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2QCY2012 Result Update | Pharmaceutical

August 10, 2012

Ranbaxy
Performance Highlights
Y/E Dec. (` cr) Net sales Other income Operating profit Forex loss/(gain) Adj. Net profit 2QCY2012 3,174 124 457 (966) 304 1QCY2012 3,695 229 924 364 936 (67.5) % chg qoq (14.1) (45.7) (50.5) 2QCY2011 2,054 93 152 109 107 184.1 % chg yoy 54.6 34.1 200.1

Neutral
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 20,408 (443) 0.5 542/367 111,841 5 17,558 5,320 RANB.BO RBXY@IN

`483 -

Source: Company, Angel Research

Ranbaxy Laboratories (Ranbaxy) reported a better-than-expected performance in its 2QCY2012 results. While the companys top-line grew 54.6% during the quarter, which is higher than our expectations; the OPM was just in line of expectation. The adjusted net profit still came in 30.4% higher than expectations. We recommend a Neutral stance on the stock. Better -than-expected performance: Ranbaxy reported net sales of `3,174cr, up 54.6% yoy, and above our estimate of `2,452cr. The gross margin expanded by 571bp to 67.6%, which along with a lower rise in the other expenditure aided the 7% expansion in the OPM, which came in at 14.3%. This was in line with the expectation of 14.7% during the quarter. This aided the adjusted net profit to grow by 184.1% yoy to `304cr. Outlook and valuation: The stock is trading at EV/sales of 1.7x CY2013E. While the valuation is attractive in comparison to its peers, given the low profitability in the core business and uncertainty on the USFDA front, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.7 13.7 12.2 10.4

Abs. (%) Sensex Ranbaxy

3m 6.9 (2.7)

1yr 2.5 (2.4)

3yr 17.0 85.2

Key financials (Consolidated)


Y E Dec. (` cr) Net sales % chg Reported profit % chg EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

CY2010 8,535 16.5 1,086 654.7 35.5 16.9 13.5 21.8 10.1 3.6 2.7 15.7

CY2011 10,061 17.9 600 (44.7) 14.2 15.1 34.0 14.2 12.9 7.1 2.2 14.4

CY2012E 12,046 19.7 1,320 120.0 31.3 16.0 15.4 39.1 18.8 5.3 1.7 10.8

CY2013E 11,980 (0.5) 1,258 (4.7) 29.8 15.8 16.2 28.9 15.8 4.2 1.7 10.5

Sarabjit Kour Nangra


+91 22 3935 7800 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Ranbaxy | 2QCY2012 Result Update

Exhibit 1: 2QCY2012 performance ( Consolidated )


Y/E Dec (` cr) Net Sales Other Income Total Income Gross profit Gorss margins Operating profit Operating Margin Interest Depreciation & Amortisation PBT & Exceptional Items Provision for Taxation Minority & Share of Associate Net Profit Forex loss/ (gain) & Exceptional items Reported Net Profit Adjusted Net Profit EPS (`)
Source: Company, Angel Research

2QCY2012 1QCY2012 % chg qoq 2QCY2011 % chg yoy 1HCY2012 1HCY2011 % chg yoy 3,174 124 3,298 2,147 67.6 457 14.4 48 78 454 68 6 380 (966) (585) 304 7.2 3,695 229 3,924 2843 76.9 924 25.0 38 80 1035 137 14.0 884 364 1,248 936 22.2 (67.5) (56.9) 28.6 (2.0) (56.1) (50.5) (14.1) (45.7) (15.9) (24.5) 2,054 93 2,146 1272 61.9 152 7.4 17 74 155 18 2.3 134 109 243 107 2.5 184.1 184.1 191.7 6.4 193.7 269.9 200.1 54.6 34.1 53.7 69 6,869 257 7,127 4,989 72.6 1,380 20.1 86 158 1393 206 19 1168 (508) 661 935 22.1 4,195 178 4,373 2,698 64.3 519 12.4 31 147 518 97 4 418 130 548 334 7.9 179.6 7.5 168.8 112.8 393.4 179.6 166.1 63.8 44.7 63.0 84.9

Exhibit 2: 2QCY2012 Actual vs. Angel estimates


(` cr) Net sales Operating profit Interest Tax Adj. net profit
Source: Company, Angel Research

Actual 3,174 457 48 68 304

Estimates 2,452 362 80 70 233

Variation (%) 29.4 26.3 (39.3) (3.1) 30.4

Top-line performance above expectations: Ranbaxy reported net sales of `3,174cr, up 54.6% yoy, above our estimate of `2,452cr. Emerging markets contributed US$231mn, accounting for ~39% of total sales. Developed markets recorded US$328mn of sales and contributed by 56% to the total sales for the company. The growth was mainly driven by Lipitor in the US, resulting in US registering a growth of 140% to end the period at US$272mn, accounting for almost 46% of the overall sales. Adjusted for the exclusive opportunities, the base business grew by ~13% yoy. Amongst other geographies, sales in Europe grew by 19% yoy to end at US$102mn. Sales for the quarter in India were `5,540cr (US$102mn), a growth of 13% yoy. The CIS region reported sales of US$25mn for the quarter, a growth of 28% yoy.

August 10, 2012

Ranbaxy | 2QCY2012 Result Update

Exhibit 3: Formulations sales trend


4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 428 482 356 498 2QCY2011 428 482 356 498 3QCY2011 North America 4QCY2011 Europe 1QCY2012 India 2QCY2012 RoW 1,967 2,094 1,471 696 482 381 599 500 508 740 554 553

Source: Company, Angel Research

OPM expands to 14.4%: The gross margin expanded by 571bps, to end the period at 67.6%, which along with a lower rise in the other expenditure aided the 7% expansion in the OPM which came in at 14.3%. This was in line with the expectation of 14.7% during the quarter.

Exhibit 4: OPM trend


30.0 25.0 20.0 21.6 25.0

(%)

15.0 10.0 5.0 0.0 2QCY2011 3QCY2011 4QCY2011 1QCY2012 7.0

14.4 5.0

2QCY2012

Source: Company, Angel Research

Adj. net profit grows 184.1%: The OPM expanded, but forex losses during the quarter led the company to report a loss of `585cr vs a net profit of `243cr posted in the corresponding previous year quarter. However, adjusted for the forex and exceptional items, the adjusted net profit of `304cr (`107cr in 2QCY2011), registered a growth of 184.1% yoy.

August 10, 2012

Ranbaxy | 2QCY2012 Result Update

Exhibit 5: Net profit trend


1,000 800 600 428 400 200 0 2QCY2011 -200 3QCY2011 (124) 4QCY2011 1QCY2012 2QCY2012 107 304 936

Source: Company, Angel Research

Concall takeaways
Ranbaxys current market share in Lipitor is at ~50% with price erosion of 95%. As part of settlement, the company has shared Lipitor revenues with Teva of ~US$85mn. The company has hired consultants for plant assessments; it expects to get a timeline for plant inspections by September 2012. The current medical representative strength in the domestic market stands at 7,500 executives and the company is focusing more on the chronic segment. The company has derivatives exposure of US$1.3bn as of 2QCY2012. Capex for CY2012 is to be higher than `600cr.

Investment arguments
US Consent Decree: Road cleared but timelines uncertain: Post the USFDAs adverse action in early CY2009 (AIP invoked on Poanta Sahib facility and import alert issued for Dewas facility), Ranbaxys US sales had been impacted but for the first-to-file (FTF) products. Ranbaxy has signed a consent decree with the USFDA regarding the ongoing Current Good Manufacturing Practices cGMP issues. We note that the consent decree lays out a plan of action as agreed by the two parties to resolve the outstanding issues. However, the timeline regarding the resolution is still unclear. As per Ranbaxys management, the company has taken corrective actions, as per suggestions by a consultant, and has been working closely with the USFDA to resolve the issues. Though the move is positive, the timelines for the same are not clear. We have therefore not factored the same in our estimates. India back in focus: Ranbaxys domestic formulation business has been reporting below-industry average growth rate of 78% since the past few years. The company has now renewed its focus on one of the fastest growing pharmaceutical markets by completely rolling out Project Viraat in 2010 with a

August 10, 2012

(`cr)

Ranbaxy | 2QCY2012 Result Update

view of establishing a leadership position in the next two to three years. Under the project, Ranbaxy increased its field force significantly, launched new products and penetrated rural areas. Going forward, with this, the company plans to achieve 1520% growth on the domestic front. Looking for profitable growth: Ranbaxys OPM collapsed from 12.6% in CY2006 to 6.1% in CY2009 on USFDA issues, high operating leverage and realized losses in forex hedges. However, the company is now targeting to achieve profitable growth by closing down low-margin facilities in various emerging markets, reducing its work force in Europe and transferring its new drug discovery research division to Daiichi. Further, a resolution of the USFDA issue would help reduce costs incurred on remedial measures. Going forward, Ranbaxy aims to achieve double-digit margins in its base business.

Outlook and valuation


The stock is trading at EV/sales of 1.7x CY2013E. While the valuation is attractive in comparison to its peers, given the low profitability in the core business and uncertainty on the USFDA front, we maintain our Neutral rating on the stock.

Exhibit 6: Key assumptions


CY2012E Domestic sales growth Export sales growth Growth in employee expenses Operating margins Debt:Equity
Source: Company, Angel Research

CY2013E 11.0 19.5 17.9 15.8 (0.1)

11.0 21.7 19.2 16.0 0.1

Exhibit 7: One-year forward EV/Sales


50,000 45,000 40,000 35,000 30,000

(` cr)

25,000 20,000 15,000 10,000 5,000 0

Source: Company, Angel Research

August 10, 2012

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
1x 2x 3x 4x

Ranbaxy | 2QCY2012 Result Update

Exhibit 8: 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 Neutral CMP (`) 59 103 91 156 953 399 92 92 475 647 178 Tgt. price Upside (`) 55.4 51.2 9.0 14.0 12.9 6.5 63.3 17.1 11.3 65.8 % PE (x) 6.5 8.2 21.1 19.0 17.5 17.7 7.6 25.5 6.4 11.1 18.6 4.8 16.2 23.9 0.7 0.9 2.7 2.6 2.8 2.6 1.0 5.1 0.9 1.6 2.6 0.8 1.8 4.5 FY2014E EV/Sales (x) EV/EBITDA (x) 4.3 6.4 17.7 13.5 12.6 12.3 5.6 16.4 5.0 7.8 13.2 4.7 11.2 10.9 FY12-14E CAGR in EPS (%) 14.6 61.1 12.0 20.5 18.4 2.3 26.6 8.7 32.8 29.5 26.7 27.8 44.8 0.1 29.4 10.4 16.1 20.2 16.8 15.1 8.9 38.9 15.5 26.1 22.9 11.5 15.8 26.7 FY2014E RoCE (%) RoE (%) 29.9 16.4 17.0 26.8 16.6 20.8 10.0 29.0 17.0 26.0 24.7 7.9 28.9 18.8

2,207 -

Accumulate 874 Accumulate 350 Accumulate 86 Neutral Buy Buy Buy Neutral Neutral 56 406 107 483 676

Accumulate 1,646 1,859 2,105 -

Accumulate 581

Source: Company, Angel Research; Note: * December year ending

Background Ranbaxy Laboratories (Ranbaxy), India's largest pharmaceutical company, is an integrated, research-based, international pharmaceutical company. The company is currently present in 23 of the top 25 pharmaceutical markets of the world. Ranbaxy has a global footprint in 46 countries, manufacturing facilities in seven countries and serves customers in over 125 countries. The company generates a balanced mix of revenue from emerging and developed markets, which contribute 50% and 44%, respectively.

August 10, 2012

Ranbaxy | 2QCY2012 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) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of assoc. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (394) 1,106 (1,500) (565) 0.0 (935) 8 8 (951) (121) (13.2) 817 (193) 1,010 699 69.2 311 14 296 144 4.0 7.1 7.1 1,911 134.0 411 585 25.2 240 1,086 654.7 17.5 35.5 35.5 404.1 1,086 (43.2) 3,772 197 (7.3) 16 600 (44.7) (28.8) 14.2 14.2 (60.0) 1,734 59.7 1,734 399 23.0 1,335 15 1,320 1,320 120.0 11.0 31.3 31.3 120.0 1,653 (4.7) 1,653 380 23.0 1,273 15 1,258 1,258 (4.7) 10.5 29.8 29.8 (4.7) (157.0) (307.5) CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E 7,256 31 7,224 189 7,414 7.2 6,830 3,183 579 1,263 1,806 394 (44.9) 5.5 282 112 (77.5) 1.5 206 (489) 124.3 7,344 15 7,329 268 7,597 2.5 6,885 3,208 513 1,417 1,746 445 12.8 6.1 268 177 58.4 2.4 71 443 54.2 8,551 10,081 15 425 18.0 7,096 3,153 578 1,506 1,858 1,440 223.7 16.9 553 887 400.4 10.4 61 661 34.6 19 126 13.7 8,542 3,353 863 1,639 2,688 1,519 5.5 15.1 394 1,125 26.9 11.2 611 446 41.1 8,535 10,061 8,961 10,187 12,067 21 12,046 214 12,260 20.3 10,120 4,577 818 2,116 2,609 1,926 26.8 16.0 442 1,484 31.9 12.3 64 100 5.8 12,004 24 11,980 214 12,194 -0.5 10,087 4,540 839 2,108 2,600 1,893 (1.7) 15.8 490 1,403 (5.5) 11.7 64 100 6.0

2,322 (2,686)

1,737 (2,883)

1,497 (2,900)

(126.0) (218.5)

August 10, 2012

Ranbaxy | 2QCY2012 Result Update

Balance sheet (Consolidated)


Y/E Dec (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets 4,042 1,643 2,399 471 2,091 543 6,510 2,396 819 3,295 4,588 1,922 7,426 4,125 1,727 2,398 623 2,093 541 6,009 1,242 1,086 3,681 4,111 1,897 7,552 4,804 2,157 2,647 382 1,901 498 8,693 3,264 1,631 3,798 4,140 4,553 9,981 5,172 2,468 2,704 264 2,155 98 10,458 3,068 1,773 5,617 8,276 2,183 7,404 5,872 2,910 2,962 264 2,155 98 12,842 4,001 2,120 6,721 9,908 2,935 8,414 6,372 3,399 2,972 264 2,155 98 13,727 4,934 2,108 6,685 9,853 3,873 9,363 210 4,086 4,296 67.5 4,285 (1,223) 7,426 210 4,133 4,343 53.3 3,630 (474) 7,552 211 5,394 5,605 64.7 4,335 (23) 9,981 211 2,658 2,869 81.0 4,491 (38) 7,404 211 3,669 3,880 81.0 4,491 (38) 8,414 211 4,618 4,829 81.0 4,491 (38) 9,363 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

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Ranbaxy | 2QCY2012 Result Update

Cash flow statement (Consolidated)


Y/E Dec (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Inc./ (Dec.) in Investments Other income 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 CY2007 CY2008 CY2009 CY2010 CY2011E (1,500) 282 (489) (136) 386 (568) 303 (489) (755) 3,615 143 (262) (1,169) 2,327 438 2,396 1,010 268 443 (243) (538) (235) (2) 443 206 1 (655) (168) (822) 2,396 1,242 2,322 553 (633) 661 (619) 962 (438) (42) 661 180 27 705 (98) 247 880 2,023 1,242 3,264 (2,686) 394 2,174 446 (196) (760) (250) (400) 446 (204) 0 156 611 768 (196) 3,264 3,068 1,734 442 180 100 (399) 1,858 (700) 100 (600) (309) (16) (325) 933 3,068 4,001 CY2012E 1,653 490 (6) 100 (380) 1,657 (500) 100 (400) (309) (15) (324) 933 4,001 4,934

1,250 (1,130)

1,958 (1,154)

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Ranbaxy | 2QCY2012 Result Update

Key ratios
Y/E Dec. 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 Int. Coverage (EBIT / Int.) 0.4 4.8 0.5 5.4 2.5 0.2 0.7 14.4 0.5 0.9 1.8 0.1 0.3 23.2 (0.1) (0.2) 21.9 2.4 5.8 3.3 10.1 22.1 21.8 12.9 35.4 14.2 18.8 75.9 39.1 15.8 70.1 28.9 1.5 1.3 0.4 2.4 1.3 0.5 10.4 74.8 1.4 10.7 1.2 0.2 12.5 11.2 107.3 1.8 22.1 14.9 0.5 25.7 12.3 77.0 2.8 26.6 1.1 0.1 29.8 11.7 77.0 2.8 24.9 1.1 24.9 102.2 7.1 7.1 13.4 103.3 35.5 35.5 48.7 2.0 133.1 14.2 14.2 36.8 5.9 68.0 31.3 31.3 60.7 10.6 91.9 29.8 29.8 41.4 7.3 114.4 4.7 0.0 3.1 56.3 3.0 68.5 36.0 4.7 0.0 3.1 51.0 3.0 13.6 9.9 3.6 0.4 2.5 14.9 2.1 34.0 13.1 7.1 1.2 2.2 14.4 2.9 15.4 8.0 5.3 2.2 1.7 10.8 2.5 16.2 11.7 4.2 0.0 1.7 10.5 2.1 CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E

1.9 89 70 52 35

1.9 91 76 67 4

2.0 82 70 86 40

2.0 80 81 61 7

2.2 73 77 34 (29)

2.0 100 100 35 (32)

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Ranbaxy | 2QCY2012 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 Source: 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

Ranbaxy 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%)

August 10, 2012

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