1QCY2013 Result Update | Pharmaceutical

May 9, 2013

Ranbaxy
Performance Highlights
Y/E Dec. (` cr) Net Sales Other Income Operating profit Forex loss/ (gain) & Exceptional items Adjusted Net Profit
Source: Company, Angel Research

NEUTRAL
CMP Target Price
% chg qoq 1QCY2012 (8.6) 5.2 53.9 3,709 262 923 (311) 936 % chg yoy (34.2) (53.0) (89.6) (95.1)

`438 -

1QCY2013 4QCY2012 2,440 123 96 (79) 46 2,671 117 63 416 (154)

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 18,542 (1,287) 0.7 578/371 112,974 5 19,939 6,050 RANB.BO RBXY@IN

Ranbaxy Laboratories (Ranbaxy) reported a below expectation result during 1QCY2013. While the companys top-line de-grew by 34.2% during the quarter, the OPM came much below expectation at 4.0% (10.0% expected). The adjusted net income came in at `46cr. While the operating performance of the company continues to be impacted and the Management is confident on improving the operating performance, there is no clarity on the consent decree. So while the valuations have become attractive on EV/sales basis, we would wait for a few more quarters before we review the stock. So, as of now we remain Neutral on the stock. Lower than expected performance: Ranbaxy reported net sales of `2,440cr, down 34.2% yoy, and below our estimate of `2,850cr. The gross margin declined by 14.0% to 63.2%, which aided the OPM to come in at 4.0% (including the forex losses), much lower than 24.9% in 1QCY2012. This was lower than our expectation of 10.0% for the quarter. This aided the adjusted net loss to be at `46cr. Outlook and valuation: The stock is trading at an attractive valuations of EV/sales of 1.3x CY2014E. While the valuation is very 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 63.5 13.1 13.3 10.1

Abs. (%) Sensex Ranbaxy

3m 2.3 2.2

1yr 21.0 (14.5)

3yr 18.9 (2.5)

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

CY2011 10,061 17.9 638 (44.7) 15.1 15.1 29.0 15.1 12.9 6.4 1.6 10.3

CY2012 12,253 21.8 1,096 71.9 25.9 14.1 16.9 31.5 21.4 4.5 1.2 8.2

CY2013E 11,400 (7.0) 739 (32.6) 17.5 10.5 25.1 17.0 10.6 4.0 1.4 13.6

CY2014E 12,060 5.8 952 28.8 22.5 12.5 19.4 19.1 13.1 3.5 1.3 10.4

Sarabjit Kour Nangra

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

Please refer to important disclosures at the end of this report

Ranbaxy | 1QCY2013 Result Update

Exhibit 1: 1QCY2013 performance ( Consolidated )

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

1QCY2013 2,440 123 2,563 1,542 63.2 96 4.0 53 80 87 35 (6) 46 (79) 125 46 1.1

4QCY2012 2,671 117 2,788 1,516 56.8 63 2.3 136 80 (36) 34 (6) (76) 416 (493) (154) -

% chg qoq (9) 5 (8) 2 54 (1) (340)

1QCY2012 3,709 262 3,971 2,864 77.2 923 24.9 19 80 1087 137 13.9

% chg yoy (34.2) (53.0) (35.5) (46.2) (89.6) (0.3) (74.3) -

CY2012 12,253 480 12,733 8,193 66.9 2796 22.8 304 320 2652 294 28.2 2330 1,407 923

CY2011 9,970 442 10,412 6,636 66.6 1440 14.4 306 394 1182 197 16.3 968 3,831 (2,862) 638 15.1

% chg yoy 23 9 22 23 94

(19) 124 49 141 (132) 72

936 (311) 1,246

936 22.2

1,096 26.0

Exhibit 2: 1QCY2013 Actual vs Angel estimates

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

Actual 2440 96 53 35 46

Estimates 2850 118 14 14 202

Variation (%) (14) (18) 287 148 (77)

Top-line performance below expectations: Ranbaxy reported net sales of `2,440cr, down 34.2% yoy, below our expectations of `2,850cr. The decline in the business was on account of the base impact, wherein the company had posted sales on back of exclusivities. On a like-to-like basis, the company posted a sales growth of 10% yoy. In the US, the company posted sales of `689cr. Amongst other geographies, sales in Western Europe were at `208cr, a dip of 18% yoy. Sales for the quarter in India were `543cr, a growth of 11% yoy. The East & Europe and CIS region reported sales of `360cr for the quarter, registering a growth of 15% yoy.

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Ranbaxy | 1QCY2013 Result Update

Exhibit 3: Formulations sales trend

4,000 3,500 3,000 2,500 696 482 356 599 482 356 740 482 381 1,967 2,094 1,471 920 1QCY2012 2QCY2012 3QCY2012 4QCY2012 851 1QCY2013 827 500 508 461 554 553

(` cr)

2,000 1,500 1,000 500 0

Source: Company, Angel Research

OPM contracts to 4.0%: The gross margin declined by 14.0% to 63.2%, which aided the OPM to come in at 4.0% (including forex losses), much lower than 24.9% in 1QCY2012. This was lower than our expectation of 10.0% for the quarter.

Exhibit 4: OPM trend

30.0 25.0 20.0 24.9

(%)

15.0 10.0 5.0

14.4 11.7

2.3 0.0 1QCY2012 2QCY2012 3QCY2012 4QCY2012

4.0 1QCY2013

Source: Company, Angel Research

Adj. net profit below expectations: The OPM contraction and forex losses during the quarter led the company to report an income of `125cr. However, adjusted for the forex and exceptional items, the adjusted net income came in at `46cr (a profit of `936cr in 1QCY2012).

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Ranbaxy | 1QCY2013 Result Update

Exhibit 5: Net profit trend

1,050 900 750 600 936

(` cr)

450 300 150 0 (150) (300) 1QCY2012

304

319

46 2QCY2012 3QCY2012 4QCY2012 (154) 1QCY2013

Source: Company, Angel Research

Concall takeaways

Expects to achieve EBDITA margins near to that of the pharma industry in the next 3-4 years. Company filed 5 FTFs in the current year with a market potential of US$4.3bn. Ranbaxy expects margins to improve every six months, driven by new launches and an increase in volumes. It targets to be among the top Indian companies by 2015. According to the Management, excluding one-off expenses and consent decree remediation expenses, the OPM for the quarter was 9-9.8%. The company has hired consultants for plant assessments and as per the current assessment, the company itself is not clear when the resolution is expected. The company has derivatives exposure of US$962bn as of 1QCY2013. Debt of the US business is at $167mn.

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

May 9, 2013

Ranbaxy | 1QCY2013 Result Update

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 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 1.3x CY2014E. 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

CY2013E Domestic sales growth Export sales growth Operating margins Debt:Equity
Source: Company, Angel Research

CY2014E 11.0 4.0 12.5 (0.6)

11.0 (12.0) 10.5 (0.5)

Exhibit 7: One-year forward EV/Sales

60,000 50,000 40,000

(` cr)

30,000 20,000 10,000 0

Source: Company, Angel Research

May 9, 2013

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 Jan-13 Apr-13
1x 2x 3x 4x

Ranbaxy | 1QCY2013 Result Update

Exhibit 8: Recommendation summary

Company Alembic Pharma. Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco Accum. Buy Buy. Neutral Buy Neutral Buy Buy Buy Neutral Neutral Neutral CMP (`) 121 189 777 400 1,986 73 2,314 65 559 725 438 2,538 948 Aurobindo Pharma Buy Tgt Price (`) 139 264 962 463 206 90 676 877 Upside % 14.8 39.7 23.8 15.8 182.2 38.5 20.9 20.9 PE (x) 8.7 9.8 16.2 17.3 19.1 3.5 27.8 7.2 12.1 17.4 19.4 25.6 26.7 FY2015E EV/Sales (x) 1.1 1.1 1.9 2.8 2.8 0.8 5.4 0.8 1.8 2.3 1.3 2.5 5.5 EV/EBITDA (x) 6.0 6.6 10.8 12.0 13.3 4.0 18.9 5.5 8.4 10.7 10.4 15.1 12.8 FY12-15E CAGR in EPS (%) 26.1 58.2 14.8 17.6 5.4 47.9 4.8 21.5 30.6 29.1 (6.8) 13.4 0.2 FY2015E RoCE (%) 34.0 12.0 18.5 17.4 15.3 12.0 36.1 14.6 26.0 28.5 13.1 15.9 27.0 ROE (%) 34.7 18.0 24.7 16..2 19.6 13.7 31.0 15.8 25.3 24.8 19.1 16.7 19.3

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 | 1QCY2013 Result Update

Profit & Loss Statement (Consolidated)

Y/E Dec (` 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 817 (307.5) (193) 1,010 699 69.2 311 14 296 144 (218.5) 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) 16 638 (44.7) (28.8) 15.1 15.1 (60.0) 1,587 46.2 342.0 1,245 294 23.6 951 19 10 923 1,096 71.9 7.5 25.9 25.9 71.5 992 (37.5) 992 238 24.0 754 15 739 739 (32.6) 6.5 17.5 17.5 (32.6) 1,273 28.3 1,273 305 24.0 967 15 952 952 28.8 7.9 22.5 22.5 28.8 CY09 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 CY10 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 CY11 19 126 13.7 3,353 863 1,639 2,688 1,519 5.5 15.1 394 1,125 26.9 11.2 611 446 41.1 CY12 21 207 22.3 4,060 818 1,928 3,716 1,731 13.9 14.1 320 1,411 25.4 11.5 304 273 17.2 CY13E 11,424 24 11,400 207 11,607 (6.8) 10,203 4,321 798 2,234 2,850 1,197 (30.8) 10.5 381 816 (42.2) 7.2 304 273 27.5 CY14E 12,084 24 12,060 207 12,267 5.7 10,553 4,571 844 2,123 3,015 1,508 25.9 12.5 411 1,096 34.4 9.1 304 273 21.5 8,551 10,081 12,274 8,535 10,061 12,253 8,961 10,187 12,460 8,542 10,522

2,322 (2,686)

1,737 (2,883)

1,497 (2,900)

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Ranbaxy | 1QCY2013 Result Update

Balance sheet (Consolidated)

Y/E Dec. (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Long Term Loans Other Long term liabilities Long term Provisions Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long term loan & Adv. Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets 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 9,982 5,623 2,468 3,155 264 1,638 98 1,005 9,514 3,068 1,773 4,673 9,930 (417) 5,744 6,100 2,788 3,312 264 1,639 79 1,081 10,040 4,600 2,157 6,837 8,965 1,075 7,451 6,600 3,169 3,431 264 1,639 79 1,081 10,856 2,488 2,006 6,361 9,377 1,479 7,974 7,100 3,580 3,520 264 1,639 79 1,081 12,046 3,194 2,123 6,729 9,919 2,127 8,711 3,630 (474) 7,552 4,335 (23) 9,982 210 4,133 4,343 53.3 211 5,394 5,605 64.7 211 2,658 2,869 81.0 975 1,610 246 (38) 5,744 211 3,873 4,084 89.0 1,971 1,051 291 (36) 7,451 211 4,396 4,608 89.0 1,971 1,051 291 (36) 7,974 211 5,132 5,344 89.0 1,971 1,051 291 (36) 8,711 CY09 CY10 CY11 CY12 CY13E CY14E

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Ranbaxy | 1QCY2013 Result Update

Cash flow statement (Consolidated)

Y/E Dec (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations Inc./ (Dec.) in Fixed Assets Inc./ (Dec.) in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances CY09 1,010 268 (1,130) 443 (243) (538) (235) (2) 443 206 1 (655) (168) (822) (1,154) 2,396 1,242 CY10 2,322 553 (633) 661 (619) 962 (438) (42) 661 180 27 705 (98) 247 880 2,023 1,242 3,264 CY11 (2,686) 394 3,768 446 (196) 834 (701) (400) 446 (655) 0 (4,088) 3,713 (375) (196) 3,264 3,068 CY12 1,245 320 (3,513) 273 (294) (2,515) (477) (19) 273 (223) 0 482 3,788 4,270 1,532 3,068 4,600 CY13E 992 381 1,037 273 (238) 1,899 (500) 273 (227) (216) (3,569) (3,785) (2,112) 4,600 2,488 CY14E 1,273 411 58 273 (305) 1,164 (500) 273 (227) (216) (15) (231) 706 2,488 3,194

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Ranbaxy | 1QCY2013 Result Update

Key ratios
Y/E Dec. Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Int. Coverage (EBIT / Int.) 0.5 5.4 2.5 0.2 0.7 14.4 (1.0) (1.9) 1.8 (1.1) (2.5) 4.6 (0.5) (1.8) 2.7 (0.5) (1.9) 3.6 1.9 91 76 67 4 2.0 82 70 86 40 2.0 80 81 61 7 2.1 72 76 33 (103) 1.8 104 104 34 (71) 1.8 97 97 33 (31) 2.4 5.8 3.3 10.1 22.1 21.8 12.9 35.4 15.1 21.4 164.0 31.5 10.6 36.0 17.0 13.1 30.5 19.1 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 28.6 (1.0) 25.7 11.5 76.4 4.5 39.7 86.3 (1.1) 88.9 7.2 76.0 2.8 15.1 79.3 (0.5) 45.7 9.1 76.0 2.2 15.4 79.3 (0.5) 50.1 7.1 7.1 13.4 103.3 35.5 35.5 13.4 2.0 133.1 15.1 15.1 24.5 68.0 25.9 25.9 33.5 96.6 17.5 17.5 26.5 5.1 108.9 22.5 22.5 32.2 5.1 126.4 62.1 32.6 4.2 0.0 2.8 46.8 2.8 14.4 10.5 3.3 0.5 2.7 15.7 2.3 29.0 17.9 6.4 1.3 1.6 10.3 2.7 16.9 13.1 4.5 2.4 1.2 8.2 1.9 25.1 16.5 4.0 0.0 1.4 13.6 2.0 19.4 13.6 3.5 0.0 1.3 10.4 1.8 CY09 CY10 CY11 CY12 CY13E CY14E

May 9, 2013

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Ranbaxy | 1QCY2013 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%)

May 9, 2013

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