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Slow transformation expected


We maintain Buy rating on Cipla with a revised target price of Rs480 (earlier
Rs540) based on 22xFY16E EPS of Rs21.7. Ciplas Q4FY14 results were below our
expectations. The companys revenues for the quarter grew by 27%YoY, EBIDTA
margin declined by 530bps to 16.2% and net profit declined by 6%YoY. Cipla is
currently undergoing transformation and the results are likely to fructify over
future quarters. The company has strengthened its senior management team,
enhanced R & D activities, filed own dossiers in the US and established front end
marketing in the US and other countries. All these initiatives are likely to bear
fruit. Key risks to our assumptions include slowdown in global generic business
and regulatory risks for its manufacturing facilities.
Export driven growth: Cipla reported 27%YoY growth in revenues to Rs25.20bn
from Rs19.79bn due to strong growth in formulation exports. The companys
formulation exports (51% of revenues) grew by 30%YoY to Rs12.82bn from
Rs9.81bn due to good growth across geographies. Ciplas domestic formulations
(36% of revenues) grew by 19%YoY to Rs9.08bn from Rs7.61bn despite the NPPP
effect and trade related issues. The company has settled the margin issue with
traders by offering higher margins, which is reflected in sales growth.
EBIDTA margin likely to improve: Ciplas EBIDTA margin declined by 530bpsYoY
to 16.2% from 21.5% due to increase in material and personnel costs. Material cost
increased by 390bps to 39.8% from 35.9% due to higher sales of ARV products.
Personnel cost went up by 310bps to 17.0% from 13.9% due to several senior level
recruitments. Other expenses declined by 180bps to 26.9% from 28.7% due to
manufacturing cost efficiencies. We expect EBIDTA margin to improve going ahead
on the success of various initiatives.
Net profit declines by 6%: The companys net profit declined 6%YoY to Rs2.61bn
from Rs2.77bn due to 530bps drop in EBIDTA margin. Ciplas tax provision was at
21.7% against 27.1% due to its thrust on R & D. Though net profit declined in the
quarter, we expect it to improve on the completion of various projects under R & D
and other export initiatives. Cipla has filed over 1,000 ANDAs globally in the past
one year and has commenced marketing its own products in the US. The company
has plans to launch 2-3 inhalers in Europe by end of FY15.
Recommendation and key risks: At the CMP of Rs372 Cipla trades at 20.6x FY15E
EPS of Rs18.0 and 17.2x FY16E EPS of Rs21.7 and 13.9x FY17E EPS of Rs26.7. We
have revised our FY15 and FY16 EPS estimates downwards by 12% each. We
maintain Buy rating on the scrip with revised target price of Rs480 based on 22x
FY16E EPS of Rs21.7 with an upside of 29% from CMP. Key risks to our assumptions
include slowdown in global generic business and regulatory risks for its
manufacturing facilities catering to global markets.
Y/E Mar (Rs mn) (Cons.) Q4FY14 Q4FY13 YoY Gr% Q3FY14 QoQ Gr% Q4FY14E % Var.
Total income 25,195 19786 27.3 25,808 (2.4) 27,020 (6.8)
Total Expenditure 21,102 15,529 35.9 21,135 (0.2) 21,760 (3.0)
EBIDTA 4,093 4,258 (3.9) 4,673 (12.4) 5,260 (22.2)
Other income 775 566 37.1 524 47.9 580 33.7
PBDIT 4,868 4,823 0.9 5,197 (6.3) 5,840 (16.6)
Depreciation 1050 851 23.4 912 15.1 930 12.9
Interest 341 188 81.6 333 2.4 350 (2.5)
PBT 3,477 3,785 (8.1) 3,952 (12.0) 4,560 (23.8)
Prov. For tax 753 1027 (26.7) 987 (23.7) 1,150 (34.5)
PAT 2,724 2,758 (1.2) 2,965 (8.1) 3,410 (20.1)
Source: Company, Centrum Research Estimates

Target Price Rs480 Key Data
CMP* Rs372 Bloomberg Code CIPLA IN
Upside 29.0% Curr Shares O/S (mn) 802.9
Previous Target Rs540 Diluted Shares O/S(mn) 802.9
Previous Rating Buy Mkt Cap (Rsbn/USDbn) 299/5.1
Price Performance (%)* 52 Wk H / L (Rs) 450.4/364
1M 6M 1Yr 5 Year H / L (Rs) 450.4/364
CIPLA IN (6.3) (4.8) (2.8) Daily Vol. (3M NSE Avg.) 1675965
Nifty 8.0 17.1 18.1
*as on 29
th
May 2014; Source: Bloomberg, Centrum Research
Shareholding pattern (%)
Mar-14 Dec-13 Sept-13 June-13
Promoter 36.8 36.8 36.8 36.8
FIIs 23.3 23.8 23.8 23.1
DIIs 11.4 10.6 10.9 10.8
Others 28.5 28.8 28.5 29.3
Source: BSE, as on 29th May 2014
Trend in EBIDTA margin (%)

Source: Company, Centrum Research
Earning Revision
Particulars
(Rs mn)
FY15E FY16E
New Old Chg (%) New Old Chg (%)
Sales 1,17,226 1,20,362 (2.6) 1,36,800 1,40,674 (2.8)
EBITDA 24,485 26,754 (8.5) 29,376 31,850 (7.8)
EBITDA Margin (%) 20.9 22.2 (170)bps 21.5 22.6 (110)bps
PAT-adj. 14,488 16,457 (12.0) 17,408 19,683 (11.6)
Source: Centrum Research
Centrum vs. Bloomberg Consensus*
Particulars
(Rs mn)
FY15E FY16E
Centrum BBG Var (%) Centrum BBG Var (%)
Sales 117,226 116,220 0.9 136,800 134,228 1.9
EBITDA 24,485 24,616 (0.5) 29,376 29,094 1.0
PAT 14,488 15,954 (9.2) 17,408 18,863 (7.7)
*as on 29
th
May 2014; Source: Bloomberg, Centrum Research

Bloomberg Consensus*
Centrum
Target
Price
(Rs)
Variance
(%)
BUY SELL HOLD
Target Price
(Rs)
25 7 18 429 480 12.0
Source: Bloomberg, Centrum Research Estimates



Ranjit Kapadia, ranjit kapadia@centrum.co.in; 91 22 4215 9645









Y/E March (Rs mn) Revenue YoY (%) EBITDA EBITDA (%) Net profit YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)
FY13 82,793 17.9 21,978 26.5 15,447 35.0 18.7 18.5 16.9 19.8 14.0
FY14* 101,004 22.0 21,330 21.1 13,885 (10.1) 17.3 14.6 13.9 21.5 14.5
FY15E* 117,226 16.1 24,485 20.9 14,488 4.3 18.0 13.5 13.0 20.6 12.6
FY16E* 136,800 16.7 29,376 21.5 17,408 20.2 21.7 14.4 13.9 17.2 10.5
FY17E* 161,911 18.4 35,853 22.1 21,450 23.2 26.7 15.6 15.0 13.9 8.6
Source: Company, Centrum Research Estimates, * Consolidated
21.5
27.8
22.5
18.1
16.2
0
5
10
15
20
25
30
Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14
Pharma
Buy
Result Update 31 May 2014
INDIA
Cipla


2
Cipla
Concall highlights
Global growth initiatives
The management indicated that it had a two pronged strategy for the US market of setting up on
its own and continuing with partners.
Cipla has achieved good growth of 29% in API business due to key respiratory launches.
The company has filed 16 ANDAs with US FDA in FY14. It has 84 approved ANDAs of which 40
products have been launched. Its 34 ANDAs are pending approval.
The management indicated that 85% of the R & D projects were on track.
The company has established front end marketing with its own sales force in Europe and has
diversified product portfolio.
Management said the company had established its own front end in Croatia and launched a
combination inhaler.
The company has plans to launch 2-3 combination inhalers in Europe in FY15, which would be
substitutable. These inhalers have potential market size of 1bn euro.
The management expects margin improvement for S. African business from FY15 onwards.
The management expects momentum in the US market after 2-3 years with own filings.
Management initiatives
The company has given a thrust to R & D and plans to spend 6-7% on R & D in FY15 and FY16.
Currently, there are 300 projects at various stages of completion.
The management indicated that the company has plans to launch products in oncology,
ophthalmology, complex molecules and respiratory segments.
Cipla has centralised quality function across the whole organisation.
The management indicated that the company planned to launch 15-20 products in the US in
FY15.
India affected by NPPP
The management said new product launches contributed double in Q4FY14 on YoY basis.
Cipla has achieved 17% domestic growth in FY14 despite NPPP and trade related issues. The
growth was in respiratory, anti-infective and cardiac therapies.
The company has launched anti-HIV drug of MSD in the domestic market under in-licensing
arrangement.
Cipla has increased the prices of NLEM products by 6.3% in April14.
Financials
The management has guided for mid-teen growth in revenues and EBIDTA margin of 21.0% in
FY15.
Cipla has hedges of $270mn (Rs16.2bn) currently. The company had forex gain of Rs400mn in
Q4FY14.
Cipla Medpro had Rs13.0bn in revenues in FY14.
The management indicated the capex of Rs5.00bn for FY15 of which Rs1.0bn would be spill over
of FY14.





3
Cipla
Sales composition
For Q4FY14, Cipla reported 27%YoY growth in revenues to Rs25.19bn from Rs19.79bn. The companys
domestic business (36% of revenues) grew by 19%YoY to Rs9.08bn from Rs7.61bn due to good growth
in respiratory, anti-infective and CVS segments. Ciplas exports (60% of revenues) grew by 32% to
Rs15.21bn from Rs11.56bn due to good growth in ARV, anti-asthma and anti-allergic segments. Ciplas
other operating income grew by 46%YoY to Rs902mn from Rs617mn due to increase in export
incentives.
The details are as follows:
Exhibit 1: Sales composition
PARTICULARS
(Rs mn)
Q4FY14 Q4FY13 YoY Q3FY14 QoQ Q4FY14E % Var.
Mar'14 Mar'13 Gr % Dec'13 Gr % Mar'14
Domestic 9,080 7,610 19.3 10,440 (13.0) 10600 (14.3)
Exports-total 15,210 11,560 31.6 15,086 0.8 16100 (5.5)
Other op. income 902 617 46.2 282 219.9 320 181.9
Total income 25,192 19,787 27.3 25,808 (2.4) 27,020 (6.8)
Exports -as % of total income 60.4 58.4

58.5

59.6

Source: Company, Centrum Research
Performance of major brands
As per AIOCD AWACS MAT-Mar14, Cipla grew at 9.2% against the industry growth of 6.2%. Four of its
brands grew faster than the market growth of 6.2%. These were Foracort 11.6%, Budecort 21.3%,
Duolin 12.3% and Azee 27.9%. We expect these brands to drive future growth.
Ciplas top 10 brands contributed 26% to the companys domestic revenues.
The details are shown in the following table:
Exhibit 2: Performance of major brands

Source: AIOCD AWACS-March'14
Earnings revision
Based on the above results, we have revised our consolidated EPS estimates for FY15 and FY16
downwards by 12% each.
Exhibit 3: Earning Revision
Particulars
FY15E FY16E
Current Earlier Chg(%) Current Earlier Chg(%)
Sales 1,17,226 1,20,362 (2.6) 1,36,800 1,40,674 (2.8)
EBIDTA 24,485 26,754 (8.5) 29,376 31,850 (7.8)
EBIDTA margin (%) 20.9 22.2 (170)bps 21.5 22.6 (110)bps
Net profit 14,488 16,457 (12.0) 17,408 19,683 (11.6)
Source: Centrum Research
At the CMP of Rs372 Cipla trades at 20.6x FY15E EPS of Rs18.0 and 17.2x FY16E EPS of Rs21.7 and 13.9x
FY17E EPS of Rs26.7. We maintain Buy rating on the scrip with a revised target price of Rs480 based on
22x FY16E EPS of Rs21.7 with an upside of 29% from the CMP. Key risks to our assumptions include
slowdown in global generic business and regulatory risks for its manufacturing facilities catering to
global markets.
Products (Top 10 by
revenues)
Therapeutic
Category
MAT
(Rs mn)
Gr. Rate
%
Company

35,310 9.2
Asthalin Antiasthmatic 1,461 0.6
Foracort Antiasthmatic 1,380 11.6
Seroflo Antiasthmatic 1,181 (0.5)
Budecort Antiasthmatic 977 21.3
Aerocort Antiasthmatic 913 0.5
Duolin Antiasthmatic 858 12.3
Novamox Antiinfective 674 (4.0)
Ciplox Antiinfective 629 (0.5)
Amlopres-AT Cardiovascular 559 1.3
Azee Antiinfective 557 27.9
Total

9,189



4
Cipla
Valuation & key risks
Exhibit 4: Sensitivity Analysis
Sensitivity to key variables FY15E % change % impact on EBITDA % impact on EPS
Sales 1 4.9 8.2
Material cost 1 (1.8) (3.1)
Source: Company, Centrum Research Estimates
Exhibit 5: 1 year forward EV/EBITDA chart Exhibit 6: 1 year forward P/E chart

Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates
Exhibit 7: Comparative Valuations
Sector
Mkt Cap
(Rs mn)
CAGR FY14-FY16E (%) EBITDA Margin (%) PE (x) EV/EBITDA (x) RoE (%) Div Yield (%)
Rev. EBITDA PAT FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E
Cipla
298,679 16.4 17.4 12.0 21.1 20.9 21.5 21.5 20.6 17.2 14.5 12.6 10.5 14.6 13.5 14.4 0.5 0.7 0.8
Aurobindo
185,367 33.8 24.3 32.1 25.8 20.8 22.2 16.7 12.1 9.6 10.4 8.4 6.3 35.4 35.1 32.2 0.3 0.4 0.5
Dr. Reddy's Labs
405,757 14.8 16.4 11.4 23.4 23.9 24.1 18.9 17.7 15.2 13.9 11.8 9.9 26.2 22.9 22.4 0.8 1.0 1.3
Lupin
413,069 19.7 22.6 23.5 26.6 27.2 27.9 22.6 18.4 14.8 13.9 11.3 9.2 30.1 28.5 27.5 0.7 0.8 0.9
Source: Company, Centrum Research Prices as on 29
th
May 2014


















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5
Cipla
Quarterly financials, Operating Metrics and Key Performance Indicators
Exhibit 8: Quarterly Financials -consolidated
PARTICULARS (Rs mn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14
P & L



Revenues 22,158 21,107 19,786 24,877 25,124 25,808 25,195
Material cost 7,512 7,820 7,098 9,257 9,466 9,991 10,035
Personnel cexpenses 2,616 2,751 2,746 3,293 3,829 4,028 4,279
Other Expenses 5,016 5,332 5,685 5,404 6,187 7,116 6,788
Total Expenses 15,144 15,903 15,529 17,954 19,482 21,135 21,102
EBIDTA 7,014 5,204 4,258 6,923 5,642 4,673 4,093
Other income 646 509 566 671 683 524 775
PBDIT 7660 5713 4823 7594 6325 5197 4868
Interest 45 79 188 407 377 333 341
Depreciation 808 849 851 850 914 912 1050
Profit before tax 6,807 4,785 3,785 6,337 5,034 3,952 3,477
Tax provision 1945 1270 1027 1536 1358 987 753
Net profit before minority 4,862 3,515 2,758 4,801 3,676 2,965 2,724
Minority int., share of asso. 18 (114) 7 52 (96) (122) (117)
Net profit after minority 4,880 3,401 2,765 4,853 3,580 2,843 2,607
Growth (%)
Revenues NA NA NA NA 13.4 22.3 27.3
EBIDTA NA NA NA NA (19.6) (10.2) (3.9)
Net profit NA NA NA NA (24.4) (15.6) (1.2)
Margin (%)
EBIDTA 31.7 24.7 21.5 27.8 22.5 18.1 16.2
Profit before tax 30.7 22.7 19.1 25.5 20.0 15.3 13.8
Net margin 21.9 16.7 13.9 19.3 14.6 11.0 10.3
Source: Company, Centrum Research,
Exhibit 9: Key performance indicators
Key performance indicator- FY13 FY14E FY15E FY16E FY17E
Sales Growth % 17.9 22.0 16.1 16.7 18.4
Material cost % 35.7 38.4 38.2 37.9 37.7
Source: Centrum Research Estimates






6
Cipla
Financials -consolidated
Exhibit 10: Income Statement
Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Net Sales 82,793 101,004 117,226 136,800 161,911
Material cost 29,527 38,748 44,753 51,880 61,100
% of sales 35.7 38.4 38.2 37.9 37.7
Personnel expenses 10,362 15,430 17,700 20,440 23,970
% of sales 12.5 15.3 15.1 14.9 14.8
Other expenses 20,926 25,496 30,289 35,104 40,988
% of sales 25.3 25.2 25.8 25.7 25.3
Operating Expenses 60,815 79,675 92,742 107,424 126,058
% of sales 73.5 78.9 79.1 78.5 77.9
EBIDTA 21,978 21,330 24,485 29,376 35,853
Depreciation 3,305 3,726 4,232 4,708 5,273
EBIT 18,673 17,604 20,253 24,668 30,580
Interest Income/(expenses) (339) (1,457) (1,720) (2,040) (2,260)
PBT from operations 18,334 16,147 18,533 22,628 28,320
Other non operating income 2,221 2,654 2,885 3,110 3,430
PBT 20,555 18,801 21,418 25,738 31,750
-PBT margin (%) 24.8 18.6 18.3 18.8 19.6
Provision for tax 5,444 4,634 6,530 7,850 9,800
Effective tax rate (%) 26.5 24.6 30.5 30.5 30.9
EO items 398.0 - - - -
Minority interest (62) (282) (400) (480) (500)
Net profit 15,447 13,885 14,488 17,408 21,450
Source: Company, Centrum Research Estimates
Exhibit 11: Key Ratios
Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Growth Matrices (%)
Net sales 17.9 22.0 16.1 16.7 18.4
EBIDTA 32.5 -3.0 14.8 20.0 22.0
Adjusted PAT 35.0 -10.1 4.3 20.2 23.2
Profitability Matrices (%)
EBIDTA margin 26.5 21.1 20.9 21.5 22.1
EBIT margin 25.2 20.1 19.7 20.3 21.0
PAT margin 18.7 13.7 12.4 12.7 13.2
Return ratios (%)
ROE 18.5 14.6 13.5 14.4 15.6
ROCE 16.9 13.9 13.0 13.9 15.0
ROIC 17.2 14.2 13.3 14.3 15.6
Turnover Ratios (days)
Inventory 93.4 95.4 95.3 94.6 95.4
Debtors 71.0 59.8 58.6 58.8 57.3
Creditors 69.9 57.9 58.9 60.0 59.3
Solvency Ratio (X)
Debt-equity 0.1 0.1 0.1 0.1 0.1
Net Debt -equity 0.1 0.1 0.1 0.1 0.1
Liquidity ratio 3.7 3.3 3.5 3.2 3.5
Interest coverage 61.6 13.9 13.5 13.6 15.0
Dividend
DPS Rs. 2.0 2.0 2.5 3.0 3.5
Dividend Yield (%) 0.5 0.5 0.7 0.8 0.9
Dividend Payout (%) 12.2 13.5 16.5 16.5 15.6
Per share (Rs)
Basic EPS (reported) 19.2 17.3 18.0 21.7 26.7
FDEPS (reported) 19.2 17.3 18.0 21.7 26.7
FDEPS(adjusted) 18.7 17.3 18.0 21.7 26.7
BVPS 112.3 125.2 141.9 160.0 182.5
CEPS 22.9 21.9 23.3 27.5 33.3
Valuation metrices (x)
P/E 19.8 21.5 20.6 17.2 13.9
P/BV 3.3 3.0 2.6 2.3 2.0
EV/EBIDTA 14.0 14.5 12.6 10.5 8.6
EV/Sales 3.7 3.1 2.6 2.3 1.9
Source: Company, Centrum Research Estimates

Exhibit 12: Balance Sheet
Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Share capital 1,606 1,606 1,606 1,606 1,606
Reserves & surplus 88,581 98,899 112,290 126,832 144,937
Total shareholder's fund 90,187 100,504 113,896 128,437 146,543
Loan fund 9,670 12,284 13,255 14,365 15,475
Deferred tax liability 2,805 3,090 3,307 3,378 3,440
Minority interest 496 550 600 650
Total capital employed 102,662 116,374 131,008 146,780 166,108
Gross block 53,174 60,833 64,190 67,880 72,065
Accumulated depreciation (17,076) (20,800) (25,029) (29,734) (35,004)
Net Block 36,099 40,034 39,162 38,147 37,062
Capital WIP 3,778 4,419 5,500 6,000 6,600
Net fixed assets 39,877 44,452 44,662 44,147 43,662
Investments 25,324 7,086 11,800 22,600 28,400
Goodwill on consolidation 24931 26000 27200 28400
Cash and bank 1,430 1,752 2,947 3,748 5,273
Inventories 23,871 28,953 32,280 38,643 45,989
Debtors 16,688 16,389 21,250 22,800 28,050
Other current assets and loans and
advances
9,387 10,442 11,844 11,779 12,844
Total current assets and loans and
advances
76,700 89,553 106,121 126,770 148,956
Current liabilities and provisions 13,915 17,631 19,775 24,137 26,510
Net current assets 62,785 71,922 86,347 102,633 122,446
Total assets 102,662 116,374 131,008 146,780 166,108
Source: Company, Centrum Research Estimates
Exhibit 13: Cash Flow
Y/E March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Cash flow from operations
Net Profit 15,447 13,885 14,488 17,408 21,450
Depreciation and amortization 3,305 3,726 4,232 4,708 5,273
Change in working capital (6,637) (2,123) (7,446) (3,486) (11,288)
Deferred tax liability 473 285 217 71 62
Capital reserve 230 (1,688) 1,293 - -
Cash flow from operations 12,818 14,085 12,783 18,701 15,497

Cash flow from investments
Capex (7,312) (8,301) (4,441) (4,193) (4,788)
Other investing activities (12,637) 18,238 (4,714) (10,800) (5,800)
Cash flow from investments (19,949) 9,937 (9,155) (14,993) (10,588)

Cash flow from financing
Inc / (dec) in secured loan (95) 30 5 10 10
Inc / (dec) in unsecured loan 9,630 2,585 966 1,100 1,100
Dividends paid (1,879) (1,879) (2,390) (2,867) (3,345)
Cash flow from financing 7,656 735 (1,419) (1,757) (2,235)

Net Cash Flow 525 24,757 2,210 1,952 2,675
Source: Company, Centrum Research Estimates


7
Cipla

Appendix A
Disclaimer
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this report is accurate or complete.


8
Cipla

The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking
and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this
report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.
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Rating Criteria

Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn
Buy Upside > 25% Upside > 20% Upside > 15%
Hold Upside between -25% to +25% Upside between -20% to +20% Upside between -15% to +15%
Sell Downside > 25% Downside > 20% Downside > 15%

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager
Registration Nos.
CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233
DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)
CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-661-2012
PMS REGISTRATION NO.: INP000004383
MCX SX (Currency Derivative segment) REGN. NO.: INE261454230
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