IPCA at Rs 752 (16x its FYE EPS), implying a limited upside of 1%. Hence, we initiate coverage on IPCA with a Neutral rating and a one year Target Price of Rs 752. NEUTRAL IPCA IN CMP RS 681 TARGET RS 752 (+1%) Company Data O/S SHARES (MN) : 126 MARKET CAP (RSBN) : 86 MARKET CAP (USDBN) : WK HI/LO (RS) : 744 / 443 LIQUIDITY 3M (USDMN) : 2.1 FACE VALUE (RS) : 2 Share Holding Pattern, % PROMOTERS : 45.9 FII / NRI :.6 FI / MF : 12.4 NON PROMOTER CORP. HOLDINGS : 5.2 PUBLIC & OTHERS : 11. Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 1 Jun 11 Aug 12 Oct 13 IPCA BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FYE Net Sales 27,537 31,632 36,848 EBIDTA 6,232 7,614 9,2 Net Profit 3,932 4,799 5,853 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: Phillip Capital India Research Surya Patra ( ) spatra@phillipcapital.in 49 of 66

50 27 November 213 / INDIA EQUITY RESEARCH / IPCA LABORATORIES INITIATING Acute therapies dominate domestic formulation mix 6% 6% 17% 5% 3% 3% 1% 1% 1% Cardiovascular & Abti diabetics % Non Steroidal anti ininflammatory drugs (NSAID) Anti malarials Anti bacterials Gastro Intestinal (GI) products Neuro Psychiatry Cough Preparations Dermatology Urology Neutraceuticals Others 32% Source: Company Steady growth despite concerns of new pricing policy US generics to grow at % CAGR over FY Domestic formulations sales (Rs bn) % Growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14e FYe US generic sales (Rs mn) 32.5% CAGR 67.5% CAGR FY9 FY1 FY11 FY12 FY13 FY14e FYe Source: PhillipCapital India Research Continued progress in institutional business 6 Institutional Sales (Rs mn) % Growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14e FYe of 66

51 27 November 213 / INDIA EQUITY RESEARCH / IPCA LABORATORIES INITIATING Sales Mix of IPCA Laboratories (Rs Mn) FY11 FY12 FY13 FY14E FYE Domestic formulations Growth % % of sales Branded Formulation Exports Growth % % of sales Institutional Sales (Africa) Growth % % of sales Generic Formulation Exports Growth % % of sales Total Formulation Exports Growth % % of sales Gross APIs Growth % % of sales TOTAL Growth % Predictably steady progressive financial Performance Total Income(Rs Bn) % Growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY APAT(Rs Bn) % CAGR (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY of 66

52 27 November 213 / INDIA EQUITY RESEARCH / IPCA LABORATORIES INITIATING Continued deleveraging strengthens Balance Sheet Return ratios remain strong 4 Free Cash Flow(Rs mn) Net Debt/Equity (rhs).7 3 ROCE% ROE% FY9 FY1 FY11 FY12 FY13 FY14 FY FY9 FY1 FY11 FY12 FY13 FY14 FY 1 yr forward band Rs P/E 2x 12 1 Rs mn EV/EBITDA 12x 7 6 x 8 9x x 5x x 3x Apr 8 Apr 1 Apr 12 Apr 8 Apr 9 Apr 1 Apr 11 Apr 12 Apr 13 Source: Bloomberg, PhillipCapital India Research 52 of 66

53 27 November 213 / INDIA EQUITY RESEARCH / IPCA LABORATORIES INITIATING Financials Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FYE Net sales 23,14 27,537 31,632 36,848 Growth, % Other income Total income 23,587 28,131 32,265 37,585 Raw material expenses 9,131 1,966 12,583 14,658 Employee expenses 3,355 3,918 4,323 4,886 Other Operating expenses 5,966 7, 7,744 9,2 EBITDA (Core) 5,135 6,232 7,614 9,2 Growth, % Margin, % Depreciation ,98 EBIT 4,464 5,365 6,639 7,923 Growth, % Margin, % Interest paid Other Non Operating Income Pre tax profit 3,652 4,535 6,395 7,798 Tax provided 881 1,299 1,596 1,944 Profit after tax 2,771 3,236 4,799 5,853 Net Profit 2,771 3,236 4,799 5,853 Growth, % Net Profit (adjusted) 3,17 3,932 4,799 5,853 Unadj. shares (m) Wtd avg shares (m) Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FYE Cash & bank ,286 2,384 Debtors 3,491 4,178 6,24 7,269 Inventory 6,699 7,41 8,493 9,893 Loans & advances 2,235 2,374 3,163 3,685 Total current assets 12,547 14,545 19,182 23,23 Investments Gross fixed assets 13,386,791 18,291 2,193 Less: Depreciation 3,945 4,748 5,723 6,821 Add: Capital WIP 945 1,292 1, 5 Net fixed assets 1,386 12,334 13,567 13,872 Total assets 23,273 26,97 32,84 37,853 Current liabilities 3,43 3,745 4,577 5,312 Provisions Total current liabilities 3,78 4,288 5,196 5,979 Non current liabilities 6,953 7,143 7,852 6,868 Total liabilities 1,733 11,431 13,48 12,847 Paid up capital Reserves & surplus 12,288,286 19,539 24,754 Shareholders equity 12,54,539 19,791,7 Total equity & liabilities 23,273 26,97 32,84 37,853 Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FYE Pre tax profit 3,652 4,535 6,395 7,798 Depreciation ,98 Chg in working capital 461 1,3 3, 2,169 Total tax paid 763 1,269 1,579 1,894 Other operating activities Cash flow from operating activities 2,331 2,87 2,766 4,832 Capital expenditure 3,118 2,8 2,28 1,43 Chg in investments Cash flow from investing activities 3,41 2,573 2,198 2,43 Free cash flow 5,185 3,211 5,45 33,795 Debt raised/(repaid) ,34 Cash flow from financing activities ,34 Net chg in cash ,26 1,756 Valuation Ratios & Per Share Data FY12 FY13 FY14E FYE Per Share data EPS (INR) Growth, % Book NAV/share (INR) FDEPS (INR) CEPS (INR) CFPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Receivable days Working capital days Liquidity ratios Current ratio (x) Quick ratio (x) Interest cover (x) Total debt/equity (%) Net debt/equity (%) Valuation PER (x) PEG (x) y o y growth Price/Book (x) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Estimates 53 of 66

54 Lupin Unique geographic presence PhillipCapital (India) Pvt. Ltd. PHARMACEUTICALS: Initiating Coverage 27 November 213 Best US generic execution amongst Indian peers Lupin, supported by its strategic branded generics play, aggressive filling of limited competition ANDAs and superior execution by its integrated operation, has emerged as the 5 th largest US generic player and leading Indian player in US generics with US prescription market share of over 4%. With the larger mix of limited competition ANDA launches coupled with strong growth in US prescription generation (26% CAGR), Lupin delivered healthy growth of 28% CAGR on constant currency (33% CAGR in Rupee terms) over last five years to $693mn in FY13. The average US generic revenue per ANDA of ~$7mn for Lupin is the best amongst Indian peers. Superior drug pipeline to drive 2% CAGR in US sales Going ahead, we expect Lupin s strongest ANDA pipeline amongst its Indian peers (in terms of no of Para IV fillings i.e 86 out of total filling of 177 including 91 pending) and continued aggressive future fillings (about > ANDAs p.a.) with prime focus on differentiated generics to sustain US generics growth. We estimate 2% CAGR in its US generics sales over FY13 e to Rs 54.5bn despite a muted growth in branded generic business. The US sales growth would primarily be led by its rich drug pipeline awaiting launch through 214. Emerged 2 nd best in domestic formulations With the increasing share of chronic drug sales from 31% in FY8 to 51% in FY13 and deep domestic penetration (with doubling of field force to 52 in FY13 over last 5 years), Lupin has emerged as the second best domestic formulation player in terms of market share in its covered market. Over last five years Lupin s domestic formulations business has delivered 2% CAGR to Rs 23.64bn in FY13 (% of total sales). Going forward, we believe the implementation of new pricing policy will have no material impact on its domestic business. On the contrary, the focused therapy marketing coupled with continued momentum of new product launches (including the inlicensed) would help it to outpace industry growth and deliver 18% CAGR over FY13 e to Rs 31.78bn. Strong foothold & rising genericisation in Japan ensures future growth Lupin s strategic acquisition of Kyowa Pharma in FY8 has already placed itself amongst top 1 generic pharma companies in Japan. Its recent acquisition of I rom Pharma has further strengthened its position in Japan s hospital segment (valued $8bn). The Japanese Govt. has set a target to enhance generic penetration from current 26.5% (in $11bn valued Japan pharma market) in FY13 to 35% by FY17, which makes us view Japan as a long term growth driver for Lupin. We estimate % CAGR in Japanese sales over FY13 to Rs.7bn (12% of sales.) Streched valuation: Initiate with a Neutral rating and target price of Rs 923 Considering Lupin s strong US outlook and improving domestic formulation mix, we value Lupin at 22x (1% premium to peers average) FYE EPS of Rs 42.1 to arrive at our target price of Rs 923. At CMP of 864, the stock already trades at 2.5x its FYE EPS and offers limited upside of ~7%. Hence, we initiate our coverage on Lupin with a Neutral rating and target price of Rs 923. NEUTRAL LPC IN CMP RS 864 TARGET RS 923 (+7%) Company Data O/S SHARES (MN) : 448 MARKET CAP (RSBN) : 387 MARKET CAP (USDBN) : WK HI/LO (RS) : 946 / 56 LIQUIDITY 3M (USDMN) : 13.1 FACE VALUE (RS) : 2 Share Holding Pattern, % PROMOTERS : 46.8 FII / NRI : 31.7 FI / MF : 12.1 NON PROMOTER CORP. HOLDINGS : 1.1 PUBLIC & OTHERS : 8.4 Price Performance, % 1mth 3mth 1yr ABS REL TO BSE Price Vs. Sensex (Rebased values) Apr 1 Jun 11 Aug 12 Oct 13 Lupin BSE Sensex Source: Bloomberg, Phillip Capital Research Other Key Ratios Rs mn FY13 FY14E FYE Net Sales 94,616 18, ,739 EBIDTA 22,943,82 31,616 Net Profit 13,269,413 18,846 EPS, Rs PER, x EV/EBIDTA, x P/BV, x ROE, % Debt/Equity (%) Source: Phillip Capital India Research Surya Patra ( ) spatra@phillipcapital.in 54 of 66

55 27 November 213 / INDIA EQUITY RESEARCH / LUPIN INITIATING Strong visibility of US pipeline for FY stretched Valuations Supported by its aggressive US fillings coupled with continued focus on branded play and rising contribution from domestic chronic segments, Lupin has delivered compounded annual growth of 26% and 27% in sales and net profits over last five years to Rs 96.4bn and Rs 13.27bn, respectively in FY13. Going ahead, we expect Lupin s strengthening US pipeline (despite the high base of US operation), its continued steady progress in domestic formulation and the Japanese generics will drive 17% and 19% CAGR in sales and net earnings over FY13 E to Rs131.2bn and Rs 18.8bn, respectively. Considering Lupin s strong US outlook and improving domestic formulation mix, we value Lupin at 22x (1% premium to peers average) FYE EPS of Rs 42.1 to arrive at our target price of Rs 923. At CMP of 864, the stock trades at 2.5x FYE EPS and offers limited upside of ~7%. We initiate our coverage on Lupin with a Neutral rating and target price of Rs 923. Key downside risk to our estimates include 1) early generic competition in Suprax, 2) regulatory hurdles in terms of delay in approvals and facility issues and 3)adverse currency fluctuation. However, the continued inorganic efforts of the company in US branded business and ROW market supported by strong free cash flow generation (estimated to Rs 38.6bn over FY13 ) and healthy.2x D/E position pose an upside risk to our estimates. Strongest pipeline of ANDAs amongst Indian Peers Potential Generics Mkt Size Likely Launch Remarks (US $mn) Duloxetine Hcl(Cymbalta) Dec 13 multiple filling >1, Shared FTF with several players Choline fenofibrate(triplix) Jan 14 Mylan launched in th July 213 n Impax was Authorised generic but will be limited competion Telmisartan; amlodipine(twynsta) NA 16 Jan 14 Niacin(Niaspan) Mar 14 Competative launch after teva's 18days exclusivity in 16th Mar 214 Esomeprazole magnesium(nexium) May 14 Ranbaxy is FTF,Dr Reddy and Teva settled to launch on on 27 May 214 Eszopiclone(Lunesta) 8. 3 May 14 multiple settlement by glenmark, sun Sun n Mylan has already got FA YAZ Jun 14 Likely competing launch by Watson, Sandoz, Lupin, Sun n Femycare on patent expiry in Jun 214. Bimatoprost (Lumigan) 4 19 Aug 14 LPC is sole FTF for.1% formulation Memantine (Namenda) Jan Settled with Amneal, Watson, Dr. Reddy's, Lupin, Mylan, Orchid, Sun, Teva, Upsher Smith, and Wockhardt Colesevelam(Welchol) Sep Glenmark/Impax already settled. Impax is FTF. Watson n Lupin r litigating, late entry after exclusivity expiry on 2nd Sep 2 Celecoxib(Celebrex) Dec multiple filling >1, Teva, Mylan, Watson, Apotex etc Amlodp+Valsartan+Hclthzde(Exforge HCT) 321. Asacol (mesalamine). Cadila is FTF Darunavir(Prezista) 45 Lupin has joint FTF with Mylan may be in 219 Naproxen+ Esomeprazole(Vimovo) DRL FTF Gatifloxacin(Zymaxid) Moxifloxacin(Vigamox) estradiol valerate and dienogest(natazia) armodafinil(nuvigil) of 66

56 27 November 213 / INDIA EQUITY RESEARCH / LUPIN INITIATING Best execution in US Generics (in terms of avg. Sales/ANDA) 8. FY13 US sales per ANDA ($ mn) Lupin Dr Reddy Sun Pharma Glenmark Cadila IPCA Labs Aurobindo Robust growth in US Sales US Generic Sales (Rs bn) US Branded Sales (Rs bn) % growth in overall US sales (RHS) FY9 FY1 FY11 FY12 FY13 FY14 FY Steady progress in domestic formulations 35 Domestic formulations sales (Rs bn) % growth (rhs) FY9 FY1 FY11 FY12 FY13 FY14 FY Commands 2 nd best position in domestic formulations in terms of prescription share Source: Sun Pharma AR 56 of 66