INVESTMENT IDEA 03 Dec 2016

PCG RESEARCH
FDC Ltd.
Industry CMP Recommendation Buying Range Target Time Horizon
BUY at CMP and add on
Pharmaceuticals Rs. 218 Rs. 192 - 218 Rs. 255 - 290 3-4 Quarters
Declines

HDFC Scrip Code FDCLTD Company Background

BSE Code 531599
FDC Ltd. is a domestic focused pharmaceuticals company with a 1.2% market share of the Indian
NSE Code FDC Pharmaceuticals Market (IPM). The Company is engaged in the manufacturing of Formulations (75% of
Bloomberg FDCLT FY16 revenues), APIs (6%) and Oral Rehydration Salts (ORS) (19%). Its therapeutic areas of focus include
Anti-Infectives, Ophthalmological, Vitamins / Minerals / Dietary supplements, Cardiac, Anti-Diabetes and
CMP as on 02 Dec-16 218 Dermatology. It has a range of functional foods and beverages. Its active pharmaceuticals ingredients
Equity Capital (Rs Cr) 17.9 (APIs) produced cover a range of therapeutic categories, such as Albuterol Sulfate, Bromhexine
Hydrochloride, Cinnarizine, Dihydrochloride, Flurbiprofen Sodium, Miconazole Nitrate and Timolol Maleate.
Face Value (Rs) 1 The major brands include Zifi, Electral, Enerzal, Vitcofol, Pyrimon, Zocon, Zipod, Cotaryl and Mycoderm.
FDC is a leading player in Oral Rehydration Salt (ORS) segment, with its well-known brand Electral and
Equity O/S (Cr) 17.9
Enerzal. It has multi-location manufacturing facilities for APIs, as well as finished dosage formulations
Market Cap (Rs cr) 3870 (FDFs).
Book Value (Rs) 59
Company has plants located at various parts of India such as at Roha Dist. Raigarh, Waluj and Sinnar in
Avg. 52 Week Maharashtra, Verna in Goa and Baddi in Himachal Pradesh. Company had 5,277 permanent employees as
95710
Volumes on March-2016 out of which 3,785 employees are engaged in the marketing and distribution activities; 850
52 Week High 244 MRs were added in Ophthalmology and Cardiac division during FY16. FDC also exports formulations to the
country like Denmark, UK, USA, Africa and Australia. Company derived exports revenues of Rs 130cr in
52 Week Low 165 FY16 (13% of Revenues); with a pick-up in ORS sales to Africa and Opthalmics solutions sales to US and
UK, where it has received regulatory clearances for its plants. We expect exports to pick up with ~20%
growth for the next 2-3 years.
Shareholding Pattern (%)
Promoters 68.9 We believe company would post faster revenue growth led by Exports formulations as company launches its
products in US markets and also traction from EU markets. Moreover, Company has strong hold on some of
Institutions 14.3 its products in ORS, Anti Infectives and Cardiac and those products would continue to do well in domestic
market. FDC has posted 9.2% revenue and 5.3% PAT cagr over FY13-16. We forecast 11% revenue cagr
Non Institutions 16.8
over FY16-19E led by strong traction from domestic business and exports revenue to post 18% cagr, given
the low base effect and US business to accelerate going forward. We expect 590bps margin surge over
FY16-19E driven by operating leverage tailwinds and focus on high margin products. Company has posted
EBITDA margin of 26.9% in H1 FY17. Accordingly, we have envisaged 25% PAT cagr over the same period
Kushal Rughani and expect company to post Rs17 EPS for FY19E. We recommend investors to BUY FDC at CMP of Rs218
kushal.rughani@hdfcsec.com and add on dips to Rs192 for sequential targets of Rs255 and Rs290 (based upon 17x FY19E earnings) over
the next 3-4 quarters.

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Investment Rationale

Q2 FY17 Update

FDCs Q2 FY17 revenues grew 10% YoY to Rs 290cr from Rs 265cr driven by Zifi, Electral and Enerzal. The
company has revised higher the prices of Electral and Enerzal tetra packs in the domestic market. We expect
these tetra packs to drive future growth as these are ready to drink, convenient to carry and have higher
margins.

EBIDTA margin surged 570bps to 28.5% from 22.8% in Q2, mainly due to the decline in raw material cost.
Material costs fell by 500bps YoY to 31.7% from 36.7% due to change in product mix, with higher revenues
from flagship brands and fall in prices of crude related chemicals. Other expenses declined by 130bps to
24.0% from 25.3%. We expect margin improvement led by new product launches, volume growth and price
increase up to 10% for non-NLEM (National List of Essential Medicines) products in April16. Net profit rose
39% YoY to Rs67cr from Rs 48cr led by strong margin improvement and lower tax rate.

H1 FY17: Revenues up 5.7% YoY, Margin expanded 380bps

FDC posted 5.7% increase in overall revenues during H1 FY17. The companys nine major brands are listed
among top 1,000 brands and contribute 50% to domestic revenues. Domestic revenues increased 6% yoy to
change in products mix and decline in raw material costs. Company has posted EBITDA margin of 26.9% in
H1 FY17. During Q1, company had made provision of Rs6cr; PAT came in at Rs 115cr, +21% yoy for H1
FY17.

The companys nine major brands are in the list of top 1,000 brands and contributed 51% to the revenues.
FDCs four major products Zifi, Electral, Enerzal and Zifi CV grew faster than the market growth of 14%.
These four brands collectively contributed ~50% to the revenues and are likely to be future growth drivers.
We expect net profit to improve on price increases of non-NLEM products, New Launches, volume growth and
line extensions.

Key Highlights

The companys major brand Zifi and its line extensions had posted revenues of Rs 270cr in FY16,
contributed 32% of domestic revenues.

FDCs multivitamin brand Vitcofol had revenues of Rs 45cr and grew at 15.3%. The companys
antifungal brand Zocon had revenues of Rs 37cr and grew at 29% and is one of the fastest growing
antifungal brands in India.

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FDCs flagship brand Enerzal had posted revenues of Rs35cr in FY16. The company promotes the
product as sports drink at various sports events. FDC markets through chemists directly to
gymnasiums and health institutes. The brand is superior to competing brands contain caffeine,
whereas Enerzal is caffeine free and hence not habit forming.

Electral generated revenues of Rs140cr and grew 12% yoy despite being under price control. FDC
derived about 30% of its domestic revenues from price controlled products.

Company has launched Enerzal in Pet Bottle (Orange and Apple Flavour). Other Products are under
development / ready for launch.

During the year March 31, 2016, FDC has generated sales of Rs 6cr from APIs and Rs7.5cr from
finished formulations. The US Business for API's and formulations is expected to contribute
significantly to the growth of FDC's International business going forward.

In April 2016, Latanoprost 0.005% Ophthalmic Solution ANDA got US FDA approval. 20 Other product
approvals were received in Rest of the World markets of which 17 products (Ophthalmics, Liquids,
ORS) were registered in Sri Lanka, Philippines, Peru, Ethiopia, Zimbabwe, Hong Kong, Myanmar from
Waluj site. One tablet formulation was registered in Botswana from Goa III and one ORS product was
registered in Tanzania from Sinnar and Kit pack for Congo from Goa I.

Company has ramped up its R&D expenditure to 3.2% of revenues in FY16 vs. 2.5% in FY15. We
expect company to spend more on R&D (expect ~4% of revenues in the coming years)

Company History and other key details

FDC had started its business in 1936 as an importer of formulations, medical equipment and specialized
infant foods. In 1949 company set up its first manufacturing unit with the objective of manufacturing
indigenous formulations and absorbent cotton wool. In 1963, company entered into the ophthalmic
therapeutic segment, in which FDC commands ~20% market share at present. Company has one of the best
product portfolios in the ophthalmic segment catering to almost all-possible eye ailments.

In 1972, FDC entered into oral rehydration salts (ORS) with Electral. The product was introduced as a
substitute to IV fluids and it has become a household name in the last 25 years. FDC started this project in a
small setup at Jogeshwari with an initial capacity of 4000 packs per day and today it has separate
manufacturing facilities at Nashik and Waluj with total capacity of 2.3 lakh packs per day.

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In 1978, FDC started manufacturing bulk drugs at Roha. Company started with manufacture of Diazepam,
Metronidizole, Tinidizole, Trimethoprim, Hydroxy ethyl and Theophylline. Later on, it shifted focus to high
value low volume drugs such as Flurbiprofen, Timolol Maleate and Salbutamol sulphate, mainly the bulk
drugs, which were required for captive consumption and also had export potential. In 1983 Company started
foods division. Currently this division is known as nutraceuticals. In the developed nations of Europe and US,
nutraceuticals have become a major market. In the coming years, same trend is expected to be in the
domestic market, thus FDC would be benefited. FDC has launched few innovative products in this segment
and several are in the pipeline.

In 1989, Company setup a state of art manufacturing facility at Waluj, Aurangabad. This plant has UK
authority approval for sterile dosage forms. In 1996, FDC came out with maiden public issue at price of
Rs100 per share to set up the formulation plant at Nashik, part payment of two Form-Fill-Seal (FFS)
machines besides modernization/ expansion / integration of existing manufacturing facilities and R&D
centers. Today Nashik plant manufactures ORS formulations. It is to be noted that Adjusted for Split and
Bonus, FDC stock price has given fantastic returns from Rs10 to Rs440 in the span of 20 years (i.e. since
IPO).

In 1998, FDC established another manufacturing
manufacturing selected products going off patent
group of professionals in UK to export Ophthalmic
stake. Company continues to focus on increasing
markets of EU.
unit for solid dosage form at Goa with the objective of
for the international market. FDC has joint venture with
range of formulations. In this JV, FDC has majority of the
export of ophthalmic dosage formulation to high margin

Domestic Pharmaceuticals Outlook

The domestic pharma market was valued at Rs 878.7bn and grew at 13.5% in FY16 as per IMS MAT March
16 data. The 24 listed pharma companies generated revenues of Rs 494.5bn (56% of total) and grew at 12%
compared to the industry growth of 13.5%. This slow growth is attributed to some major drugs coming under
price control during the year. The 24 listed pharma companies have lions share of over 56% in the domestic
market, and their major brands are likely to drive the future growth of the industry.

The Indian pharmaceuticals market increased at a CAGR of 17.4% during 2005-16 with the market
increasing from US$6 billion in 2005 to US$36.7 billion in 2016 and is expected to post CAGR of 15.3% to
US$55 billion by 2020. By 2020, India is likely to be among the top three pharmaceutical markets by
incremental growth and sixth largest market globally in absolute size.

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We expect the key pharma brands to drive future growth of the domestic pharma industry as these have
higher recall in the doctors community. The domestic pharma market consists of branded generic market of
patent-expired products. Being the decision maker, the doctor will prefer familiar brands and those that have
demonstrated excellent therapeutic efficacy.

We expect the domestic pharma market driven by fast growing lifestyle segments, established brands and
effective brand promotion. A combination of all three factors would lead to strong company revenues and
industry growth.

Export Formulations to post strong revenue growth

Though Majority part of revenues is derived from domestic market; FDC also derives revenues from exports
formulations. Company caters to the country like Denmark, UK, USA, Africa and Australia. Company derived
exports revenues of Rs 130cr in FY16 (13% of Revenues); with a pick-up in ORS sales to Africa and
Opthalmic solutions sales to US and UK, where it has received regulatory clearances for its plants. We expect
exports sales to pick up with ~18% growth for the next 2-3 years. Currently, company has miniscule
exposure to US markets; company has filed several ANDAs and intends to focus more on R&D thus company
may surprise positively if US revenues scales up considerably.

FDC had acquired property at Jogeshwari, Erstwhile it was on lease

In Aug 2015, Company had purchased the property of ~8,700 Sq. mtrs located at Jogeshwari (West),
Mumbai for Rs 261cr which they were using on lease since 1949 and lease was going to expire in 2018. This
was the main reason for the surge in companys fixed assets and decline in investments during FY16.

Passed through US FDA inspection successfully

The US Food and Drug Administration (US FDA) has completed the inspection of the companys
manufacturing unit situated at Waluj in July 2016. US FDA had made two minor observations for which
appropriate steps shall be taken by the company. The USFDA carried out the audit of the facility in relation to
cGMP (Current Good Manufacturing Practices) norms and the abbreviated new drug application (ANDA) filed
by the company for Dorzolamide ophthalmic solution.

FDC Ltd has received the establishment inspection report (EIR) from US Food and Drug Administration (US
FDA) for its manufacturing unit situated at Baddi (Himachal Pradesh) with no observations. This approval
confirms the closure of inspection conducted in February 2016. The said audit was carried out in relation
to cGMP inspection and ANDA filed by the company for product cefixime tablets (Anti Infectives).

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Expect 11% revenue and 25% PAT CAGR over FY16-19E

FDC has posted 9.2% revenue and 5.3% PAT cagr over FY13-16. We forecast 11% revenue cagr over FY16-
19E led by strong traction from domestic business and exports revenue to surge 20%+, given the low base
effect and US business to accelerate going forward. FDC posted 5.7% revenue growth for H1 FY17 however
EBITDA margin surged 380bps yoy to 26.9%. We expect 590bps margin surge over FY16-19E driven by
operating leverage tailwinds, higher growth trajectory from exports formulations and focus on high margin
products. Accordingly, we have envisaged 25% PAT cagr over the same period and expect company to post
Rs17 EPS for FY19E. We recommend investors to BUY FDC at CMP of Rs218 and add on dips to Rs192 for
sequential targets of Rs255 and Rs290 (based upon 17x FY19E earnings) over the next 3-4 quarters.

Key Risks

The 30% of FDC domestic products portfolio is under NLEM which might impact on margin for the company.
Moreover, company highly depends on the top 4 Brands (~50% of Domestic Revenues); the slower growth in
those products may impact company negatively. Slower than expected exports formulations revenue may
lead to disappointment in financials.

Major Products in Domestic Market

Therapeutic Rev Cont (

Product Name Segment FY16 )
Zifi and its Ext. Anti Infectives Rs 270cr
Electral ORS Rs 140cr
Vitcofol Multivitamins Rs 45cr
Zocon Anti Fungal Rs 37cr
Amodep AT CVS -
Enerzal Nutraceuticals -
Source: Company, HDFC sec Research

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Company Positioning in IPM (#)

MAT MAT MAT

Therapy Mar Mar Mar
Segment 2016 2015 2014
Electrolytes 1 1 1
Opthal/Otolog 7 8 8
Energy Drink 1 2 2
Anti Infectives 12 12 11
Cardiac Care 33 32 32
Vit/Min/Nutris 36 34 35
Source: Company, HDFC sec Research,

Financial Summary (Rs cr)

(Rs Cr) FY14 FY15 FY16E FY17E FY18E FY19E

Sales 846 889 1006 1092 1243 1435
EBITDA 207 198 224 277 336 403
Net Profit 135 148 157 205 248 303
EPS (Rs) 7.6 8.3 8.8 11.5 13.9 17.0
P/E 28.8 26.4 24.8 19.0 15.7 12.9
EV/EBITDA 18.7 19.6 17.3 14.0 11.5 9.6
RoE 16.6 16.6 15.8 18.0 18.9 19.8
Source: Company, HDFC sec Research

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Revenues to witness 11% cagr over FY16-19E EBITDA and PAT to witness robust growth momentum
1600 450

1400 400

1200 350

1000 300

Rs Cr
800 250

600 200

400 150

200 100

0 50
FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, HDFC sec Research Source: Company, HDFC sec Research

FY16 Intl Revenues Split (%)

20 Denmark
UK
32
USA
5 Aus & NZ
7 Africa
Malaysia
10 Others
14
12

Source: Company, HDFC sec Research

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OPM to surge 590bps over FY16-19E

30.0

25.0

%
20.0

15.0

10.0
FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, HDFC sec Research

Strong Return Ratios (%)

25.0

20.0

15.0

10.0

5.0
FY14 FY15 FY16 FY17E FY18E FY19E

RoE RoCE

Source: Company, HDFC sec Research

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Income Statement (Consolidated) Balance Sheet (Consolidated)

(Rs Cr) FY14 FY15 FY16 FY17E FY18E FY19E (Rs Cr) FY14 FY15 FY16 FY17E FY18E FY19E
Net Revenue 846 889 1006 1092 1243 1435
SOURCE OF FUNDS
Growth (%) 9.4 5.1 13.2 8.5 13.8 15.5 Share Capital 17.9 17.9 17.9 17.9 17.9 17.9
Operating Expenses 639 691 783 815 907 1032 Reserves 827 919 1032 1191 1376 1593
EBITDA 207 198 224 276 336 403 Shareholders' Funds 845 937 1050 1209 1394 1611
Growth (%) 14.6 -4.2 12.8 23.6 21.5 20.0 Long term Debt 1 1 1 1 1 1
EBITDA Margin (%) 24.5 22.3 22.2 25.3 27.0 28.1 Net Deferred Taxes 30 23 19 19 19 19
Depreciation 25 39 34 34 37 40 Long Term Provisions & Others 1 1 1 1 1 1
EBIT 182 159 190 242 299 363 Total Source of Funds 877 962 1070 1257 1446 1680
Other Income 39 46 32 41 45 53 APPLICATION OF FUNDS
Interest 3.1 2.0 1.4 1.1 2.0 2.0 Net Block 300 420 694 716 734 788
PBT 218 203 220 282 342 414 Non Current Investments 187 217 35 83 172 222
83 56 63 79 96 116 Long Term Loans & Advances 130 8 8 10 14 19
Tax
RPAT 135 148 157 205 248 303 Total Non Current Assets 617 645 737 809 920 1029
Inventories 103 123 131 132 160 177
Growth (%) -12.7 9.2 6.5 30.4 21.3 21.9
7.6 8.3 8.8 11.5 13.9 17.0 Trade Receivables 57 61 63 74 86 101
EPS
Source: Company, HDFC sec Research Cash & Equivalents 22 15 18 68 86 121
Other Current Assets (incl Curr Invests) 253 303 283 341 370 441
Total Current Assets 436 502 496 614 702 840
Trade Payables 79 87 83 86 95 110
Other Current Liab & Provisions 100 101 81 80 80 79
Total Current Liabilities 179 188 164 166 175 189
Net Current Assets 256 314 331 449 527 651
Total Application of Funds 877 962 1070 1257 1446 1680
Source: Company, HDFC sec Research

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Cash Flow Statement (Consolidated) Key Ratio (Consolidated)

(Rs Cr) FY14 FY15 FY16 FY17E FY18E FY19E Key Ratios (%) FY14 FY15 FY16 FY17E FY18E FY19E
Reported PBT 218 203 220 282 342 414 EBITDA Margin 24.5 22.3 22.2 25.3 27.0 28.1
Non-operating & EO items -39 -46 -32 -41 -45 -53 EBIT Margin 21.5 17.9 18.9 22.2 24.1 25.3
Interest Expenses 3 2 1 1 2 2 APAT Margin 16.0 16.6 15.6 18.8 20.0 21.1
Depreciation 25 39 34 34 37 40 RoE 16.6 16.6 15.8 18.0 18.9 19.8
Working Capital Change -13 -72 -19 -68 -60 -90 RoCE 21.5 17.3 18.7 21.1 22.6 23.8
Tax Paid -83 -56 -63 -79 -96 -116 Solvency Ratio
OPERATING CASH FLOW ( a ) 111 71 141 130 180 198 Net Debt/EBITDA (x) -1.2 -1.4 -1.2 -1.4 -1.2 -1.3
Capex -17 -158 -311 -15 -45 -75 Net D/E -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
94 -87 -170 115 135 123 Interest Coverage 66.7 99.1 155.3 242.5 167.9 201.6
Free Cash Flow
Investments 58 -30 182 -48 -89 -50 PER SHARE DATA
EPS 7.6 8.3 8.8 11.5 13.9 17.0
Non-operating income 39 46 32 41 45 53
CEPS 9.0 10.4 10.7 13.4 16.0 19.2
INVESTING CASH FLOW ( b ) 80 -142 -97 -22 -89 -72
BV 47.3 52.5 58.8 67.7 78.0 90.2
Debt Issuance / (Repaid) -1 0 0 0 0 0
Dividend 2.3 2.3 2.3 2.8 3.5 4.4
Interest Expenses -3 -2 -1 -1 -2 -2
VALUATION
FCFE 90 -89 -171 114 133 121
P/E 28.8 26.4 24.8 19.0 15.7 12.9
Share Capital Issuance 0 0 0 0 0 0
P/BV 4.6 4.2 3.7 3.2 2.8 2.4
Dividend -46 -46 -46 -57 -71 -89
EV/EBITDA 18.7 19.6 17.3 14.0 11.5 9.6
FINANCING CASH FLOW ( c ) -50 -48 -47 -58 -73 -91 4.6 4.4 3.9 3.6 3.1 2.7
EV / Revenues
NET CASH FLOW (a+b+c) 142 -119 -3 49 18 35
Div Yield (%) 1.0 1.0 1.0 1.3 1.6 2.0
Source: Company, HDFC sec Research
Div Payout Ratio (%) 29.7 27.2 25.6 24.4 25.2 25.7
Source: Company, HDFC sec Research

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Price Movement Chart

300

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200

150

100

50

Apr-16

Sep-16
May-16

Jul-16
Feb-16
Dec-15

Jun-16

Oct-16

Nov-16
Jan-16

Dec-16
Mar-16

Aug-16
Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year.

Sell: Stock is expected to decline by 10% or more in the next 1 Year.

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I, Kushal Rughani, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject
issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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