Alembic Pharmaceuticals Ltd 25 th September, 2012

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1 Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Alembic Pharmaceuticals Ltd 25 th September, 2012 CMP Target Price Rs Rs Alembic Pharma continues to maintain its market share of 1.62% owing to its strong distribution reach, strong field force and product launches. It has four brands in the list of top 300 brands of industry i.e. Azithral, Roxid, Althrocin and Wikoryl. BSE Code NSE Code APLLTD Market Cap (Rs Mn) Week High/Low 78.95/34.00 Industry Pharmaceuticals Face Value Rs.2.00 Shares O/S On consolidated basis, the company has posted a rise of about 12% in its net profit at Rs crore for the quarter ended June 2012 as compared to Rs crore for the same quarter in the previous year. Total income has increased by 6.72% at Rs crore for quarter as compared to Rs crore for the quarter ended June R&D cost of the quarter was about 14 Crores, which is about 4.1% of sales. There was the loss of about Rs.3.5 Crores for the quarter largely on the forex denominated loans. Price increase growth is just above 2%, 9% is about volume growth and about 4% is new product introduction. EPS worked out to be 1.64 as against 1.46 for the last corresponding quarter. EPS 6.90 Book Value P/E P/B 3.38 Shareholding Pattern The Domestic formulations business posted sales of Rs crores against Rs crores with a 14% growth over the corresponding quarter of the previous year. Export API recorded sales of Rs crores against Rs crores registering growth of 37% while domestic API recorded sales of Rs crores against Rs crores in like quarter last year. International Generic Formulation sales stood at Rs crores against Rs crores over the corresponding quarter last year. De-growth was due to price erosion, product mix and capacity constraint. Cumulative ANDA filings as on June 2012 stands at 49 of which 20 are already approved and cumulative DMF filings are at 63. Valuation Research Analyst: Vineeta Mahnot research@hemonline.com With strong pipeline of ANDA filings, capacity expansion and sharp growth across business segments and positive guidance by management; Alembic Pharma Ltd. growth outlook looks strong. We believe APL is trading at an attractive valuation at 9.03x and 7.25x of FY13EPS of Rs.7.85 and FY14EPS of Rs We initiate a BUY on the stock with a target price of Rs.90 (appreciation of about 27%) with the long term investment horizon. For Private Circulation Only 1 Hem Research

2 Business Details Established in 1907, Alembic Pharmaceuticals Limited is a leading pharmaceutical company in India. The Company is vertically integrated with the ability to develop, manufacture and market pharmaceutical products, pharmaceutical substances and Intermediates. Alembic is the market leader in the Macrolides segment of anti-infective drugs in India. Alembic's manufacturing facilities are located in Vadodara and Baddi in Himachal Pradesh. The plant at Vadodara has the largest fermentation capacity in India. The Panelav facility houses the API and formulation manufacturing (both US FDA approved) plants. The plant at Baddi, Himachal Pradesh manufactures formulations for the domestic and non-regulated export market. The company has a state of the art Research Centre at Vadodara. APL s business segments include: Active Pharmaceutical Ingredients- API's continue to make up a significant part of the operations for Alembic Pharmaceuticals Limited. The fermentation based APIs are manufactured at its main manufacturing facility exceeding 3 million sq.mt. Alembic Pharmaceuticals has an exclusive facility for manufacturing synthetic APIs, consisting of independent manufacturing blocks for Macrolides, NSAIDs and other drugs. The API manufacturing facility at panelav has successfully under gone inspection of USFDA and EDQM. API covers anti infectives, cardio-vascular, central nervous system, musculoskeletal, erectile dysfunction, gastro-intestinal. Formulations- APL s extensive range of finished dosage formulations covers every aspect of human life. The basket of formulations contain more than 150 products in several forms belonging to diverse therapeutic segments from antiinfective, cough & cold products to cardiovascular and oral anti-diabetics. The manufacturing expertise is available for almost all dosage forms including sterile as well as non sterile products. Formulations which account for 65% of the total business today has manufacturing facility at three different places; namely Vadodara & Panelav at Gujarat in the west & Baddi at Himachal Pradesh in the north. The facility at Panelav enjoys certifications from international regulatory authorities like MHRA (UK), MCC (South Africa). The formulation business has crossed the boundaries of India and is well spread to many other countries in overseas. Domestic business includes Generics and branded formulations. Herbal nutraceuticals- Alembic Pharmaceuticals Limited has been in the Nutraceuticals business for 50 years. In order to cater to the changing needs of world Nutraceuticals, the Company has constantly been adding products with their improvised therapeutic profile. For Private Circulation Only 2 Hem Research

3 Strong Industry growth ahead The Indian Pharmaceutical Industry is currently valued at $20 billion and stands 13th in terms of value. Globally adjudged as the third largest in terms of volume, the sector is remarkably growing at 14% per year. The growth of the sector has been fuelled by exporting life-saving drugs to developing countries and supplying quality drugs to the developed nations at affordable prices. India is one of the world's most lucrative healthcare markets, and is expanding rapidly. The Indian healthcare industry estimated at US$ 40 billion in 2010 is expected to reach US$ 280 billion by India is also emerging as a world leader in generic pharmaceuticals production, supplying 20% of the global market for generic medicines. The Indian pharma companies are increasingly filing Abbreviated New Drug Approval (ANDAs) application for the approval by the US Food & Drug Administrations (FDA). As US is the largest market for generics, increasing approval by the US FDA gives an opportunity to penetrate into the market deeper. Of a total approval of 214 ANDAs by the US FDA in the first-half of 2012, Indian pharma companies managed to get around 88 ANDAs (41.1 per cent). 7 projects announced in June 2012 quarter Qtr ended New Projects Projects Completed Projects Shelved (Nos.) Rs. Crores Mar , , In the June 2012 quarter, eight projects Jun , with an investment of over Rs.752 crore were commissioned as per data sourced from CMIE. In the September 2012 quarter, projects with an investment of over Rs.1,031.7 crore are scheduled to be completed. In , projects worth over Rs.7,957 crore are scheduled to commission. In FY12, India also touched a milestone of being polio free for one whole year. There is a need to ensure that there is no case of polio infection for the next three consecutive years for India to celebrate eradication of poliomyelitis. (Nos.) Rs Crores (Nos.) Rs Crores Jun , Sep , Dec , Mar , , Jun , , Sep Dec , Mar , Jun , Sep Dec The Indian drug exports grew by a robust 29.8 per cent in dollar terms in April 2012 as compared to the year ago month. In rupee terms, exports grew by an even higher 51.5 per cent to Rs.5,718 crore. A sharp depreciation in the rupee vis-a-vis the USD and strong global demand fuelled the growth in exports during the month. Export to US, the largest market for generics, grew by a whopping 88.7 per cent in April Exports to Russia and UK were higher by 76.2 per cent and 29.2 per cent, respectively. Exports to Germany and Brazil grew by 23.9 per cent and 17.9 per cent, respectively. The Indian pharma companies import bulk drugs and chemicals to manufacture formulations. In rupee terms, imports were higher by 41.8 per cent to Rs.1,132.9 crore in April For Private Circulation Only 3 Hem Research

4 CMIE expects drug exports from India to grow by 22.7 per cent to Rs.77,747 crore in A depreciation in the value of rupee against the USD and pro-generic policies of the developed and developing countries will boost the growth in exports. The rising healthcare cost has become a concern for developed countries like the US, UK and Japan. In order to rein in this cost, the governments of these developed countries are switching over to generic drugs from branded drugs. In case of developing countries like Africa and Latin America as well, the use of generic drugs is gaining importance due to poor penetration of modern medicines, rising lifestyle diseases, increasing income levels. Thus, there is a strong demand for generics in the global market. The Indian pharma industry is already the largest exporter of generics. And their share in global generic market is expected to increase going forward. Expiration of patents, increase in number of Abbreviated New Drug Approval (ANDAs) filings for approval by the US FDA, favourable government policies are likely to aid the growth in exports. Around USD 80 billion worth of drugs are expected to go off-patent in The Domestic formulations market, valued at Rs.48,200 crore has grown steadily at CAGR of 14-15% over the past five years. In the absence of forex losses in the September 2012 quarter, CMIE expects the profit scenario of the industry to improve. The PAT is likely to return to growth. PAT is expected to grow by 60.6 per cent during the quarter. Sales are expected to grow by 18 per cent in the September 2012 quarter. Strong growth in exports will drive the growth in sales. The progeneric policy of developed markets and strong demand scenario in the developing market bodes well for the growth in export volumes. Export realisations are likely to remain high due to depreciation in the value of rupee against the dollar. The core operating performance is likely to improve during the quarter. The PBDIT is expected to grow by 45.9 per cent. The PBDIT margin is likely to expand by 330 basis points to 17.4 per cent. Interest expense is likely to account for per cent of PBDIT as compared to 19.6 per cent in the year ago quarter. Resultantly, the PAT margin is likely to expand by 270 basis points to 10.3 per cent. For Private Circulation Only 4 Hem Research

5 Strong guidance Alembic s management plans to achieve 25% to 30% CAGR for the next three years time. The company proposes to be like 2500 crores topline company in a couple of years about three to four years time. APL expects steady ramp up in sales in international generic post quarter four of FY13. APIs are expected to grow not more than 15% as the company is changing the product mix; for the current fiscal API business growth would be 10% net of forex. Domestic formulation business is expected to 10% to 11% for quarter two of FY13 and by 14% to 15% for the full year. Export formulation business is expected to put up 225 to 240 crores in FY13 and significant growth to come in FY14. Chronic segment (contributing about 45% of the sales) which has been growing at 18%-20% for the last couple of years is expected to maintain the same growth momentum going ahead. For the full year the total revenue growth would be around 10%. Further, APLs focus will be to improve its operating margins. For the current year (FY13) the company hopes to continue between 14% and 15% margin and for the next year (FY14); with new plant capacity in place operating margins are expected to move up by 100 to 125 basis points. Tax rate for the current year would be at 19% to 20%. Further, the company has started repaying its debt levels. It repaid about Rs.25 crores during the quarter ended June 2012 and expects its debt-equity ratio to go down to 0.6. For Private Circulation Only 5 Hem Research

6 Capacity expansion driven growth Alembic has planned a capex of Rs.120 crore for FY13; out of which about Rs.100 odd crores would be for the new formulation facility. The company has already spent almost Rs.20 to 25 crores in the previous year and the balance Rs.80 odd crores is planned to be spent in the current year. This new facility is expected to be up and running by the end of the fourth quarter. Expanded annual production is expected to increase from 2.6 billion tablets/capsules to 5 billion tablets/capsules. APL also plans to spend about Rs.30 to 35 crores of maintenance capex for balance plants and R&D spends. APL has filed four ANDA during the quarter ended June It has also filed its first Brazilian dossier with ANVISA. During the quarter the company has launched dermatology division with a field force of 100 people. The company expects that it will further add to the basket of specialty products and growth of the company in the future. Also, the company has filed Para 4 and desvenlafaxine succinate extended release tablets. This is a first to file opportunity and it expects to share 180 days exclusivity with other ANDA filers. Going forward, APl expects to file anywhere between 8 and12 ANDAs every year. It plans to have 55 ANDA filed and 74 DMF filings by FY13. The company also plans to launch new products in branded formulations segment. For Private Circulation Only 6 Hem Research

7 Agreement with Accu-Break Pharmaceuticals Alembic has also entered into development and license agreement with Accu-Break Pharmaceuticals USA (ABP) to develop new brand products that will use ABP's innovative ACCU break tablet technologies. The first product that ABP will seek Food and Drug Administration marketing approval for is an Accu-Break-formatted version of the popular anticoagulant medication warfarin. Further, ABP's patented Accu Break tablets can be split easily by hand into exact smaller doses to provide maximum flexibility, and to make it easier and safer for patients and caregivers to adjust their doses. APL will be working on it for the US market and also hopes to extend this platform to other territories as well in the future. Given for this Accu-Break technology it is ramping up its manufacturing facility, so by the time it has those approvals in place the company would have adequate manufacturing facility with it. The company plans to do the filing within the next 9 to 12 months and hopes to get an approval for another 9 to 12 months after that; so around 24 month for it to be commercialized. This warfarin opportunity would be anywhere between 5 million to 20 million in a five year period. Further, the company plans to enter into new therapeutic segment- Respiratory therapies which will expand its spread. For Private Circulation Only 7 Hem Research

8 Consolidated Profit & Loss Account Rs. Crores Particulars FY11 FY12 FY13E FY14E Net sales Growth % 10.00% 15.00% Expenditure EBITDA Growth % 11.24% 21.05% EBITDA margin 13.33% 15.03% 15.20% 16.00% Other income Depreciation & Amortisation EBIT EBIT margin 10.88% 12.77% 12.94% 13.78% Interest PBT Tax PAT Minority interest/share of JV/Associates Adjusted PAT Growth Net Profit margins Extraordinary item Reported PAT Equity Capital Res. & Surplus Equity Shares EPS Ratios Particulars FY11 FY12 FY13E FY14E Return on Equity Return on Capital employed Debt/Equity Asset turnover Current Ratio Book value per share For Private Circulation Only 8 Hem Research

9 Balance Sheet Rs. Crores Particulars FY11 FY12 FY1E2 FY14E Share Capital Reserves & Surplus Shareholders funds Borrowings Deferred tax Liability Sources of funds Gross block Accumulated Depreciation Net block Capital work in progress Investments Projects in progress Inventories Sundry debtors Cash and bank balance Other current assets Loans and advances Total current assets Deferred tax asset Current liabilities and provisions Net current assets Misc exp Uses of funds For Private Circulation Only 9 Hem Research

10 Consolidated Quarterly Financial Highlights Rs. Crore Particulars Q1FY13 Q1FY12 Q4FY12 YoY% QoQ% Revenues Expenditures Operating Profit Net Profit OPM% (40bps) 225bps NPM % bps 248bps EPS Past Price movement of the stock ALEMBIC PHARMACEUTICALS ( , , , , ) October November December 2012 February March April May June July August September Octob For Private Circulation Only 10 Hem Research

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