Cipla BUY. Performance Highlights CMP. `310 Target Price `369. 2QFY2012 Result Update Pharmaceutical. Investment Period 12 months

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1 2QFY2012 Result Update Pharmaceutical November 16, 2011 Cipla Performance Highlights Y/E March (` cr) 2QFY2012 1QFY2012 % chg qoq 2QFY2011 % chg yoy Net sales 1,731 1, , Other income Gross profit 1, Operating profit Net profit For 2QFY2012, Cipla s numbers came well above our expectations on the top-line and bottom-line fronts, mainly on the back of better-than-expected performance on the gross operating profit front. Improvement in the operating front came on the back of strong growth in the domestic formulation business. We maintain our Buy view on the stock. Results above expectations: For 2QFY2012, Cipla reported net sales of `1,731cr, posting 9.6% yoy growth and above our estimate of `1,649cr. Gross margin expanded by 628bp yoy to 58.9%. This was mainly on account of better product mix, which had lower proportion of anti-retroviral in formulation exports and domestic formulation sales. However, despite such gross margin expansion, OPM was flat at 22.6%, led by increased manpower cost and negative contribution of Indore SEZ, as it is in the optimization phase. Furthermore, net profit came in at `308cr, posting 17.2% yoy growth, higher than our estimate due to operating profit growth. Outlook and valuation: We expect the company s net sales to post a 15.5% CAGR to `8,164cr and EPS to record a 23.8% CAGR to `18.4 over FY E. The stock is trading at 20.8x and 16.8x FY2012E and FY2013E earnings, respectively. We recommend Buy on the stock with a revised target price of `369. Key financials (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E Net sales 5,358 6,124 7,006 8,164 % chg Net profit 1, ,197 1,481 % chg 40.2 (10.5) EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) BUY CMP `310 Target Price `369 Investment Period 12 months Stock Info Sector Pharmaceutical Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume 24, / ,357 Face Value (`) BSE Sensex Nifty Reuters Code 2 16,776 5,030 CIPL.BO Bloomberg Code CIPLA@IN Shareholding Pattern (%) Promoters 36.8 MF / Banks / Indian Fls 25.2 FII / NRIs / OCBs 17.1 Indian Public / Others 20.9 Abs. (%) 3m 1yr 3yr Sensex 0.3 (15.6) 78.7 Cipla 8.8 (8.5) 64.5 Sarabjit Kour Nangra Ext: 6806 sarabjit@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 2QFY2012 performance (Consolidated) Y/E March (` cr) 2QFY2012 1QFY2012 % chg (qoq) 2QFY2011 % chg (yoy) 1HFY12 1HFY11 % chg Net sales 1,731 1, , ,281 3, Other income Total income 1,802 1, , ,418 3, Gross profit Gross margin Operating profit OPM (%) Interest (44.0) Depreciation (6.6) PBT Provision for taxation PAT before extra-ordinary item Extra-ordinary items/(income) PAT after extraordinary item EPS (`) Exhibit 2: 2QFY2012 Actual vs. Angel estimates (` cr) Actual Estimates Variance (%) Net sales 1,731 1, Other income (2.6) Operating profit Tax Net profit Top-line growth mostly in-line with expectations For 2QFY2012, Cipla reported net sales of `1,731cr, posting 9.6% yoy growth and above our estimate of `1,649cr. The domestic formulation segment grew by 12% yoy to `847cr. Overall exports increased by 9.4% yoy to `910.2cr, contributing 51.8% to overall sales. The API segment reported revenue of `159.4cr, down 5.3% yoy. Revenue of the formulation exports segment stood at `751.2cr during the quarter. Technological know-how fees stood at `7.8cr (`12.0cr), registering a dip of 35.0% yoy. However, overall other operating income reported growth of 63.5% yoy to `38.4cr (`23.5cr) in 2QFY2012. November 16,

3 Exhibit 3: Sales trend 1,200 (` cr) 1, QFY2010 2QFY2011 4QFY2011 2QFY2012 Domestic Export Significant improvement in gross profit For 2QFY2012, the company s gross margin expanded by 628bp yoy to 58.9%. This was mainly on account of better product mix, which had lower proportion of anti-retroviral in formulation exports and domestic formulation sales. However, despite such gross margin expansion, OPM stood flat at 22.6%, led by higher manpower cost and negative contribution of Indore SEZ, as it is in the optimization phase. Exhibit 4: OPM trend (%) QFY2010 2QFY2011 4QFY2011 2QFY2012 November 16,

4 Net profit above expectations For 2QFY2012, the company s net profit came in at `308cr, posting 17.2% yoy growth, higher than our estimate. Net profit growth was mainly on the back of higher operating profit during the quarter. Exhibit 5: Net profit trend (` cr) QFY2010 2QFY2011 4QFY2011 2QFY2012 Concall takeaways For FY2012, management indicated 10 12% top-line growth and operating margin of 18 20%. Cipla has a field force of 7,000 employees in the domestic market. Management expects the company s operating margin to reach 24% in the next 2 3 years, with the Indore SEZ facility achieving optimum capacity utilization. During 2QFY2012, the Indore SEZ contributed `150cr in 2QFY2012 to the company s top line. Management expects capacity utilization at the Indore facility to reach optimum capacity levels in the next 2 3 years. November 16,

5 Recommendation rationale Export segment to be the growth driver: Cipla exports to more than 175 countries, with growth coming through marketing alliances and distribution tie-ups in various markets. Exports contributed 52% to the total turnover of FY2011, with Africa, US and Latin America constituting more than 60% of total exports. In the US, Cipla has entered into a partnership with 22 players and has cumulative 64 approved ANDAs, of which 35 have been launched, while 46 are pending for approval. Further, Cipla has launched Salbutamol inhalers in the UK and has received approvals for Budesonide inhalers in Germany and Portugal and Beclomethasone in Portugal. Cipla has developed eight CFC-free inhalers for the EU region, of which six have been submitted for regulatory approvals. Launch of CFC-free inhalers in Europe and US with a potential market size of more than US$3bn would be the long-term growth driver for the company. Management has also indicated that it is negotiating with MNCs such as Pfizer, GSK and Boehringer for long-term supply agreements. Increasing penetration in the domestic market: Cipla is one of the largest players in the domestic formulation market, with a market share of around 5%, contributing 46% to the total turnover in FY2011. The company is the market leader in key therapeutic areas such as respiratory care, anti-viral and urological. Cipla s distribution network in India consists of a field force of around 7,000 employees. The company plans to increase its focus on domestic markets with new therapies such as oncology and neuro-psychiatry in the offering. Cipla plans to focus on growing its market share and sales by increasing penetration in the Indian market, especially in rural areas and plans to expand its product portfolio by launching biosimilars, particularly relating to the oncology, anti-asthmatic and anti-arthritis categories. Return ratios to improve going ahead: Since FY2006, Cipla has incurred capex of `2,500cr (71% of GFA) for upgrading its existing manufacturing facilities at Kurkumbh, Patalganga, Bengaluru, Goa and Baddi, as well as setting up new facilities in Sikkim and Indore. While Cipla has already commenced the Sikkim plant, the Indore SEZ has also commenced operations. With significant capex been incurred and with most of the facilities commercialized, management expects Cipla s return ratio to improve as productivity level increases. Valuation: For FY2012, Cipla has guided for 10 12% overall revenue growth. Indore SEZ is expected to contribute ~10% to the company s overall sales in FY2012. The company expects to maintain OPM of 18 20% (excluding tech fees) for FY2012. We expect the company s net sales to post a 15.5% CAGR to `8,164cr and EPS to record a 23.8% CAGR to `18.4 over FY E. The stock is trading at 20.8x and 16.8x FY2012E and FY2013E earnings, respectively. We recommend Buy on the stock with a revised target price of `369. November 16,

6 Exhibit 6: Key assumptions Key assumptions FY2012E FY2013E Domestic sales growth (%) Export sales growth (%) Growth in employee expenses (%) Operating margins (excl tech. know-how fees) (%) Capex (` cr) Exhibit 7: One-year forward PE band (`) Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Price 10x 15x 20x 25x Exhibit 8: Recommendation summary Company Reco CMP Tgt. price Upside FY2013E FY11-13E FY2013E (`) (`) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%) Alembic Pharmaceuticals Buy Aurobindo Pharma# Buy Aventis* Sell 2,345 1,937 (17.4) Cadila Healthcare Buy Cipla Buy Dr. Reddy's Buy 1,614 1, Dishman Pharma Buy Glaxo* Neutral 1, Indoco Remedies Buy Ipca labs Buy Lupin Buy Orchid Chemicals Buy Ranbaxy* Buy Sun Pharma Buy ; Note: * December year ending;#cagr in EPS is based on recurring EPS November 16,

7 Profit & loss statement (Consolidated) Y/E March (` cr) FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E Gross sales 4,101 5,022 5,410 6,173 7,037 8,200 Less: Excise duty Net sales 4,010 4,961 5,358 6,124 7,006 8,164 Other operating income Total operating income 4,217 5,236 5,623 6,318 7,224 8,412 % chg Total expenditure 3,384 4,013 4,292 4,981 5,602 6,430 Net raw materials 2,054 2,347 2,453 2,915 3,181 3,698 Other mfg costs Personnel Other ,075 1,525 1,191 1,306 EBITDA ,066 1,143 1,404 1,734 % chg (8.9) (% of Net Sales) Depreciation & amortisation EBIT ,150 1,448 % chg (12.7) (1.0) (% of Net Sales) Interest & other charges Other Income (% of PBT) Recurring PBT 838 1,129 1,230 1,158 1,459 1,806 % chg (5.8) Extraordinary expense/(inc.) (95.0) PBT (reported) ,325 1,158 1,459 1,806 Tax (% of PBT) PAT (reported) , ,197 1,481 PAT after MI (reported) , ,197 1,481 ADJ. PAT 701 1, ,197 1,481 % chg (1.8) (1.9) (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (10.7) November 16,

8 Balance sheet (Consolidated) Y/E March (` cr) FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E SOURCES OF FUNDS Equity share capital Reserves & surplus 3,600 4,192 5,750 6,494 7,411 8,544 Shareholders funds 3,755 4,348 5,911 6,655 7,571 8,706 Minority interest Total loans Deferred tax liability Total liabilities 4,445 5,452 6,095 7,227 8,171 9,228 APPLICATION OF FUNDS Gross block 2,202 2,693 2,897 3,595 4,245 4,795 Less: acc. depreciation ,099 1,353 1,640 Net block 1,661 1,992 2,011 2,496 2,892 3,155 Capital work-in-progress Investments Current assets 3,745 4,418 4,367 5,351 6,219 7,450 Cash Loans & advances 1,138 1,113 1,226 1,268 1,583 2,008 Others 2,527 3,251 3,079 3,797 4,505 5,250 Current liabilities 1,288 1,405 1,214 1,451 1,621 1,907 Net current assets 2,457 3,013 3,153 3,900 4,598 5,542 Mis. Exp. not written off Total assets 4,445 5,452 6,095 7,227 8,171 9,228 November 16,

9 Cash flow statement (Consolidated) Y/E March (` cr) FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E Profit before tax ,326 1,158 1,459 1,806 Depreciation (Inc)/Dec in Working Capital (404) (711) (174) (523) (854) (883) Less: Other income Direct taxes paid Cash Flow from Operations , (Inc.)/Dec. in Fixed Assets (563) (700) (526) (598) (500) (400) (Inc.)/Dec. in Investments (166) Other income Cash Flow from Investing (538) (687) (692) (598) (500) (400) Issue of Equity Inc./(Dec.) in loans (935) (100) Dividend Paid (Incl. Tax) (155) (155) (155) (194) (239) (296) Others (200) (2) - - Cash Flow from Financing (386) 115 (239) (396) Inc./(Dec.) in Cash (52) (26) (155) 60 Opening Cash balances Closing Cash balances November 16,

10 Key ratios Y/E March FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity (0.01) Net debt to EBITDA (0.1) November 16,

11 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Cipla 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors. Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) November 16,