July 17, 2009 | Pharmaceuticals

8/14/2019 July 17, 2009 | Pharmaceuticals

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ICICIdirect|Equity Research

zz

Analysts Name

Raghvendra [email protected] [email protected]

Sales & EPS trend

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Stock Metrics

Bloomberg Code SUNP@IN

Face Value (Rs) 5.0

Promoter holding (%) 63.7

Market Cap (Rs Cr) 25,289

52W - H/L 1600/953Sensex 14253

Average Volume 48,321 Comparative return metrics

3M 6M 12M

Cipla 14.1 49.5 30.4

Dr Reddy 46.1 71.7 21.4

Piramal Heathcare 47.4 45.8 7.0

Sun Pharma -1.7 10.2 -6.6

July 17, 2009 | Pharmaceuticals

Initiating Coverage

Sun Pharmaceuticals (SUNPHA)

In the pit stopSun Pharma (SPIL) is a leading player in the Indian pharma space. Strongfocus on cost control, impressive pipeline for the US, strong foothold indomestic markets and a clean & strong balance sheet are the majornvestment planks of SPIL. We also like its strategy of buying distressedassets and turning it around via strong management bandwidth. We arenitiating coverage on SPIL with a PERFORMER rating.

Selective strategy for regulated markets prevents margin contractionSPILs US strategy places the company among one of the highestmargin earners in the industry. We estimate SPILs US revenue to de-grow ~27% on account of recent seizure of 33 Caraco products.However, speedy approval from its portfolio of 108 ANDAs (mostly

differentiated ANDAs) pending approval will likely cushion steeper fallin US revenues (we have not factored such revenue in our estimates).Such approvals will likely help maintain margins and US revenue

Strong foothold in domestic chronic segment earns highest marginsSPIL generates one of the highest EBITDA margins (GC ~70-75%) in theindustry. This is on account of its strong foothold in niche therapiessuch as CNS, CVS, diabetes, etc, which contribute ~75-80% of itsdomestic formulations revenue

Clean & debt-free balance sheet with strong fundamentals a safe betThe balance sheet of SPIL carries almost zero debt. Moreover, SPIL hasrobust return ratios despite expanding balance sheet, which indicates

that the reinvestment of incremental cash flows is generating betterreturn. A debt-free balance sheet with strong fundamentals provides asafe investment bet in the volatile markets

Valuations

SPIL has consistently outperformed most industry peers on parameterssuch as revenue growth, export growth and margins. Given strongformulation focus on chronic ailments, cost containment and robust

pipeline for US generics, we believe the stock is well on track for long-termsecular growth. Exclusivity opportunities in the US may bring mid-wayspikes. Moreover, a cash balance of US$550 million enhances the chancesof SPILs participation in the global consolidation wave. We estimate the fairvalue of SPIL to be in the range of Rs 1344, ~10% higher than CMP. We arenitiating coverage on SPIL with a PEFORMER rating.

Current PriceRs 1221

Target PriceRs 1344

Potential upside10 %

Time Frame12-15 months

PERFORMER

Stock price movement

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600

900

1200

1500

1800

Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09

Absolute buy

Target Price

xhibit 1:Key Financials Rs Crorear to March 31 FY07 FY08 FY09A FY10E FY11E

et Sales 2135.9 3356.7 4271.4 4108.7 4426.9

et Profit (Rs crore) 784.3 1487.1 1824.1 1698.8 1733.4

hares in issue (Crore) 19.3 20.7 20.7 20.7 20.7

PS (Rs) 40.6 71.8 88.1 82.0 83.7

Growth 31.5 77.0 22.7 -6.9 2.0

E (x) 32.1 17.0 13.9 14.9 14.6

rice / Book (x) 4.5 2.5 1.9 1.6 1.4

V/EBITDA (x) 36.9 15.4 13.5 14.2 13.8

oE (%) 28.3 29.8 28.1 21.6 18.6

oCE (%) 21.1 30.4 28.2 21.9 18.9

urce: Company, ICICIdirect.com Research


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Company Background

Promoted by Dilip Shanghvi, Sun Pharmaceuticals (SPIL) was formed as apartnership firm in 1982 to manufacture drugs at Vapi in Gujarat. It wasincorporated as a limited company in 1993 and renamed as Sun PharmaceuticalIndustries Ltd.

Business profileSPIL is primarily engaged in the formulation business. The key therapeuticsegments of the company in the formulation business in India are CNS,gastrointestinal (GI) and cardiac care. The company also has a presence in anti-diabetics, orthopaedics, paediatrics, oncology and ophthalmology. Domesticrevenue contributes ~45% to the overall FY09 revenue of the company.

Manufacturing and R&D facilitiesThe company has 17 drug manufacturing plants, seven of which are API plants

while the remaining 10 are formulation ones. The companys API plants atAhmednagar and Panoli enjoy USFDA and UKMHRA regulatory approval. On theUS generic front, between Sun Pharma and all subsidiaries the company had astock of 71 ANDA approvals until March 2009. The company filed 37 ANDAs in2008-09. The company has a cumulative 129 DMF filings until March 2009.

The erstwhile TDPL division was renamed Spectra while a new division, Arian,targeting cardiologists/physicians and diabetologists was launched during 2001.The formulation site in Halol, India (the erstwhile MJ Pharma site) receivedapproval from USFDA, UKMHRA, South African MCC, Brazilian ANVISA andColumbian INVIMA. In the same year 2004, the first joint venture manufacturingunit in Dhaka, Bangladesh was commissioned.

Market position in domestic formulations marketSun Pharma maintained its sixth position in the domestic formulation market witha market share of 3.46% in December 2008. The company has about 507 brandsand 14 of its brands were among list of the top 300 industry brands. The leadingbrands are Glucored, Pantocid, Susten Aztor, and Monotrate. CNS, cardiac andanti-diabetic are the top three therapeutic categories for SPIL contributing ~61%to the total revenues. In branded markets, SPILs products are prescribed inchronic therapies like CVS, psychiatry, neurology, gastroenterology, diabetologyand respiratory. It makes speciality formulations across a range of dosage forms,viz., oral, injectable and delivery based system. Sun Pharma began internationalacquisitions during 1997.

AcquisitionsSPIL has a vast history of acquisitions. It took stake in MJ Pharma, which hasseveral manufacturing lines for fixed dosage formulation and UKMHRA approvedmanufacturing line for Cephalexin capsules. SPIL acquired TDPL (which hasextensive product offering in therapies such as oncology, fertility, anaestheticsand pain management), brands in respiratory and asthma therapy area fromNatco Pharma, Cephalexin API manufacturer and Gujarat Lyka Organics.Moreover, SPIL acquired common stocks and options from two largeshareholders of Caraco, thereby increasing its stake to more than 60% from 44%at a total outlay of ~$42 million. In May 2007, SPIL signed a definitive agreementto acquire Taro Pharma, an MNC generic manufacturer with establishedsubsidiaries and manufacturing across the US, Israel and Canada for $454 million.

Shareholding pattern (Q4FY09)

Shareholder % holding

Indian Promoters 63.7

Financial Institutions / Banks 3.1

Foreign Institutional Investors 17.1

MFs/Insurance Companies 4.3

Non-promoters(non-institution) 11.8

63.7 63.7 63.7 63.7

24.525.025.125.3

0

20

40

60

80

100

Q2FY09 Q3FY09 Q4FY09 Q1FY10

Promoters (%) Institutional Holding (%)


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Exhibit 1:Major acquisitions done by SPILAcquired Entity Name Year BenefitMJ Pharma Ltd Equity stake 1996.

Merged with Sun

Pharma in 2003

MJ Pharma had USFDA approval for Cephalexin capsules and UKMHRA approvals for oral dosage

form. Sun upgraded the plant across dosage form lines (sterile dry powder injections, small volume

injections, nasal sprays, tablets, capsules, soft gelatin caps, aerosols, ophthalmics). This site now has

seven manufacturin lines s read over 36,000 s ftTamil Nadu Dadha

Pharma

1997 Enabled a quick entry into high-growth therapy areas of interest: fertility, anticancer, anaesthesiology,

gynaecology, pain management. Trusted brands, processes for difficult-to-make oncology products

such as Cisplatin and Carboplatin, and a field force with existing relationships were advantages. In the

subsequent years, this portfolio was totally revamped to bring new products to market, doctor

coverage was improved, and a swift increase in customer rankings was seen. The company revamped

the product list with new products based on complex technologies, like Susten and Lupride, to earn

the trust of doctors in India and world marketsCaraco Pharma Iniital stake 1997.

Larger stake

buyout in 2004

Sun increased its stake in Caraco from 49% to 63% in FY04. Current stake stands at ~76% on a diluted

basis. With this Sun got an access to the front end in the US. The US generic opportunity is immense,

with products worth $40 billion likely to go off patent in the next few years

Gujarat Lyka Organics 1999 The manufacturing site for Cephalexin and 7 ADCA actives has since been converted into a ISO 9002

certified, intermediates and API manufacturing site for India and traditional markets

Brands from Natco

Pharma

1998 A basket of brands in the respiratory/chest therapy area and brands in gastroenterology, orthopedics,

anti-infectives and pediatrics were acquired. In line with the company's strategy of reorienting brands

so that they can offer the best value. These brands were shifted into different divisions, doctor call-

lists were reworked and new products added backed by strong promotional programmes

Milmet Labs 1999 Milmet's presence in ophthalmology with well-trusted brands like Viscomet (used in major eye

surgeries) and Timolet (for glaucoma) made it an attractive acquisition candidate. New products were

brought in, several of which used complex delivery technologies such as gel forming systems. The

portfolio was revamped and coverage improved for a move in rankings to No. 1 based on prescription

share with this high-growth specialist group

Pradeep Drug Co 2000 This WHO cGMP approved API manufacturing site for India and neighbouring markets was upgradedand has subsequently received ISO 9002 and 14001 certification

Phlox Pharma Phlox manufactures cephalosporins and has a European Drug Master File for cefuroxime axetil. This

acquisition is an attractive proposition as a result of the international approval and the plant's

compliance with international regulatory standards. The acquisition gave Sun Pharma a quick entry

into the market. Additionally, the company has a number of products that were scaled up at the facility

Women's First

Healthcare

2004 Acquired three brands : gynaecological Ortho-Est (estropipate), and the antimigraine preparation

Midrin for less then $4 million. This was Sun's first step in the branded generic space in the US at a

reasonable cost

ICN, Hungary 2005 Sun bought a plant in Hungary (known as Alkoladia). It was one of the few sites globally that had an

authorisation to make controlled substances APIs. This has helped Sun to make filings in the controlled

substances space in developed markets

Able Labs 2005 Dosage form manufacturing facilities spanning 2,50,000 sq ft with specifically designed areas to

handle the manufacture of controlled substance dosage forms, were acquired for $23.15 million, from

the US Bankruptcy Court of the District of New Jersey. This deal also includes the rights to product

dossiers that were being marketed by Able

Chattem Chemicals 2008 Sun along with its subsidiaries, acquired 100% ownership of Chattem Chemicals, Inc.,a narcotic raw

material importer and manufacturer of controlled substances with a facility in Tennessee. With this

acquisition, it has been possible for Sun Pharma to augment its preseence in controlled substances.

Chattem is a US registered palyer for narcotic importer and producer. This has helped Sun Pharma to

be more active in the pain management segment in the US

Source: Company, ICICIdirect.com Research


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Exhibit 3:Revenue break-up for FY08-09SUN PHARMA

(FY09)

Rev: Rs 4374.1 crores

Rev contribution: 100%

FORMULATIONS


Rev contribution: 88.8%

API (BULK) + OTHERS



DOMESTIC MARKET



EXPORT MARKET



DOMESTIC MARKET


Rev contribution:

21.4%

EXPORT MARKET


Rev contribution:

77.8%

CHRONIC SEGMENT



ACUTE SEGMENT



US MARKET



NON-US MARKET





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Investment rationale

SPIL has been one of the best performers in the Indian pharma spaceduring the last few years on account of its superior product mix. Thecompany differentiates itself from most of its Indian peers on account ofits strong foothold in niche therapies in the domestic market, robustproduct pipeline in the US markets and cost leadership. Thereby, itgenerates one of the best EBITDA margins in the Indian pharma space.Recent at risk launch of generics pantoprazole (Protonix) andexclusivity on generics Ethyol and Trileptal led SPIL to achieve lifetimegrowth in the US business.

However, SPIL suffered a setback on the Effexor XR opportunity. Webelieve its formidable market share in niche therapies in domesticmarkets and strong pipeline of 108 pending ANDA approvals in the USmarket will keep its growth momentum upbeat in the longer run.Recent seizure of 33 drugs by USFDA from Caracos Michigan facility

will hamper the revenue flow from the US market. We estimate thebase US business (other than exclusivity opportunity on Ethyol,Protonix & Trileptal) will likely significantly de-grow at a CAGR of 30%over FY09-11E on account of the seizure from Caracos plant. TheLexapro opportunity may provide some respite.

Lexapro opportunity may provide respite

Recently, SPIL entered into a litigation settlement with Forest Labregarding Lexapro, which is a blockbuster anti-depressant drug withannual sales of US$2.3 billion on innovator price. The settlement maybring positives to SPIL but the USFDA issues with Caraco may cast cloudover this opportunity.

The major contours of SPIL (along with Caraco) - Forest Labs agreementregarding the settlement of the legal proceedings related to Lexapro(escitalopram oxalate) tablets are:

SPIL will license out to Lundbeck certain patent applicationsrelated to the synthesis of escitalopram and citalopram inexchange for an upfront payment. If such technology is usedSPIL will also get royalties on sales.

Comment: SPIL may get out-licensing income on licensing outthe technology and also royalties on sales, if the transferredtechnology is utilised for manufacturing of the drug

Forest will provide licenses to Caraco for any patents related toLexapro and with respect to the marketing of Caracos genericversion of the product. This will happen as of the date that anythird party generic that has received final approval from theFDA enters the market other than an authorised generic (AG) orthe first filer.

Comment: Caraco gets litigation risk-free rights to sellgenerics version of Lexapro, if any third party (havingapproval from USFDA) enters the Lexapro market other thanthe first filer or the authorised generics (AG). This will enable

Caraco to enter the markets as a fourth generic player afterthe FTF opportunity holder, AG and any third party enteringthe market triggering entry of Caraco.

Strong foothold in niche therapies, robust pipeline of filings for USmarkets, superior product mix and

lean cost structure makes Sun oneof the best performers in the Indianpharma space

Sun will benefit from out-licensingincome and royalties on sales

Caracos entry into the Lexapro market will be triggered by theentry of another generic after the FTF holder and its authorizedgeneric


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Caraco will take over the commercialisation and sale of severalother products from Forests Inwood business in return forroyalty payment on the sales of these products.

Comment: Caraco would get rights to commercialise variousproducts of Forest in the US markets, on which Caraco will

pay royalties on sales of these products.

Exhibit 4:Inwood Labs Product ListCategory Brand Generic

Depression Celexa Citalopram HBr

Angina Tiazac Diltiazem HCl

Angina Isochron Isosorbide Dinitrate

Hypertension Tiazac Diltiazem HCl

Asthma Theochron Theophylline Tablets

Asthma TheoCap Theophylline Capsules

Cough Suppression Tessalon Benzonatate


Forest will reimburse Caraco for a portion of their costs relatedto this litigation.

Comment: The reimbursement of the certain part of thelitigation cost will likely to improve cash flow slightly.

US generics key to drive exports revenue

In a quest to excel in the export market and generate higher margins,SPIL accorded top priority to the US markets. SPIL follows a different

strategy in the US market, which gives it stability in earnings. The majorcontours of the strategy are:

SPIL enters a product wherein it can remain competitive for alonger period

SPIL prefers to enter into the market of a product, which isdifficult to manufacture

SPIL selects products, which includes filings with Para-IVcertification, complex products, controlled substances,extended release products, blockbusters and some plain vanilla

ANDA on old molecules. The clever blend of the filings providesstability to the earnings

Moreover, SPIL follows a multi-pronged strategy in the USmarkets

This strategy seems to fetch SPIL one of the best margins on generics inthe US. We believe US revenues will de-grow ~27% on account of recentactions by the USFDA on the companys US subsidiary. This will hamperthe revenue flow from key US market. However, speedy approval from itsportfolio of 108 ANDAs (~20-25% differentiated ANDAs) pendingapproval, including seven tentative approvals, and few filings under Para-IV will likely act as a cushion for the company. The US fixed dosagebusiness is one of the significant growth drivers of SPILs overall business

Caraco will also undertakecommercialisation and sale ofseveral products from Inwood Labsproduct basket

SPIL follows a multi-prongedstrategy in the US markets wherein it targets difficult to manufacture products through a blend ofsuperior product filings

A 27% de-growth in revenues fromthe US market will be cushioned by speedy approvals of 108 pendingANDA approvals


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while the US fixed dosage business per se is dependent upon thecomposition of (ANDA) filings for the market.

Filing under exclusivity provide for the best revenue and profits growth asthere is almost nil generics competition while technologicallydifferentiated products generate better and sustainable margins due tolimited competition. Plain vanilla products have highest competition and

the margins are not very high. A major risk in the US markets arises fromprice erosion once the patent on a product expires. However, SPIL has anedge over other Indian players because of its front-end Caraco (which hasa presence in the US market) and backward integration into own bulk formany of its products.


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pantoprazole market is low with around three to four players innovatorWyeth, authorised generics Prasco, Teva & SPIL. Kudco is anothergenerics company, which filed ANDA for pantoprazole. With its 30-monthstay becoming complete in December 2008, it has probably not enteredthe market. Kudco is also SPILs potential competitor. It has Para IV ANDAwhose 30-month stay expired in December 2008.

Lower claim probability on SPIL in Protonix issueTeva launched generic Protonix in December 2007. Thereby, it becamethe first generic company to dilute the price. This may trigger tripledamage claims on the quantity on launch. Just to put a check on thequantity exposed for potential triple damage control, we believe Teva isunlikely to re-launch the product in the US once the inventory in themarket is depleted. However, it is not known whether Teva is there in themarket or not. If Teva is not in the market, it is a positive for SPIL as itwould be the only generic company in the market. Also, if Wyeth goes fordamage claims on SPIL, it is likely to be a single damage claim.

Effexor XR a lost opportunitySPIL received a not to sue covenant from Wyeth over SPILs ANDA forgeneric venlafaxine extended release (generic version of Effexor XR) withmultiple Para IV certifications in October 2007. The three strengths (forwhich ANDA has been approved) have annual sales of ~US$2.6 billion inthe US. In April 2007, Wyeth filed suit against Osmotica Pharma of US for505b (2) application filed by Osmotica for generic tablet version of EffexorXR. However, later they settled the patent litigation, wherein Wyethgranted Osmotica a royalty-bearing licence. Osmotica got an approval inMay 2008.

Moreover, Teva settled the patent litigation with Wyeth and will launch

generic Effexor XR capsules in July 2010. Subsequently, Osmotica filed acitizens petition in May 2008, requesting the USFDA to ask allsubsequent filers for the generic tablet version of Effexor XR to resubmittheir ANDA applications with its drug being the reference listed drug(RLD) as its product is NDA. Responding to the citizens petition, USFDAgranted CP to Osmotica. Thereby, it has not given approval to SPILsgeneric tablet version of EffexorXR (venlafaxine extended release)capsules. Post this development, SPIL needed to re-file the ANDA usingOsmoticas venlafaxine extended release tablets as the RLD. SPIL hasfiled for the ANDA for Effexor XR with Osmoticas drug as RLD. It expectsto launch the drug on approval. If it is successful in launching the drug bythe end of CY09, then SPIL will benefit from the exclusive marketing ofEffexor XR until July 2010, when Teva is expected to launch the drug.

In case of patent litigation turning against SPIL, probable damageclaim on Sun will likely be lesser

Sun Pharma lost the opportunityto market Effexor XR afterOsmotica filed for citizens petitionrequesting the USFDA to make allthe subsequent filers to resubmittheir application with Osmoticas product as the Reference ListedDrug (RLD)


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Robust pipeline of filings key to US revenue growth

SPIL, along with Caraco, has ~108 ANDAs (which includes sevententative approvals and some filings with Para-IV certification) pendingapprovals. Approvals will likely be significant growth drivers for thetopline & bottomline and to maintain margins. The growth will likely be

fuelled on account of the companys focus on filing for technologicallydifferentiated products such as new drug delivery systems, extendedreleases, controlled substances, filings with para IV certification, etc. Webelieve currently differentiated ANDAs account for 20-25% of the filings.

Exhibit 6:ANDA pipeline

48 59

94

142

170

15 20

53

103

29

0

40

80

120

160

200

2005 Mar 2006 Mar 2007 Mar 2008 Mar 2008 Dec

Cummulative product filings Cummulative product approvals


We believe while product sales under exclusivity (with FTF opportunity)

will likely bring midterm spikes in the performance, the filings under newdrug delivery systems (NDDS), extended releases, or controlledsubstances, etc. will likely provide for a sustainable medium to long termgrowth. It will also prevent margins erosion on account of lesscompetition in differentiated products.

We believe SPIL has an edge over its Indian peers because of its front-end Caraco and backward integration into own APIs for many of itsproducts. For the US markets, SPIL selects products, which includes filings with Para-IV certification, complex products, extended releaseproducts, blockbusters and some plain vanilla ANDA filings on oldmolecules. The clever blend of the filings provides stability to the

earnings.

The plain vanilla ANDA filings on old molecules gives SPIL asteady stream of revenue for few years, thereby enabling thecompany to corner decent market share on the product

On products under exclusivity period (on filings with Para IVcertification), the competition is likely to be low during theexclusivity period (if the company launches the product)

For complex molecules such as extended release or controlledsubstances, there is less competition and price erosion, so the

margins and markets are sustainable

Sun Pharmas robust R&D pipelineof 108 pending ANDA approvalswill be the key growth driver for

the US business.


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Changing business mix delivers superior margin

The product mix and US revenue contribution has a major bearing on theEBITDA margin. Revenue mix from the US has increased to ~36% inFY09 from ~25% in FY04 while the EBITDA margin expanded to ~44% inFY09 from ~31% in FY04, indicating a positive relationship of EBITDAmargin with US revenue contribution. However, SPIL has shownsignificantly higher margins historically. Contribution from exclusivity on

Trileptal & Ethyol and at risk launch of generics pantoprazole on January29, 2008 contributed significantly to the topline & EBITDA margin. Supernormal EBITDA margin on products during the exclusivity period lead theoverall EBITDA margin to be very high.

Post FY09, revenues from the US market will likely decline on account ofexpiry of exclusivity period, declining contribution from genericpantoprazole and decline in sales revenue of Caraco on account ofproduct withdrawal and USFDA action against its Michigan plant.However, we believe the US strategy of the company of prudent product-selection, lean cost structure and strong cash flows to finance the R&Dactivity for the US business are the three mainstays to manage a robust

and consistent growth rate in the US & overall margins.

Exhibit 7:Changing business mix delivers superior margins

35.230.6 30.0 31.5

46.2 43.640.6

36.9

6.3

24.922.8

18.723.8

36.3

43.5

24.9

0

15

30

45

60

FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E

0

15

30

45

60

EBITDA (%) US (% to total sales)

US(%contribution)

EBITDA%


SPILs US strategy ofprudent product-mix in theUS, lean cost structure and

strong cash flows tofinance the R&D activity forthe US business are thethree mainstays to manage a robust and consistentgrowth rate in the US


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Domestic market niche focus, high margins

SPIL has superior margins via its strong focus on niche therapies in thedomestic market. The extensive product mix and exposure to growingniche therapy areas of cardiovascular (CVS), central nervous system

(CNS), gastrointestinal (GI), respiratory, ophthalmology, orthopaedics,etc. enables SPIL to grow faster than the industry growth rate. Thecompany generates ~75-80% of domestic formulation revenues from theniche therapies. During FY09, the domestic formulations businessregistered a healthy growth of 32% vis--vis industry growth of ~13%.The company has been ranked No. 1 in six specialty therapies.

SPIL has demonstrated significantly good results in domestic markets. Itsdomestic formulations revenue grew at a CAGR of ~28% to Rs 1960crore over FY04-09. With continued focus on niche therapies and newproduct launches, we expect SPIL to sustain the domestic growth of~15% over FY09-FY11E.

Exhibit 8:Specialty-wise ranking in the domestic marketSpeciality 1998 Current Ranking

Psychiatrist 1 1

Neurologist 1 1

Cardiologist 5 1

Opthalmologist NA 1

Diabetologist 6 1

Orthopedicians 31 1

Cgastro-enterologist 6 2

Nephrologist NA 4

Oncologist 20 6

Consulting Physician 8 5

Chest Physicians 16 4Gynaecologist NA 6


Exhibit 9:Therapy-wise revenue contribution

20%

11%

8% 7% 6%

2%4%

14%

28%

0%

10%

20%

30%

Cardiology

Diabetology

Gastroenterology

Gynaec&

Urology

Musculo-s

keletol

&Pain

Antiasthamatic

&Antiallergic

Optholmology

Others

Neuro-

Psychiatry

Therapy-w

isereven

uecontribution


Extensive product mix andexposure to growing nichetherapy areas lead to~28% CAGR growth in thedomestic business over FY04-09. With continued focus on niche therapiesand new product launches,we expect SPIL to sustainthe domestic growth of~15% over FY09-FY11E.


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Strong focus on niche therapies

SPIL exhibited robust domestic revenue growth on account of its strongfocus on chronic therapeutic areas. These require prolonged treatment asthe illness tends to be more chronic such as neuropsychiatry, CVS,diabetology, etc. The segment accounts for ~75-80% of SPILs domesticformulations revenue. Due to prolonged nature of treatment, we believe

the prescription life of the medicine is higher and is not readilychangeable. Also, due to companys ranking over the last five years, thebrand value is higher. This will likely help SPIL to maintain superiormargin.

With rising stress levels, lifestyle changes and rising affluence, we believechronic therapy areas such as CNS, CVS and diabetes will likely grow faster (~21-22%) than the industry growth rate of 12-13%. Historicallyalso the chronic segment has grown faster than the acute segment due tochanges in lifestyle. SPIL generates ~15% of its revenue from specialtysegments of ophthalmology and diabetology. In this therapeutic segment,it has maintained its top ranking in the industry.

Exhibit 10:Break-up of chronic therapies in the domestic marketChronic Therapies

CVS

29%

Diabetes

16%Gynaec

10%

Nephro

39%

Opthal6%


A total of 70% of SPILsdomestic revenues come

from high margin chronic segment. We expect this segment to grow at ahigher rate of ~21-22%


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R&D expenditure fetching robust returns

SPIL increased its stake from 56.5% to 76% i.e. 19.5% in Caraco viatechnology transfer (technology developed by SPILs R&D) during the lastfive years. Thereby, the company made expenditure on R&D to the tuneof ~Rs 1129 crore. The current market cap of Caraco (Caraco is a listedentity) is ~Rs 765 crore implying that the expenditure on R&D hasgenerated ~Rs 150 crore via stake increase in Caraco and generatedEBITDA of ~Rs 1120 crore on sale of products in the US marketsdeveloped by the R&D team.

Strong organic revenue and profit growth has enabled SPIL to increase itsspending on R&D while maintaining profit margins. SPIL spends ~9% ofits annual sales on R&D, which is one of the highest in the Indian pharmaspace. The R&D of the company is focused on generics research and hasdeveloped a number of products ranging from ANDA with Para IVcertification to controlled substance and plain vanilla products. In therecent past, a major fillip to its US business was provided by thesuccessful FTF applications (Protonix, Ethyol and Trileptal). During

H2FY09, SPIL received four ANDA approvals out of which one is thecompanys first controlled substance release.

Exhibit 11:Increased R&D effort translating into higher product filings

40

59

94

142

15 20

29

53

0

40

80

120

160

FY05 FY06 FY07 FY08

Cummulative products filed Cummulative products approved


SPILs strong focus on R&D

led to successful FTF applications (Protonix, Ethyol and Trileptal). During H2FY09, SPIL received four ANDA approvals which have anestimated market size ofUS$ 650 million.


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Leanest cost structure

SPIL has one of the leanest cost structures in the industry, translating intohighest margins and superior RoEs. SPILs lean cost structure, strongorganic growth and value-accretive acquisitions have enabled it tomaintain high return ratios. Average RoE for the last five years has beenconsistently above 30% despite a worsening environment for globalgenerics and increasing shareholders fund. However, going forward, weexpect RoE to decline on expanded balance sheet largely financed viashareholders fund.

In FY05, Sun issued FCCBs to the tune of US$350 million at an initialconversion rate of Rs 729 per share and at a fixed exchange rate of Rs45.01 per dollar. During FY08, the entire outstanding FCCBs wereconverted into equity leading to an increase in shareholders fund. With allthe FCCBs getting converted, Suns net worth will rise significantly,lowering the reported RoEs.

Exhibit 12:Cost comparison Rs croreCost Structure Sun Pharma Cipla DRL Ranbaxy

Net Sales 3357.1 4230.9 4991.7 6982.2

Raw material 722.6 2071.6 1813.3 2721.6

RM as % to sales 21.5 49.0 36.3 39.0

Employee cost 304.3 255.5 731.1 891.8

Emp. Cost as % to sales 9.1 6.0 14.6 12.8

R&D expenses 300.1 - - 428.0

R&D as % to sales 8.9 6.1

SGA 290.3 - 874.3 1690.7

SGA as % to sales 8.6 17.5 24.2

Other expenses 188.7 1042.2 734.1 335.3

Other exp as % to sales 5.6 24.6 14.7 4.8


SPIL has one of the leanestcost structures in the industry, translating intoone of the highest margins

and superior RoEs


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1 7 | P a g e

A clean balance sheet with strong fundamentals

SPIL enjoys a strong balance sheet with over Rs 2000 crore in cash &liquid investments, an important asset in tough business cycles. Withhuge cash and attractive valuations in the market, we believe SPIL canparticipate in the consolidation wave in the industry. SPILs strategy has

always been to focus on acquiring high potential yet underperformingassets and create value out of such buy outs.

SPIL has been utilising its strong operating cash flow to step upinvestments in manufacturing to meet the requirements of rapidlyexpanding revenues. A significant portion of the fixed asset baseexpansion is because of the multiple capacity acquisitions Sun has donein the past. Although there has been a rapid expansion in the fixed assetbase, fixed asset turnover has improved from 1.6 in FY04 to 3.2 in FY08,signifying rapid upgradation and turning around the acquisitions.

Exhibit 13:Improving asset utilisation

613.0725.7

892.4951.4

1035.4

1.6 1.61.8

2.2

3.2

0

300

600

900

1200

FY04 FY05 FY06 FY07 FY08

0.0

1.0

2.0

3.0

4.0

FixedAssetT/o

Net Fixed Asset Fixed Asset T/o

NetFixedAssets(Rs


Although there has been a rapid expansion in the fixed asset base, fixed

asset turnover has improved from 1.6 in FY04to 3.2 in FY08, signifying rapid up-gradation andturning around theacquisitions.


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1 8 | P a g e

Taro acquisition:

On May 20 2007, SPIL announced the acquisition of Taro Pharma forUS$454 million. The deal was agreed at $7.75 per share implying theequity value of the transaction to be ~$230 million and debt refinance

of ~$224 million. The total EV of the transaction works out to ~$454million. In May 2007, Franklin Advisers and Templeton AssetsManagement, having beneficial ownership of ~9% in Taro, filed amotion in the court to prevent the proposed merger on the grounds ofdiscrimination against minority shareholders.

Taro breaching the agreement

A year after signing the deal with SPIL, Taro sent a notice to SPIL toterminate the merger agreement on the grounds the price of US$7.75 pershare does not reflect the financial turnaround that the company achievedin CY07. However, SPIL claims the turnaround happened on account ofthe help that SPIL extended to Taro in the form of cash injection of US$60

million. SPIL currently holds a 36% stake in Taro and has the option tobuy 5 million shares of promoters at US$7.75 per share. It also has awarrant to buy additional 3.8 million shares at US$6 per share. Exercisingall these options may take SPILs shareholding in Taro to 52%.

Promoters effort to raise the agreed price

In June 2008, SPIL exercised the option to acquire the promoters share,subsequent to which Taro filed a motion seeking a declaratory judgmenton the tender offer in the Tel Aviv court. Responding to the motion theCourt ruled in favour of SPIL. Now Taro is appealing to the lower courtseeking declaratory judgment on the tender offer in the Israeli Supreme

Court. The Supreme Court of Israel will decide whether a tender offer or aspecial tender offer is required. The Taro promoters may not tender theirstake. Hence, SPIL is pleading in the Supreme Court of the state of NewYork to order the promoters and directors of Taro to honour the promise.

Taro acquisition, an attractive opportunity for value creation

If the Taro acquisition happens, it will be EPS accretive in the first year. Asper unaudited results, Taro reported profit of US$50 million on sales ofUS$339 million in CY08 as against a profit of US$29 million on sales ofUS$315 million in CY07. The acquisition is likely to help SPIL penetratedeeper into the US as Taro gets ~85% revenue from the US. In FY08,SPIL generated ~45% of revenue from the US on account of FTF

opportunities and at risk launches. However, we believe that the USrevenue contribution should stabilise at ~30-35% (without acquisition ofSPIL). On Taro acquisition, US revenues may move up to ~45-50%. IfSPIL does not succeed in acquisition of Taro, it should be construed as anopportunity lost rather than a real loss.

Exhibit 14:Taro financials (un-audited numbers) Rs croreCY07 CY08 YoY Gr. (%)

Sales 1471.1 1607.1 9.2

EBITDA 210.5 278.7 32.4

Net Profit 169.3 77.6* -54.2

Rs/$ assumed at 47

*includes an investment loss of Rs 82 crore



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1 9 | P a g e

Risks & concerns

Near-term risks could be in the form of uncertainty surrounding SPILsTaro Pharma acquisition, which we believe, will be a long drawn affairunless both parties quickly agree on the issue.

During October 2008, Caracos Detroit facility was issued a warning letterby USFDA. Although the FDA warning letter would not impact sales ofcurrently marketed products, it would halt any further approval of ANDAsfrom that facility. If the issue is not resolved quickly, revenues from USwould be impacted.

Heightened competition in key therapy areas of the domestic market andgreater vulnerability to currency fluctuations (with international businessnow accounting for ~50% sales) remain the key concern.

Sun continues to ship generic pantoprazole but in substantially lower

quantities. Sun intends to selectively sell pantoprazole with a certain pricepoint and mitigate risk particularly before potential entry of a genericcompetitor (UCB) in the near term. The generic pantoprazole waslaunched at-risk. Hence, Sun may be liable for damage claims.


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2 0 | P a g e

Financials

Organic growth to remain subduedHaving grown at a CAGR of ~40% during FY07-09, SPILs CAGR is likelyto decline on a higher base in the next two years due to loss of exclusivityon some of its products, loss of revenue from the US post USFDA actionand increasing competition in at-risk launched pantoprazole (Protonix),which generated estimated revenue of ~US$200 million for SPIL from theday it was launched till date. We estimate the FY09-11E revenue CAGR of2% at Rs 4427 crore. SPIL has exhibited excellent growth track record inthe past on account of extensive product mix in niche therapies andclever product selection for the US market. Higher base and loss revenuefrom Caraco post USFDA action seems to keep revenue growth flat.

Exhibit 15:Net sales to witness flat growth Rs Crore

984.71185.3

1636.8

2135.9

3356.7

4271.4 4108.7 4426.9

0

500

1000

1500

2000

2500

3000

3500

4000

45005000


Marketing exlusivity led growth

Organic growth

without exlusivity


During FY07-09, the net profit of SPIL grew by ~52% to Rs 1824 croredue to super normal margins on product under exclusivity in the USmarkets and generic Protonix. We believe rising competition on genericProtonix will keep margins under pressure. We estimate net profit will de-grow at a CAGR of ~2.5% to Rs 1733 crore over FY09-11E.

Exhibit 16:Profits to decline @2.5% CAGR over FY09-11 Rs Crore

345.9 404.6573.3

784.3

1487.1

1824.11698.8 1733.4

0

200

400

600

800

1000

1200

1400

1600

1800

2000



SPILs FY09-11E CAGR islikely to decline on a higher

base in the next two yearsdue to loss of exclusivity on some of its products, lossof revenue from the US post USFDA action and increasing competition in at-risk laupantoprazole


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2 1 | P a g e

Margins will likely stabilise in FY11E but remain robustGiven SPILs lean cost structure and strong focus on cost control, at risklaunch of generics pentoprazole (protonix) and exclusivity on Trileptaland ethyol lead to SPILs super normal EBITDA margin in the range ofover ~43% during FY08 & 09. We believe SPILs EBITDA margin will likelyshow declining trend over FY09-11E before normalising in FY11E in therange of ~37%.

During FY10E, we believe the EBITDA margin will likely be in the range of~40% as SPIL is still marketing generics pentoprazole at certain pricelevel with very few competitors. This will likely keep margins higher. InFY11E, we have assumed the margins will normalise in the range of ~36-40% on account of better product mix and higher contribution fromcontrolled substances from US markets.

SPIL is likely to maintain its operating margin at over ~37% in the longerrun on account of its strategy of remaining focused on technologicallydifficult products for the US markets, superior product mix in nichetherapy areas in domestic markets and lean cost structure. We believeincrease in SPILs revenue from core generic business of US would alsohelp in keeping margins high.

Exhibit 17:Operating and net profit margins to stabilise

0%

10%

20%

30%

40%

50%


NPM,

OPM

(%)

EBITDA (%) NPM (%)


We believe SPILs EBITDA margin will likely showdeclining trend over FY09-

11E before normalising in FY11E in the range of~37%


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2 2 | P a g e

Over the last five years, theRoNW & RoCE has shown adeclining trend due to increasing balance sheet size, mostly financed byreserves.

Return ratios to stabilise after a spikeGiven strong cost discipline, robust organic growth and value-accretiveacquisitions, SPIL has maintained better return ratios. However, over thelast five years, the RoNW & RoCE has shown a declining trend due toincreasing balance sheet size, mostly financed by reserves.

Exhibit 18:Return ratios to stabilise

0%

10%

20%

30%

40%

FY '04 FY '05 FY '06 FY '07E FY '08E FY09E FY10E FY11E

0%

10%

20%

30%

40%

RONW ROCE

ROCE & RoNW stabilizing after a fall


Exhibit 19:Balance sheet size expanding at 33% CAGR with net worth at 42%over FY04-11E

0

2000

4000

6000

8000

10000

12000

FY '04 FY '05 FY '06 FY '07E FY '08 FY '09E FY10E FY11E

Networth BS Total

Expanding balance sheet largely

financed by reserves


Exhibit 20:Du -Pont ratio analysisFY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E

ROE (%) 43.2 35.8 36.1 28.3 29.8 28.1 21.6 18.6

PAT/PBT 0.9 0.9 0.9 0.9 0.9 1.0 1.0 0.9

PBT/PBIT 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

PBIT/Sales 0.4 0.4 0.5 0.5 0.4 0.4 0.4 0.4

Sales/Assets 0.5 0.5 0.6 0.6 0.5 0.5 0.4 0.8

Assets/Equity 1.1 1.1 1.1 1.1 1.5 2.3 2.7 1.6



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2 3 | P a g e

Continued return from generic Pantoprazole in FY09 is likely to keep RoIC at higher levels. Suddendecline from pantoprazole

revenue will impact returnratios post patent expiry onit in July 2010

Rising RoIC indicating superior re-investment rateFollowing the trend of RoNW & RoCE, RoIC is likely to show an increasingtrend from FY10E onwards. Looking at the historical trend, RoICincreased suddenly during FY08. During the period between FY04 andFY07, the RoIC declined from ~39% to ~27% and later peaked in FY08 at~53% due to supernormal returns from generic Pentoprazole, Ethyol and

Trileptal. Continued return from generic Pentoprazole in FY09 is likely tokeep RoIC at higher levels. As Pentoprazole is going off patent in July2010, we expect a sudden decline from pentoprazole revenue to impactreturn ratios. In FY11E, we expect technologically differentiatedmolecules to generate higher revenues in US markets post ANDAapproval over FY10. This would likely improve the RoIC in FY11E. Withincreasing RoIC and incremental cash flows being reinvested at higherrates (at the rate of RoIC), we can expect healthy cash flows in futureyears.

Exhibit 21:Return on invested capital to stabilise after spike in FY08

37.0%

30.0%26.9%

53.1%

47.5%

40.4%37.6%39.5%

0%

10%

20%

30%

40%

50%

60%

FY '04 FY '05 FY '06 FY '07E FY '08E FY09E FY10E FY11E

ROIC likely to increase after a slight

decline over FY08 to FY09E



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2 4 | P a g e

With continued focus on niche therapies and new product launches, weexpect SPIL to sustain thedomestic growth of ~15%over FY09-FY11E

On the Taro acquisition, US revenues may move up to~45-50%

Valuations

SPIL has been one of the best performers in the Indian pharma space onaccount of extensive and superior product mix. The companydifferentiates itself from most of its Indian peers on account of strongfoothold in niche therapies in Indian markets, robust pipeline ofproducts in the US markets and cost leadership, thereby generating oneof the best EBITDA margins in the Indian pharma space. Recent at risklaunch of generic pantoprazole and exclusivity on Ethyol and Trileptallead it to achieve lifetime growth rate in the US. However, SPIL suffereda setback on its Effexor XR opportunity. We believe its formidablemarket share in niche therapies in domestic markets and strong pipelineof 108 pending ANDAs approvals in the US market will likely keep itsgrowth momentum upbeat.

SPIL accorded top priority to the US markets to excel in the exportsmarket and follows a differentiated strategy in US markets, which

generates stabile earnings. We believe US revenues will likely de-grow~27% due to recent USFDA actions on the Caracos Michigan facility.However, speedy approval from its portfolio of 108 ANDAs (~20-25%differentiated ANDAs) pending approval will likely protect furtherdeterioration of US revenues. SPIL has an edge over other Indian playersbecause of its front-end Caraco and backward integration into own bulkfor many of its products.

In the domestic market, SPIL generates superior margins via its strong focus on niche therapies. The extensive product mix and exposure togrowing niche therapy areas of CVS, CNS, GI, respiratory,ophthalmology, orthopaedics, etc. will likely lead SPIL to grow faster than

the industry growth rate. The company generates ~75-80% of domesticrevenue from niche therapies. During FY08-09, the domestic formulationsbusiness registered a healthy growth of 33% vis--vis industry growth of~13% while the domestic formulations revenue growth was at a CAGR of~25% to Rs 1565 crore over FY04-09. With continued focus on nichetherapies and new product launches, we expect SPIL to sustain thedomestic growth of ~15% over FY09-FY11E.

Moreover, the company has a long history of acquisitions. The companyis currently making efforts to acquire Israel based Taro Pharma. If theTaro acquisition happens, it will be EPS accretive in the first year. Taroreported unaudited profit of US$50 million on the sales of US$339 millionin CY08 as against a profit of US$29 million on sales of US$315 million in

CY07. The acquisition is likely to help SPIL to penetrate deeper into theUS as Taro gets ~85% revenue from the US. In FY08, SPIL generated~45% of revenue from the US on account of FTF opportunities and at risklaunches. However, we believe the US revenue contribution shouldstabilise at ~30-35% (standalone SPIL). On the Taro acquisition, USrevenues may move up to ~45-50%.


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2 5 | P a g e

Is the high P/E viable?

SPIL generates a very strong EBITDA margin, which is probably oneof Indias best margins. Superior product mix gives better visibilityon the earnings

Neat and clean balance sheet with almost nil debt on the booksreduces risk

Strong fundamentals and better return ratios augur well SPIL has been one of the best performers in the Indian pharma

space during the last few years on account of extensive andsuperior product mix

If the Taro acquisition happens, it will be EPS accretive in the firstyear. Taro reported unaudited profit of US$50 million on the salesof US$339 million in CY08 as against a profit of US$29 million on

sales of US$315 million in CY07. The acquisition will lead SPIL topenetrate deeper into the US market

SPIL has a very strong pipeline of filings for the US market, whichmay again generate some interesting launch

SPIL has a superior and extensive product line in the niche chronictherapy areas in the domestic market, which generate consistentand better revenue and margin

Lesser competition in the SPILs niche chronic therapy areas givesbetter earning visibility

SPIL invests aggressively in building a strong proprietary productpipeline for the US market. It has demonstrated this by making R&Dexpenditure of ~9% of sales

We believe SPIL deserves a premium over other players in terms of targetPE, as we believe:

1) There is better visibility on revenues and earnings momentum2) The company can maintain its margin due to its superior product

mix in the domestic market and robust pipeline for the US market

3) Lower risk due to strong fundamentals, almost debt free andclean balance sheet

4) Better RoIC, indicating higher reinvestment rate


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2 6 | P a g e

We estimate the fair value of SPIL to be in the range of Rs 1344 (16xFY11E EPS), ~10% higher than CMP. We are initiating coverage on SPILwith a PERFORMER rating.

Exhibit 22:P/E band18x

16x

12x

8x

0

300

600

900

1200

1500

Apr-03

Sep-03

Feb-04

Jul-04

Dec-04

May-05

Oct-05

Mar-06

Aug-06

Jan-07

Jun-07

Nov-07

Apr-08

Sep-08

Feb-09

Jul-09


Exhibit 23:EV to EBITDA band

20x

16x

12x

8x

0

8000

16000

24000

32000

40000

Apr-03

Sep-03

Feb-04

Jul-04

Dec-04

May-05

Oct-05

Mar-06

Aug-06

Jan-07

Jun-07

Nov-07

Apr-08

Sep-08

Feb-09

Jul-09


Exhibit 24:Market cap to sales band10x

8x

5x

2x

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Apr-03

Aug-03

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09


Exhibit 25:Price to book band4x

3x

2x

1x

0

500

1000

1500

2000

2500

3000

3500

4000

Apr-03

Sep-03

Feb-04

Jul-04

Dec-04

May-05

Oct-05

Mar-06

Aug-06

Jan-07

Jun-07

Nov-07

Apr-08

Sep-08

Feb-09

Jul-09



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Exhibit 26:P&L account Rs croreFY '06 FY '07 FY '08 FY09A FY10E FY11E

Net Sales 1636.8 2135.9 3356.7 4271.4 4108.7 4426.9

Other Income 167.4 242.8 145.1 86.8 259.0 332.0

Raw Material 529.5 577.1 756.4 950.3 1083.3 1265.0

Raw material as % of sales 32.4 27.0 22.5 22.2 26.4 28.6

Emp Expenses 141.6 199.0 304.1 439.9 505.9 581.7Emp exp as % of sales 8.7 9.3 9.1 10.3 12.3 13.1

SGA Expenses 321.8 443.9 290.3 388.3 369.8 398.4

SGA as % of sales 19.7 20.8 8.6 9.1 9.0 9.0

Other expenses 0.0 0.0 189.8 391.4 164.3 187.5

Other exp as % of sales 0.0 0.0 5.7 9.2 4.0 4.2

R&Dexpenses 153.4 244.0 299.0 332.0 317.5 362.7

R&D exp as % of sales 9.4 11.4 8.9 7.8 7.7 8.2

EBITDA 490.5 672.0 1551.3 1863.3 1668.0 1631.5

EBITDA margin (%) 30.0 31.5 46.2 43.6 40.6 36.9

Depreciation 61.0 81.3 96.9 116.2 106.6 112.2

PBT 596.9 833.5 1599.6 1955.6 1820.4 1851.3

Taxation 23.9 -6.7 48.5 71.2 72.8 79.8

Net Profit before minority interest 573.0 840.2 1551.1 1884.4 1747.6 1771.5Minority Interest -0.3 55.9 64.0 60.3 48.8 38.1

Net Profit after minority interest 573.3 784.3 1487.1 1824.1 1698.8 1733.4


Exhibit 27:Balance sheet Rs croreFY '06 FY '07 FY '08 FY '09E FY10E FY11E

Equity Share Capital 92.9 96.7 103.6 103.6 103.6 103.6

Preference capital 1.4 1.4 0.0 0.0 0.0 0.0

Reserves & Surplus 1495.9 2674.7 4887.3 6383.1 7776.1 9197.5

Minority Interest 33.2 43.8 188.6 248.9 297.7 335.8

Loan Funds 1874.5 1113.2 143.6 236.5 135.6 135.9

Secured Loans 35.6 38.3 36.8 129.6 28.8 29.1

Unsecured Loans 1838.9 1074.9 106.8 106.8 106.8 106.8

Deffered Tax Liability 105.3 89.5 9.2 9.0 9.0 9.0

Total Liabilities 3603.1 4019.3 5332.2 6981.0 8321.9 9781.7

Fixed Assets

Gross Block 1284.9 1425.2 1596.0 1940.6 2163.0 2298.6

Accumulated Depreciation 392.5 473.8 560.7 676.9 783.5 895.7

Net Block 892.4 951.4 1035.4 1263.7 1379.5 1402.9

Capital Work-in-progress 41.4 60.8 68.6 42.0 0.0 0.0

Investments 354.1 254.3 656.5 2500.0 2500.0 2500.0Net Current Assets

Cash 1546.8 1448.7 1510.5 380.6 1752.1 2962.8

Trade Receivables 360.9 678.9 1417.7 1791.8 1725.4 1857.3

Loans & Advances 247.1 265.3 508.1 437.4 421.2 453.4

Inventory- Other 511.7 664.5 772.8 1008.0 1048.3 1194.5

Current Assets, Loans & Advances 2666.6 3057.3 4209.1 3617.9 4946.9 6468.0

Less : Current Liabilities & Provisions 351.5 304.6 637.3 442.6 504.5 589.2

Total Net Current Assets 2315.1 2752.8 3571.8 3175.3 4442.4 5878.8

Miscellaneous expenses not written 0.0 0.0 0.0 0.0 0.0 0.0

Total Assets 3603.1 4019.3 5332.2 6981.0 8321.9 9781.7



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2 8 | P a g e

Exhibit 28:Ratio analysisFY '06 FY '07 FY '08 FY09E FY10E FY11E

Per share data

EPS 30.8 40.6 71.8 88.1 82.0 83.7

Cash EPS 34.1 47.6 79.6 96.6 89.5 90.9

Book Value 171.1 286.6 481.9 626.4 760.9 898.1

Margins

Operating Margin (%) 30.0 31.5 46.2 43.6 40.6 36.9

Gross Profit Margin (%) 36.5 38.5 48.4 47.5 44.1 41.3

Net Profit Margin (%) 31.8 35.3 44.3 43.2 40.0 37.2

Balance sheet & Return ratios

RoNW (%) 36.1 28.3 29.8 28.1 21.6 18.6

ROCE (%) 16.8 21.1 30.4 28.2 21.9 18.9

ROIC (%) 30.0 26.9 53.1 47.5 40.4 37.6

Debt Equity 1.2 0.4 0.0 0.0 0.0 0.0

Valuation ratios

EV/Sales 12.9 9.9 6.5 5.4 5.2 4.6

EV/EBIDTA 42.9 31.6 14.0 12.3 12.9 12.4

Market Cap to sales 12.7 10.1 6.9 5.4 5.6 5.2

P/BV 6.5 3.9 2.3 1.8 1.5 1.2

Turnover RatiosFixed Assets Turnover Ratio 1.9 2.4 3.3 3.5 3.1 3.2

Debtors Turnover Ratio 4.5 3.1 2.4 2.4 2.4 2.4

Inventory Turnover Ratio 3.4 3.4 4.5 4.3 4.0 3.8

Creditors Turnover Ratio 2.8 4.0 2.1 4.0 3.9 3.8

Working capital ratios

Current Ratio 7.6 10.0 6.6 8.2 9.8 11.0

Quick Ratio 6.1 7.9 5.4 5.9 7.7 9.0

Working Capital/Sales 1.4 1.3 1.1 0.7 1.1 1.3

Cash to Absolute Liabilities 4.4 4.8 2.4 0.9 3.5 5.0

L& A T/o 6.6 8.1 6.6 9.8 9.8 9.8

Debtor Days 80.5 116.0 154.2 153.1 153.3 153.1

Inventory Days 107.5 108.4 81.5 84.1 90.8 96.2

Creditor Days 129.2 91.1 172.2 90.8 94.0 95.8L&A Days 55.1 45.3 55.3 37.4 37.4 37.4

Debtors to Sales 0.2 0.3 0.4 0.4 0.4 0.4

Average Debtors/Sales 0.2 0.2 0.3 0.4 0.4 0.4 Source: Company, ICICIdirect.com Research

Exhibit 29:Cash flow statement Rs croreFY '06 FY '07 FY '08 FY09E FY10E FY11E

Op cash or cash equivalents 1752.1 380.6 1510.5 1448.7 1546.8 1180.9

Profit after Tax 1771.5 1747.6 1884.4 1551.1 840.2 573.0

Less: Dividend Paid 352.0 301.3 328.3 267.7 141.2 102.3Add: Depn 112.2 106.6 116.2 96.9 81.3 61.0

Add Provision for deffered tax 0.0 0.0 0.2 80.3 15.8 15.7

Cash Profit 1571.7 1548.4 1672.1 1300.0 764.5 547.4

Net Increase in Current Liabilities 230.8 103.5 194.7 332.8 46.9 92.8

Net Increase in Current Assets 964.4 77.9 538.7 1089.9 488.9 406.0

Cash Flow after changes in WC 1030.0 1547.0 938.8 542.8 228.8 234.1

Purchase of Fixed Assets 135.6 180.4 318.0 188.6 159.6 219.9

(Increase) / Decrease in Investment 0.0 0.0 1843.5 402.2 99.8 294.4

Increase / (Decrease) in Loan 2.9 101.9 92.8 969.6 761.3 51.5

Increase / (Decrease) in share cap 0.0 0.0 0.0 1079.4 494.2 5.8

Net Cash Inflow / Outflow 897.3 1264.7 1129.9 61.8 98.1 365.9

Closing Cash/ Cash Equivalent 2542.6 1645.3 380.6 1510.5 1448.7 1546.8 Source: Company, ICICIdirect.com Research


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RATING RATIONALEICICIdirect.com endeavours to provide objective opinions and recommendations.ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. currentmarket price and then categorises them as Outperformer, Performer, Hold andUnderperformer. The performance horizon is two years unless specified and the notional targetprice is defined as the analysts' valuation for a stock.Outperformer (OP): 20% or more;Performer (P): Between 10% and 20%;Hold (H): +10% return;Underperformer (U): -10% or more;

Pankaj Pandey Head Research [email protected]

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corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companiesmentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investmentbanking or other advisory services in a merger or specific transaction. It is confirmed that Raghvendra Kumar CFA Ashish Thavkar MBA research analysts and the authors of this report havenot received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICISecurities, which include earnings from Investment Banking and other business.

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