4 February 2011

India | Pharmaceutical | Initiating Coverage

BUY
Target: ` 416
Stock Statistics
Bloomberg code BSE code NSE code CMP (`) Face Value (`) BSE Sensex Market Cap (`Crore) 52 Wk Hi/Lo (`) Average Daily RATIOS (TTM) Price Earning (P/E) Price Book Value Price to Cash EPS EV/EBITDA CIPLA.IN 500087 CIPLA 335.10 2 18,395.97 26,865.75 381/300 1,72,210 2010 26.09 4.37 21.45 16.66

Cipla Limited
for private circulation only

ompany Description: Founded in 1935, Cipla is the second largest pharmaceutical company in India with market share of 5.4% in FY10. Company offers various drugs and healthcare products with major share in many therapeutic categories & in most dosage forms. The company has well diversified product portfolio that includes OTC products, prescription products, flavors and fragrances, pesticides, and animal products. The Company's products are certified by various recognized regulatory authorities namely Food and Drug Administration (FDA), USA; Medicines and Healthcare products Regulatory Agency (MHRA), UK and like. The Company also provides technology services for preparation of product, product and process know how and new developments with various manufacturing facilities and R&D centers located across India. Company's business model is based on international strategic alliances by focusing on pursuing organic growth while reducing capital commitment and regulatory risks. In the US, Cipla has entered into partnership for 118 products with 22 partners. Number of partners has increased from 17 to 22 over the last 12 months. Of the pipeline of ~100 ANDAs filed till date, 57 have been approved (35 commercialized) while 45ANDAs are awaiting approval. In addition, Company has developed a strong presence in the 170 countries including both developed and developing countries and derived 55.4% of its FY10 revenues from exports to regions including US, Europe, Middle East,Africa andAustralia. In May 2007, Cipla overtook Ranbaxy and GlaxoSmithKline India (GSK) to become the largest pharmaceutical company in the domestic market. Recently in May 2010, it set up a wholly owned subsidiary, Cipla Singapore Pte. Ltd. In April 2010, it commenced commercial production of pharmaceutical formulations at its Special Economic Zone project at Indore, Madhya Pradesh. Company History: In 1935, Khwaja Abdul Hamied, set up the Chemical, Industrial & Pharmaceutical laboratories known as Cipla. The company was registered as a public limited with an authorized capital of INR 6 lacs. Today Cipla is leading player in anti infective and anti-asthmatic formulations. Company manufactured ampicillin for the first time in the country in 1968. Business Overview: Exports Break up The present businesses of Cipla can be Europe, 17% broadly classified into: Domestic branded formulation Middle Africa, 34% East, 9% sales. Domestic unbranded formulation sales. North, Central Exports. & South
America, 26%

Shareholding pattern as on 30/9/2010

Foreign 21%
Promoter s 16%

Public 33%
NonInstitution s 29%

Others 1%

Cipla's Share Price vs Sensex

390 380 370 360 350 340 330 320 310 300 21,000 20,000 19,000 18,000 17,000 16,000 15,000

Australasia, 14%

Initiating coverage with an FY11 earnings estimate of `15.7 - We are initiating coverage of Cipla with earning estimates of `15.7 per share in FY11 and `18.5 per share in FY12 backed by the company's regulatory approvals for the Indore SEZ start to flow in, exports are likely to pick up from FY12E and launch of combination inhalers in the EU. Keeping in view, the company's better global positioning and increasing product basket, we believe Cipla is poised to gain strong market standing with expected upsurge in market share as a result of growing demand for generics. This represents a huge opportunity for the company to further enhance its top-line as well as bottom-line in next 2-3 years. We believe the stock offers good investment opportunity for investors looking at medium to long-term investment. Considering expansion plans, we value Cipla at 21.4x P/E of FY11E and recommend BUY with a price target of ` 416.

Close Price

BSE_SENSEX

Historical Prices
Price ` Gain/Loss 1M 365.70 -3.34% 3M 345.00 2.46% 12M 337.25 4.81%

NDA Securities Ltd

Cipla Limited
Products
Products:

4 February 2011

Cipla has the largest product basket among all the pharmaceutical players in India ranging from prescription to OTC to animal health, besides a big kitty for active pharmaceutical ingredients (APIs) or bulk drugs. In FY10, company has introduced approx. 200+ brands and expects to launch 120-150 new brands over FY11-12. Prescription: Amoebicides/Antiprotozoals, Anabolic steroids, Anaesthetics, Analgesics/Antipyretics, Antacids, Anthelmintics, Anti-inflammatory drugs, Anti-TB drugs, Antiacne drugs, Antiallergic drugs, Antialzheimer drugs, Antiasthma drugs, Antibiotics and Antibacterials Anticancer drugs etc. OTC: Cipla's over-the-counter drugs portfolio comprises the following: Analgesics Oral, Artificial Sweetener, Calcium Preparations, Child Care, Cold & Flu, Constipation, Cosmetics & Skin Care, Dental Care & Oral Hygiene, Diarrhoea, Food Supplements, Indigestion, Infant Food, Medicated Plasters, Medicated Shampoos,Veterinary etc. Cipla's animal health care products division has four sections dedicated for equine, poultry, Companion animals, livestock animals products, apart from Herbal Specialities. Active Pharmaceutical Ingredients(API): Cipla is one of the biggest exporters of low-cost, high qualityAPIs across the world. Major bulk drugs and intermediates manufactured by Cipla are: Adefovir Dipivoxyl, Albendazole USP, Albuterol Sulfate, Alendronate Sodium.3H2O, Alprazolam, Amlodipine Besylate,Anastrazole,Atorvastatin,Aripiprazole,Azelastine HCl etc.

Growing Tie-Ups

Cipla's tie-ups in different countries: In the US, with Teva/Ivax, Watson, Morton Grove, Sandoz /Eon andAkorn. In Germany, entered into agreements with Stada, Hexal and Ratiopharm. In the UK, with NeoLabs. In SouthAfrica, with Medpro. Manufacturing Facilities: Cipla has various manufacturing facilities at Bengaluru, Patalganga, Kurkumbh, Goa, Baddi, and at Sikkim to produce wide range of products. Indore SEZ plant is under construction and the company plans to build twoAPI plants during the next two years. R&D Spend: Cipla's R&D division focuses on new product development and new drug delivery systems across a range of therapies. However, Cipla has relatively low profile on its R&D initiatives compared to the domestic peers, all of whom have set their sights on discovering new chemical entities (NCEs). But lately, R&D spend of Cipla has been increasing and in FY10, the total R&D expenditure as a percentage of total turnover was ~ 5%.

Manufacturing Facilities Increasing R&D expenditure

Wide array of new products in bouquet

Investment Thesis
Aggressive launch of new products - maintains domestic growth momentum: The total domestic drug market is valued at INR 40,052 crore, an increase of 17% over FY09, according to data from drug sales tracking agency, ORG-IMS. With the growth in domestic market Cipla domestic business grew at a CAGR of 13.5% during FY07-FY10 Cipla is one of the largest players in the domestic formulation market, with a market share of around 5% contributing 46% of the total turnover in FY2010. The company is the market leader in key therapeutic areas such as respiratory care, anti-viral and urological. Cipla's distribution network in India comprises a field force of around 5,100 employees and 42 exclusive and dedicated sales depots, as well as approximately 2,300 stockists and 160,000 chemists. During 2QFY11, domestic sales grew by 20% and in FY10, company has introduced approx. 200+ brands and expects to launch 120-150 new brands over FY11-12 contributing ~2-3% to sales. Cipla plans to focus on growing its market share and sales by increasing penetration in the Indian market, especially in the rural areas. It has plans to expand its product portfolio by launching biosimilars, particularly relating to the oncology, antiasthmatic and anti-arthritis categories. We expect Cipla will continue to derive its future growth from past introductions plus new brand launches in forthcoming years. EU inhalers to lead growth: Cipla has launched Salbutamol inhalers in the UK and received approvals for Budesonide inhalers in Germany and Portugal and Beclomethasone in Portugal. Cipla

NDA Securities Ltd

Page 2

Cipla Limited
Launch of CFCfree inhalers in Europe strong growth driver

4 February 2011
has developed eight CFC-free inhalers for the EU region, of which six have been submitted for regulatory approvals. The company expects most of these registrations and compliances to be completed in two years. Launch of CFC-free inhalers in Europe and US with a potential market size of more than US $3 billion would be the long-term growth driver for the company. In addition, Cipla expected to launch the inhaler Seroflo in Russia and South Africa in 2HFY11. Management has also indicated that Inhaler sales contribution could increase to 25% of net sales over the next three years (from current 15% levels) if the regulatory approvals for EU come through. Possible acquisition target: Growing domestic demand for health care would help drive an increase in acquisitions of Indian drug makers and Indian pharma majors, such as Cipla, which have a strong domestic presence, appear to be the probable acquisition target. We believe that Cipla has one of the strongest generic pipelines amongst Indian companies. It has tie-ups with various US based generic companies for supply of products, this coupled with the company's low-risk strategy and strong capex should ensure good long-term potential. The domestic pharma industry appears all set to witness a string of M&A. Some of the few acquisition deals closed during the fiscal 2011 indicates that global pharma companies are willing to pay a high price for acquiring Indian pharma companies. Abbott Laboratories agreed to buy Piramal Healthcare's generic-drug business to expand in a market expected to more than double by 2015 from almost $8 billion this year. Abbott agreed to pay $3.72 billion - almost nine times Piramal's domestic revenue, higher than the four times revenue seen in previous takeovers of Indian drug makers. Hospira, based in Lake Forest, Illinois, agreed in December 2010 to buy Orchid Chemicals' generic injectable-drug business for about $400 million. Tokyo-based Daiichi Sankyo bought 64 % of Ranbaxy, India's largest drug maker, for about 489 billion yen ($5.4 billion) in 2008. We believe that Cipla being the second largest pharmaceutical company with market share of 5.4% in FY10 is a good potential buy for foreign companies seeking to tap growth prospects in India.

Possible acquisition target

Upside from Biosimilars

Biosimilars launches in India: Cipla has initiated investments in biotechnology in India and China. The company is setting up a factory to produce biosimilar activities and formulations at Goa. Through its joint venture in 3QFY10 with Desano, a Chinese company, CIPLA has initiated clinical trials and regulatory processes for the Indian markets and is currently working on six products. In biosimilars, the company is focusing on anticancer antiasthmatic and antiarthritis categories. Over the next three years, the company expects to invest up to USD 65 million in biosimilars, excluding any major additions in manufacturing capabilities. It plans to launch two products in the domestic market by FY2012. Bright industry prospects in generic market: The key markets for generics are the EU nations, USA and several Latin American countries. Regulators have been pushing for greater generic penetration to reduce healthcare-related costs. Currently, the global generics market is pegged at around USD 124-billion and is growing at a CAGR of 11 % since the last three years. Due to low manufacturing and R&D cost in India and China as compared to other European markets, key players are prompt to set up or shift their base in India. We believe Cipla is strongly positioned to emerge as a key supplier of generic products to global MNC companies due to large manufacturing infrastructure, strong chemistry skills and large capacity for inhalers. SEZ facility at Indore: Company commenced commercial production of pharmaceutical formulations at its INR 9 billion Special Economic Zone (SEZ) project, at Indore, Madhya Pradesh. The facility has significant capacity to manufacture products ranging from aerosols, nasal sprays, eye drops to tablets and capsules. While it has already started production for non-regulatory markets from this facility but awaiting approvals from developed markets regulators such as UK MHRA and US FDA. As regulatory approvals at the Indore SEZ start to flow in, growth in exports is likely to pick up from FY12E. We are expecting Indore SEZ would start contributing from FY12 onwards and will boost overall growth and margins of the Company. Exports momentum to improve from FY12: Cipla exports to more than 175 countries, with growth coming through the marketing alliances and distribution tie-ups in the various markets. Exports contributed 54% of the total turnover of FY2010, with Africa, US and Latin America constituting more than 60% of total exports. During 2QFY11 export formulation sales grew by a healthy 14.1% to INR 664cr, while API sales remained flat at INR168cr. Africa continued to the largest region for Cipla with contribution of 42% to total exports. Also during 2QFY11, the company indicated that appreciation in the rupee by 4-5% YoY impacted overall growth of the export segment. Also, management has indicated that it is negotiating with various MNC's like Pfizer, GSK, and Boehringer for long term supply agreements. Generally, such deals span across many products and multiple markets. These potential contracts are likely to raise earnings for FY12/13 and exports are likely to pick up from FY12 onwards as Indore SEZ would also be fully operational.

Growing prospects of generic market

SEZ facility to pick up exports

Exports likely to improve further

NDA Securities Ltd

Page 3

Cipla Limited
Huge capacity expansion

4 February 2011
Capacity ramp up: Cipla has made substantial investments in capacities over the last five years. Manufacturing capacities have been enhanced across bulk drugs, tablets, capsules, liquids and, most importantly, nearly double for aerosols/inhalers. The company is also investing in the Indore SEZ primarily this facility will be utilized for exports and will include capacity for aerosols, liquid orals, PFS etc. Two API plants - one in Patalganga, and the other at Banglore - will be commissioned over next two years to meet API requirements ahead. In addition to its own investments in manufacturing plants, Cipla also meets its manufacturing requirement via outsourcing. We believe Cipla is well placed to efficiently utilize these capacities in future given a track record of operational excellence. Availability of huge capacities is just an indicator of future growth plans, which will be driven by efficient utilisation of available capacity and improvement in asset turnover in the short and medium terms. We strongly believe Cipla has the appropriate targets and capabilities that enable success in its endeavor to supply products to pharma players worldwide and create value for itself and its partners. Given expectation of a generics boom, strong growth in India/global markets, and demand pick-up for inhalers in the EU, Cipla should improve capacity utilisation and the fixed assets turnover ratio is expected to improve going forward. HC index outperformed BSE Sensex - In the last six month we have seen the BSE healthcare index has outperformed the sensex (Healthcare gained 14% vs 4.86% by sensex). On the contrary Cipla gained not so much (Cipla gained only 1.24% during last six months. Hence it is undervalued. Along with this, during the recent downtrend seen in market since last 7-8 days this sector has registered least decline in comparison to other sectors which have witnessed a fall of 7-8%. That's why; we are positive on the stock and see good investment opportunity in to the same.
Sensex vs BSE Health Care
7300 6300 5300 4300 3300 2300 1300 300 21,000 20,000 19,000 18,000 17,000 16,000 15,000

Healthcare index outperformed Sensex

BSE Health Care

BSE_SENSEX

Partnership based model

Strategic Partnership Model: Buoyed by the success of the partnership model in less-regulated markets such as South & Central America, Africa, Australia and Asia, Cipla began replicating the strategy for the high-risk and high-return regulated or developed markets. As per a typical partnership agreement, Cipla manufactures the specified products, while its partner is responsible for the regulatory, legal and marketing aspects. Over the past few years, Cipla has partnered 8 leading generics companies in the US.

Concerns
Foreign risk exposure Notice from NPPA Cipla parternership model Domestic demand helped volume growth
Adverse Currency movements: Cipla derives a major proportion of its revenues from overseas markets (more than 50% of total revenues) making it highly vulnerable to currency fluctuation risks, which may affect revenues significantly. NPPA order for overpricing: NPPA (National Pharmaceutical Pricing Authority) has fined Cipla and some other pharmaceutical companies for overpricing which could result in cash outflow (INR 15 billion) and negative impact the profitability. Strategic partnership model to sell its products in global market: The pharma industry is undergoing a major consolidation phase. The waves of mergers and acquisitions in the global generics market and the entry of many mid-size Indian pharma companies have created additional competition which might result in losing alliance with existing clients due to acquisition or merger of the clients with other companies.

Financial Highlights

Domestic business adds to top line - During FY10, Company registered a revenue growth of 8% to ` 5,713 crores as against ` 5,316 crores in FY09 due to improvement in domestic business growth. In 2QFY11 as well, due to improved performance in domestic business Company registered a revenue growth of 12% YoY to ` 1,615 crore. However, sales were impacted to some extent by lower growth in exports of API due to non-availability of important raw material, lower tender business in antiretroviral and unfavorable currency movement. Company has been able to reduce its COGS as a percentage of sales to 45.77% during FY10 over 47.32% in FY09 which improved the gross margins of the company. We expect this trend to continue going forward as well. EBITDA margin improved in FY10 to 26.5% from 21.9% in FY09 as a result of improved product mix as the management decided not to participate in some non-remunerative ARV tenders. However, during 2QFY11 EBITDA margins were impacted by higher start up expenses of Indore plant resulting in decline in margin. The overall cost in FY10 declined but material cost increased marginally by 4.5% due to change in the product mix and staff cost to 5.95% as a percentage

Improving EBITDA and Operating Margins

NDA Securities Ltd

Page 4

Cipla Limited
of due to overall increase in manpower as well as annual increments. However, Interest cost declined due to repayment of short term working capital loans and fixed deposit availed by the company during the year. Operating margins improved from 18.8% in FY09 to 23.4% in FY10 due to decline in overall cost as a percentage of sales. In 2QFY11 as well, staff cost increased by INR 51 crore due to increase in manpower particularly at Indore SEZ, regrouping of contractual staff at Goa facilities and annual increments.
8000 7000 6000 5000 4000 3000 2000 1000 0 FY07 FY08

4 February 2011
Revenue Growth

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

FY10

FY11E

FY12E

Positive free cash flow

Negative to positive Free Cash Flow and improved Revenue (INR Cr) Revenue Growth % balance sheet - Cipla spent ` 520 crore on capex in FY10 with a total 29.2% 28.4% 30% capex of approx ` 2,500 crore during (FY06-FY10). 26.7% 26.5% 27% Cipla generated its highest free cashflows of ` 655 crore 25.6% 24.2% in FY10 after posting negative free cashflows for the past 24% 23.7% 21.9% 25.0% 23.4% 21.3% five years (FY05-09). Total working capital days fell 21% 21.5% 21.0% 18.8% from 207days in FY09 to 201days in FY10 largely due to 20.2% 18% 19.4% tighter control over debtor days, which fell from 128 days 17.5% 15% 15.7% in FY09 to 102 days in FY10. The company always preferred the organic growth route and never opted for big ticket acquisitions, maintaining a Net profit margins healthy under-leveraged balance sheet. Its low-risk strategy has ensured a very low net debt to equity ratio since the past four years. Company has repaid most of the loans in its books and repaid loans of INR 9.35 billion in FY10 which will further improve net debt to equity ratio and will enable company to utilise cash into capacity expansion. Also, the interest rate hike will have minimal impact on the company's books.
FY07 FY08 FY09 FY10 FY11E FY12E
EBITDA Margins Operating Margins

12%

Strong Balance sheet

Management guidance Company has maintained a conservative revenue guidance of 8-10% growth for FY2011 driven by 10% growth in domestic business and 10-12% growth in export business. We have modelled a revenue growth of 10% for FY11E and 15% for FY12E. Income from technology licensing will be in the range of `75-100 crore for FY11E and may even be lower in FY12E. Management has indicated a capex plan of INR 1,000 crore in near future on building manufacturing facilities and expanding existing ones.

Recent Developments
(Dec. 28) Cipla receives demand notice from govt: Cipla has received fresh notices from the National Pharmaceutical Pricing Authority, demanding an amount of INR 477 million in respect of the drug Salbutamol and an amount of INR 254.6 million in respect of the drug Ciprofloxacin. (Dec. 09) Amar Lulla resigns as Joint MD of Cipla: Amar Lulla will cease to be the Joint Managing Director of the Company effective from the Dec. 13, 2010. (Nov. 12) Net Profit down by 5% for Sept quarter: Cipla reported 5% decrease in net profit to `263.01 crore despite 15% increase in net sales to `1,579.88 crore for the quarter ended September 2010. (Oct. 25) Dr Reddy's enters pact with Cipla, Vitabiotics to market drugs: Dr Reddy's Laboratories (DRL) has entered into an agreement with drug major Cipla and UK-based Vitabiotics to market overthe-counter (OTC) and prescription drugs, besides nutraceutical products, in Russia and CIS countries.

Industry Outlook
The pharmaceutical industry in India is the world's second-largest by volume and is likely to lead the manufacturing sector of India. The Indian pharmaceutical industry has grown from a humble ` 15billion turnover in 1980 to approximately `1,006.11 billion in 2009-10 as per the pre-Budget survey. This industry plays an important role in promoting and sustaining development in the field of global medicine. Due to the presence of low cost manufacturing facilities, educated and skilled manpower and cheap labor force among others, the industry is set to scale new heights in the fields of production, development, manufacturing and research. According to data from drug sales tracking agency ORGIMS, total domestic drug market is valued at `40,052 crore in 2009 an increase of 17% over the 2008. According to data published by the Department of Pharmaceuticals, Ministry of Chemicals and

NDA Securities Ltd

Page 5

Cipla Limited

4 February 2011
Fertilizers, the total turnover of India's pharmaceuticals is expected to reach $ 55 billion in 2020 from $ 12.6 billion in 2009 and has the further potential to reach $ 70 billion by 2020 in an aggressive growth scenario. Few of the facts below further strengthen our belief:

Indian top in US generics

Indian Pharma remains top in US generics.The US generics market, which accounts for a little over 70% of prescriptions in the US, was valued by IMS at about $31 billion for the 12 months ended November 2009. BCC Research estimates the US market generic sales worth $34 billion in 2009. Indian pharma companies maintained their No 1 position in the US generics market by bagging 33.17% or 139 of 419 original Abbreviated New Drug Application (ANDA) approvals from the US FDA in 2010. Bio-Pharma biggest contributor to industry growth - Biopharmaceuticals are seen as growth drivers in the pharma space, with an expected compound annual growth rate of 10 per cent over the next five years, compared with 4-6% for the whole pharma market. India's bio-tech industry clocked a 17 percent growth with revenues of INR 137 billion ($3 billion) in the 2009-10 financial year over the previous fiscal. Bio-pharma was the biggest contributor generating 60 percent of the industry's growth at INR 8,829 crore, followed by bio-services at INR 2,639 crore and bio-agri at INR 1,936 crore. Indian pharma majors expect to see rising global demand for biosimilar drugs. Biosimilars, which are the generic version of patented biotechnology drugs, are estimated to have a market size of around $78 billion by 2013, with the market size likely to expand even further as many biopharma products fall off the 'patent cliff' by 2014. Govt explores capping FDI in pharma - Hoping to cash in on the upcoming opportunity in India, some global pharma majors are entering into strategic alliances with domestic companies to develop and market their biosimilar drugs worldwide. The Indian government is exploring a proposal to reduce the limit on foreign direct investment (FDI) allowed in the pharmaceutical industry through the automatic route to 49% from 100% amid concerns over the takeover of local drug makers by overseas firms. Indian Pharma market is likely to triple by 2015. According to the McKinsey report, The Indian Pharma market is expected to triple to US$20 billion by 2015 if the Indian economy continues on its current high growth path. Generics will continue to dominate, while patent protected products are likely to constitute 10% of the market within this timeframe. Generic sales expected to grow at CAGR of 10.5% Generics sales particularly to foreign markets remain the largest business Segment for Indian pharma companies. The global generics market is expected to grow at a CAGR of about 10.5 percent between 2007 and 2012, outperforming the overall pharma market CAGR of about 5.5 percent in the same period. Conclusion: With several companies slated to make investments in India, the future scenario of the Source : KPMG pharmaceutical industry looks pretty promising. The country's pharmaceutical industry has tremendous potential of growth considering all the projects that are in the pipeline. Due to the low cost of R&D, increasing public spending on healthcare and government support, the Indian pharmaceutical off-shoring industry is designated to turn out to be a US$ 2.5 billion opportunity by 2012.

Biopharmaceuti cals growth driver in pharma space

FDI capping in Pharma

Pharma market expected to triple Generic Segment grow

Peer Comparison and Valuation

CIPLA is the second largest pharmaceutical company in India, after the ABT-PIHC combine, with a market share of 5.4% in FY10. Twenty of the company's brands rank in the Top 300 brands in the country. The company's strong generic pipeline, entry into biosimilars and the likely commercialization of CFC-free inhalers offer it a significant long-term growth potential. The commencement of API supply to Teva for Zyprexa's 180-day exclusivity too would provide it a significant revenue earning opportunity (slated for expiration in April 2011). Besides, management has indicated that it is negotiating with MNC pharma majors (likes of Pfizer and GSK) for long-term supply agreements. Closure of such a deal too would present a significant growth opportunity.

NDA Securities Ltd

Page6

Cipla Limited

4 February 2011
Performance-wise, during second quarter 2011, Company posted a 20% growth in domestic operations (Y-O-Y) and its export formulations business posted a growth of about 14%, while API exports declined by 1%. The company has managed this growth despite rupee appreciation. Meanwhile given the huge expansion plans into the pipeline and plans to invest about Rs 1,300 crore over the next few years towards upgrading and expanding existing facilities as well as setting up new ones. It is setting up API facility in Bengaluru (for anti-cancer products). The company also recently acquired a small-sized domestic pharma company, Meditab (earlier owned by promoters), for about `133 crore. Meditab has formulations manufacturing facilities at multiple locations (China and Uganda) and R&D Centres in India and Malaysia. The acquisition promises to give Cipla better control over operations and costs even as it would help expand its API and intermediates international business into the Chinese andAfrican markets.

Peer Comparison Table

CIPLA LIMITED
Company Cipla Dr Reddy's Labs
GlaxoSmithKline Pharma

Lupin Ranbaxy Labs.

CMP 334.60 1,566.20 2,270.20 420.40 535.45

Mkt. Cap(Cr) 26,865.03 26,503.24 19,228.59 18,754.04 22,556.37

Market Cap/Sales 4.52 5.51 8.88 5.15 4.35

EV/EBIDTA 16.66 19.83 22.42 25.57 9.46

P/E 26.09 28.69 33.09 29.98 15.56

P/BV 4.37 4.76 10.64 8.47 5.93

We are initiating coverage with a BUY rating on Cipla Ltd. (CIPLA) with a price target of ` 416 (rounded off two decimal places). At current levels, the stock is trading at 21.4x and 18.2x FY2011E and FY2012E earnings, respectively. We recommend a Buy on the stock, with a Target Price of `416. Our calculations show that the stock is trading at 22.3% discount from its calculated fair market value of `416. Thus, CIPLA valuations on the street appear attractive with healthy dividend yield and growing profits. We believe the stock offers good investment opportunity for investors looking at medium to long-term investment. The Indore SEZ (`1,000cr invested) is expected to contribute from Fy2012 onwards and boost overall growth and margins for the company.

Income Statement

NDA Securities Ltd

Page 7

Cipla Limited

4 February 2011

Balance Sheet
All figures in INR Crore FY ending -March Gross Block Depreciation Net Block Investments Capital work in progress Current assets: Inventories Debtors Cash & Bank Other current assets Loans & Advances Total Current Assets Total Assets Shareholders' Funds Equity Share Capital Reserves & Surplus Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Deferred Tax Liability March FY 08 2,201.79 540.43 1,661.36 94.75 233.12 1,120.49 1,393.91 79.28 34.49 1,115.81 3,743.98 5,733.21 155.46 3,600.36 3,755.82 14.09 526.36 540.45 149.15 March FY 09 2,693.29 700.80 1,992.49 81.32 366.32 1,398.32 1,837.15 53.00 23.45 912.65 4,224.57 6,664.70 155.46 4,195.29 4,350.75 2.79 937.45 940.24 164.15 1,012.85 196.71 1,209.56 6,664.70 March FY 10 2,895.44 884.27 2,011.17 265.10 684.24 1,512.58 1,552.71 60.84 57.82 1,168.18 4,352.13 7,312.64 160.58 5,753.51 5,914.09 0.41 4.66 5.07 179.15 997.96 216.37 1,214.33 7,312.64 March FY 11E 3,498.79 1,085.72 2,413.07 265.10 684.24 1,649.79 1,768.64 0.00 57.82 1,168.18 4,644.43 8,006.84 160.58 6,991.04 7,151.62 0.41 4.66 5.07 179.15 1,374.82 216.37 1,591.19 8,927.03 March FY 12E 4,222.71 1,330.61 2,892.10 265.10 684.24 1,840.45 2,033.94 0.00 57.82 1,168.18 5,100.38 8,941.83 160.58 8,448.63 8,609.21 0.41 4.66 5.07 179.15 1,687.08 216.37 1,903.45 10,696.87

Key Ratios
March FY08 Debt-Equity Ratio 0.1 Long Term Debt Equity Ratio 0.02 Current Ratio 2.17 Particulars Turnover Ratios Fixed Assets Inventory Debtors Interest Coverage Ratio ROCE (%) RONW (%) Valuation Ratio Price to Earning (P/E) Price to Book Value (P/BV) Price/Cash EPS (P/CEPS) EV/EBITDA Market Cap/Sales Dupont Model PBIDT/Sales(%) Sales/Net Assets PBDIT/Net Assets PAT/PBIDT(%) Net Assets/Net Worth ROE(%) March FY09 0.18 0.01 1.89 March FY10 0.09 0.01 2.36

2.05 2.06 1.94 3.9 3.99 3.72 3.38 3.11 3.19 48.88 18.26 47.82 22.41 19.93 24.18 20.12 19.21 21.11 25.32 22.77 25.65 4.56 3.93 4.58 21.59 18.93 22.18 18.04 16.26 17.79 4.18 3.4 5.0 23.78 22.01 28.06 0.95 0.95 0.91 0.23 0.21 0.26 72.15 70.28 71.22 1.15 1.22 1 20.12 19.21 21.11

Current liabilities & Provisions: Current Liabilities 870.98 Provision 416.81 1,287.79 Total Current Liabilities Total Liabilities and SE 5,733.21

Equity Research Division 16, Krishna Market, 1st Floor, Kalkaji, New Delhi 110019 Phones: EPABX: 47152222 (30 lines), Fax 47152211 Email: equityresearch@ndaindia.com Regd. & Corp. Office
906, Arunachal, 19 Barakhamba Road, New Delhi 110 001 Phones: 011-46204000 (30 lines), 23717551, Fax 011-46204050 Web: www.ndaindia.com Email: info@ndaindia.com, investorcell@ndaindia.com

Mumbai Office
21, Prospects Chamber Annexe Dr. D N Rd, Fort, Mumbai-400001 Phones: 022-22842694, 22851387

Disclaimer: This document is meant for private circulation only. This document is not to be reported, copied or made available to any other without written permission of NDA. The information contained in this report has been obtained from sources that are believed to be reliable and NDA has no responsibilities for the accuracy of the facts stated. The recommendation made herein does not constitute an offer to sell or solicitation to buy any securities. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. NDA Securities recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The readers using the information are solely responsible for their actions. Either NDA or its affiliates, directors, employees, representatives, clients or their relatives may or may not have position(s) in the stocks recommended. This report has been prepared by ASP Research Service Pvt. Ltd. under exculsive rights of

NDA Securities Ltd