IPCA LABORATORIES LTD Result Update: Q4 FY 12

C.M.P: Rs. 374.10 Target Price: Rs. 417.00 Date: July 10 th , 2012 BUY

Stock Data: SYNOPSIS

Sector: Pharmaceuticals IPCA is a fully-integrated Indian Face Value Rs. 2.00 pharmaceutical company 52 wk. High/Low (Rs.) 378.00/383.00 manufacturing over 350 formulations Volume (2 wk. Avg.) 11785.00 and 80 APIs for various therapeutic BSE Code 524494 segments. Market Cap (Rs.In mn) 47192.72 During the quarter ended, the Net Share Holding Pattern profit of the company increased to Rs.766.10 millions and registering a growth of 30.80%.

IPCA Laboratories Ltd has

recommended a final dividend of Rs. 1.20 per share (60%) for the financial year ended March 31, 2012. 1 Year Comparative Graph IPCA Laboratories Ltd has allotted 1,21, 250 fully paid-up equity shares of Rs. 2/- each of the Company @ Rs. 63/- per equity share, under Employee Stock Option Scheme 2006.

Net Sales and PAT of the company are expected to grow at a CAGR of 15% and 12% over 2011 to 2014E. IPCA Laboratories BSE SENSEX

Net sales EBITDA Net Profit EPS Years (Rs.Mn) (Rs.Mn) (Rs.Mn) (Rs.) P/E

FY 12 23293.70 4736.10 2801.70 22.21 16.84

FY 13E 26088.94 5727.74 3364.37 26.67 14.03

FY 14E 28436.95 6442.29 3744.49 29.68 12.60

Peer Group Comparison

Market Cap. Name of the company CMP(Rs.) (Rs. Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

IPCA laboratories ltd 374.10 47192.72 22.21 16.84 3.74 160.00

Sun Pharma 626.40 649309.90 18.62 33.67 7.54 350.00

Dr Reddys Labs 1667.10 28217.83 53.73 30.93 4.20 275.00

Lupin 547.30 245021.10 18.00 30.46 7.77 150.00

Investment Highlights

Q4 FY12 Results Update

IPCA LABORATORIES LTD disclosed a phenomenon rise in standalone net profit for the quarter ended March 2012. During the quarter, the profit of the company surged 30.80% to Rs 766.10 million from Rs 585.70 million in the same quarter previous year. Net sales for the quarter rose 17.28% to Rs 5611.40 million from Rs.4784.70 million, when compared with the prior year period. It reported earnings of Rs 6.07 a share during the quarter, registering 30.33% increase over previous year period.

Quarterly Results - standalone (Rs in mn)

As At Mar-12 Mar-11 %change

Net sales 5611.40 4784.70 17.28%

PAT 766.10 585.70 30.80%

Basic EPS 6.07 4.66 30.33%

Break up of Expenditure

Allotment of Equity Shares under ESOS

IPCA Laboratories Ltd has allotted 1,21,250 fully paid-up equity shares of Rs. 2/- each of the Company @ Rs. 63/- per equity share, under Employee Stock Option Scheme 2006 (ESOS).With this allotment, the paid up equity share capital of the Company is now increased to Rs. 25,16,55,310/- dividend into 12,58,27,656 fully paid-up equity shares of Rs. 2/- each.

Recommends Final Dividend

IPCA Laboratories Ltd has recommended a final dividend of Rs. 1.20 per share (60%) for the financial year ended March 31, 2012.

Subsidiary announcement

Tonira Exports Ltd which was a subsidiary of Tonira Pharma Ltd has become a subsidiary of IPCA Laboratories pursuant to aforesaid amalgamation.

Company Profile

IPCA is a fully-integrated Indian pharmaceutical company manufacturing over 350 formulations and 80 APIs for various therapeutic segments. The company was incorporated in 1949.For more than 60 years, Ipca has been partnering healthcare

3 globally in over 110 countries and in markets as diverse as Africa, Asia, Australia, Europe and the US.

This is one of the world's largest manufacturers and suppliers of over a dozen APIs. These are produced right from the basic stage at manufacturing facilities endorsed by the world's most discerning drug regulatory authorities like US-FDA, UK-MHRA, EDQM-Europe, WHO-Geneva and many more. Ipca is a therapy leader in India for anti-malarials with a market-share of over 34% with a fast expanding presence in the international market as well. The company also leads in DMARDs (Disease Modifying Anti-Rheumatic Drugs) treatment for rheumatoid arthritis. The Company has leading brands in 5 therapeutic areas, with 4 of its branded formulations being ranked among the Top-300 Indian brands by ORG-IMS . The company has 9815 employees. Its exports for the FY2011-12 are Rs.1401.97Crs.

Clients Domestic Clients Our domestic pharmaceutical customers include pharmaceutical majors like Abbott, AstraZeneca, Bayer, Cipla, Dr. Reddy's, Merck, Pfizer, Ranbaxy, and Wockhardt.

International clients International client roster includes global pharmaceutical giants like AstraZeneca, GlaxoSmithKline, Merck, Roche and Sanofi Aventis

Product Area

APIs (Active Pharmaceutical Ingredients)

IPCA is one of the world's largest manufacturers of APIs - Atenolol (anti- hypertensive), Chloroquine Phosphate (anti-malarial), Furosemide (diuretic), Hydroxychloroquine Sulphate (NSAID), Metoprolol Succinate (anti-hypertensive), Metoprolol Tartrate (anti-hypertensive) and Pyrantel Salts (anthelmintic) - besides being one of the largest suppliers of these APIs worldwide.

Formulations The company has leading brands in 5 therapeutic areas, with 4 of our branded formulations being ranked among the Top-300 Indian brands by ORG-IMS.

4 Top 10 brands are Zerodol (Aceclofenac + combinations), Lariago (Chloroquine), HCQS (Hydroxychloroquine), Perinorm (Metoclopramide), Rapither (Artemotil), Tenoric (Atenolol + Chlorthalidone), Lumerax (Artemether + Lumefantrine), Etova (Etodolac), Malirid (Primaquine) and Folitrax (Methotrexate).

Marketing: As part of Ipca's marketing segmentation strategy for India, specialty- focused marketing divisions were conceived a couple of years ago. Today, these 12 divisions are paying rich dividends. Brands like Glycinorm, HCQS, Lariago, Malirid, Movon, Pari, Perinorm, Ramcor, Solvin, Sultax, Tenolol, Tenoric, and Zerodolhave become brand leaders in their respective therapeutic segments, and 4 of these are also rated among the Top-300 Indian Brands (all categories) by ORG-IMS.

Generic

Ipca's formulations basket includes generics for the developed markets and branded formulations for emerging markets. Formulations account for 67% of export turnover, making Ipca one of India's largest formulation exporters. Its finished formulations are available in over 500,000 retail shops that are catered to by a network of over 1500 wholesalers. 4000 sales and marketing personnel service over 200,000 doctors across the country.

Subsidiaries

• Ipca Pharma Nigeria Ltd, Nigeria • National Druggists(Pty) Ltd, South Africa • Ipca Pharmaceuticals Inc., USA • Ipca Pharmaceuticals Ltd S.A De C.V, Mexico • Ipca Pharmaceuticals (shanghai) Ltd, China • Laboratories Ipca Do Brasil Ltda. Brazil • Ipca Pharma(Australia) Pty Ltd. Australia • Ipca Pharma (NZ) Pty Ltd. New Zealand • Ipca Laboratories (UK) Ltd. UK. • Onyx Research Chemicals Ltd, UK. • Onyx Scientific Limited. UK • Ipca Traditional Remedies Pvt Ltd. • Tonira Exports Ltd.

Financials Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY11 FY12 FY13E FY14E

Description 12m 12m 12m 12m

Net Sales 18811.00 23293.70 26088.94 28436.95

Other Income 84.40 129.20 144.70 157.73

Total Income 18895.40 23422.90 26233.65 28594.68

Expenditure -15026.10 -18686.80 -20505.91 -22152.38

Operating Profit 3869.30 4736.10 5727.74 6442.29

Interest 122.00 -393.60 -582.53 -757.29

Gross profit 3991.30 4342.50 5145.21 5685.01

Depreciation -554.30 -653.10 -718.41 -790.25

Profit Before Tax 3437.00 3689.40 4426.80 4894.76

Tax -783.70 -887.70 -1062.43 -1150.27

Profit After Tax 2653.30 2801.70 3364.37 3744.49

Extraordinary Items -99.60 0.00 0.00 0.00

Net Profit 2553.70 2801.70 3364.37 3744.49

Equity capital 251.40 252.30 252.30 252.30

Reserves 10287.20 12370.40 15734.77 19479.26

Face value 2.00 2.00 2.00 2.00

EPS 20.32 22.21 26.67 29.68

Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Sep-11 31-Dec-11 31-Mar-12 30-Jun-12E

Description 3m 3m 3m 3m

Net sales 6235.00 6148.30 5611.40 6060.31

Other income 26.40 39.40 36.90 41.33

Total Income 6261.40 6187.70 5648.30 6101.64

Expenditure -4654.60 -4635.30 -4443.30 -4714.92

Operating profit 1606.80 1552.40 1205.00 1386.72

Interest -389.10 -507.10 -111.20 -114.54

Gross profit 1217.70 1045.30 1093.80 1272.18

Depreciation -175.80 -181.20 -142.00 -149.10

Profit Before Tax 1041.90 864.10 951.80 1123.08

Tax -262.30 -224.50 -185.70 -275.15

Profit After Tax 779.60 639.60 766.10 847.93

Equity capital 251.40 251.40 252.30 252.30

Face value 2.00 2.00 2.00 2.00

EPS 6.20 5.09 6.07 6.72

Key Ratios

Particulars FY11 FY12 FY13E FY14E No. of Shares(in mn) 125.70 126.15 126.15 126.15 EBITDA Margin (%) 20.57% 20.33% 21.95% 22.65% PBT Margin (%) 18.27% 15.84% 16.97% 17.21% PAT Margin (%) 14.11% 12.03% 12.90% 13.17% P/E Ratio (x) 18.41 16.84 14.03 12.60 ROE (%) 25.18% 22.20% 21.04% 18.98% ROCE (%) 27.92% 30.04% 29.89% 28.26% Debt Equity Ratio 0.50 0.42 0.35 0.30 EV/EBITDA (x) 12.15 9.96 8.24 7.33 Book Value (Rs.) 83.84 100.06 126.73 156.41 P/BV 4.46 3.74 2.95 2.39

Charts:

Net Profit & PAT

P/E Ratio (X)

Debt Equity Ratio

EV/EBITDA(X)

P/BV Ratio

Outlook and Conclusion

At the current market price of Rs.374.10, the stock is trading at 14.03 x FY13E and 12.60 x FY14E respectively. Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.26.67 and Rs.29.68 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 15% and 12% over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 8.24 x for FY13E and 7.33 x for FY14E. Price to Book Value of the stock is expected to be at 2.95 x and 2.39 x respectively for FY13E and FY14E. We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY ’ in this particular scrip with a target price of Rs. 417.00 for Medium to Long term investment.

Industry Overview

India's pharmaceutical sector is gaining its position as a global leader. The pharma market in India is expected to touch US$ 74 billion in sales by 2020 from the current US$ 11 billion, according to a Price water house Cooper (PwC) report.

In fact, India has every chance to capitalise the opportunity to become a pharmaceutical Superpower in 2020 and a hub for all pharmaceutical manufacturing & research needs, according to Subodh Priolkar, President, 63rd IPC, and Regional Managing Director, Colorcon Asia.

Sector Structure/ Market Size

The domestic pharmaceutical market (IPM) grew 21.9 per cent to record sales of Rs 5,369 crore (US$ 1.01 billion) in March 2012, as compared to the previous year, according to an analysis by a market research firm, All India Organisation of Chemists

and Druggists (AIOCD) AWACS. Exceptional growth in companies such as Mankind, Macleods and Micro Labs resulted in the record sales.

While Mankind recorded a growth of 32.6 per cent to record sales of Rs 194 crore (US$ 36.67 million), Macleods Rs 132 crore (US$ 24.95 million) and Micro Labs with Rs 109 crore (US$ 20.60 million) grew 40 and 45.1 per cent, respectively.

Abbott, with its subsidiaries Abbott Healthcare and Solvay, registered sales of Rs 306 crore (US$ 57.84 million) to retain its number one position in the domestic market. The other market leaders were Cipla, GSK and Sun Pharma with sales of Rs 280 crore (US$ 52.93 million), Rs 254 crore (US$ 48.02 million) and Rs 255 crore (US$ 48.20 million), respectively. Ranbaxy's sales grew 19.2 per cent to Rs 229 crore (US$ 43.29 million) in March 2012.

Exports

• In order to harness the full potential of the Comprehensive Free Trade Agreement with Japan, India is likely to press the former for further opening of the pharmaceutical sector. This would help the domestic industry to leverage Comprehensive Economic Partnership Agreement (CEPA) and increase its share in the Japanese market. Indian pharmaceutical industry would gain significantly from the pact as Japan, the world's second largest market, had agreed to cut duties on imports of Indian generic drugs • India has proposed joint ventures (JV) with Russian pharmaceutical companies to manufacture 500 drugs in Russia and to supply them in markets of Russia, Belarus and Kazakhstan. "Joint ventures are good idea. Pharma sector is a good example where we can cooperate," according to Elvira Nabiullina, the Russian Minister of Economic Development • Ranbaxy has announced the opening of its new manufacturing facility at Casablanca, Morocco. "Morocco is one of the important markets and this manufacturing facility further reinforces our commitment to the people of Morocco and the African continent," as per Mahendra Bhardwaj, Head, Ranbaxy (Africa)

Growth

India will see the largest number of merger and acquisitions (M&A) in the pharmaceutical and healthcare sector, according to consulting firm Grant Thornton. A survey conducted across 100 companies has revealed that a fourth of the respondents were optimistic about acquisitions in the pharmaceutical sector.

The drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth US$ 9,173.50 million between April 2000 to February 2012, according to the latest data published by Department of Industrial Policy and Promotion (DIPP).

Generics

India tops the world in exporting generic medicines worth US$ 11 billion. Currently, the Indian pharmaceutical industry is one of the world's largest and most developed, according to Mr Srikant Kumar Jena, Union Minister of State for Chemicals and Fertilisers.

Generics will continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the pie till 2015, according to McKinsey report 'India Pharma 2015 - Unlocking the potential of Indian Pharmaceuticals market'.

Indian generics constitute nearly a fifth of global supplies, as per a press release dated December 28, 2011. India has world renowned capacity in producing low cost, high quality bulk and generic drugs. Supply of such drugs and investment in producing pharmaceutical products in Belarus through JV by Indian companies will provide win- win situation for both countries. Presently US$ 700 million is the size of pharma market in Belarus and about 70 per cent of the total requirement of Belarus is imported.

According to a recent trend, multinational drug companies are showing a healthy growth in the Indian market. Out of 25 top medicine brands by sales last year, 13 were global drug major such as Pfizer, GSK and Novartis. A recent report of market

13 research entity AIOCD AWACS reveals that brand-building exercise is fast becoming more evident in a predominantly generic Indian medicine market.

• Onco Therapies, a subsidiary of Strides Arcolab, has received US Food and Drug Administration (FDA) approval for anti-cancer Cisplatin injection. Cisplatin is a chemotherapy drug. The US market for generic Cisplatin is about US$ 10 million, according to IMS data • Sun Pharmaceutical Industries Ltd announced that it has received approval from the US health regulator - US Food and Drug Administration (USFDA), for the sale of its generic Zyprexa Zydis tablets in the American market. The tablets are used in treating schizophrenia - a mental disorder

Diagnostics Outsourcing/ Clinical Trials

"The Indian healthcare devices market is part of our focus on emerging markets. The Hyderabad centre will enable us to improve product time to market and create valued- innovation," highlighted Robert Frechette, Vice-President (Engineering Services), Covidien. The value of the Indian medical devices market is estimated at US$ 4 billion, and is clocking a growth rate of 15 per cent annually, he added.

The Indian pharmaceutical companies can be of immense value in providing affordable healthcare, especially in countries such as Japan. India also has a vast pool of trained pharmaceutical scientists, doctors and researchers, which opens up avenues for joint collaborative research for new drug discoveries along with joint intellectual property rights (IPRs).

Investments

• Ranbaxy Laboratories Ltd has launched blockbuster drug Atorvastatin - a cholesterol reducing drug in the Australian market. The company has introduced the product under the brand name, 'Trovas' and the drug will be available in bottles and blister packs, through retail pharmacy chains • Covidien, a US-based manufacturer of medical devices and pharmaceuticals, has set up its first research and development (R&D) centre in India. "The Hyderabad centre will enable us to improve product time to market and create

14 valued-innovation," as per Robert Frechette, Vice-President (Engineering Services), Covidien • Drug-maker, Cipla is set to launch a fixed-dose combination of Artesunate (AS) and Mefloquine (MQ) medicines for the treatment of falciparum malaria. "Cipla will sell the drug in African and the South-East Asian markets," according to Dr Y K Hamied, Chairman and Managing Director, Cipla • Abbott Laboratories plans to establish its R&D centre in India in collaboration with Syngene, a contract research subsidiary of Biocon Ltd, to develop nutrition products in India. The Indian nutrition market is estimated to be about Rs 1,500 crore (US$ 283.55 million), according to an estimate by Motilal Oswal • MSD, the Indian unit of US-based pharmaceuticals major Merck, plans to set up a laboratory for developing vaccines with an investment of Rs 750 crore (US$ 141.78 million)

Government Initiatives

The Union Budget for 2012-13 was announced by Mr Pranab Mukherjee, the Union Finance Minister. Highlights of Union Budget 2012-13:

• It is proposed to extend concessional basic customs duty of 5 per cent with full exemption from excise duty/CVD to six specified life-saving drugs/ vaccines. These are used for the treatment or prevention of ailments such as HIV-AIDS, renal cancer, etc • Probiotics are a cost-effective means of combating bacterial infections. It is proposed to reduce the basic customs duty on this item from 10 per cent to 5 per cent • Basic customs duty and excise duty reduced on Soya products to address protein deficiency among women and children. Basic customs duty and excise duty reduced on Iodine

In addition, some of the various initiatives taken by the Government:

The Ministry of Commerce has proposed an ambitious Strategy Plan to double pharmaceutical exports from US$ 10.4 billion in 2009-10 to US$ 25 billion by 2013-

15 14. The Government has also planned a 'Pharma India' brand promotion action plan spanning over a three-year period to give an impetus to generic exports.

A high-level inter-ministerial group chaired by the Indian Prime Minister, Dr Manmohan Singh, has decided to continue with the 100 per cent foreign direct investment (FDI) regime in the pharmaceuticals sector. "There is going to be no cap. 100 per cent FDI would be allowed," highlighted Mr Arun Maira, Member, Planning Commission.

Marking a new trend of investments from foreign players in the Indian pharma sector, the need for overseas investors to get a no-objection from their JV partner before venturing out on their own or roping in another local firm has been removed by the Pharmaceuticals Export Promotion Council. It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country.

The pharmaceutical industry has asked the Centre to incentivise the sector to encourage higher spending in research and development and bring down taxes and duties on life saving drugs and active pharmaceutical ingredients (API) to provide a stimulus to its growth.

In addition, the Union Minister of Commerce and Industry and Minister of Trade and Industry, Singapore, have signed a 'Special Scheme for Registration of Generic Medicinal Products from India', which seeks to fast-track the registration process for Indian Generic medicines in Singapore.

Furthermore, a 'Pharma Vision 2020' has been prepared by the Department of Pharmaceuticals, for making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose provides requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and such other measures.

Road Ahead

On the back of increasing middle-class population base, improvements in medical infrastructure and the establishment of IP rights, the Indian pharma industry is estimated to grow manifolds.

"India is a unique market, always very intriguing. India presents challenging paradigms and gives tremendous opportunities. I see the healthcare sector as one of the biggest business opportunities," as per Terri Bresenham, President and CEO, GE Healthcare India, and MD, Wipro GE Healthcare. He further added that India is the first country to have a large number of multinational healthcare providers. There are seven-eight very active MNCs in this sector. It opens a whole host of opportunities for companies in capital management, asset management and supply chain management, among others.

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

Firstcall India Equity Research: Email – [email protected] C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods K, Jagadhishwari Devi Diversified H.Lavanya Oil & Gas Ashish.Kushwaha Diversified

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