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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
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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
Target | Estimate Change
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
Source: Jefferies estimates, company data
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
Target | Estimate Change
13 January 2015
page 3 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
Target | Estimate Change
13 January 2015
page 4 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
Target | Estimate Change
13 January 2015
page 5 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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)
Source: Jefferies estimates, company data
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
Target | Estimate Change
13 January 2015
page 6 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
Source: Company Data, Jefferies estimates
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
Source: Company Data, Jefferies estimates
Healthcare
Target | Estimate Change
13 January 2015
page 7 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
Source: Company Data, Jefferies estimates
Healthcare
Target | Estimate Change
13 January 2015
page 8 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
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
Source: Jefferies estimates, company data
Healthcare
Target | Estimate Change
13 January 2015
page 9 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
Exhibit 14: Profit and Loss Statement
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
Source: Company Data, Jefferies estimates
Exhibit 15: Balance Sheet Statement
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
Capital Employed 170,899 232,827 289,553 356,722 437,343
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
Cash & Bank Balance 40,587 75,902 112,495 168,147 238,618
Loans & Advances 19,174 22,782 -4,382 -2,459 2,360
Other Current Assets 774 25,475 25,475 25,475 25,475
Current Liabilities 37,913 60,882 33,459 40,353 46,366
Creditors 13,565 13,283 15,627 19,819 22,292
Other Liabilities 1,661 1,977 1,977 1,977 1,977
Provisions 22,687 45,622 15,855 18,557 22,097
Net Current Assets 75,506 116,511 170,182 238,913 321,439
Appl. Of fund 170,899 232,827 289,553 356,722 437,343
Source: Company Data, Jefferies estimates
Healthcare
Target | Estimate Change
13 January 2015
page 10 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
Change in Wkg Capital -3,623 -7,678 -17,078 -13,079 -12,055
CF from Op Activities 26,121 22,748 43,799 58,006 73,734
Change in Fixed Assets -22,503 -18,580 -9,000 -5,000 -5,000
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
Source: Company Data, Jefferies estimates
Exhibit 17: Key Ratios
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
Creditor Days 97 66 66 66 66
Net Debt to Equity -0.3 -0.4 -0.5 -0.6 -0.6
Source: Company Data, Jefferies estimates
Healthcare
Target | Estimate Change
13 January 2015
page 11 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
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
Source: Jefferies estimates, company data
Healthcare
Target | Estimate Change
13 January 2015
page 12 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
Exhibit 19: Profit and Loss Statement
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
Source: Company Data, Jefferies estimates
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
Capital Employed 112,810 140,070 152,675 173,827 198,370
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
Cash & Bank Balance 5,136 8,451 2,983 17,401 35,106
Loans & Advances 10,043 13,184 13,184 13,184 13,184
Current Liabilities 29,559 30,153 30,927 32,402 33,916
Creditors 11,862 10,503 11,368 12,843 14,357
Other Liabilities 15,362 16,739 16,739 16,739 16,739
Provisions 2,336 2,911 2,819 2,819 2,819
Net Current Assets 39,191 48,511 48,468 70,590 97,068
Appl. Of fund 112,810 140,070 152,675 173,827 198,370
Source: Company Data, Jefferies estimates
Healthcare
Target | Estimate Change
13 January 2015
page 13 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
Change in Wkg Capital -10,890 -8,460 -5,333 -7,704 -8,773
CF from Op
Activities 8,498 17,835 21,825 22,492 25,163
Change in Fixed Assets -10,610 -13,883 -20,000 -7,000 -6,539
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
Source: Company Data, Jefferies estimates
Exhibit 22: Key Ratios
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
Creditor Days 68 60 60 60 60
Net Debt to Equity 0.2 0.1 0.1 0.0 0.0
Source: Company Data, Jefferies estimates
Healthcare
Target | Estimate Change
13 January 2015
page 14 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
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
Source: Jefferies estimates, company data
Healthcare
Target | Estimate Change
13 January 2015
page 15 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
Exhibit 24: Profit and Loss Statement
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
Source: Company Data, Jefferies estimates
Exhibit 25: Balance Sheet Statement
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
Source: Company Data, Jefferies estimates
Healthcare
Target | Estimate Change
13 January 2015
page 16 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
Source: Company Data, Jefferies estimates
Exhibit 27: Key Ratios
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
Source: Company Data, Jefferies estimates
Healthcare
Target | Estimate Change
13 January 2015
page 17 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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
Source: Company Data, Jefferies estimates
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
Target | Estimate Change
13 January 2015
page 18 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
Long Term Financial Model Drivers
LT Earnings CAGR 20%
Organic Revenue Growth 16%
Operating Margin Expansion 200bps
Other Considerations
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
Target Investment Thesis
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
Adjusted currency to 3Q15 average
(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%
US revenues growth slows to 20%
Emerging markets growth at 21%
Branded sales growth sees some
improvement
Japan business growth improves to 13%
Margins improve 250bps FY14-17E
2017 EPS: 74; Target Multiple: 24.5x;
Target Price Rs 1813
Downside Scenario
Domestic growth at industry level of 15%
US revenues growth slows to 16%
Emerging markets growth at 18%
Branded sales growth remains muted
Japan business growth improves to 9%
Margins improve 150bps over FY14-17E
2017 EPS: 70; Target Multiple: 22x; Target
Price Rs 1540
Long Term Analysis
Scenarios
Group P/Es vs Growth
Source: Company Data, Jefferies estimates
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
[Lupin Ltd]
Buy: INR 1650 Price Target
Healthcare
Target | Estimate Change
13 January 2015
page 19 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
Long Term Financial Model Drivers
LT Earnings CAGR 24%
Organic Revenue Growth 17%
Operating Margin Expansion 390bps
Other Considerations
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
Target Investment Thesis
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
Export formulation(ex inhalers) business
growth at around 24%
Domestic growth above industry at 17%
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
2017 EPS: 34; Target Multiple: 24.0x;
Target Price: Rs 816
Downside Scenario
Export formulation(ex inhalers) business
growth at around 20%
Domestic growth above industry at 16%
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
2017 EPS: 31; Target Multiple: 20.0x;
Target Price: Rs 620
Long Term Analysis
Scenarios
Group P/Es
Source: Company Data, Jefferies estimates
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
[Cipla Ltd]
Buy: INR 740 Price Target
Healthcare
Target | Estimate Change
13 January 2015
page 20 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
Long Term Financial Model Drivers
LT Earnings CAGR 10%
Organic Revenue Growth 12%
Operating Margin Expansion -100bps
Other Considerations
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
Target Investment Thesis
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
Adjusted currency to 3Q15 average
(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%
2017 EPS: 175; Target Multiple: 19.5x;
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%
2017 EPS: 160; Target Multiple: 17.5x;
Target Price: Rs2800
Long Term Analysis
Scenarios
Group P/Es vs Growth
Source: Company Data, Jefferies estimates
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
Dr Reddy’s Labs Ltd
Hold: INR 3100 Price Target
Healthcare
Target | Estimate Change
13 January 2015
page 21 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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.
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Jefferies Franchise Picks
Healthcare
Target | Estimate Change
13 January 2015
page 22 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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)
Healthcare
Target | Estimate Change
13 January 2015
page 23 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
Healthcare
Target | Estimate Change
13 January 2015
page 24 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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%
Healthcare
Target | Estimate Change
13 January 2015
page 25 of 27 , Equity Analyst, +91 22 4224 6113, [email protected] Nahar
Please see important disclosure information on pages 22 - 27 of this report.
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Healthcare
Target | Estimate Change
13 January 2015
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Please see important disclosure information on pages 22 - 27 of this report.
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Healthcare
Target | Estimate Change
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Please see important disclosure information on pages 22 - 27 of this report.