Weak Q4 Led by One-Offs; on Right Track

25 MAY 2016 Quarterly Update CIPLA INDIA BUY PHARMACEUTICALS Target Price: Rs 550

Weak Q4 led by one-offs; on right track Cipla’s reported Q4EBITDA declined 57% YoY while EBITDA (adjusted CMP : Rs 495 Potential Upside : 11% for one-offs) was flat YoYdespite 40 days of consolidation of higher- margin Invagen in US. While reported EBITDA margin was 6.7%,

EBITDA margin adjusted for one-offs [inventory (3.4%), restructuring & MARKET DATA rationalization (3.4%) and incremental R&D (2.2%)] was at 15.8% (400 No. of Shares : 803 mn bps lower than our estimate). Free Float : 63% Market Cap : Rs 398 bn While steps towards restructuring and incremental focus on R&D seem 52-week High / Low : Rs 748 / Rs 492 positive, FY17 guidance (ex-Invagen acquisition) of mid-teens revenue Avg. Daily vol. (6mth) : 1.8 mn shares growth and 15-20% EBITDA growth seem disappointing. We reduce Bloomberg Code : Cipla IB Equity our FY17/FY18EPS by 26%/20%. Maintain BUY rating with revised TP Promoters Holding : 37% FII / DII : 14% / 15% of Rs 550 (20x FY18 EPS) vs. Rs 640earlier (22x FY17), as we expect scale-up in US to drive rerating.

♦ Weak Q4:While India business (40% of revenue) growth recovered to 16% YoY (vs. 3% growth in 9MFY16), export formulation growth was muted at 3% YoY led by weak performance in South Africa (11.5% of revenue) and high base in Q4FY15 (led by gNexium). We note adjusted EBITDA margin was weaker than expected due to weak performance in export formulations and higher R&D expense (8.2% of Q4 sales vs. 6.5% in FY16) ♦ Last leg of clean-up:Cipla has seen significant clean-up in inventory, rationalization of non-key marketsand restructuring in last 2 quarters to reduce complexity (given its past baggage) and enhance base business profitability ♦ Fast tracking US (~20% of FY18E revenue): We expect strong growth (60% CAGR over FY16-18E) in US (ex-Nexium) led by: (1) integration of Invagen/Exelan,(2) launch of products via own front end, (3) partnership model. It expects to file20-25 ANDAs(including respiratory and oncology) vs.5 in FY16; has 90 approved ANDAs and 78 ANDA pending (including partners); plans to launch 5-7 from Invagen and 8-10 products from Cipla pipeline (including few limited competition) in FY17. gAdvair (inhalers):Did not disclose any timeline to start clinical trials in US but confident of filing for substitutable version; UK approval’s exact timeline still not knownbut expects in few quarters

Financial summary (Consolidated) Key drivers Y/E March FY15 FY16 FY17E FY18E Growth (% ) FY16 FY17E FY18E Sales (Rs mn) 108,824 133,725 161,983 188,236 Exports FD 35 32 17 Adj PAT (Rs mn) 11,807 15,059 17,378 22,091 India 9 13 15 Con. EPS* (Rs.) - - - - Core EBITDA margin 14.2 17.5 18.5 EPS (Rs.) 14.7 18.8 21.6 27.5 core-EPS 13 30 27 Chg YOY (%) (15.0) 27.5 15.4 27.1 P/E (x) 33.7 26.4 22.9 18.0 Price performance 120 RoE (%) 11.2 13.2 13.8 15.3 Sensex Cipla RoCE (%) 14.8 14.3 13.7 15.9 100 EV/E (x) 18.6 17.4 14.7 11.7 80 DPS 2.0 2.0 2.0 2.0 60 Source: *Consensus broker estimates, Company, Axis Capital Apr-15 Jul-15 Oct-15 Jan-16 Apr-16

25 MAY 2016 Quarterly Update CIPLA INDIA PHARMACEUTICALS

Exhibit 1: Domestic growth strong, but weak exports led to muted Q4 revenue growth

(Rsmn) Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 YoY (%) QoQ (%) Domestic 10,860 13,970 12,620 11,940 12,580 16 5 Exports 18,950 23,800 21,000 19,760 19,480 3 (1) Formulations 16,900 21,740 18,740 18,330 17,440 3 (5) API 2,050 2,060 2,260 1,430 2,040 (0) 43 Gross revenue 29,810 37,770 33,620 31,070 32,060 8 3

Source: Company

Exhibit 2: Weak Q4 led by one-offs and weak export formulations

(Rsmn) Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 YoY (%) QoQ (%) Net sales 29,807 37,768 33,617 30,273 32,067 8 6 Other operating income 1,120 760 907 793 599 (47) (24) Total revenue 30,927 38,528 34,524 31,066 32,665 6 5 One-offs (gNexium) - 4,823 2,592 - - - - Revenue (ex-one offs) 30,927 33,705 31,932 31,066 32,665 6 5 Gross profit 19,339 26,012 22,355 18,727 18,506 (4) (1) Gross margin 61 67 64 59 56 -528 bps -340 bps Staff 5,147 6,203 5,859 5,862 6,591 28 12 % to Sales 17 16 17 19 21 329 bps 119 bps Other Op. expenses 9,115 9,419 8,602 8,328 9,725 7 17 % to Sales 31 25 26 28 30 -25 bps 282 bps EBITDA 5,077 10,390 7,894 4,537 2,190 (57) (52) EBITDA margin 16 27 23 15 7 -971 bps -790 bps Core EBITDA* 5,077 6,050 5,561 4,537 5,161 2 14 Core EBITDA margin 16 18 17 15 16 -61 bps 120 bps Interest 434 514 503 230 368 (15) 60 Depreciation 1,357 1,288 1,340 1,375 1,414 4 3 Other Income 612 489 259 793 547 (11) (31) PBT 3,898 9,078 6,311 3,726 955 (75) (74) Tax rate 26% 28% 29% 3% -4% -3051 bps -730 bps Reported PAT 2,597 6,504 4,312 3,432 809 (69) (76) Core PAT 2,597 3,361 2,650 3,432 3,126 20 (9) Core EPS (ex-one-offs) 3.2 4.2 3.3 4.3 3.9 20 (9)

Source: Company. *Core EBITDA margin excludes effects of one-offs pertaining to (1) Non-moving inventory write-off (1.3%) (2) Inventory reduction (2.1%) (3) Restructuring and rationalization (2.1%) (4) Incremental R&D (2.2%) (5) Staff adjustments (1.3%)

Other concall highlights and our views ♦ Guidance:Management guided for FY17 revenue growth to be in mid-teens and expects EBITDA growth (on base business) of 15-20%

♦ North America (USD 321 mn, 15% of FY16 sales): Sales grew 117% YoY in FY16 led by launch of Esomeprazole. Cipla indicated Q4 includes base level of Esomeprazole and Pulmicort which is likely to continue fornext few quarters ♦ Cipla completed acquisition of InvaGen Pharma and Exelan Pharma in Q4. Most of InvaGen’s products have been transitioned to Cipla’s label and the company has managed to retain most of InvaGen’s customers. Management highlighted low risk of price erosion from new entrants in InvaGen’s key products, as they are in highly competitive segments (8-10 competitors). InvaGen’s top 3 products contribute ~30-35% to the revenue

25 MAY 2016 Quarterly Update CIPLA INDIA PHARMACEUTICALS

Exhibit 3: US growth driven by gNexium

350 321.4* (USD Mn) 300

250 117%

200 148 150

100

0 FY15 FY16 Source: Company *Includes sales for InvaGen Pharmaceuticals Inc. and Exelan Pharmaceuticals Inc.

♦ Cipla is targeting 5-7 product launches from InvaGen pipeline and 8-10 from own operations in FY17. The company aims to file 20-25 ANDAs in FY17 (with key filings in respiratory and oncology segments) at a rate of 4-5 per quarter from Q2FY17, and has approved and 78 pending ANDAs

♦ Invagen acquisition for USD 550mn is currently treated as goodwill in FY16. A part of goodwill is expected to be reclassified as intangibles, which would be amortized as per accounting policy

♦ While Invagen’s 483 observations has been cleared by USFDA, outcome of 483 on Cipla’s Indore facility (July’15) is still awaited. Management remains confident of resolution given no major observations

♦ R&D (8.2% of Q4 sales; 6.5% of FY16 sales):Total project R&D has increased by 68% YoY in FY16, in line with management’s aim to accelerate development and filing timelines of top 50 projects. Management is targeting R&D expenditure of 8-8.5% of sales in FY17 ♦ India (Rs 51.84 bn, 40% of FY16 sales): India business grew 16% YoY in Q4 with sales of Rs 12.6 bn (against 14% market growth) whereas it grew 9% YoY in FY16 aided by 20% growth in COPD portfolio within the respiratory segment.However, the growth was hampered by weaker Gx (generics) business in 1HFY16. Management is focusing on in-licensing and new product introductions to drive domestic growth.  Contribution of new introductions to sales increased to 4.5% in FY16 (vs. 3.2% in FY15)  The company has executed 6 in-licensing deals in oncology, respiratory and dermatology segments and initiated 5 incremental innovation projects, of which 3 will be commercialized in FY17  Cipla expects 2-3% impact on revenues due to NLEM/ FDC ban+

25 MAY 2016 Quarterly Update CIPLA INDIA PHARMACEUTICALS

Exhibit 4: India growth: Hampered by weak Gx business in 1HFY6 Rx Overall 60,000 (Rs mn) 51,840 4 7,480 50,000 9% 40,000

30,000 13% 20,000

10,000

0 FY15 FY16 Source: Company * Excludes other India income, includes excise component; ^Based on IMS MAT Mar’16 data

♦ South Africa (ZAR 3,272 mn, 12% of FY16 sales):Revenue growth in FY16 was 25% YoY in constant currency terms, driven by 14% growth in private market. Management expects private market sales to grow in low teens in FY16. Over 60% of South Africa business is focused on private market across pharmaceuticals and nutrition, with a market share of ~5%. There has been sales impact of ZAR 70mn on reclassification (gross to net sales)

Exhibit 5: South Africa: Strong growth in constant currency terms

3,500 3,272 (ZAR Mn) 25% 3,000 2,613 2,500

2,000

1,500

1,000

500

0 FY15 FY16 Source: Company

♦ Europe (USD 522 mn, 4% of FY16 sales): European business registered growth of 30% in FY16 driven by strong performance across B2B and DTM segments. The company is in the process of rationalizing its strategy to focus more on B2B segment going forward. Cipla launched multiple products in Q4, including Fluticasone Salmeterol (Netherlands), Mometasone (Austria, Portugal), Fluticasone (Germany, Hungary, Spain), Ipratropium Salbutamol respules (Belgium), as well as receiving approval for Salmeterol Fluticasone in Italy

25 MAY 2016 Quarterly Update CIPLA INDIA PHARMACEUTICALS

Exhibit 6: Europe: Growth led by inhaler franchise

100 (USD Mn) 92 30% 80 70.6

0 FY15 FY16 Source: Company

♦ International (USD 522 mn, 25% of FY16 sales): Overall growth in international business was 14% YoY as against 9% YoY in FY15, which was supported by growth of ~25% in front-end markets despite adverse operating environment (Yemen war situation and currency devaluation in several EMs). Respiratory segment reported growth of 20% YoY in International markets. Management highlighted its plans to exit fringe markets and to focus on prioritizing investments in markets where the company is in a leadership position (Uganda, Sri Lanka, Yemen, North Africa)

Exhibit 7: International sales: Rationalization in few markets led to lower growth 600 (USD Mn) 522.5 500 459.1 14 %

400

300

200

100

0 FY15 FY16 Source: Company

Other balance sheet highlights ♦ Debt/ Equity is ~0.44x given USD 550mn Invagen acquisition; debt borrowed at LIBOR plus 35 to 85 bps ♦ Capex was Rs 11bn in FY16 (8.2% of sales) and is expected to remain at same level going forward ♦ Working capital cycle – Inventory has reduced by Rs 5bn given rationalization and restructuring initiatives. We note inventory days have reduced from 150 days in FY15 to 124 days in FY16

25 MAY 2016 Quarterly Update CIPLA INDIA PHARMACEUTICALS

Cipla’s US scale-up is driven by Invagen acquisition and R&D increase Cipla’s UK arm, Cipla (EU) Ltd, concluded acquisition of two US-based companies InvaGen and Exelan Pharma on February 18 for USD 550 mn. The combined revenue of the two companies was ~USD 250 mn in CY15 with EBITDA margin at 29% (as EV/EBITDA of 8.4x).

InvaGen’s portfolio provides 40 approved ANDAs, 32 marketed products and 30 pipeline products (including 5 first-to-file products) which are expected to be approved over next 4 years. InvaGen is engaged in development, manufacturing, marketing and distributing of generic pharmaceuticals with focus on wide range of therapeutic areas including, cardiovascular, anti-infective, CNS, anti-inflammatory, anti-diabetic and anti-depressants. Delaware based Exelan Pharmaceuticals is a privately-held sales and marketing company with focus on generic pharmaceuticals for government and institutional market.

Exhibit 8: We expect strong scale-up in US revenue

Invagen + Exelan base business gPulmicort gNexium 531 500 (USD mn) 464 36 36 16 400 321 202 176 300 155 292 200 148 123 19 236 100 123 148 160 0 FY14 FY15 FY160 FY17E FY18E

Source: Company, Axis Capital

Exhibit 9: R&D has been increasing to support … Exhibit 10: … investments in complex generics pipeline

R&D cost (%) Delivery System 16 9 (Rs bn) 8 8 Biosimilars 14 8 Respiratory 12 7 7 7 10 Complex Injectables 8 5 15 6 Dermatologicals 6 5 5 4 5 Transdermal 4

4 (Delivery)Complexity Injectables & Opthals 2 9 3 7 13 Modified-release dosage

0 3 R&D

Traditional generics

FY12 FY16 FY13 FY14 FY15

FY11

FY17E FY18E

Source: Company, Axis Capital Source: Company, Axis Capital

25 MAY 2016 Quarterly Update CIPLA INDIA PHARMACEUTICALS

India business (40% of FY16 revenue) growth remains steady

Exhibit 11: IPM growth has improved Exhibit 12: Cipla’s volume growth has outperformed IPM Volume Price New product Volume Price New product 14 (%) 13 13 20 (%) 12 12 15 3 3 15 13 10 3 1 2 2 8 4 6 5 10 6 4 7 4 6 3 1 12 4 2 1 6 5 1 5 7 2 4 2 4 4 0 1 0 FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16

Source: AIOCD, IPM = India Pharma market Source: AIOCD

Exhibit 13: Key therapies witnessing good growth

% of YoY growth FY13 FY14 FY15 FY16 Q4FY16 portfolio* Respiratory 30% 7% 10% 13% 12% 8% Anti-Infectives 27% 9% 13% 19% 14% 12% Cardiac 12% 4% 12% 17% 7% -2% Gastro Intestinal 8% 11% 7% 6% 21% 20% Opthal 3% 6% 16% 19% 15% 14% Neuro / CNS 4% 15% 28% 28% 17% 2% Pain / Analgesics 3% 3% 6% 21% 31% 20% Derma 3% 21% 26% 15% 14% 19% Gynaecological 2% 0% -43% -25% 8% 6% Vit/min & nut 2% 14% 43% 1% 7% 3% Total (Rsbn) 48.9 7% 6% 15% 13% 9%

Source: AIOCD

25 MAY 2016 Quarterly Update CIPLA INDIA Financial summary (Consolidated) PHARMACEUTICALS

Profit &loss (Rs mn) Cash flow (Rs mn) Y/E March FY15 FY16 FY17E FY18E Y/E March FY15 FY16 FY17E FY18E Net sales 108,824 133,725 161,983 188,236 Profit before tax 16,542 20,070 23,478 29,599 Other operating income 4,630 3,058 3,425 3,501 Depreciation & Amortisation (5,047) (5,417) (6,154) (6,879) Total operating income 113,454 136,783 165,408 191,737 Chg in working capital (7,186) (6,241) (8,247) (9,560) Cost of goods sold (41,897) (51,184) (64,226) (72,941) Cash flow from operations 11,734 16,463 17,445 21,338 Gross profit 71,557 85,599 101,182 118,795 Capital expenditure (6,462) (10,424) (10,000) (10,000) Gross margin (%) 65.8 64.0 62.5 63.1 Cash flow from investing (9,412) (10,424) (10,000) (10,000) Total operating expenses (49,941) (60,588) (72,163) (83,263) Equity raised/ (repaid) - - - - EBITDA 21,617 25,011 29,019 35,532 Debt raised/ (repaid) 5,078 34,896 (1,000) (10,000) EBITDA margin (%) 19.9 18.7 17.9 18.9 Dividend paid (1,879) (1,879) (1,879) (1,879) Depreciation (5,047) (5,417) (6,154) (6,879) Cash flow from financing 1,525 33,017 (2,879) (11,879) EBIT 16,569 19,594 22,865 28,653 Net chg in cash 3,848 39,056 4,566 (541) Net interest (1,683) (1,613) (1,461) (1,227) Other income 1,656 2,089 2,073 2,173 Key ratios Profit before tax 16,542 20,070 23,478 29,599 Y/E March FY15 FY16 FY17E FY18E Total taxation (4,000) (4,396) (5,400) (6,808) OPERATIONAL Tax rate (%) 24.2 21.9 23.0 23.0 FDEPS (Rs) 14.7 18.8 21.6 27.5 Profit after tax 12,541 15,674 18,078 22,791 CEPS (Rs) 21.0 25.5 29.3 36.1 Minorities (735) (615) (700) (700) DPS (Rs) 2.0 2.0 2.0 2.0 Profit/ Loss associate co(s) - - - - Dividend payout ratio (%) 13.6 10.7 9.2 7.3 Adjusted net profit 11,807 15,059 17,378 22,091 GROWTH Adj. PAT margin (%) 10.8 11.3 10.7 11.7 Net sales (%) 10.2 22.9 21.1 16.2 Net non-recurring items - - - - EBITDA (%) 1.3 15.7 16.0 22.4 Reported net profit 11,807 15,059 17,378 22,091 Adj net profit (%) (15.0) 27.5 15.4 27.1 FDEPS (%) (15.0) 27.5 15.4 27.1 Balance sheet (Rs mn) PERFORMANCE Y/E March FY15 FY16 FY17E FY18E RoE (%) 11.2 13.2 13.8 15.3 Paid-up capital 1,606 1,606 1,606 1,606 RoCE (%) 14.8 14.3 13.7 15.9 Reserves & surplus 108,214 116,967 132,466 152,679 EFFICIENCY Net worth 109,820 118,573 134,072 154,285 Asset turnover (x) 1.0 1.0 1.0 1.1 Borrowing 17,018 51,914 50,914 40,914 Sales/ total assets (x) 0.7 0.7 0.8 0.8 Other non-current liabilities 2,846 3,664 3,664 3,664 Working capital/ sales (x) 0.4 0.3 0.3 0.3 Total liabilities 156,704 205,420 226,500 241,939 Receivable days 67.2 64.4 65.0 65.0 Gross fixed assets 95,040 134,993 142,238 149,620 Inventory days 150.3 124.4 120.0 120.0 Less: Depreciation (26,743) (32,300) (38,454) (45,332) Payable days 62.7 46.0 45.6 45.6 Net fixed assets 68,296 102,693 103,784 104,287 FINANCIAL STABILITY Add: Capital WIP 5,809 8,093 5,000 5,000 Total debt/ equity (x) 0.2 0.5 0.4 0.3 Total fixed assets 74,105 110,786 108,784 109,287 Net debt/ equity (x) - 0.3 0.2 0.1 Total Investment 6,398 7,569 7,721 7,875 Current ratio (x) 2.8 2.8 2.9 2.9 Inventory 37,806 38,080 44,840 51,355 Interest cover (x) 9.8 12.1 15.7 23.3 Debtors 20,043 23,593 28,846 33,521 VALUATION Cash & bank 5,643 6,017 14,120 14,115 PE (x) 33.7 26.4 22.9 18.0 Loans & advances 12,710 19,374 22,189 25,786 EV/ EBITDA (x) 18.6 17.4 14.7 11.7 Current liabilities 27,021 31,269 37,850 43,076 EV/ Net sales (x) 3.7 3.3 2.6 2.2 Net current assets 49,180 55,796 72,146 81,700 PB (x) 3.6 3.4 3.0 2.6 Other non-current assets - - - - Dividend yield (%) 0.4 0.4 0.4 0.4 Total assets 156,704 205,420 226,500 241,939 Free cash flow yield (%) 1.3 1.5 1.9 2.9

Source: Company, Axis Capital Source: Company, Axis Capital

25 MAY 2016 Quarterly Update CIPLA INDIA PHARMACEUTICALS

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).

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25 MAY 2016 Quarterly Update CIPLA INDIA PHARMACEUTICALS

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