pharma jefferies (1)

Mkt. Cap Price Cons. Current EPS Estimates Previous Est.Company Name Ticker (MM) Rating Price Target Next FY 2014 2015 2016 2015 2016 Cipla CIPLA IN INR506.4BN BUY INR630.75 INR740.00▲ -- INR17.30 INR17.00 INR25.40 INR17.50 INR26.10Dr. Reddy's Laboratories DRRD IN INR544.3BN HOLD INR3,207.25INR3,100.00▲ -- INR126.50 INR132.60 INR145.00 INR130.30 INR151.80Lupin Ltd. LPC IN INR639.4BN BUY INR1,431.00INR1,650.00▲ -- INR41.00 INR48.40 INR57.40 INR48.60 INR57.80Sun PharmaceuticalIndustries SUNP IN INR1,730.1BN BUY INR835.30INR1,100.00▲ -- INR27.30 INR28.90 INR35.40 INR28.70 INR35.10

x

INDUSTRY NOTE

Target | Estimate Change

India | Healthcare | Pharmaceuticals 13 January 2015

Pharmaceuticals2015 Outlook: Focus on EMs

EQU

ITY R

ESEARC

H IN

DIA

Piyush Nahar *Equity Analyst

+91 22 4224 6113 [email protected] Fitkariwala *

Equity Associate+91 22 4224 6125 [email protected]

* Jefferies India Private Limited

Key Takeaway

We anticipate 2015 will be a year of divergent performance, based on fourkey themes: 1> increased focus on EM - how companies manage growth andintegrate recent acquisitions given rising risks and currency headwinds; 2>slow FDA approvals which would keep US growth lackluster; 3> increased focuson R&D and its results; and 4> continuing acquisition overdrive. Cipla is our toppick for the year, and expect DRRD will likely remain under pressure.

EM to be key focus - Emerging markets are likely to be the focus in 2015 given: 1> increasedrisks from the commodity price correction and strengthening USD; and 2> integrationof various acquisitions. The INR appreciated c7-40% in 2014 against most EM currencies,especially Russia, Africa and LATAM. This would impact both growth and profitability ofcompanies. Further, the commodity price correction would impact industry growth in manycountries. The focus, in our view, will now likely be on how companies manage growth andprofitability in this environment. We expect DRRD and RBXY to be the most impacted. ForSun, Lupin and Cipla, 2015 should also be about integrating recent acquisitions.

US FDA approvals to remain lackluster - 2014 saw pharma companies' earningsimpacted by the delay in USFDA approvals. We believe this trend of delay in approvalswill likely continue in 2015. As we have highlighted in our earlier report "GDUFA Year III,"15 October 2014 , approval will likely take significant time to improve. The delays wouldnegatively impact earnings as companies need a significant increase in approvals to sustaingrowth. DRRD and LPC would be the most impacted, in our view, while Cipla the least.

R&D spend to increase further, watch for clinical datapoints - The past coupleof years have seen a significant increase in R&D spend among Indian companies as theyentered new therapies and also invested in new drug development. We expect R&D spendto increase further in 2015 as many of the studies have entered late stage trials. 2015 couldalso mark the year when the first clinical data points and NDA filings would come from theseefforts. DRRD expects to file its first NDA in 2015. SUNP could also see initial results for itsrecent in-licensed psoriasis biologic and also from additional usages of DUSA product.

Acquisition overdrive to continue - The past year has been a year of consolidation inthe global pharma space in which Indian companies also participated. We believe that theacquisition drive could sustain for some of the Indian companies, especially LPC and DRRDas their organic growth slows. For CIPLA and SUNP, 2015 should be a year of consolidation.

Cipla our preferred pick, cautious on DRRD - Our preferred pick for 2015 is CIPLA,while we are cautious on DRRD. SUNP will likely be in consolidation phase this year as itfocuses on the RBXY integration. The key drivers for CIPLA should be the launch of gSeretidein the UK, the US business launch and the consolidation of the EM businesses. DRRD is likelyto face pressure on most of its key businesses: 1> US due to lack of approvals especially withits key API plant under scrutiny, 2> Russia where both the currency and market growth wouldimpact sales and profitability (c20% of EBITDA); and 3> Venezuela where the company isbenefiting from shortages, but this could changed if the crisis continues. LPC could alsoface pressure in the year as FDA approvals remain lackluster and JPY depreciation impactsprofitability from the region.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investmentdecision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 22 to 27of this report.

US – Approval rates to remain weak The last couple of years have seen a significant rise in USFDA approval volatility. This has

impacted earnings of companies, both positively (LPC, SUNP) and negatively (DRRD). We

believe that the delay in approvals could continue into 2015. Further, unlike in 2014, the

impact should largely be negative, in our view, given that all of the companies are already

benefiting from limited competition in key products.

GDUFA focus to shift towards approvals

The first two years of GDUFA had been negative for the Indian companies as the FDA

focused on improving compliance of manufacturing facilities while approvals remained

muted. Going forward, though, we expect this to change and focus to shift towards

approvals. This is as October marked the start of USFDA commitments on ANDA

approvals. FDA is committed to act on 60% of the filings made in Year III (Oct 14- Sep 15)

within 15 months of filing. FDA would need to sharply increase its approval activity pace

from current levels to achieve this target. As Exhibit 1-2 show, during the past two years,

approval rates have actually declined, leading to a rise in the pending pipeline, which

now stands at c3,800 ANDAs. The rate of Complete Response letter (CRL) issuance - which

is what the FDA has committed to – has also declined from its peak and CRLs run-rate is

now below the ANDA filing rate.

Benefits, though, would take time to accrue

Industry and investor expectations are that with GDUFA entering the year III cohort,

approval rates would increase sharply, leading to better growth for generic companies.

However, we expect approval uncertainty to remain in the near term, even as FDA focus

shifts towards approvals, and GDUFA benefits to accrue only from 2HFY16. This is as: 1>

Approval pace takes time to increase significantly - For the FDA to increase the approval

rate, it would need to significantly increase staffing, which would take time; 2> FDA

commitment is for CRLs and not approvals - The FDA could then prioritize issuing CRLs

over final approvals (in the near term) which would limit the benefits. This trend has

borne out over the past two years; 3> Impact on current products to offset the benefits in

near term - Most of the Indian companies are currently benefiting from the delay in

approvals as they have products with limited competition. An increased approval rate

would likely increase competition in the same, offsetting part of the benefits in the near

term.

Exhibit 1: No improvement in CRLs and approvals in FYIII

Source: USFDA, Jefferies

Exhibit 2: Pending pipeline remains elevated

Source: USFDA, Jefferies estimates

0

20

40

60

80

100

120

140

Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

Number of final approvals

Number of Complete Responses (CR) issued

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0

200

400

600

800

1,000

1,200

1,400

1,600

Sep12 Oct12-Sep13 Oct13-Sep14 Oct14-Nov14

CRLs issued New ANDA submissions

Final approvals Pending Pipeline - RHS

Healthcare


13 January 2015

page 2 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar

Please see important disclosure information on pages 22 - 27 of this report.

Emerging markets – Currency to play a key factor Emerging market performance for pharma companies in 2015 would, in our view, be

determined largely by currency. The sharp depreciation in various EMs and the relative

strength in the INR has to led c7-40% appreciation in the INR vs. other EM currencies. This

would adversely affect both the reported sales as well as profitability of the companies.

The key impact would be in Russia, LATAM and Venezuela where currency and

commodity price pressure could lead to lower industry growth.

Exhibit 3: EM currencies have depreciated c7-42% against INR

US Japan Russia Africa RoW Europe

% change in currency in 2014* 2.0 -10.0 -42.1 -7.2 -6.7 -10.0

% of Sales

Sun Pharma 60.3 0.0 0.0 0.0 11.8 0.0

Cipla 7.8 0.0 0.0 11.1 23.3 17.2

Ranbaxy 44.1 0.0 7.1 7.2 10.3 7.1

Dr Reddy 44.3 0.0 12.5 0.0 7.4 4.3

Lupin 45.1 11.0 0.0 3.2 6.4 2.5

Sector 42.8 2.0 3.9 3.7 11.4 5.4

Note: * positive number indicates INR depreciation (positive for pharma companies), Source: Jefferies estimates, company data

R&D – expect clinical datapoints R&D spend for Indian companies has increased from 6.2% in FY13 to 7.5% in FY15. This

has been led by entry into new complex therapies and investment in new drug

development which requires clinical trials. We expect R&D spend to increase further in

2015 as many of the studies have entered late stage trials. 2015 could also mark the year

when the first clinical data points and NDA filings would come from these efforts. Key to

watch would be DRRD and SUNP. DRRD expects to file its first NDA in 2015. SUNP could

also see initial results for its recent in-licensed psoriasis biologic Tildrakizumab and also

from additional usages of DUSA product.

Exhibit 4: R&D spend to increase led by clinical trials

Source: Jefferies estimates, company data

Exhibit 5: Sun to spend most in absolute terms, DRRD as %

of sales


5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

FY13 FY14 FY15E FY16E FY17E

R&D spend for the sector (%)

0

5

10

15

20

25

0

2

4

6

8

10

12

RBXY CIPLA SUNP LPC DRRD

FY16E R&D spend (%) FY16E R&D spend (Rs bn) - rhs

Healthcare


13 January 2015



Valuations – Above historical averages but relative premium in line Pharma sector has outperformed the market by c7% in 2014. The sector has seen a re-

rating in 2014 and is now one standard deviation above historical average. The re-rating

though has been in line with the re-rating of the Indian markets and the PE premium for

the sector is in line with its historical averages. Given the strong earnings growth over the

next few years, we believe that the premium could continue.

Exhibit 6: PE valuations are above historical averages

Source: Factset, Jefferies

Exhibit 7: PE premium near its historical average

Source: CMIE, Factset, Jefferies estimates

10

12

14

16

18

20

22

24

26

28

30

Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14

Pharma Avg. +1 st. dev. -1 st. dev.

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14

Pharma PE rel. to MSCI India Avg.

Healthcare


13 January 2015



Cipla – Execution the key focus Cipla is one of our preferred picks for 2015. 2015 will be a key execution year

for Cipla led by launch of key respiratory products in the EU, the US business

launch and the consolidation of the EM business. We expect Cipla to report

24% EPS CAGR over FY14-17E led by margin improvement of C400bps. The

stock is now trading at sector multiples and, given the strong earnings,

growth remains our preferred pick in the sector. We retain our Buy rating

with a revised TP of Rs740 as we roll our DCF to Mar 16.

Investment in Management and front end nearly complete

The past two years saw Cipla shifting its strategy from a manufacturing focus to owning

the front end in key markets. The set-up in key markets though is now complete under a

new management team. Further, the company has bought controlling stakes in channel

partners/opened its own office in various key EM markets including Kenya, Mayanmar,

Yemen, Sri Lanka and Iran.

Expect benefits to accrue ahead

We expect the benefits of the recent investment to reflect in the top line and margins

going forward. We expect growth to improve led by better growth in EM including India,

the EU inhaler rollout and the US front end launch. Further, we expect margins to improve

c400bps led by better mix and better asset utilization.

India business growth to remain ahead of industry - Despite being the

most impacted due to pricing policy, Cipla has grown much ahead of industry

and peers since FY14 in the domestic business. It has gained significant market

share in the past 18 months, highlighting management capability to drive better

growth. We expect the trend to continue going forward.

EM growth to improve – We expect EM growth to improve going forward.

The slower growth in recent quarters has been due to rationalization of low

margin product/territories and integration issues in key markets. While this could

keep reported growth low in the near term, we expect growth to improve from

current levels. Further EBITDA growth should be much better going forward, in

our view.

US business to start contributing from FY16E – Cipla’s US front-end will

operationalize from early 2015. While we expect the initial products to be small

and US front end contribution to be c2% of the overall sales, it would provide

entry into the market and should be the base for stronger medium term growth.

We expect the front end to drive better growth when Cipla’s inhalers get

launched in the US market starting 2017/18.

EU inhalers now getting operationalized – the key driver

The key trigger for the company in the near to medium term, in our view, is the launch of

its respiratory business in the developed markets, especially EU. There are three key

products over the next 3 years that could drive strong earnings growth and margins for

the company.

gAdvair MDI – The company has already launched this in Germany and Sweden

and roll-out in other geographies especially UK is expected over the next 12m.

gSymbicort – Management has indicated that they have made a gSymbicort

filing. We expect the launch to be in 2016.

gAdvair DPI – We expect the launch to be in the second wave of generic

launches in 2017. While the benefits from this would be lower than MDI, given

the larger market, it should still be a significant opportunity for the company.

Healthcare


13 January 2015



Expect 24% earnings CAGR led by margin improvement

We expect earnings to grow at 24% CAGR over FY14-17E led by better top-line growth

and margins. We expect margins to improve c400bps over the period led by better mix

(inhalers, US, EU) and better asset utilization as front ends in various markets get utilized.

Change in estimates

We have adjusted our estimates by 1-3% and raised our TP to Rs740 as we factor in the

following:

Change in our USD/INR assumptions to 61.8(3Q15 average) from 60 earlier

Various EM and other region currencies are adjusted to 3Q15 average levels

Roll forward our DCF to Mar 16

Exhibit 8: Change in estimates

Old New % change

FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

Sales 115,385 138,260 162,433 113,973 136,357 160,218 (1.2) (1.4) (1.4)

EBITDA 24,168 32,381 40,956 23,648 31,609 40,013 (2.2) (2.4) (2.3)

OP margin 20.9 23.4 25.2 20.7 23.2 25.0 (20) (24) (24)

Net profit 14,082 20,965 27,043 13,687 20,418 26,333 (2.8) (2.6) (2.6)

NP margin 12.2 15.2 16.6 12.0 15.0 16.4 (20) (19) (21)

EPS 17.5 26.1 33.7 17.0 25.4 32.8 (2.8) (2.6) (2.6)

EPS growth 1.4 48.9 29.0 (1.4) 49.2 29.0

DPS 2.0 2.7 3.4 2.0 2.7 3.4 - - -

ROE 12.5 16.0 17.6 12.2 15.7 17.3 (31) (32) (30)


Exhibit 9: Profit and Loss Statement

Rs mn 2013 2014 2015E 2016E 2017E

Net Sales 82,793 101,004 113,973 136,357 160,218

Change (%) 17.9 22.0 12.8 19.6 17.5

Material Cost 29,526 38,020 41,563 46,771 53,029

Employee Cost 10,363 13,940 17,425 19,865 22,844

SG&A 17,288 22,595 24,268 28,587 33,177

R&D Expenses 5,503 5,119 5,927 8,181 9,613

EBITDA 20,114 21,331 23,648 31,609 40,013

% of net sales 24.3 21.1 20.7 23.2 25.0

3.855

Depreciation 3,305 3,726 4,988 5,272 5,557

Interest 339 1,457 1,373 1,336 1,336

Other Income 2,619 2,654 1,788 3,303 3,071

EO Income / (Exp) 0 0 0 0 0

PBT 19,089 18,800 19,075 28,304 36,190

Tax 5,443 4,634 4,578 7,076 9,048

Rate (%) 28.5 24.6 24.0 25.0 25.0

PAT 13,584 13,884 13,687 20,418 26,333

Adjusted PAT 13,584 13,884 13,687 20,418 26,333

change (%) 29.4 2.2 -1.4 49.2 29.0

Source: Company Data, Jefferies estimates

Healthcare


13 January 2015



Exhibit 10: Balance Sheet Statement

Rs mn 2013 2014 2015E 2016E 2017E

Share Capital 1,606 2,101 2,101 2,101 2,101

Reserves 88,581 98,898 110,532 127,887 150,270

Net Worth 90,187 100,999 112,633 129,988 152,371

Deferred Tax Liability 2,805 3,090 3,090 3,090 3,090

Loans 9,669 12,479 12,144 12,144 12,144

Capital Employed 102,662 116,568 127,866 145,221 167,604

Gross Fixed Assets 53,175 87,604 92,604 97,604 102,604

Less: Depreciation 17,076 21,757 26,744 32,017 37,574

Net Fixed Assets 36,100 65,847 65,859 65,587 65,030

Capital WIP 3,778 3,536 3,536 3,536 3,536

Investments 25,324 7,086 7,086 7,086 7,086

Deferred Tax Asset 0 0 0 0 0

Current Assets 51,376 57,534 68,787 85,573 110,760

Inventory 23,871 28,953 30,603 35,719 41,225

Debtors 16,688 16,389 16,845 22,021 26,752

Cash & Bank Balance 1,430 1,752 10,898 17,392 32,342

Loans & Advances 9,387 10,441 10,441 10,441 10,441

Current Liabilities 13,916 17,436 17,403 16,561 18,808

Creditors 8,284 10,241 13,065 11,692 13,375

Other Liabilities 2,809 3,771 1,191 1,191 1,191

Provisions 2,824 3,424 3,146 3,678 4,242

Net Current Assets 37,460 40,099 51,385 69,012 91,952

Appl. Of fund 102,662 116,568 127,866 145,221 167,604


Exhibit 11: Cash flow Statement

(Rs mn) 2013 2014 2015E 2016E 2017E

PAT 13,584 13,884 13,687 20,418 26,333

Depreciation 3,305 3,726 4,988 5,272 5,557

Interest Exp 339 1,457 1,373 1,336 1,336

Other Income 2,619 2,654 1,788 3,303 3,071

Change in Wkg Capital -6,163 -2,033 -2,140 -11,134 -7,990

CF from Op Activities 8,446 14,381 16,120 12,590 22,165

Change in Fixed Assets -7,316 -33,232 -5,000 -5,000 -5,000

Change in Investments -12,633 18,239 0 0 0

Other Income 2,619 2,654 1,788 3,303 3,071

CF from Investing Activities -17,330 -12,340 -3,212 -1,697 -1,929

Change in equity 0 -1,526 0 0 0

Changes in debt 9,535 2,810 -336 0 0

Interest Exp -339 -1,457 -1,373 -1,336 -1,336

Dividend paid -1,606 -1,666 -2,053 -3,063 -3,950

Others 1,820 -97 0 0 0

CF from Financing Activities 9,409 -1,936 -3,761 -4,398 -5,286

Net change in Cash 525 105 9,147 6,494 14,950


Healthcare


13 January 2015



Exhibit 12: Key Ratios

2013 2014 2015E 2016E 2017E

Basic (Rs)

EPS 16.9 17.3 17.0 25.4 32.8

BPS 112.3 125.8 140.3 161.9 189.8

DPS 2.0 1.8 2.0 2.7 3.4

Payout (%) 11.8 10.3 11.7 10.4 10.2

Valuation (X)

P/E 37.4 36.6 37.1 24.9 19.3

P/B 5.6 5.0 4.5 3.9 3.3

EV/EBITDA 25.6 24.2 21.8 16.3 12.9

EV/Sales 6.2 5.1 4.5 3.8 3.2

Dividend Yield (%) 0.3 0.3 0.3 0.4 0.5

Profit Ratios (%)

RoE 15.1 13.7 12.2 15.7 17.3

RoCE 21.0 15.8 16.4 21.1 26.1

Turnover Ratios

Debtor Days 74 54 54 59 61

Inventory Days 295 269 269 279 284

Creditor Days 65 57 57 57 57

Net Debt to Equity -0.1 0.1 0.0 -0.1 -0.2


Healthcare


13 January 2015



Sun Pharma (SUNP IN) – RBXY

integration the key The key focus for the company in 2015 would be progress on Ranbaxy

integration. We expect the acquisition to be complete in the first quarter of

the calendar year. The stock has corrected over the past few months amid

concerns over USFDA action at its key plant. We believe that the risk of the

same is low and expect Sun’s strong performance to continue going forward.

We retain our Buy with a revised TP of Rs1,100 as we roll our DCF to Mar16.

Strong performance to continue going forward – We expect Sun Pharma’s strong

performance to continue going forward led by Taro, India and RoW business. While the

higher R&D would impact near-term margins, we expect this to lead to better medium-

term growth. Further, the acquisition of Ranbaxy addresses the medium-term growth

concerns and should lead to better growth from FY17.

Taro performance to improve going forward – Our key worry around

Taro has been sustainability of pricing in its portfolio. Recent quarters though

have shown that Taro has significant pricing levers in the near term to offset the

impact of competition on both margins and sales. Given the now broad-based

nature of the price hikes and limited additional ANDA filers for key products, we

believe that significant competitive threat is still at least 18 months away.

Strong performance by ex-US business – Unlike peers, Sun’s ex-US

business is seeing strong growth (15-20% growth). The segment contributes

c40% of top line and provides key growth drivers.

Healthier pipeline than peers – The key risk for the industry is the delay in

approval by USFDA. This risk is the least for Sun, in our view, as it has the

strongest pipeline of limited competition products. Further, the company has

c40 ANDA pending for approval for more than 40 months now. This compared

to the mean approval time of 36months at USFDA points to the likelihood that

these ANDAs would be the first in line for approval, providing growth drivers.

Ranbaxy acquisition addresses growth concerns – The acquisition of Ranbaxy

addresses medium-term growth concerns for Sun Pharma. Overall, in the best case, the

acquisition could lead to margin benefit of c500bps (for Ranbaxy) from FY17 vs current

estimates. Given the strong performance across the business and the strength of its

pipeline, Sun Pharma remains one of our preferred picks in the sector. We expect the

acquisition to be completed by the first quarter of the year. The focus post that should

then be on the integration of the RBXY business.

R&D spend to increase, focus on clinical data points – Sun has recently in licensed

a Phase III biologics Tildrakizumab for treatment of chronic plaque psoriasis The company

expects to spend USD250mn over 5 years. The preliminary data points are expected in the

current year and would be key to watch. Further, we would look for any more data points

on additional usages of DUSA products

Change in estimates

We have adjusted our estimates by c1% and raised our TP to Rs1,100 as we change our

USD/INR assumptions to 61.8(3Q15 average) from 60 earlier and roll our DCF to Mar 16.

Exhibit 13: Change in estimates

Old New % change


Sales 183,878 217,433 250,636 184,701 222,671 256,185 0.4 2.4 2.2

EBITDA 78,930 90,507 106,944 79,384 91,524 108,131 0.6 1.1 1.1

OP margin 42.9 41.6 42.7 43.0 41.1 42.2 6 (52) (46)

Net profit 59,506 72,602 90,176 59,788 73,299 90,999 0.5 1.0 0.9

NP margin 32.4 33.4 36.0 32.4 32.9 35.5 1 (47) (46)

EPS 28.7 35.1 43.5 28.9 35.4 43.9 0.5 1.0 0.9

EPS growth 5.1 22.0 24.2 5.6 22.6 24.1

DPS 4.6 5.6 7.0 4.6 5.7 7.0 0.5 1.0 0.9

ROE 26.2 24.7 24.0 26.3 24.9 24.2 12 19 13


Healthcare


13 January 2015




Rs mn 2013 2014 2015E 2016E 2017E

Net Sales 112,999 160,804 184,701 222,671 256,185

Change (%) 40.9 42.3 14.9 20.6 15.1

Material Cost 20,733 27,793 32,668 42,360 48,485

Employee Cost 13,051 17,299 18,856 21,495 24,720

SG&A 24,007 36,235 40,863 47,250 31,298

R&D Expenses 6,245 9,460 12,929 20,040 21,776

EBITDA 48,962 70,017 79,384 91,524 108,131

% of net sales 43.3 43.5 43.0 41.1 42.2

Depreciation 3,362 4,092 5,944 6,562 6,906

Interest 443 442 2,561 2,561 2,561

Other Income 3,893 5,522 7,417 11,337 14,676

EO Income / (Exp) -5,901 -25,193 0 0 0

PBT 49,050 71,005 78,297 93,739 113,341

Tax 8,456 7,022 9,611 11,910 14,521

Rate (%) 17.2 9.9 12.3 12.7 12.8

PAT 34,693 38,790 68,685 81,829 98,820

Minority Interest 4,863 7,375 8,897 8,530 7,821

Adjusted PAT 35,732 56,608 59,788 73,299 90,999

change (%) 34.4 58.4 5.6 22.6 24.1



Rs mn 2013 2014 2015E 2016E 2017E

Share Capital 1,036 2,071 2,071 2,071 2,071

Minority Interest 16,351 19,212 28,109 36,639 44,460

Reserves 148,862 183,178 231,008 289,647 362,446

Net Worth 166,248 204,461 261,188 328,357 408,977

Deferred Tax Liabilities 2,054 2,757 2,757 2,757 2,757

Loans 2,597 25,609 25,609 25,609 25,609


Gross Fixed Assets 75,763 86,505 95,505 100,505 105,505

Less: Depreciation 30,618 36,678 42,622 49,184 56,090

Net Fixed Assets 45,145 49,827 52,883 51,321 49,415

Capital WIP 5,626 8,415 8,415 8,415 8,415

Goodwill 11,330 18,346 18,346 18,346 18,346

Investments 24,116 27,860 27,860 27,860 27,860

Deferred Tax Asset 9,176 11,867 11,867 11,867 11,867

Current Assets 113,420 177,393 203,641 279,266 367,805

Inventory 25,778 31,230 35,801 46,655 53,665

Debtors 27,108 22,004 34,252 41,449 47,688


Loans & Advances 19,174 22,782 -4,382 -2,459 2,360

Other Current Assets 774 25,475 25,475 25,475 25,475


Creditors 13,565 13,283 15,627 19,819 22,292


Provisions 22,687 45,622 15,855 18,557 22,097


Appl. Of fund 170,899 232,827 289,553 356,722 437,343


Healthcare


13 January 2015



Exhibit 16: Cash flow statement

(Rs mn) 2013 2014 2015E 2016E 2017E

PAT 29,831 31,415 59,788 73,299 90,999

Depreciation 3,362 4,092 5,944 6,562 6,906

Interest Exp 443 442 2,561 2,561 2,561

Other Income 3,893 5,522 7,417 11,337 14,676


CF from Op Activities 26,121 22,748 43,799 58,006 73,734


Change in Investments -1,987 -3,745 0 0 0

Other Income 3,893 5,522 7,417 11,337 14,676

CF from Investing Activities -20,597 -16,802 -1,583 6,337 9,676

Change in equity 4,736 3,016 8,897 8,530 7,821

Changes in debt -610 23,012 0 0 0

Interest Exp -443 -442 -2,561 -2,561 -2,561

Dividend paid -5,744 -3,107 -11,958 -14,660 -18,200

Others 3,452 6,009 -1 0 0

CF from Financing Activities 1,392 28,487 -5,622 -8,691 -12,939

Net change in Cash 6,915 34,433 36,593 55,652 70,471



2013 2014 2015E 2016E 2017E

Basic (Rs)

EPS 17.3 27.3 28.9 35.4 43.9

BPS 72.4 89.4 112.5 140.8 176.0

DPS 2.4 1.5 4.6 5.7 7.0

Payout (%) 13.8 5.5 16.0 16.0 16.0

Valuation (X)

P/E 48.1 30.4 28.8 23.5 18.9

P/B 11.5 9.3 7.4 5.9 4.7

EV/EBITDA 34.1 23.8 21.0 18.2 15.4

EV/Sales 14.8 10.4 9.0 7.5 6.5

Dividend Yield (%) 0.3 0.2 0.6 0.7 0.8

Profit Ratios (%)

RoE 20.9 19.0 26.3 24.9 24.2

RoCE 32.2 43.4 41.0 44.0 49.4

Turnover Ratios

Debtor Days 88 50 68 68 68

Inventory Days 454 410 400 402 404


Net Debt to Equity -0.3 -0.4 -0.5 -0.6 -0.6


Healthcare


13 January 2015



Dr. Reddys – Currency and FDA delays

to pressure growth DRRD’s stock price has corrected c10% over the past month amid concerns

over the Russia business and a delay in US approvals given the Form 483 on its

key API plant. We believe that the company will continue to face pressure

over the next 6-12 months in its key businesses especially Russia/CIS (c20% of

EBITDA) and the US (lack of significant launches). With the stock trading at

sector multiples and EPS growth of 13%, we retain our Hold rating with a

revised TP of Rs3,100 as we roll our DCF to Mar 16.

US approval rate to remain weak, recent concerns on API plant could lead to

further delay – US business revenues has remained at current levels for the past 5

quarters due to the lack of approvals. We believe that post a boost in 2H FY15, this could

again stagnate due to the delay in approvals. DRRD’s key API plant in Srikakulam recently

received a 483 letter. While management expects to resolve the issue quickly, we believe

that approvals could be delayed till the closure of the letter. This could further pressure

growth for the company especially with its other key business of Russia facing headwinds.

Russia business to remain a drag – Russia is a key contributor to DRRD with nearly

13% of sales and c20% of EBITDA coming from the market. The 40% currency

depreciation over the last six months would thus heavily impact DRRD’s earnings going

forward. Further, the slowdown in the Russian economy could lead to further pressure on

sales and profitability.

RoW could face pressure led by Venezuela – DRRD’s RoW business has seen strong

growth over the past year led by strong performance in the Venezuela market. This

though could see a reversal going forward as the oil price decline is pressuring the

economy and currency of Venezuela.

R&D spend to remain elevated, pressuring margins – DRRD’s R&D spend has

increased sharply over the past couple of years to c10%. We expect R&D spend to remain

at current levels as the company has multiple products in clinical trials. Further, the

company expects to file its first NDA in the current year and we would watch for the

potential of the product.

Changes to estimates

We marginally change our estimates by -6 to 2% and revised our TP to Rs3,100 from

Rs2,950. We have made the following changes to our estimates

Adjusted currency to 3Q15 average (USD/INR to 61.8)

Added Valcyte as semi-exclusivity for 6 months

Lowered Russia growth

Exhibit 18: DRRD IN

Old New % change


Sales 145,344 166,297 190,558 146,622 165,197 186,940 0.9 -0.7 -1.9

EBITDA 32,813 38,424 44,681 33,323 36,952 42,284 1.6 -3.8 -5.4

OP margin 22.6 23.1 23.4 22.7 22.4 22.6 12.7 -73.1 -78.1

Net profit 22,157 25,826 30,481 22,555 24,663 28,617 1.8 -4.5 -6.1

NP margin 15.2 15.5 16.0 15.4 14.9 15.3 18.3 -57.1 -69.2

EPS 130.3 151.8 179.2 132.6 145.0 168.2 1.8 -4.5 -6.1

EPS growth 3.0 16.6 18.0 4.8 9.3 16.0 184.7 -725.5 -196.7

DPS 18.5 21.6 25.5 18.9 20.6 23.9 2.0 -4.4 -6.1

ROE 20.2 19.6 0.0 20.5 18.8 0.0 27.8 -81.6 0.0


Healthcare


13 January 2015




Rs mn FY13 FY14 FY15E FY16E FY17E

Net Sales 116,266 132,170 146,622 165,197 186,940

Change (%) 20.2 13.7 10.9 12.7 13.2

Cost of Revenues 55,687 56,369 61,490 69,752 78,465

SG&A 28,035 32,185 36,047 40,733 46,095

R&D Expenses 7,673 12,402 15,762 17,759 20,096

EBITDA 24,871 31,215 33,323 36,952 42,284

% of net sales 21.4 23.6 22.7 22.4 22.6

Depreciation 5,549 6,598 7,351 7,970 8,473

Interest 460 400 1,849 1,537 2,254

Other Income 2,479 1,416 900 900 900

PBT 22,365 26,607 28,921 31,619 37,165

Tax 4,900 5,094 6,366 6,956 8,548

Rate (%) 22.6 19.1 22.0 22.0 23.0

EO Income / (Exp) -688 0 0 0 0

Adj. PAT 16,777 21,513 22,555 24,663 28,617

change (%) 17.6 28.2 4.8 9.3 16.0


Exhibit 20: Balance sheet statement

Rs mn FY13 FY14 FY15E FY16E FY17E

Share Capital 868 851 851 851 851

Reserves 72,236 89,950 109,294 130,446 154,989

Net Worth 73,105 90,800 110,145 131,297 155,840

Deferred Tax Lia 2,946 4,528 4,528 4,528 4,528

Loans 36,760 44,742 38,002 38,002 38,002


Net Fixed Assets 51,836 59,121 71,769 70,799 68,865

Investments 21,783 32,438 32,438 32,438 32,438

Deferred Tax Asset 0 0 0 0 0

Current Assets 68,750 78,664 79,394 102,992 130,983

Inventory 21,600 23,992 25,775 29,304 32,894

Debtors 31,972 33,037 37,452 43,102 49,799


Loans & Advances 10,043 13,184 13,184 13,184 13,184


Creditors 11,862 10,503 11,368 12,843 14,357


Provisions 2,336 2,911 2,819 2,819 2,819


Appl. Of fund 112,810 140,070 152,675 173,827 198,370


Healthcare


13 January 2015



Exhibit 21: Cash flow Statement

(Rs mn) FY13 FY14 FY15E FY16E FY17E

PAT 16,777 21,513 22,555 24,663 28,617

Depreciation 5,549 6,598 7,351 7,970 8,473

Interest Exp -460 -400 -1,849 -1,537 -2,254

Other Income 2,479 1,416 900 900 900


CF from Op

Activities 8,498 17,835 21,825 22,492 25,163


Change in Investments -7,103 -8,245 0 0 0

Other Income 2,479 1,416 900 900 900

CF from Investing

Activities -15,234 -20,712 -19,100 -6,100 -5,639

Change in equity 15,663 -18 0 0 0

Changes in debt 4,550 8,027 -6,831 0 0

Interest Exp 460 400 1,849 1,537 2,254

Dividend paid -2,517 -3,062 -3,211 -3,511 -4,074

Others -14,261 -737 0 0 0

CF from Financing

Activities 3,895 4,610 -8,193 -1,974 -1,820

Net change in Cash -2,841 1,733 -5,468 14,418 17,704



FY13 FY14 FY15E FY16E FY17E

Basic (Rs)

EPS 96.9 126.5 132.6 145.0 168.2

BPS 429.8 533.8 647.5 771.9 916.2

DPS 15.0 18.0 18.9 20.6 23.9

Payout (%) 15.5 14.2 14.2 14.2 14.2

Valuation (X)

P/E 32.7 25.0 23.9 21.8 18.8

P/B 7.4 5.9 4.9 4.1 3.5

EV/EBITDA 22.2 17.7 16.6 14.9 13.1

EV/Sales 4.7 4.2 3.8 3.3 3.0

Dividend Yield (%) 0.5 0.6 0.6 0.7 0.8

Profit Ratios (%)

RoE 22.9 23.7 20.5 18.8 0.0

RoCE 18.8 19.1 16.8 17.5 0.0

Turnover Ratios

Debtor Days 100 91 93 95 0

Inventory Days 194 224 226 228 0


Net Debt to Equity 0.2 0.1 0.1 0.0 0.0


Healthcare


13 January 2015



Lupin (LPC IN) Going forward, while near-term earnings growth will be slower for Lupin due

to increased competition in key products, we expect base business growth to

remain strong over the medium term led by margin improvement, strong

growth in the India/EM business and launches in the US markets. We expect

margins to improve 200bps over FY14-17E, driving 20% EPS CAGR. Retain

Buy with TP of Rs1,650

US business growth to remain stable – While the lack of exclusivities in the current

year (which were present last year) will impact US business revenues in 1H15, the c10

launches expected in the period should offset the impact on revenue growth. Further, the

recent improvement in base business margins should offset the impact on earnings

growth.

India business to remain strong – We expect the India business to see strong

recovery going forward. Post weakness in 1H2014, growth is back to above industry

levels and we expect the trend to continue.

Currency headwind to impact Japan growth –The JPY has over the past six months

depreciated against the INR by c11%. Japan contributes c11% of Lupin’s revenue. The

currency depreciation would impact the reported growth for the company. Further, it

would also reduce the margin benefits expected from transferring manufacturing to India.

Margins to improve going forward – On the margins front, while we expect gross

margins to decline c50bps over FY14-16 and R&D spend to increase, the faster and better-

than-expected benefit of cost rationalization and better realization would limit the impact

and we expect EBITDA margins to improve 200bps over the period.

Acquisition focus to remain – Lupin has been looking for acquisitions for the past

couple of years but has not made any significant acquisitions yet. We believe that the

focus on acquisition will increase significantly in 2015 and we expect some large

acquisition to boost growth.

Expect EPS CAGR of 20% - LPC is now trading at 18x FY17 PE, in line with sector

multiples. Given the recent improvement in margins, we expect valuations to sustain at

current levels. Retain Buy with a target price of Rs1,650

Changes to estimates

We marginally change our estimates by c-1% and revise our TP to Rs1,650 from Rs1,550.

We have made the following changes to our estimates:

Adjusted currency to 3Q15 average (USD/INR to 61.8)

Added Diovan to our estimates

Rolled our DCF to Mar 16

Exhibit 23: LPC IN

Old New % change


Sales 132,140 154,367 179,142 131,114 152,216 176,480 -0.8 -1.4 -1.5

EBITDA 36,031 42,505 50,945 35,848 42,217 50,516 -0.5 -0.7 -0.8

OP margin 27.3 27.5 28.4 27.3 27.7 28.6 7 20 19

Net profit 21,806 25,894 32,225 21,684 25,709 31,955 -0.6 -0.7 -0.8

NP margin 16.5 16.8 18.0 16.5 16.9 18.1 4 12 12

EPS 48.6 57.8 71.9 48.4 57.4 71.3 -0.6 -0.7 -0.8

EPS growth 18.7 18.7 24.5 18.1 18.6 24.3

DPS 7.8 9.3 11.5 7.8 9.2 11.5 -0.6 -0.7 -0.8

ROE 24.9 23.7 23.6 24.8 23.6 23.5 -11 -11 -11


Healthcare


13 January 2015




Rs mn 2012 2013 2014 2015E 2016E 2017E

Net Sales 70,829 96,413 112,866 131,114 152,216 176,480

Change (%) 21.4 36.1 17.1 16.2 16.1 15.9

Material Cost 26,039 35,485 38,174 44,663 52,193 59,171

Employee Cost 9,695 12,666 14,647 17,429 19,869 23,049

SG&A 15,420 18,465 20,724 20,921 23,701 27,227

R&D Expenses 5,228 7,098 9,294 12,252 14,236 16,517

EBITDA 14,447 22,699 30,028 35,848 42,217 50,516

% of net sales 20.4 23.5 26.6 27.3 27.7 28.6

Depreciation 2,275 3,322 2,610 4,396 4,515 4,537

Interest 355 410 267 111 111 111

Other Income 144 279 1,165 1,518 987 1,964

EO Income / (Exp.) -563 0 0 0 0 0

PBT 11,961 19,245 28,317 32,859 38,578 47,831

Tax 2,522 5,842 9,622 10,843 12,538 15,545

Rate (%) 21.1 30.4 34.0 33.0 32.5 32.5

Minority Interest 199 263 331 331 331 331

PAT 8,677 13,141 18,364 21,684 25,709 31,955

Adjusted PAT 9,240 13,141 18,364 21,684 25,709 31,955

change (%) 5.5 42.2 39.7 18.1 18.6 24.3



Rs mn 2012 2013 2014 2015E 2016E 2017E

Share Capital 893 895 897 893 893 893

Minority Interest 723 595 669 1,001 1,332 1,663

Reserves 39,236 51,147 68,419 86,633 108,229 135,071

Net Worth 40,852 52,636 69,985 88,527 110,454 137,628

Deferred Tax Lia 1,910 2,337 2,487 2,487 2,487 2,487

Loans 16,400 11,645 6,537 6,537 6,537 6,537

Capital Employed 59,162 66,618 79,009 97,551 119,478 146,652

Gross Fixed Assets 41,918 46,841 52,839 62,795 67,795 72,934

Less: Depreciation 14,422 16,840 19,283 23,680 28,195 32,732

Net Fixed Assets 27,497 30,001 33,556 39,116 39,601 40,202

Capital WIP 4,437 3,107 3,041 3,041 3,041 3,041

Investments 28 21 1,785 1,785 1,785 1,785

Deferred Tax Asset 468 704 708 708 708 708

Current Assets 46,911 55,305 62,970 80,373 105,321 135,870

Inventory 17,327 19,489 21,295 25,811 30,856 35,423

Debtors 17,318 21,870 24,641 29,815 35,448 41,098

Cash & Bank Balance 4,025 4,349 7,975 14,106 28,053 45,796

Loans & Advances 8,241 9,597 9,060 10,641 10,965 13,554

Current Liabilities 20,178 22,520 23,051 27,471 30,978 34,955

Creditors 11,621 13,003 13,703 18,126 20,989 23,967

Other Liabilities 5,940 5,957 5,895 5,100 5,100 5,100

Provisions 2,617 3,560 3,454 4,245 4,889 5,888

Net Current Assets 26,733 32,785 39,919 52,901 74,343 100,916

Appl. Of fund 59,162 66,618 79,009 97,551 119,478 146,651


Healthcare


13 January 2015



Exhibit 26: Cash Flow Statement

(Rs mn) 2012 2013 2014 2015E 2016E 2017E

PAT 8,677 13,141 18,364 21,684 25,709 31,955

Depreciation 2,275 3,322 2,610 4,396 4,515 4,537

Interest Exp. 355 410 267 111 111 111

Other Income 144 279 1,165 1,518 987 1,964

Change in Wkg. Capital -14,921 -15,751 -17,708 -23,176 -26,062 -31,539

CF from Op Activities 5,142 11,057 16,713 17,822 21,852 25,810

Change in Fixed Assets -8,737 -4,496 -6,099 -9,956 -5,000 -5,138

Change in Investments 4 7 -1,764 0 0 0

Other Income 144 279 1,165 1,518 987 1,964

CF from Investing -8,590 -4,210 -6,698 -8,438 -4,013 -3,175

Change in equity 52 -127 77 328 331 331

Changes in debt 4,777 -4,755 -5,108 0 0 0

Interest Exp. -355 -410 -267 -111 -111 -111

Dividend paid -1,661 -1,790 -2,679 -3,469 -4,113 -5,113

Others 455 560 1,587 0 0 0

CF from Financing 3,268 -6,522 -6,389 -3,253 -3,893 -4,893

Net change in Cash -180 324 3,626 6,131 13,947 17,743



2012 2013 2014 2015E 2016E 2017E

Basic (Rs)

EPS 19.4 29.3 41.0 48.4 57.4 71.3

BPS 89.9 116.3 154.6 195.2 243.4 303.2

DPS 3.7 4.0 6.0 7.8 9.2 11.5

Payout (%) 19.2 13.7 14.6 16.1 16.1 16.1

Valuation (X)

P/E 73.4 48.5 34.7 29.4 24.8 19.9

P/B 15.8 12.2 9.2 7.3 5.8 4.7

EV/EBITDA 43.9 27.9 21.1 17.7 15.0 12.5

EV/Sales 8.9 6.6 5.6 4.8 4.2 3.6

Dividend Yield (%) 0.3 0.3 0.4 0.5 0.6 0.8

Profit Ratios (%)

RoE 23.0 25.3 26.5 24.8 23.6 23.5

RoCE 17.4 21.7 25.5 25.3 27.8 29.4

Turnover Ratios

Debtor Days 89 83 80 83 85 85

Inventory Days 243 200 204 211 216 219

Creditor Days 91 78 73 85 85 85

Net Debt to Equity 0.2 0.1 0.0 -0.1 -0.2 -0.3


Healthcare


13 January 2015



Long Term Financial Model Drivers

LT Earnings CAGR 17%

Organic Revenue Growth 16%

Operating Margin Expansion -70bps

Other Considerations

Sun focus is on the chronic segment both

in India and in export market which has

allowed it to sustain market leading

margins and returns. Growth in domestic

and EM markets will be above industry

due to this focus. US growth will be

steady and with lower one-off revenues

than peers

1 Year Forward P/E

Source: Bloomberg, Jefferies estimates

Sun Pharma is an international speciality pharma company, with a large presence in the US

and India, and a footprint across 40 other markets. It has two subsidiaries Caraco and

Taro..

INRUSD exchange rate

Ex-US business strong performance

Less Competition for Taro

Integration and improvement at Ranbaxy

Catalysts

Target Investment Thesis

Domestic growth sustains above industry

at 18%

US business ex Taro to grow at 30% in

FY16-17

Healthier pipeline than peers. Ranbaxy

acquisition addresses near term concerns

R&D spend to rise to 7% of sales

Adjusted currency to 3Q15 average

(USDINR to 61.8)

2017 EPS: 43.9; Target Multiple: 25x;

Target Price 1100

Upside Scenario

Domestic growth at 19% in FY16-17

Taro sales grows at 5% in FY16-17

US ex Taro to growth at 40% in FY16-17

Margins remain stable over next few years

2017 EPS: 46; Target Multiple: 27x; Target

Price: 1,242

Downside Scenario

Domestic growth sustains at industry

average at 16-17% in FY16-17

Taro sales stays flat/decreases

US business ex Taro grows at 20% over

FY16-17

Margins decline c100bps in FY16-17

2017 EPS: 42; Target Multiple: 23.0x;

Target Price: 966

Long Term Analysis

Scenarios

Group P/Es vs Growth


EM Exposure

Source: Company data, Jefferies estimates

0

20

40

60

80

DRRD LPC SUNP RBXY Cipla

Emerging Markets Share (%)

Recommendation / Price Target

Ticker Rec. PT

CIPLA Buy 740

SUNP Buy 1,100

LPC Buy 1650

DRRD Hold 3100

Company Description

THE LO

NG

VIE

W

Peer Group

[Sun Pharmaceuticals Ltd]

Buy: INR 1100 Price Target

Healthcare


13 January 2015






Operating Margin Expansion 200bps


Lupin has strong presence in US markets

with a branded business presence. It is

focussing on the US markets and has

aggressive launch plans which would

drive growth. India growth has been

boosted by marketing of Lily products

1 Year Forward P/E

Source: Factset, Jefferies estimates

Lupin is a global pharmaceutical company. It has presence in 70 countries with its major

markets being India, US, Japan and South Africa. In USA it has presence both in branded

and generic markets..

INR/USD exchange rate

Acquisition in US branded business

Improvement in Japanese business

Competition in key products in US generics

Pick-up in growth in EMs

Catalysts


Domestic growth ahead of industry at 16%

US revenues growth slows to 18%

Emerging markets growth at 19%

Branded sales growth sees some

improvement

Japan business growth improves to 11%

Margins improve 200bps FY14-17E


(USDINR to 61.8)

2017 EPS: 71.3; Target Multiple: 23.1x;

Target Price Rs 1650

Upside Scenario

Domestic growth ahead of industry at

17%



Branded sales growth sees some

improvement


Margins improve 250bps FY14-17E


Target Price Rs 1813

Downside Scenario

Domestic growth at industry level of 15%



Branded sales growth remains muted


Margins improve 150bps over FY14-17E

2017 EPS: 70; Target Multiple: 22x; Target

Price Rs 1540

Long Term Analysis

Scenarios



EM Exposure


0

20

40

60

80




Ticker Rec. PT

CIPLA Buy 740

SUNP Buy 1,100

LPC Buy 1650

DRRD Hold 3100

Company Description

THE LO

NG

VIE

W

Peer Group

[Lupin Ltd]


Healthcare


13 January 2015






Operating Margin Expansion 390bps


Cipla has strong presence in various EM

which are the fastest growing pharma

markets. It has the strongest franchise in

the domestic market with one of the

highest reach. Expect growth to remain

strong. Pricing policy in the domestic

market could impact profitability of the

company. The case with DPCO on pricing

could lead to one-time payment of

penalty.

1 Year Forward P/E

Source: Factset, Jefferies estimates

Cipla is 3rd largest pharmaceutical company in India in terms of retail sales. Cipla

manufactures an extensive range of pharmaceutical & personal care products and has

presence in over 170 countries across the world. It offers prescription drugs for all kinds of

ailments -- arthritis, cancer, depression -- as well as over-the-counter drugs for colds, oral

hygiene, and skin care.

EU inhaler approvals

US launches

Margin recovery

Catalysts


Export formulation(ex inhalers) business

growth at around 22%

Domestic growth above industry at 17%

Respiratory starts contributing significantly

from 2HFY16 with UK launch of gAdvair in

early FY16

Operating margins improve by c400bps in

FY14-17

Changed USDINR assumptions to

61.8(3Q15 average) from 60 earlier

2017 EPS: 32.8; Target Multiple: 22.6x;

Target Price 740

Upside Scenario




Medpro becomes EPS accretive from FY15

Respiratory starts contributing significantly

from 1HFY16 with UK launch of gAdvair in

the quarter

Operating margins improve by c450bps in

FY14-17


Target Price: Rs 816

Downside Scenario




Medpro becomes EPS accretive from FY17

Respiratory starts contributing

significantly from 1HFY17 with UK launch

of gAdvair in the 4Q16

Operating margins improve by c300bps

in FY14-17


Target Price: Rs 620

Long Term Analysis

Scenarios

Group P/Es


EM Exposure


0

20

40

60

80




Ticker Rec. PT

CIPLA Buy 740

SUNP Buy 1,100

LPC Buy 1650

DRRD Hold 3100

Company Description

THE LO

NG

VIE

W

Peer Group

[Cipla Ltd]


Healthcare


13 January 2015






Operating Margin Expansion -100bps


Dr Reddy’s has a strong presence in the

US markets. We expect a slowdown in the

business going forward. Domestic growth

for the company remains below industry.

Growth drivers for company are in early

stages and we believe company will face

growth pressures in the interim.

1 Year Forward P/E

Source: Bloomberg, Jefferies estimates

Dr. Reddy's Laboratories Ltd. is an integrated global pharmaceutical company. It has

presence in US, India, Europe and EM. Dr. Reddy’s offers a portfolio of products and

services including active pharmaceutical ingredients (APIs), custom pharmaceutical

services (CPS), generics, biosimilars, differentiated formulations and new chemical entities

(NCEs).

INR/USD exchange rate

Competitive intensity in key products

Recovery in PSAI business

Pick-up in growth in EMs

Recovery in growth in India

Catalysts


US growth remains low

PSAI business sees slow recovery

India business growth recovers to better

than industry growth at 16%

Russia remains weak due to currency and

Venezuela is stable


(USDINR to 61.8)

2017 base EPS: 168; Target Multiple:

18.5x; Target Price Rs3100

Upside Scenario

US growth remains strong in FY16 and

FY17

PSAI business sees sharp recovery in FY15

India business growth above industry at

17%

EM growth remains strong at 17%


Target Price 3413

Downside Scenario

US growth tapers over the next two years

PSAI remains weak with margins and

growth subdued

India business growth remains below

industry at 14%

EM growth slows to 13%


Target Price: Rs2800

Long Term Analysis

Scenarios



EM Exposure


0

20

40

60

80




Ticker Rec. PT

CIPLA Buy 740

SUNP Buy 1,100

LPC Buy 1650

DRRD Hold 3100

Company Description

THE LO

NG

VIE

W

Peer Group

Dr Reddy’s Labs Ltd

Hold: INR 3100 Price Target

Healthcare


13 January 2015



Company DescriptionCipla is the second-largest pharmaceutical company in India in terms of retail sales. Cipla manufactures an extensive range of pharmaceutical& personal care products and has presence in over 170 countries across the world. It offers prescription drugs for all kinds of ailments --arthritis, cancer, depression -- as well as over-the-counter drugs for colds, oral hygiene, and skin care.

Dr. Reddy's Laboratories Ltd. is an integrated global pharmaceutical company. It has presence in US, India, Europe and EM. Dr. Reddy’s offersa portfolio of products and services including Active Pharmaceutical Ingredients (APIs), Custom Pharmaceutical Services (CPS), generics,biosimilars, differentiated formulations and News Chemical Entities (NCEs)

Lupin is an global pharmaceutical company. It has presence in 70 countries with its major markets being India, US, Japan and South Africa.In USA it has presence both in branded and generic markets.

Sun Pharma is an international speciality pharma company, with a large presence in the US and India, and a footprint across 40 other markets.It has two subsidiaries Caraco and Taro.

Analyst Certification:I, Piyush Nahar, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Ankit Fitkariwala, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Piyush Nahar is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

Registration of non-US analysts: Ankit Fitkariwala is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies LLC and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, andtherefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, publicappearances and trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise Picks

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Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Cipla (CIPLA IN: INR630.75, BUY)• Dr. Reddy's Laboratories (DRRD IN: INR3,207.25, HOLD)• Lupin Ltd. (LPC IN: INR1,431.00, BUY)• Ranbaxy Laboratories Ltd. (RBXY IN: INR635.15, BUY)• Sun Pharmaceutical Industries Ltd (SUNP IN: INR835.30, BUY)

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Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1049 52.09% 284 27.07%HOLD 812 40.32% 144 17.73%UNDERPERFORM 153 7.60% 6 3.92%

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to the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein arethose of the author(s) and may differ from the views of Jefferies.

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pharma jefferies (1)

Business

cipla cipla

significant increase

indian companies

bn buy inr1

pharma companies

industry growth

growth andprofitability

bn buy inr630