INVESTMENT RESEARCH

FUNDAMENTAL COVERAGE - LTD Rudra Shares & Stock Brokers Ltd Dated : 11/09/2015 BUY Investment Rationale Price` 1427 Business Profile:- Torrent is one of the front runners in the Indian Pharmaceuticals Industry Fair Value 1690.70 having presence in as well as International Markets. The Company’s revenues are mainly Upside 18% from manufacture and sale of branded as well as unbranded generic pharmaceutical products. A Div Yield 1.0% new facility is taking shape at Dahej SEZ in Western India, which will cater to the international Tenure 1 Year markets. Torrent Pharma is the sole manufacturer of Insulin Formulations for Novo Nordisk in Sensex 25610.21 India since the early ‘90s and has also set up a dedicated formulation and packaging facility for Nifty 7789.3 Insulin. Group/Index B / S&P BSE The segmentation of the company's business can be done as the Branded Generics (semi- Small Cap regulated markets) which includes India Business, Brazil, Phillippines & others and the Generics (Regulated markets) which includes USA, Germany, UK & Others. The Breakup of FY15 Revenues from various segments is as under:- INDIA:- The India formulations segment registered growth of 39% over the previous year Stock Details recording Revenue of ` 1609 crores as against ` 1161 crores in the previous FY2014. M.cap (` in cr) 24144.84 BRAZIL:- During the year Brazilian operations registered revenue of ` 606 crores (Reai 242 Mn) Equity(` in cr) 84.6 with the growth of 14% (Reai Growth 24%) over previous year. 52 wk H/L` 1622/742.55 USA:- Revenues from US operations were ` 832 crores (USD 132 Mn) during the FY 2014-15 as Face Value ` 5 compared to ` 776 crores (USD 125 Mn) during the previous FY showing a growth of 7%. NSE code TORNTPHARM GERMANY:- Revenues from Germany operations, during 2014-15, were ` 620 crores (Euro 80 Mn) BSE code 500420 with a growth of 8%. OTHER MARKETS:- Dossier out licensing and product supply business continues to be an important part of the Europe business for the Company; with revenues of ` 221 crores (Euro 27 Mn) during the financial year 2014-15.

Torrent, despite being a late entrant in the US pharma market is ranked No 8 amongst the US Key Valuation Ratios generic Indian Companies and has a market share of around 10% in its covered market. RONW 30% P/E 25.7 The growth during the year is on account of higher revenues from one of the new launches in P/BV 9.7 2013-14. Given the future market moving towards complex products, Torrent is significantly ROI 5.1% ramping up its pipeline with products like Ointments, Injectables, Specialty Oral solids (oncology). EV/EBIDTA 19.7 The Company received 6 ANDA approvals in 2014-15. The Company has 53 ANDA approvals (including 5 tentative approvals) and its pipeline consists of 19 pending approvals and 40 products under development. The US business is expected to contribute to the growth of international business in a significant way. Shelcal and Chymoral Forte sales grew more than 100% in Q1 FY16.Torrent expects to start Share Holding Pattern % receiving ANDA approvals from its Dahej facility by the end of FY16. Also, Torrent plans to add 180 products in the domestic portfolio in the next five years. Promoters The Indrad and Dahej SEZ facilities were inspected and approved by the USFDA.

FII FY15 & Q1(2015-16) Results:- During the FY 2014-15, the Company reported revenues of ` 4,653 DII crores, a growth of 11% compared with ` 4,184 crores in the previous FY. EBIDTA during the year stood at 27% compared to 23% in the previous showing an improvement by 4% mainly on account Bodies Corp of forex gain. The Company generated net cash of ` 810 crores from operations (after working Others capital changes) during FY 2014-15 while it spent a net amount of ` 2,162 crores in investing activities mainly on acquisition of domestic formulation business of Elder Pharmaceutical Limited. Q1 FY 2015-16 Revenues were at ` 1947 crores up by 75% from ` 1114 crores during the same period last year.EBITDA for FY2015-16 was at ` 974 crores up by 156% from ` 380 crores during the same period last year. PAT for the quarter stood at ` 449 crores up by 75% from ` 256 crores during the same period last year. The exceptional growth in the Revenues & Profits for the quarter is primarily on account of a new product which is Aripiprazole which the company launched in the last quarter in US market, Key Financial Data (IN `) which currently has limited competition . TPL got almost 10-11 % market share on that product EV (`in cr) 25792 itself. Now it is believed that story will continue for next two quarters also because Alembic is one BV (`in cr) 147.2 more in that field and there are not many other players also there. NW(`in cr) 2491 EPS (TTM) 55.5

1 www.rudra.ooo Branded Generics India Business:- Domestic formulation business recorded revenues of ` 491 Crores for Q1 FY 2015-16 growing by 39%. Generics USA:- Revenues from US operations for Q1 2015-16 registered growth of 231%.

Recommendation of Final Dividend :- The Board of Directors of Torrent Pharmaceuticals Ltd has at its meeting held on May 15, 2015, has recommended a final dividend of ` 6.25/- per equity share of ` 5/- each fully paid up further to the interim dividend of ` 5/- per equity share paid during the last quarter. These final dividend amounts, if declared by the Shareholders are proposed to be paid / dispatched on or around July 31, 2015.

Research & Development activities:- The Company is currently working on several in-house New Chemical Entities (NCE) projects within the areas of metabolic, cardiovascular and respiratory disorders. The Company has cumulatively filed 467 patents for NCEs from these and earlier projects in all major markets of which, 224 patents have been granted /accepted so far. In the financial year 2013-14, the Company completed the Phase-I (SAD) clinical trial of its third NCE for the indication of acute kidney injury and in the financial year 2014-15, the molecule has progressed to multiple dose studies. Another Multiple Ascending Dose study for a second indication of inflammatory bowel disease has also been initiated and is expected to be completed by Q1 2016-17. The total stength of MR currently is 3100 and by the end of the year the company will stabilize at 3000 MR's. Company have increased their Research and development (R&D) expense. The company spent 4.8% as R&D expense to the turnover in the FY15 and Planning to spend around 6% and above in the years ahead. They are focusing more on launching new limited competition products. Right now they have some 40 products under development and 19 ANDAS pending for approval (as stated above). So, this will give a visibility over next one, one and a half year. The big visibility will come from Nexium and Detrol which are likely to be launched in next one, one and a half year so FY16 and FY17 are stable and then FY18 onwards these new developments will come in.

Growth through inorganic Acquisitions:- On the domestic front the company had taken over Elder Pharma’s portfolio which is also doing very well and the company is increasing the productivity by reducing the manpower and all that which is also adding to the margins front. The Elder portfolio was de-growing heavily over the last few years. Over these two quarters the company have come back to a position of growth in the second quarter and it would continue to build on this. At this moment Elder integration is something that the company occupied but once it had completed that task, TPL would look at more opportunities.Also, it in the process of recruiting 550 more people from 600 current strength to 1150 scientists this year(i.e FY2015-16) as TPL is ramping up its product development capabilities across all the geographies,

Future Initiatives & activities:- The company on May 5, 2015 signed a share- purchase agreement to acquire 100 % stake in Zyg Pharma , a company engaged in manufacturing various dermatological formulations like creams, ointments, gels, lotions and solutions. The acquisition will help the company strengthen its position in niche dermatological segment, especially in developed markets like the US and Europe. The company expects Zyg Pharma to file ~25 ANDAs in the next three to four years. Other than sharpening focus on Pain & Nutraceutical segments, the company also entered the Nephrology market through a new division launch in the year gone by. The company also entered into an exclusive licensing agreement with Reliance Life Sciences for marketing three biosimilars in India — Rituximab, Adalimumab and Cetuximab.

New Capital Investments:- The Company has set up a state of art formulation and API manufacturing facility at Dahej SEZ in . The Company has started the process of getting the formulation plant approved by various regulatory authorities viz. USFDA, BfArM – Germany for International markets. The facility is expected to commercialize during the next year. During the current year, the company has initiated an expansion of its current manufacturing facility at . The additional capacities would be available within next two years time.

New facility for Oncology:- As part of portfolio diversification plans, the company is planning to enter critical care therapy segment for international markets by establishing integrated manufacturing facility for drug substances and drug products (API & formulations) in oncology. The plant is expected to become operational within next two years time.

Oyster Shell Plant:- The company has set up a manufacturing facility for Oyster Shell powder (natural calcium source), an API for manufacture of Shelcal Brand.

Corporate Governance Transparency Ratio's VALUATION (` In Cr except per share) Year End 201503 201403 201303 201203 FY 16 Est. Earnings 1690.70 Tax Rate % 20.1 21.3 25.3 20.1 Share Capital 85.00 Receivable days 124.9 95.7 78.0 70.7 FV 5.00 Dividend Payout % 25.7 25.7 42.4 21.8 No. of Shares 17.00 Share Holding Trend % Est. EPS 99.45 Quarter End 201506 201503 201412 201409 Estimated P/E Ratio 17.00 Promoters HLD % 71.25 71.25 71.51 71.51 Price /Share 1690.70 FII HLD % 12.37 12.26 12.87 12.83 DII HLD % 6.72 6.77 6.55 6.54

2 www.rudra.ooo Company Overview Torrent Pharma, the flagship company of Torrent Group, is ranked amongst the top pharma companies of India. It is a dominant player in the therapeutic areas of cardiovascular (CV) and central nervous system (CNS) and has achieved significant presence in gastro-intestinal, diabetology, anti-infective and pain management segments. It has also forayed into the therapeutic segments of nephrology and oncology while also strengthening its focus on gynecology and pediatric segments. Right from pioneering niche marketing in India to earning the sobriquet of ‘the Company with the most first launches’, Torrent Pharma has always remained ahead of its competition. Torrent Pharma’s competitive advantage stems from its world-class manufacturing facilities, advanced R&D capabilities, extensive domestic network and a widespread global presence Its modern and well-equipped R&D Centre is ranked amongst the best in the country and has a team of highly qualified scientists working on various Drug Discovery and Development projects. The R&D Centre has been approved by USFDA and various other regulatory authorities.Torrent Pharma has a strong international presence spanning over 40 countries with over 1200 product registrations. It has wholly owned subsidiaries in USA, UK, Germany, Brazil, Russia, Mexico, Philippines and other major markets. These wholly owned subsidiaries spearheads the company’s entry into several new regulated and semi regulated international markets.

Valuation Conclusion We have valued the company on the basis of FY16 estimates, as the company's growth from the US Business grew 231% for Q1 Fy16 and would sustain for the next two to three quarters (as reported by the management). The company has, in present, limited competition , but in the near future it is quite possible that the launch of similar products from its new competitors and also launch of new products may reduce the existing margins. Therefore, we have not valued the estimates further. As per our valuation, considering the P/E ratio 17 times and 1year tenure, the Estimated share Price turns around to be ` 1690 ( as stated above). Therefore we recommend to buy the share.

Swot Analysis Strengths (a) Low cost manufacturing i.e. cost effective. (b) Innovative (c ) Chronic focus (d) Strong financial position (e) High Operating margins. (f) strong emerging US pipeline

Weakness (a) High R&D expenditure (b) Over leveraged financial position (c ) The Brazilian market remains dicey due to frequent changes

Opportunity (a) Emerging Markets and expansion abroad. (b) Patent expiry opens up the market for generic players in a huge manner, which will continue to be present for Torrent Pharmaceuticals Ltd. in the coming years. (c ) The US generics space.

Threats (a ) Competition in the existing market and entry of new players could be a threat. (b ) Slow growth in the industry. (c ) High currency fluctuations. (d) Change in the policies of the government such as changes in the rates of taxation, high interest rates etc. (e)Frequent inspection by USFDA

3 www.rudra.ooo Income Statement and Estimates ( ` in Cr except per share) Particulars 201203 201303 201403 201503 2016E Sales 2594.00 3054.00 4036.00 4585.00 7001.00 Other operating income 102.00 158.00 148.00 68.00 90.00 Other Income 44.00 43.00 38.00 286.00 70.00 Total Sales 2740.00 3255.00 4222.00 4939.00 7161.00 EBITA 398.00 616.00 903.00 1115.00 2402.26

Profit & Loss Total Sales 2,740.00 3,255.00 4,222.00 4,939.00 7,161.00 Raw Material Cost 863.00 926.00 1,238.00 1,415.00 1,718.64 Employee Expenses 532.00 623.00 741.00 842.00 1,074.15 Other Expenses 865.00 1,007.00 1,253.00 1,376.00 1,715.06 TOTAL EXPENDITURE 2,260.00 2,556.00 3,232.00 3,633.00 4,507.85 EBITDA 480.00 699.00 990.00 1,306.00 2,653.15 Depreciation (82.00) (83.00) (87.00) (191.00) (250.89) Reported EBITA 398.00 616.00 903.00 1,115.00 2,402.26 Goodwill amortization - - - - - Reported EBIT 398.00 616.00 903.00 1,115.00 2,402.26 Net financials Interest income - - - - - Interest expenses (40.00) (34.00) (59.00) (175.00) (288.88) Net Financial Items (40.00) (34.00) (59.00) (175.00) (288.88) Reported Pre-tax profit 358.00 582.00 844.00 940.00 2,113.38 Reported Tax charge (72.00) (147.00) (180.00) (189.00) (422.68) Reported Net profit 286.00 435.00 664.00 751.00 1,690.70 Minorities 2.00 (2.00) - - - Reported Net profit 284.00 437.00 664.00 751.00 1,690.70 Extra ordinary items (51.93) (27.65) - - - Reported Net Income before extra ordinary 335.93 464.65 664.00 751.00 1,690.70 items

EPS and Dividend Dividend Paid (75.60) (193.20) (170.00) (187.00) (342.03) Retained earnings 208.40 243.80 494.00 564.00 1,348.67 Reported EPS 33.81 52.02 39.06 44.18 99.45 EPS Re-stated 19.76 27.33 39.06 44.18 99.45 DPS 9.00 23.00 10.00 11.00 20.12 Payout ratio 26.62% 44.21% 25.60% 24.90% 20.23%

Number Of Shares Opening Balance 42 42 42 85 85 Issued during the year(Bonus Issue 1:1) - - 43.0 - - Closing Balance 42 42 85 85 85 FV 5 5 5 5 5 Wtd. Avg. no. of shares 8.4 8.4 17.0 17.0 17.0 Note: The figures shown in the brackets means NEGATIVE.

4 www.rudra.ooo BALANCE SHEET Particulars 201203 201303 201403 201503 2016E Equity & Liabilities Shareholders' Fund Share Capital 42.00 42.00 85.00 85.00 85.00 Reserves and Surplus 1152.00 1380.00 1818.00 2406.00 3754.67 Minority Interests 4.00 - - - - Total Shareholders' Fund 1,198.00 1,422.00 1,903.00 2,491.00 3,839.67 Non-Current Liabilities Long-term Borrowings 322.00 455.00 745.00 2185.00 2185.00 Other Long term Liabilities 4.00 10.00 10.00 8.00 6.00 Deferred Tax Liability 63.00 57.00 47.00 189.00 189.00 Long term Provisions 110.00 130.00 190.00 207.00 227.00 Total Non-Current Liabilities 499.00 652.00 992.00 2589.00 2607.00 Current Liabilities Short term Borrowings 138.00 125.00 210.00 319.00 420.00 Trade Payables 864.00 1067.00 1429.00 1828.00 2327.33 other current liability 291.00 276.00 372.00 453.00 656.80 Short term Provisions 70.00 242.00 163.00 231.00 334.92 Total current Liabilities 1363.00 1710.00 2174.00 2831.00 3739.05 Total Equity & Liabilities 3,060.00 3,784.00 5,069.00 7,911.00 10,185.72 Assets Non-Current Assets Fixed Assets Tangible FA(incl.WIP) 916.00 1105.00 1409.00 3495.00 4482.96 Non-current Investments 38.00 - - - - Goodwill on consolidation - - - 16.00 16.00 Deferred tax receivables 12.00 31.00 66.00 84.00 110.00 Long term loans & Advances 61.00 63.00 129.00 207.00 282.00 Other Non current Assets 46.00 24.00 61.00 50.00 50.00 Total Non-Current Assets 1073.00 1223.00 1665.00 3852.00 4940.96 Current Assets current Investments 87.00 60.00 186.00 298.00 342.40 Inventories 532.00 924.00 1006.00 1067.00 1217.37 Trade Receivables 523.00 688.00 1099.00 1595.00 2166.20 Cash and cash Equivalents 674.00 627.00 769.00 567.00 771.47 Short Term Loans and Advances56.00 76.00 85.00 109.00 134.00 Other current Assets 115.00 186.00 259.00 423.00 613.30 Total current Assets 1987.00 2561.00 3404.00 4059.00 5244.74 Total Assets 3060.00 3784.00 5069.00 7911.00 10185.70

Cash and cash equivalents 674.00 627.00 769.00 567.00 771.47 Other interest bearing assets 87.00 60.00 186.00 298.00 342.40 Interest-bearing debt 464.00 590.00 965.00 2,512.00 2,611.00 Net interest-bearing debt (297.00) (97.00) 10.00 1,647.00 1,497.13

Investments Tangible assets Gross capex (161.29) (292.89) (400.08) (2202.57) (1238.85) Sale of fixed assets 1.13 8.46 1.90 6.14 - Net capex (160.16) (284.43) (398.18) (2196.43) (1238.85) Depreciation tangibles (82.00) (83.00) (87.00) (191.00) (250.89) Note: The figures shown in the brackets means NEGATIVE.

5 www.rudra.ooo CASH FLOW ANALYSIS Particulars 201203 201303 201403 201503.00 2016E EBIT 616.00 903.00 1,115.00 2,402.26 Depreciation 83.00 87.00 191.00 250.89 Depreciation (ex goodwill) 83.00 87.00 191.00 250.89 Movement in Stocks / Inventories (392.00) (82.00) (61.00) (150.37) Movement in Debtors (165.00) (411.00) (496.00) (571.20) Movement in Creditors 203.00 362.00 399.00 499.33 Other WC increase/decrease (44.50) (79.60) (148.80) - Change in working capital (398.50) (210.60) (306.80) (222.25) Tax paid (147.00) (180.00) (189.00) (422.68) Operating Cash Flow 153.50 599.40 810.20 2,008.23 Net interest (34.00) (59.00) (175.00) (288.88) Cash Earnings 119.50 540.40 635.20 1,719.35 CapEx (284.43) (398.18) (2,196.43) (1,238.85) Sale of fixed assets 8.46 1.90 6.14 - Net CapEx (275.97) (396.28) (2,190.29) (1,238.85) Free Cash Flow pre dividend (156.47) 144.12 (1,555.09) 480.49 Dividend (193.20) (170.00) (187.00) (342.03) Free Cash Flow post Dividend (349.67) (25.88) (1,742.09) 138.47 Net acquisitions/disposals - - - - Net cash flow (349.67) (25.88) (1,742.09) 138.47

RATIO ANALYSIS Particulars 201203 201303 201403 201503 2016E Return on assets 13.6% 15.0% 11.6% 18.7% Return on equity 35.5% 39.9% 34.2% 53.4% ROCE 16.4% 17.8% 15.2% 14.5%

EBIT Margin 18.9% 21.4% 22.6% 33.5% Pre tax margin 17.9% 20.0% 19.0% 29.5% Net Profit Margin 14.3% 15.7% 15.2% 23.6%

Total asset turnover 0.95 0.95 0.76 0.79 Fixed asset turnover 3.22 3.36 2.01 1.80 Equity turnover 2.48 2.54 2.25 2.26

Current Ratio 1.5 1.6 1.4 1.4 Quick Ratio 1.0 0.5 1.1 1.1 Cash Ratio 0.4 0.4 0.2 0.2

Receivable Days 67.9 77.2 99.5 95.9 Inventory Days 104.0 109.0 104.1 92.5 Payable Days 119.5 345.1 402.7 405.7 Conversion Cycle (Days) 52.3 (158.9) (199.0) (217.4)

Financial Leverage Effect 1.5 1.5 1.7 1.6 Debt to Capital 0.3 0.3 0.5 0.4 Debt to Equity 0.4 0.5 1.0 0.7 Note: The figures shown in the brackets means NEGATIVE. Disclaimer This report, which contains information based on research carried by or on behalf of Rudra Shares & Stock Brokers Limited, is neither advice nor any offer to sell or a solicitation to buy any securities, it contains information for the intended recipient only and no other person. Further the intended recipient is also advised to exercise restraint in placing any dependence on this report, as the sender, Rudra Shares & Stock Brokers Limited, neither claims or guarantees the accuracy of any information contained herein nor assumes any responsibility in relation to losses arising from the errors of fact, opinions contained herein or the dependence placed on the same. The information herein may change any time due to the volatile market conditions, and may not be accurate, complete or exhaustive, the recipient therefore is advised to use his own discretion and judgment, while entering into any transactions, whatsoever. Further, Rudra Shares & Stock Brokers Limited, its directors employees and associates may or may not have trading or investment positions in the securities mentioned herein.

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