1QCY2012 Result Update | Pharmaceutical

May 11, 2012

Ranbaxy
Performance Highlights
Y/E Dec. (` cr) Net sales Other income Operating profit Forex loss/(gain) Adj. Net profit 1QCY2012 3,695 573 924 (345) 936 4QCY2011 3,738 (3268) 806 3,411 429 118.4 % chg qoq (1.1) 14.6 1QCY2011 2,143 130 365.2 (2) 303 209.1 % chg yoy 72.4 342.0 152.9

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 20,228 0.5 570/367 114,414 5 16,293 4,929 RANB.BO RBXY@IN

`479 12 months

Source: Company, Angel Research

Ranbaxy reported a lower-than-expected performance for 1QCY2012. While the companys top line came in 26.1% below our expectation, the contraction in OPM was more than expected, which aided the adjusted net profit to come in 36.3% lower than our expectation. We recommend Neutral on the stock. Lower-than-expected performance: For 1QCY2012, Ranbaxy reported net sales of `3,695cr, up 72.4% yoy, below our estimate of `5,000cr. Gross margin came just in-line at 75.9%, expanding by 11.0% yoy. However, OPM expanded only by 7.9% to 25.0%, which was lower than our estimate. This was mainly on account of 171.2% yoy rise in other expenditure during the period. This aided the adjusted net profit to grow by 209.1% yoy to `936cr. Outlook and valuation: The stock is trading at EV/Sales (ex. FTF) of 2.7x CY2012E and 2.0x CY2012E. While the valuations are attractive in comparison to its peers, given the low profitability in the core business and uncertainty on the USFDA front, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.7 13.5 12.2 10.6

Abs. (%) Sensex Ranbaxy

3m 8.1

1yr

3yr 39.5

(8.2) (12.3)

0.3 177.2

Key financials (Consolidated)

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

CY2010 8,535 16.5 1,086 654.7 35.5 16.9 13.5 21.8 10.1 3.8 2.7 15.7

CY2011 10,061 17.9 600 (44.7) 14.2 15.1 33.8 14.2 12.9 7.5 2.3 15.2

CY2012E 12,046 19.7 1,506 150.9 35.7 18.0 13.5 43.7 21.6 5.4 1.8 10.1

CY2013E 11,980 (0.5) 1,258 (16.5) 29.8 15.8 16.1 28.1 15.6 4.4 1.8 11.1

Sarabjit Kour Nangra

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

Please refer to important disclosures at the end of this report

Ranbaxy | 1QCY2012 Result Update

Exhibit 1: 1QCY2012 performance

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 Adjusted Net Profit EPS (`)
Source: Company, Angel Research

1QCY2012 3,695 573 4,268 2,803 75.9 924 25.0 19 80 1398 137 14 1246 (345) 936 22.2

4QCY2011 3,738 (3268) 470 2645 70.8 805.8 21.6 273 168 (2903) 75 4.7 (2983) 3,411 428 10.2

% chg qoq (1.1) 809.0 6.0 14.6 (93.2) (52.5) -

1QCY2011 2,143 130 2,273 1391 64.9 365.2 17.0 37 74 384 78 1.6

% chg yoy 72.4 342.0 87.8 102 152.9 (49.6) 8.5 263.8 75.7 309.5 209.1

CY2011 9,958 (3097) 6,861 6,451 64.8 1,415 14.2 611 394 (2686) 197 16 (2900) 3,538 638 15.1

CY2010 8,535 1120 9,655 5,383 63.1 1,414 16.6 61 372 2100 585 18 1497 (198) 1,299 30.8

% chg yoy 16.7 (28.9) 19.8 0.1

6.0 (66.3) (11.7) (50.9)

118.4

304 (2) 303 7.2

Exhibit 2: 1QCY2012 Actual vs. Angel estimates

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

Actual 3,695 924 19 137 936

Estimates 5,000 1,940 29 368 1,470

Variation (%) (26.1) (52.4) (35.7) (62.6) (36.3)

Top-line performance below expectations: Ranbaxy reported net sales of `3,695cr, up 72.4% yoy, 26.1% yoy below our estimate of `5,000cr, for 1QCY2012. Emerging markets contributed US$232mn, accounting for ~32% of total sales. Developed markets recorded US$470mn of sales and contributed 64% to the companys total sales. Growth was mainly driven by Lipitor in the U.S., resulting in U.S. registering growth of 145% to US$416mn, accounting for almost 57% of the overall sales. Adjusted for exclusive opportunities, the companys base business grew by ~7% yoy in 1QCY2012. Amongst other geographies, sales in Europe were flat at US$101mn. Sales in India for the quarter stood at `500.2cr (US$99mn) (1QCY2011 Indian sales were `442.2cr (US$98mn)). Thus, India businesss primary sales growth was 10%+ in rupee terms, impacted by stronger rupee during the quarter. The API segment, Ranbaxys second line of business, reported sales of US$34mn during 1QCY2012.

May 11, 2012

Ranbaxy | 1QCY2012 Result Update

Exhibit 3: Formulations sales trend

4,000 3,500 3,000 2,500 696 482 381 343 436 337 769 1QCY2011 428 482 356 498 2QCY2011 North America
Source: Company, Angel Research

599 500 508

(` cr)

2,000 1,500 1,000 500 0 428 482 356 498 3QCY2011 Europe

1,967

2,094

4QCY2011 India

1QCY2012 RoW

OPM expands to 25.0%: During the quarter, the companys gross margin came just in-line at 75.9%, expanding by 11.0% yoy. However, OPM expanded only by 7.9% to 25.0%, which was lower than our estimate. This was mainly on account of 171.2% yoy rise in other expenditure during the period. Other expenses during the quarter rose mainly on the back of accured expenses and claims recorded by the company towards a portion of profits payable by the company in relation to product sales (estimated to be more than 10% of total expenses for 1QCY2012 and 4QCY2011).

Exhibit 4: OPM trend

30.0 25.0 20.0 21.6 17.0 25.0

(%)

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

Source: Company, Angel Research

Adjusted net profit grows by 209.1% yoy: OPM expansion along with forex gains during the quarter aided the companys reported net profit to come in at `1,246cr vs. `304cr during 1QCY2011. However, adjusted for forex gains and exceptional gains, adjusted net profit of stood at `936cr (`303cr in 1QCY2011), registering growth of 209.1% yoy.

May 11, 2012

Ranbaxy | 1QCY2012 Result Update

Exhibit 5: Net profit trend

1,000 800 600 428 936

(` cr)

400 200 0

303 139

1QCY2011 (200)

2QCY2011

3QCY2011 (124)

4QCY2011

1QCY2012

Source: Company, Angel Research

Concall takeaways
With respect to the filings, Ranbaxy made 53 filings with 20 approvals. For the API segment, the company made 13 filings during 1QCY2012. Ranbaxys current market share in Lipitor stands at ~47%, with price erosion of 60-70%. Ranbaxy has launched Indias first new drug Synriam for the treatment of plasmodium falciparum malaria in adults. Ranbaxy has filed a Consent Decree with USFDA, under which the regulators would visit the plant in 2QCY2012. The company is establishing new manufacturing facilities at Morocco and Malaysia to cater to local demand. The company has derivatives of US$1.5bn as of 1QCY2012. Gross debt and net debt stands at US$815mn and US$44mn, respectively, at the end of 1QCY2012. Capex for CY2012 is expected to be above `600cr.

May 11, 2012

Ranbaxy | 1QCY2012 Result Update

Investment arguments
US Consent Decree: Clears the Road, 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 U.S. sales were impacted, but for FTF products. Ranbaxy has signed a consent decree with the USFDA regarding the ongoing 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 suggested 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 is not clear, so we have not incorporated the same in our estimates. India back in focus: Ranbaxys domestic formulation business has been reporting below-industry average growth rate of 78% from 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 view of establishing a leadership position in the next 23 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, reduce its work force in Europe and transfer its new drug discovery research division to Daiichi. Further, 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 (ex. FTF) of 2.7x CY2012E and 2.0x CY2012E. While the valuations are 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 Sales growth Growth in employee expenses Operating margins Capex (` cr)
Source: Company, Angel Research

CY2013E (0.5) (0.4) 15.8 500

19.7 29.0 18.0 700

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Ranbaxy | 1QCY2012 Result Update

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

Exhibit 8: Recommendation summary

Company Alembic Pharmaceuticals Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Buy Reduce Buy Buy Accumulate Buy Neutral Buy Buy Buy Buy Neutral Accumulate CMP Tgt. price Upside (`) 52 109 2,083 766 319 1,662 42 2,049 460 358 517 161 479 570 (`) 91 175 1,937 953 379 1,859 92 665 443 646 270 635 76.0 60.3 (7.0) 24.4 18.8 11.9 119.0 44.5 23.8 25.1 68.2 11.5 5.7 6.2 20.0 16.1 16.8 17.9 3.2 24.9 6.9 8.8 16.0 4.2 16.1 20.9 FY2014E 0.7 0.5 2.6 2.1 2.9 2.5 0.7 5.1 0.9 1.4 2.1 0.9 1.8 5.7 4.7 3.7 16.6 10.9 13.5 11.8 4.1 16.4 6.0 6.4 10.8 4.6 11.1 12.6 FY12-14E 14.6 4.7 5.6 22.3 13.5 2.3 38.9 8.7 25.1 23.5 29.1 50.0 44.8 8.3 FY2014E 29.4 10.1 16.1 23.0 15.2 18.9 8.9 38.9 13.8 27.3 28.0 10.7 15.6 24.0 29.2 14.0 17.0 27.5 16.8 21.0 10.1 29.0 16.9 27.7 25.2 18.0 28.1 20.8 % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

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

May 11, 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
1x 2x 3x 4x

Ranbaxy | 1QCY2012 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 asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (394) (157.0) 1,106 (1,500) (565) 0.0 (935) 8 8 (951) (121) (126.0) (13.2) 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 2,322 585 25.2 1,737 240 1,497 1,086 654.7 17.5 35.5 35.5 404.1 1,086 (43.2) 3,772 (2,686) 197 (7.3) (2,883) 16 (2,900) 600 (44.7) (28.8) 14.2 14.2 (60.0) 1,975 81.9 1,975 454 23.0 1,521 15 1,506 1,506 150.9 12.5 35.7 35.7 150.9 1,653 (16.3) 1,653 380 23.0 1,273 15 1,258 1,258 (16.5) 10.5 29.8 29.8 (16.5) 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 15 8,535 425 8,961 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 10,081 19 10,061 126 10,187 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 12,067 21 12,046 214 12,260 20.3 9,879 4,336 818 2,116 2,609 2,167 42.6 18.0 442 1,725 53.3 14.3 64 100 5.1 12,004 24 11,980 214 12,194 (0.5) 10,087 4,540 839 2,108 2,600 1,893 (12.6) 15.8 490 1,403 (18.7) 11.7 64 100 6.0

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Ranbaxy | 1QCY2012 Result Update

Balance sheet (Consolidated)

Y/E Dec. (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets 4,042 1,643 2,399 471 2,091 543 6,510 2,396 819 3,295 4,588 1,922 7,426 4,125 1,727 2,398 623 2,093 541 6,009 1,242 1,086 3,681 4,111 1,897 7,552 4,804 2,157 2,647 382 1,901 498 8,693 3,264 1,631 3,798 4,140 4,553 9,981 5,172 2,468 2,704 264 2,155 98 10,458 3,068 1,773 5,617 8,276 2,183 7,404 5,872 2,910 2,962 264 2,155 98 12,984 4,143 2,120 6,721 9,908 3,077 8,556 6,372 3,399 2,972 264 2,155 98 13,825 5,032 2,108 6,685 9,853 3,972 9,462 210 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 3,811 4,022 81.0 4,491 (38) 8,556 211 4,717 4,928 81.0 4,491 (38) 9,462 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

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Ranbaxy | 1QCY2012 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 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 1,975 442 180 100 (454) 2,043 (700) 100 (600) (352) (16) (368) 1,075 3,068 4,143 1,653 490 (6) 100 (380) 1,657 (500) 100 (400) (352) (15) (367) 889 4,143 5,032

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Ranbaxy | 1QCY2012 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 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 26.9 (0.1) (0.3) 21.9 2.4 5.8 3.3 10.1 22.1 21.8 12.9 35.4 14.2 21.6 88.2 43.7 15.6 70.1 28.1 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 14.3 77.0 2.8 30.9 1.1 0.1 33.5 11.7 77.0 2.8 24.9 1.1 (0.1) 22.3 102.2 7.1 7.1 13.4 103.3 35.5 35.5 48.7 2.0 133.1 14.2 14.2 36.8 5.9 68.0 35.7 35.7 60.7 10.6 95.3 29.8 29.8 41.4 8.3 116.8 4.7 0.0 3.1 56.0 3.0 68.1 35.8 4.6 0.0 3.1 50.7 3.0 14.4 10.5 3.6 0.4 2.7 15.7 2.3 33.8 13.0 7.1 1.2 2.2 14.3 2.9 13.5 7.9 5.0 2.2 1.7 9.5 2.4 16.1 11.6 4.1 0.0 1.6 10.4 2.1 CY2008 CY2009 CY2010 CY2011 CY2012E CY2013E

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 35 (29)

2.0 100 100 35 (32)

May 11, 2012

10

Ranbaxy | 1QCY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make Source: such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

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

Ranbaxy No No No No

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

Ratings (Returns):

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

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

Neutral (-5 to 5%)

May 11, 2012

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