3QCY2012 Result Update | Pharmaceutical

November 9, 2012

Ranbaxy
Performance Highlights
Y/E Dec. (` cr) Net Sales Other Income Operating profit Forex loss/ (gain) & Exceptional items Adjusted Net Profit 3QCY2012 2,651 200 310 (367) 387 2QCY2012 3,174 124 457 966 304 % chg qoq (16.5) 61.4 (32.2) 27.2 3QCY2011 2,023 32 107 341 (124) % chg yoy 31.0 517.7 189.0 -

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 22,906 (1,423) 0.6 578/367 125,043 5 18,684 5,686 RANB.BO RBXY@IN

`542 -

Source: Company, Angel Research

Ranbaxy Laboratories (Ranbaxy) reported a justinline performance in its 3QCY2012 results. While the companys top-line grew 31.0% during the quarter, the OPM came below expectation at 11.7% (13.5% expected). The adjusted net profit still came in at `387cr. We recommend a Neutral stance on the stock. Just- in-line performance: Ranbaxy reported net sales of `2,651cr, up 31.0% yoy, and above our estimate of `2,768cr. The gross margin expanded by 86bp to 60.8%, which along with a lower rise in the staff and other expenditure aided the 6.4% rise in the OPM, which came in at 11.7%. This was lower than our expectation of 13.5% for the quarter. This aided the adjusted net profit to come in at `387cr. Outlook and valuation: The stock is trading at EV/sales of 1.9x CY2013E. While the valuation is attractive in comparison to its peers, given the low profitability in the core business and uncertainty on the USFDA front, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.6 13.5 13.1 9.8

Abs. (%) Sensex Ranbaxy

3m 6.4 8.1

1yr 7.6 14.1

3yr 13.2 30.5

Key financials (Consolidated)

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

CY2010 8,535 16.5 1,086 654.7 35.5 16.9 13.5 21.8 10.1 4.1 2.7 15.7

CY2011E 10,061 17.9 600 (44.7) 14.2 15.1 38.1 14.2 12.9 8.0 2.4 16.0

CY2012E 12,046 19.7 1,572 161.9 37.3 16.0 14.6 45.3 19.2 5.6 1.9 12.1

CY2013E 11,980 (0.5) 1,356 (13.7) 32.1 15.8 16.9 29.7 16.1 4.5 1.9 11.8 Sarabjit Kour Nangra
+91 22 3935 7800 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Ranbaxy | 3QCY2012 Result Update

Exhibit 1: 3QCY2012 performance ( Consolidated )

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

3QCY2012 2,651 200 2,852 1,612 60.8 310 11.7 (16) 82 444 54 3 387 (367) 754 387 9.2

2QCY2012 % chg qoq 3QCY2011 % chg yoy 9MCY2012 9MCY2011 % chg yoy 3,174 124 3,298 2,147 67.6 457 14.4 48 78 454 68 6 380 966 (585) 304 7.2 27.2 1.8 4.3 (2.2) (32.2) (16.5) 61.4 (13.5) (24.9) 2,023 32 2,056 1212 59.9 107 5.3 151 79 (90) 26 7.7 (124) 341 (464) (124) 3.6 111.6 189.0 31.0 38.7 32.9 9,521 297 9,818 6609 69.4 1691 17.8 168 240 1580 260 22.3 1298 (117) 1,415 1,298 30.7 6,218 158 6,376 3917 63.0 626 10.1 216 226 343 122 11.6 209 126 83 209 5.0 1,610.6 519.9 6.1 360.8 112.5 92.5 520.8 170.1 53.1 87.6 54.0 68.7

Exhibit 2: 3QCY2012 Actual vs Angel estimates

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

Actual 2651 310 (16) 54 387

Estimates 2768 373 48 119 357

Variation (%) (4) (17) (132) (55) 8

Top-line performance just-in-line with expectations: Ranbaxy reported net sales of `2,651cr, up 31.0% yoy, just-in-line with our estimate of `2,768cr. Emerging markets contributed US$233mn, accounting for ~49% of total sales. Developed markets recorded US$216mn of sales and contributed by 45% to the total sales for the company. The growth was mainly driven by the US, resulting in the US registering a growth of 60% to end the period at US$167mn, accounting for almost 35% of the overall sales. Amongst other geographies, sales in West European grew by 30% yoy to end at US$44mn. Sales for the quarter in India were US$106mn, a growth of 13% yoy. The East & Europe and CIS region reported sales of US$58mn for the quarter.

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Ranbaxy | 3QCY2012 Result Update

Exhibit 3: Formulations sales trend

4,000 3,500 3,000 2,500 696 482 356 428 482 356 498 3QCY2011 4QCY2011 1QCY2012 2QCY2012 1,967 2,094 1,471 920 3QCY2012 599 482 381 740 500 508 827 554 553

(` cr)

2,000 1,500 1,000 500 0

Source: Company, Angel Research

OPM expands to 11.7%: The gross margin expanded by 86bp to 60.8%, which along with a lower rise in the staff and other expenditure aided the 6.4% rise in the OPM, which came in at 11.7%. This was lower than our expectation of 13.5% during the quarter.

Exhibit 4: OPM trend

30.0 25.0 20.0 25.0 21.6

(%)

15.0 10.0 5.0 0.0 3QCY2011 4QCY2011 1QCY2012 5.3

14.4 11.7

2QCY2012

3QCY2012

Source: Company, Angel Research

Adj. net profit came just-in-line: The OPM expanded, but forex losses during the quarter led the company to report a gain of `367cr. However, adjusted for the forex and exceptional items, the adjusted net profit came in at `387cr (a loss of `124cr in 3QCY2011).

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Ranbaxy | 3QCY2012 Result Update

Exhibit 5: Net profit trend

1,000 800 600 936

(` cr)

428 400 200 0 3QCY2011 (200) (124) 4QCY2011 1QCY2012 2QCY2012 304

387

3QCY2012

Source: Company, Angel Research

Concall takeaways
Ranbaxys current market share in Lipitor is at ~50% with price erosion of 99%. As part of settlement, the company has shared Lipitor revenues with Teva of ~US$85mn. The company has hired consultants for plant assessments; which will finish by year end. The current medical representative strength in the domestic market stands at 7,500 executives and the company is focusing more on the chronic segment. The company has derivatives exposure of US$1.27bn as of 3QCY2012. Capex for CY2012 is to be higher than `600cr.

Investment arguments
US Consent Decree: Road cleared but timelines uncertain: Post the USFDAs adverse action in early CY2009 (AIP invoked on Poanta Sahib facility and import alert issued for Dewas facility), Ranbaxys US sales had been impacted but for the first-to-file (FTF) products. Ranbaxy has signed a consent decree with the USFDA regarding the ongoing Current Good Manufacturing Practices cGMP issues. We note that the consent decree lays out a plan of action as agreed by the two parties to resolve the outstanding issues. However, the timeline regarding the resolution is still unclear. As per Ranbaxys management, the company has taken corrective actions, as per suggestions by a consultant, and has been working closely with the USFDA to resolve the issues. Though the move is positive, the timelines for the same are not clear. We have therefore not factored the same in our estimates. India back in focus: Ranbaxys domestic formulation business has been reporting below-industry average growth rate of 78% since the past few years. The company has now renewed its focus on one of the fastest growing pharmaceutical markets by completely rolling out Project Viraat in 2010 with a
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Ranbaxy | 3QCY2012 Result Update

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

Outlook and valuation

The stock is trading at EV/sales of 1.9x CY2013E. While the valuation is attractive in comparison to its peers, given the low profitability in the core business and uncertainty on the USFDA front, we maintain our Neutral rating on the stock.

Exhibit 6: Key assumptions

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

CY2013E 11.0 19.5 17.9 15.8 (0.1)

11.0 21.7 19.2 16.0 0.1

Exhibit 7: One-year forward EV/Sales

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

(` cr)

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

Source: Company, Angel Research

November 9, 2012

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

Ranbaxy | 3QCY2012 Result Update

Exhibit 8: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Sanofi India* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Neutral Neutral Accumulate Accumulate Neutral Buy Neutral Buy Accumulate Accumulate Neutral Neutral Neutral CMP (`) 69 170 2,193 846 394 1,768 109 1,997 66 427 583 107 542 695 Tgt Price Upside (`) 91 926 419 145 89 485 652 % PE (x) 32.6 9.5 6.5 33.5 33.9 13.7 11.8 7.4 13.5 21.0 19.6 18.8 19.0 9.6 24.2 7.5 11.4 18.8 8.0 16.9 23.7 FY2014E EV/Sales (x) 0.8 1.3 2.7 2.6 3.2 2.8 1.1 4.7 0.9 1.8 2.6 0.8 1.9 4.6 EV/EBITDA (x) 4.9 9.2 17.6 13.3 13.5 13.4 6.3 15.2 6.0 8.7 13.2 5.6 11.8 10.7 FY12-14E CAGR in EPS (%) 14.8 61.1 12.0 18.7 21.2 2.3 26.6 8.7 32.8 30.6 26.5 (1.2) 44.8 0.1 FY2014E RoCE (%) ROE (%) 29.4 10.4 16.1 19.3 18.4 15.1 10.6 38.9 15.5 26.1 22.5 4.8 15.8 26.7 30.0 16.4 17.0 26.6 17.2 20.8 11.0 29.0 17.0 26.0 24.7 7.3 28.9 18.8

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

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

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Ranbaxy | 3QCY2012 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of assoc. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (394) 1,106 (1,500) (565) 0.0 (935) 8 8 (951) (121) (13.2) 817 (193) 1,010 699 69.2 311 14 296 144 4.0 7.1 7.1 1,911 134.0 411 585 25.2 240 1,086 654.7 17.5 35.5 35.5 404.1 1,086 (43.2) 3,772 197 (7.3) 16 600 (44.7) (28.8) 14.2 14.2 (60.0) 1,889 74.0 1,889 302 16.0 1,587 15 1,572 1,572 161.9 13.1 37.3 37.3 161.9 1,714 (9.3) 1,714 343 20.0 1,371 15 1,356 1,356 (13.7) 11.3 32.1 32.1 (13.7) (157.0) (307.5) CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E 7,256 31 7,224 189 7,414 7.2 6,830 3,183 579 1,263 1,806 394 (44.9) 5.5 282 112 (77.5) 1.5 206 (489) 124.3 7,344 15 7,329 268 7,597 2.5 6,885 3,208 513 1,417 1,746 445 12.8 6.1 268 177 58.4 2.4 71 443 54.2 8,551 10,081 15 425 18.0 7,096 3,153 578 1,506 1,858 1,440 223.7 16.9 553 887 400.4 10.4 61 661 34.6 19 126 13.7 8,542 3,353 863 1,639 2,688 1,519 5.5 15.1 394 1,125 26.9 11.2 611 446 41.1 8,535 10,061 8,961 10,187 12,067 21 12,046 214 12,260 20.3 10,120 4,577 818 2,116 2,609 1,926 26.8 16.0 387 1,539 36.8 12.8 64 200 10.6 12,004 24 11,980 214 12,194 -0.5 10,087 4,540 839 2,108 2,600 1,893 (1.7) 15.8 429 1,464 (4.9) 12.2 64 100 5.8

2,322 (2,686)

1,737 (2,883)

1,497 (2,900)

(126.0) (218.5)

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Ranbaxy | 3QCY2012 Result Update

Balance sheet (Consolidated)

Y/E Dec (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets 4,042 1,643 2,399 471 2,091 543 6,510 2,396 819 3,295 4,588 1,922 7,426 4,125 1,727 2,398 623 2,093 541 6,009 1,242 1,086 3,681 4,111 1,897 7,552 4,804 2,157 2,647 382 1,901 498 8,693 3,264 1,631 3,798 4,140 4,553 9,981 5,172 2,468 2,704 264 2,155 98 10,458 3,068 1,773 5,617 8,276 2,183 7,404 5,872 2,855 3,017 264 2,155 98 12,980 4,138 2,120 6,721 9,908 3,072 8,607 6,372 3,283 3,089 264 2,155 98 13,843 5,050 2,108 6,685 9,853 3,989 9,595 210 4,086 4,296 67.5 4,285 (1,223) 7,426 210 4,133 4,343 53.3 3,630 (474) 7,552 211 5,394 5,605 64.7 4,335 (23) 9,981 211 2,658 2,869 81.0 4,491 (38) 7,404 211 3,862 4,073 81.0 4,491 (38) 8,607 211 4,850 5,061 81.0 4,491 (38) 9,595 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

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Ranbaxy | 3QCY2012 Result Update

Cash flow statement (Consolidated) Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Inc./ (Dec.) in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E (1,500) 282 1,250 (489) (136) 386 (568) 303 (489) (755) 3,615 143 (262) (1,169) 2,327 1,958 438 2,396 1,010 268 (1,130) 443 (243) (538) (235) (2) 443 206 1 (655) (168) (822) (1,154) 2,396 1,242 2,322 553 (633) 661 (619) 962 (438) (42) 661 180 27 705 (98) 247 880 2,023 1,242 3,264 (2,686) 394 2,174 446 (196) (760) (250) (400) 446 (204) 0 156 611 768 (196) 3,264 3,068 1,889 387 180 200 (302) 1,954 (700) 200 (500) (368) (16) (384) 1,070 3,068 4,138 1,714 429 (6) 100 (343) 1,694 (500) 100 (400) (368) (15) (383) 911 4,138 5,050

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Ranbaxy | 3QCY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.4 4.8 0.5 5.4 2.5 0.2 0.7 14.4 0.5 0.9 1.8 0.1 0.2 24.0 (0.1) (0.3) 22.9 1.9 89 70 52 35 1.9 91 76 67 4 2.0 82 70 86 40 2.0 80 81 61 7 2.2 73 77 34 (29) 2.0 100 100 35 (32) 2.4 5.8 3.3 10.1 22.1 21.8 12.9 35.4 14.2 19.2 77.6 45.3 16.1 70.1 29.7 1.5 1.3 0.4 2.4 1.3 0.5 10.4 74.8 1.4 10.7 1.2 0.2 12.5 11.2 107.3 1.8 22.1 14.9 0.5 25.7 12.8 84.0 2.8 29.9 1.2 0.1 32.4 12.2 80.0 2.7 26.5 1.1 (0.1) 23.7 102.2 7.1 7.1 13.4 103.3 35.5 35.5 13.4 2.0 133.1 14.2 14.2 23.6 68.0 37.3 37.3 46.4 8.7 96.5 32.1 32.1 42.3 8.7 119.9 5.3 0.0 3.4 62.6 3.3 76.9 40.4 5.2 0.0 3.4 56.6 3.3 14.4 10.5 4.1 0.4 2.7 15.7 2.3 38.1 23.0 8.0 1.1 2.4 16.0 3.3 14.6 11.7 5.6 1.9 1.9 12.1 2.7 16.9 12.8 4.5 0.0 1.9 11.8 2.3 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

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Ranbaxy | 3QCY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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

Ranbaxy No No No No

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

Ratings (Returns):

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

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

Neutral (-5 to 5%)

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