2QFY2012 Result Update | Pharmaceutical

November 2, 2011

Ipca Labs
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Tax Adjusted net profit 2QFY2012 618 8 152 26 77 1QFY2012 526 6 92 22 62 % chg qoq 2QFY2011 % chg yoy 17.4 29.9 65.9 0.0 25.1 514 7 114 34 94 20.2 20.4 33.3 (288.2) (18.0)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 3,357 0.4 351/230 25106 2 17,465 5,258 IPCA.BO IPCA@IN

`267 `358
12 months

Source: Company, Angel Research

For 2QFY2012, Ipca Labs (Ipca) reported better-than-expected results. The top line grew by 20.2% yoy to `618cr, higher than our estimates. Also, OPM came in higher than expected at 24.6%. However, the company posted a dip of 18% yoy in its net profit due to forex losses during the quarter. We recommend Buy on the stock. Results better than expectations: Ipca reported net sales of `618cr (`514cr), up 20.0% yoy, above our estimate of `530cr. The company posted OPM of 24.6% (22.2%). Recurring profit came in at `77.3cr (`94.0cr), higher than our estimate of `62.5cr. Segment wise, for 2QFY2012, the overall formulations business grew by 23.3% to `489.7cr (`397.0cr), contributing 79.0% (77.2%) to the companys total revenue. The API business witnessed 9.4% growth during the quarter to `128.3cr (`117.3cr), contributing 20.8% (22.8%) to the total revenue. Net profit for the quarter declined by 18% yoy to `77cr. Outlook and valuation: We expect net sales to post a 16.3% CAGR to `2,548cr and EPS to register a 14.8% CAGR to `27.5 over FY201113E, driven by the US and domestic markets and the API segment. At current levels, the stock is trading at 16.5x and 12.0x FY2012E and FY2013E earnings, respectively. We recommend Buy on the stock with a target price of `358. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EPS EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.1 32.3 10.1 11.5

Abs. (%) Sensex Ipca

3m (3.6) (19.7)

1yr (14.2)

3yr 78.4

(20.4) 248.3

FY2010 1,560 21.5 205 104.2 16.4 20.9 20.1 27.0 21.9 4.8 2.9 14.0

FY2011 1,883 20.7 262 27.5 20.9 19.0 15.8 22.8 19.9 3.9 2.5 13.0

FY2012E 2,207 17.2 251 (4.1) 20.0 20.5 16.5 21.7 21.9 3.3 2.1 10.1

FY2013E 2,548 15.4 346 37.8 27.5 21.5 12.0 24.9 23.3 2.7 1.8 8.3

Sarabjit Kour Nangra

+91 22 39357800 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Ipca Laboratories | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 Consolidated performance

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin (%) Operating profit Operating margin (%) Interest Depreciation PBT Provision for taxation PAT before Extra-ordinary item Less: Exceptional Items PAT after Exceptional Items EPS (`)
Source: Company, Angel Research

2QFY2012 618 8 626 375 60.6 152 24.6 39 18 104 26 77 0 77 6.2

1QFY2012 526 6 533 316 60.0 92 17.4 (1) 15 83 22 62 0 62 4.9

% chg (qoq) 17.4 29.9 17.6 18.5 65.9

2QFY2011 514 7 521 310 60.2 114 22.2 (21)

% chg (yoy) 20.2 20.4 20.2 20.9 33.3 28.5 (18.9) (21.7) (18.0) (18.0)

1HFY2012 1144 14 1159 691 58.9 244 21.3 38 33 187 48 139 0 139 11.1

1HFY2011 929 13 942 550 58.5 182 19.6 (11) 27 179 46 133 0 133 10.6

% chg (yoy) 23.2 12.6 23.1 25.7 34.0 24.2 4.4 4.1 4.5 4.5

14.1 24.5 22.8 25.1 25.1

14 128 34 94 0 94 7.5

Exhibit 2: 2QFY2012 Actual vs. Angel estimates

(` cr) Net sales Other income Operating profit Interest Tax Net profit
Source: Company, Angel Research

Actual 618 8 152 39 26 77

Estimates 530 6 94 22 63

Variation(%) 16.6 30.3 62.4 20.8 23.4

Revenue up by 20.2%, higher than estimates: For 2QFY2012, Ipca reported net sales of `618cr (`514cr), up 20.2%, above our estimate of `530cr. Segment wise, for 2QFY2012, the overall formulations business grew by 23.3% to `489.7cr (`397.0cr), contributing 79.0% (77.2%) to the companys total revenue. The API business witnessed 9.4% growth during the quarter to `128.3cr (`117.3cr), contributing 20.8% (22.8%) to the total revenue.

November 2, 2011

Ipca Laboratories | 2QFY2012 Result Update

Exhibit 3: Domestic sales trend

280 240 200 168 222 178 129 189 229

(` cr)

160 120 80 40 0 36 41

32

35

41

36

1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 2QFY2012 Formulation

Source: Company, Angel Research

API

Exhibit 4: Export sales trend

280 240 200 175 122 88 76 87 82 90 93 167 227 207 260

(` cr)

160 120 80 40 0

1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 2QFY2012 Formulation

Source: Company, Angel Research

API

OPM inches higher: Ipcas gross margin came in at 60.6% (60.2%) for the quarter. OPM came in at 24.6% (22.2%). The companys staff cost increased by mere 4% yoy, while other expenditure increased by 19.0% yoy, which aided the overall improvement in OPM. Operating profit during the quarter grew by 33.3% yoy to `152cr.

November 2, 2011

Ipca Laboratories | 2QFY2012 Result Update

Exhibit 5: OPM trend

28.0 25.0 22.0 22.2 19.0 16.3 19.8 17.4 24.6

(%)

19.0 16.0 13.0 10.0

1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 2QFY2012

Source: Company, Angel Research

Net profit lower than estimates: Ipca reported net profit of `77cr , reporting a dip of 18.0% yoy, due to forex losses during the quarter.

Exhibit 6: Adjusted net profit trend

100 80 65 60 62 53 42 40 20 0 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 2QFY2012 62 77

Source: Company, Angel Research

November 2, 2011

(` cr)

Ipca Laboratories | 2QFY2012 Result Update

Concall takeaways
Management has retained 18-20% growth for FY2012. On the Indore SEZ facility, Ipca continues to await US FDA approval (inspection yet to commence). Management has guided for 23-24% tax rate in FY2012, expecting utilization of tax credits in the coming quarters. The company has indicated that it will have fairly negligible impact if the proposed New Drug Policy 2011 gets implemented in the current shape and form.

November 2, 2011

Ipca Laboratories | 2QFY2012 Result Update

Investment agruments
Domestic formulations business The cash cow: Ipca has been successful in changing its business focus to the high-margin chronic and lifestyle segments from the low-margin anti-malarial segment. The chronic and lifestyle segments, comprising CVS, anti-diabetics, pain-management, CNS and dermatology products, constitute more than 50% of its domestic formulation sales. Management has ramped up its field force significantly with additions of divisions in the domestic formulations segment, taking the current total strength to nearly 5,000 MRs. Exports to be the next growth avenue: On the formulations front, Ipca has been increasing its penetration in regulated markets, viz. Europe and US, by expanding the list of generic drugs backed by its own API. In the emerging and semi-regulated markets, Ipca plans to focus on building brands in the CVS, CNS, pain-management and anti-malarial segments along with tapping new geographies. On the API front, where it is among the low-cost producers, Ipca is aggressively pursuing supply tie-ups with pharma MNCs. Indore SEZ approval and tender business to enhance momentum: Ipca is awaiting USFDA approval for its Indore SEZ. Once approved, the facility would cater to the US generic market and could post sales of `300cr350cr. Further, Ipca has received approval from the WHO for its anti-malarial product, making the company eligible to participate in the global tender worth US$300mn along with three other players. Valuation: We expect the companys net sales to witness a 16.3% CAGR to `2,548cr and EPS to register a 14.8% CAGR to `27.5 over FY201113E, driven by the US and domestic markets and the API segment. At current levels, the stock is trading at 16.5x and 12.0x FY2012E and FY2013E earnings, respectively. We recommend Buy on the stock with a target price of `358.

Exhibit 7: Key assumptions

FY2012 Domestic sales growth (%) Export sales growth (%) Growth in employee expenses (%) R&D as a percentage of sales Operating margin (%) Capex (`) Net debt/equity (x)
Source: Company, Angel Research

FY2013 12.7 17.5 15.4 4.0 21.5 180 0.3

14.9 19.5 24.4 4.0 20.5 189 0.4

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Ipca Laboratories | 2QFY2012 Result Update

Exhibit 8: One-year forward PE band

450 400 350 300 250 200 150 100 50 -

Oct-07

Oct-08

Oct-09

Oct-10

4x

8x

12x

16x

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company Alembic Pharma Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca Labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Buy Sell Buy Buy Buy Buy Neutral Buy Buy Buy Buy Accu. Neutral CMP (`) 44 129 2,310 755 289 1,639 51 2,096 385 267 475 174 512 508 Tgt Price (`) 77 217 1,937 1,053 369 1,920 82 658 358 593 270 578 Upside (%) 76.8 67.8 (16.1) 39.5 27.7 17.1 60.0 70.8 34.0 24.9 55.2 12.9 PE (x) 5.6 6.8 25.7 14.7 15.7 17.1 4.4 24.1 5.9 9.7 16.0 4.7 9.7 21.6 FY2013E EV/Sales (x) 0.4 1.0 3.2 2.4 2.8 3.0 1.1 5.5 0.8 1.5 2.6 1.2 1.6 5.4 EV/EBITDA (x) 2.9 5.5 21.2 11.6 13.4 11.7 6.0 15.5 4.6 6.9 13.3 5.5 6.7 17.3 FY11-13E CAGR in EPS (%) 30.6 29.5 15.6 21.6 23.8 22.7 8.6 14.6 25.8 14.8 24.0 29.6 43.1 15.8 FY2013E RoCE (%) 26.6 13.8 15.8 28.3 17.0 17.7 7.4 41.0 17.6 23.3 23.9 11.7 26.8 20.2 ROE (%) 37.0 19.0 17.1 35.2 18.2 25.2 9.2 30.7 19.3 24.9 30.8 23.4 25.9 20.4

Source: Company, Angel Research; * December ending;#Recurring EPS taken for calculations

November 2, 2011

Oct-11

Jan-08

Jan-09

Jan-10

Jan-11

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Ipca Laboratories | 2QFY2012 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E 1,097 46 1,051 40 1,092 16.1 884 464 134 147 138 168 (9.6) 16.0 33 135 (13.4) 12.9 20 20 11.5 175 13.7 175 35.8 20.4 140 (4) 136 136 8.9 12.9 10.8 10.8 7.5 1,326 43 1,284 9 1,292 18.4 1,027 507 147 188 185 256 52.8 20.0 40 217 60.2 16.9 32 1 0.3 194 10.7 76.2 118 23.3 19.7 95 6 101 177 29.9 7.8 8.1 8.1 (25.8) 1,603 43 1,560 7 1,567 21.2 1,233 646 158 221 208 326 27.4 20.9 47 280 29.2 17.9 26 3 1.0 263 35.3 (3.3) 266 62.7 23.6 204 2 205 202 14.3 13.2 16.4 16.4 103.7 1,938 55 1,883 16 1,899 21.2 1,523 776 480 266 360 10.2 19.1 56 304 8.7 16.1 31 8 2.8 297 13.1 (43.4) 341 78.4 23.0 262 (0) 262 218 8.1 13.9 20.9 20.9 27.4 2,272 65 2,207 19 2,226 17.2 1,755 920 199 331 305 452 25.7 20.5 61 391 28.7 17.7 40 1 0.3 371 24.9 371 119.9 32.3 251 251 251 15.0 11.4 20.0 20.0 (4.4) 2,622 74 2,548 22 2,569 15.4 2,000 1,062 204 382 352 548 21.1 21.5 70 478 22.1 18.8 40 1 0.2 461 24.2 461 114.8 24.9 346 346 346 37.8 13.6 27.5 27.5 37.8

November 2, 2011

Ipca Laboratories | 2QFY2012 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders Funds Minority interest Total loans Deferred tax liability Total Liabilities Gross block Less: Acc. depreciation Net Block Capital WIP Investments Current assets Cash Loans & advances Other Current liabilities Net Current Assets Total Assets APPLICATION OF FUNDS 579 165 414 128 10 605 9 69 527 157 448 1,000 779 202 577 14 41 740 11 83 645 216 524 1,156 881 243 638 38 33 899 11 120 768 210 689 1,398 1,073 299 774 38 41 1,059 11 118 930 249 810 1,663 1,263 356 906 38 41 1,303 83 188 1,032 376 926 1,912 1,443 426 1,016 38 41 1,518 111 217 1,191 419 1,099 2,195 25 564 589 353 57 1,000 25 606 631 (0) 460 65 1,156 25 840 865 (1) 455 79 1,398 25 1,026 1,052 (1) 531 81 1,663 25 1,233 1,259 (1) 531 123 1,912 25 1,499 1,524 (1) 531 141 2,195 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 2, 2011

Ipca Laboratories | 2QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in WC Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in fixed assets (Inc.)/Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 FY2011 175 33 (48) (29) 131 (144) (4) (148) 2 74 (22) (37) 17 (1) 10 10 118 40 (88) (22) 48 (90) (90) (5) 26 (34) 56 44 2 10 12 266 47 (98) (46) 169 (134) (134) (7) (38) 10 (35) (1) 12 11 341 56 (120) (78) 198 (192) (8) (200) 76 (61) (13) 2 (0) 11 11 FY2012E 371 61 (44) (78) 310 (189) (189) (59) 10 (48) 73 11 83 FY2013E 461 70 (146) (97) 288 (180) (180) (81) (81) 27 83 111

November 2, 2011

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Ipca Laboratories | 2QFY2012 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 0.6 2.0 6.6 0.7 1.8 6.8 0.5 1.4 10.6 0.5 1.4 9.7 0.4 1.0 9.8 0.3 0.8 12.0 2.0 84 74 28 126 1.9 81 85 31 134 1.9 80 85 26 139 1.9 81 82 25 142 1.9 79 81 31 135 1.9 41 43 16 130 15.3 17.3 25.6 20.1 21.7 29.0 21.9 22.6 27.0 19.9 20.5 22.8 21.9 23.0 21.7 23.3 24.9 24.9 12.9 79.6 1.3 12.8 5.5 0.5 16.7 16.9 80.3 1.2 16.4 6.3 0.6 23.0 17.9 76.4 1.2 17.0 4.4 0.6 24.6 16.1 77.0 1.2 15.5 4.9 0.5 20.9 17.7 67.7 1.3 15.3 5.1 0.4 19.7 18.8 75.1 1.3 18.5 5.6 0.3 22.6 10.8 10.8 13.4 1.6 47.0 8.1 8.1 11.2 2.2 50.5 16.4 16.4 20.1 2.8 69.1 20.9 20.9 25.3 4.2 83.7 20.0 20.0 24.9 4.0 100.1 27.5 27.5 33.1 5.5 121.2 24.6 19.9 5.7 0.6 3.5 22.0 3.7 33.2 23.8 5.3 0.8 3.0 14.8 3.3 16.3 13.3 3.9 1.0 2.4 11.6 2.7 12.8 10.6 3.2 1.6 2.1 10.8 2.3 13.4 10.7 2.7 1.5 1.7 8.4 2.0 9.7 8.1 2.2 2.1 1.5 6.9 1.7 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 2, 2011

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Ipca Laboratories | 2QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Ipca Laboratories No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 2, 2011

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