30th July 2010

BUY
Price Target Price 270.90 340.00

IPCA Lab
Investment Rationale
Capacity Expansion to meet the future demand

SENSEX
STOCK DETALS
BSE code Sector Shares outstanding cr) Market. Cap (Rs. Cr.) 52 Week H/L EPS Book Value Div. Yield (%) Face value PE Average Volume(Monthly)

17 9 92

The Company is currently in the process of setting up a new

524494 Bulk Drugs & Formln Lrg 125,227,655 3391.67 325.4/110.4 15.84 69.88 1.03 2 17.10 146114

formulations manufacturing unit at Sikkim to cater the future needs of growing formulations business. Land acquisition and Capital allocation for the project has begun and expected to be completed by year end. Companys new formulation unit at SEZ, Indore, meeting cGMP and regulatory requirement will commence commercial business in

financial year 2010-11 once the regulatory approval is obtained. Healthy Cash position The company is in a position to fund most of the future capacity expansion

Share Holding Pattern

Foreign Institutions Govt Holding Promoters Public & Others Relative Share price graph 6.83% 29.01% 0.00% 46.22% 17.94%

programs undertaken by using its own fund. The company is becoming less dependent of external debt for financing all its future projects. Excess of cash spared after meeting the planned capital requirement is distributed to the shareholder in form of dividend. From last 3 years. Dividend has been steady increasing i.e. 80% - 100% - 140%, this indicates companys strong financial position - state of self - sustainability.

180.00% 160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% -20.00%

ipca

sensex

Sustainable business model

During the financial year 2009-10, IPCA Labs reported revenues of Rs. 1,592 crores, a growth of 21% compared with Rs. 1,313 crores in the previous financial year. Profit after tax rose by whopping 103% from Rs. 101 crores to Rs. 205 crores. We expect the momentum seen in FY10 (21%) to sustain, with 19.5% CAGR over FY10-FY12E led by

Stock performance 3month Stock 2.87% 0.33% 6month 20.50% 2.58% 1year 124.91% 16.92%

sustained product launched across different markets and execution of supply arrangement with its international tie-ups.

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International Presence

The products are now exported to over 110 countries across the globe. During the FY 2009-10, the international business increased by 18% to Rs. 806.08 crores as against Rs. 680.39 crores in the previous year. Formulation exports of the company increased by 12% to Rs. 489.15 crores and exports of APIs and Drug Intermediates increased by 30% to Rs. 316.93 crores. Europe: As on date, the Company has developed and submitted 45 generic formulation dossiers for registration in UK out of which 29 dossiers are already registered, 24 more generic formulations are under development at various stages for European market. IPCA labs has also obtained certificate of suitability (COS) of 29 APIs from European Directorate for Quality Medicines. US: The Company has signed agreements with 2 marketing partners for sale/distribution of generic formulations on a profit' sharing arrangement in the US market. 16 ANDA applications in respect of generic formulations developed by the Company are filed with US FDA out of which 10 ANDA applications are granted till date. Similarly, the Company has signed agreements with 3 marketing partners for sale/distribution of generic formulations in Canadian market and under these agreements, the Company has developed and filed few formulation dossiers for registration in Canada and the formulations business from this country is expected to commence in the FY2011. Company's whollyowned subsidiary in Mexico has started activities of filing the formulation dossiers for registration in the said country; the Company has also started marketing its branded formulations in Venezuela, Columbia and Peru in the Latin American market with a few product registrations. Several more formulations dossiers are in the process of being registered/submitted for registration in all these markets of Latin America. Africa: IPCA branded formulations in countries like Uganda, Sudan, Tanzania, Kenya and Nigeria through dedicated field force. It is expanding its branded formulations business across this continent through expansion of field force and geographical coverage and increase in the number of branded formulations marketed. 36 generic formulations dossiers developed by IPCA are registered in South Africa and another 11 dossiers are under registration.

Australasia: The Company is focusing on registering more formulation dossiers in Australia and New Zealand through its wholly its wholly owned subsidiary Ipca Pharma (NZ) Pty Ltd., New Zealand. Asia: IPCA exports formulations as well as APIs to several Asian countries. In countries like Sri Lanka, Myanmar, Philippines and Vietnam, the Company markets its branded formulations through dedicated field force. The field force and product range of the Company in Asian market is also being expanded. Domestic Business

During the FY2010, the domestic formulations business recorded a growth of 25% at Rs. 597.84 crores as against Rs. 476.59 crores in the previous year FY2009. In the same year, the Company introduced 8 new products in the domestic market. New products introduced during the last four financial years now constitute nearly 14% of the companies formulation sales. The brand building was in evidence especially in chronic therapy segments such as cardiovasculars, anti-diabetics, newer anti- malarials, central nervous system (CNS), Dermatology and non- steroidal anti-inflammatory drugs. In order to increase the reach and the penetration in the Indian pharmaceuticals market, the Companyhas substantially increased its field force strength during the last 2 financial years. Financial Performance Consolidated net sales stood at Rs. 1,603 crores compared with net sales of Rs. 1,326 crores during the previous FY2009, registered a growth of 21%. We expect companys net sales to increase at rate of 19% and 18% for FY11 and FY12 respectively. Company's Consolidated Profit after Tax (PAT) increased to Rs. 205 crores in FY10 from previous Rs. 101 crores in year FY09, reported a growth of 103%. We expect companys PAT to increase at rate of 27% and 16% for FY11 and F12 respectively. We expect a fall in EBITDA margin from 21% in FY10 to 19.5% on average over FY11-FY12 due to rising raw material cost, marketing expensing and product registration fees. But it will be compensated by increased sales in future. PAT margin to improve from current 12% in FY10 to 13% in FY11 & FY12 on account of reduction of financial cost due repayment of debt.

Sales & Pat Growth FY08 FY12 E

2500

350 304.27 300

2000 257.17 1500 205.23 250 200 sales 1000 136.72 100.78 500 50 0 FY08 FY09 FY10 FY11E FY12E 0 150 100 pat

Valuation and outlook

Considering all above investment rationale we expect that the company will keep its growth story up in the coming quarters also. We recommend BUY with a 1 year target price of Rs. 340 (potential 26% appreciation from its current price). At the current market price of Rs. 270.90, the stock is trading at 13.20 x for FY11E and 11.145 for FY12E respectively. Price to Book Value of the stock is expected to be at 3.14 xs and 2.53 xs respectively for FY11E and FY12E.

Financials
Balance Sheet FY09
SOURCES OF FUNDS Share Capital Reserves Total Total Shareholders Funds Total Debt Total Liabilities APPLICATION OF FUNDS Gross Block Less: Accumulated Depr. Net Block Capital Work in Progress Investment Inventories Sundry Debtors Cash and Bank Loans and Advances Sundry Creditors Provisions Net Current Assets Total Assets Rs. crore 778.96 202.20 576.76 14.44 41.17 306.16 339.14 10.74 83.18 196.19 19.99 523.04 1090.30 881.17 243.32 637.85 38.28 32.54 380.23 388.02 10.79 120.12 185.03 24.67 689.46 1318.83 1001.17 299.79 701.38 61.28 35 452.78 472.78 13.00 90.00 228.85 28.29 771.41 1478.23 1101.17 362.86 738.31 40.43 40 540.70 560.70 76.50 95.00 298.13 36.85 937.93 1654.67 24.99 606.30 631.32 459.36 1090.30 25.04 839.84 864.89 454.52 1318..83 25.04 1055.98 1081.02 397.21 14.78.23 25.04 1313.68 1338.72 315.95 1654.77

Financial Ratios FY11E FY12E

PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) ROE (%) Debt-Equity Ratio Current Ratio Sales/Net Assets PBDIT/Net Assets PAT/PBIDT (%) Net Assets/N.W Debt Ratio Inventory turnover Valuation Ratios P/BV P/E EPS Book Value 7.23 50.52 5.84 4.27 18.68 15.79 69.08 3.14 14.63 20.54 86.34 2.53 12.14 24.30 106.93

FY10

FY09
14.91 11.89 12.04 10.26 7.68 17.95 15.06 0.73 3.42 2.28 0.34 48.57 0.91 0.42 4.35

FY10
21.73 18.79 19.66 15.72 12.89 26.23 23.53 0.53 4.29 2.50 0.54 58.84 0.74 0.34 4.23

FY11E
20.65 17.66 18.80 16.56 13.58 26.45 23.79 0.37 4.00 2.70 0.56 65.78 0.65 0.27 4.17

FY12E
20.09 17.29 18.66 16.30 13.50 27.35 22.73 0.24 3.80 3.05 0.61 67.23 .055 0.19 4.17

Profit & Loss Statement FY09 FY10

Gross Sales Excise Duty Net Sales Total Income Total Expenditure PBIDT Interest PBDT Depreciation Profit Before Tax Tax PAT Rs. crore 1332.80 20.24 1312.56 1379.56 1183.83 195.73 37.75 157.98 39..6 118.32 23.25 100.78 1606.86 14.72 1592.14 1654.52 1308.59 345.93 32.93 313.00 46.74 1266.26 62.72 205.23

FY11E
1928.23 34.71 1893.52 1972.09 1581.15 390.94 34.92 356.02 56.57 299.55 42.38 257.17

FY12E
2294.60 41.30 2253.29 2334.19 1881.57 452.62 32.09 420.52 63.07 357.45 53.18 304.27 Sources: Cash Profit (-) Dividends Retained Earnings Issued Equity Borrowings Others Applications: Capital Expenditure Investments Net Current Assets Change in Cash Rs. crore

Cash Flows FY09 FY10

193.42 134.73 27.59 107.14 -.10 106.35 -19.97 193.42 86.87 31.64 74.91 1.33 283.84 250.28 35.01 215.27 0.05 -4.84 73.36 283.84 126.05 -8.63 166.42 0.05

FY11E
227.41 313.64 35.06 278.58 00 -57.31 6.14 227.41 143.00 2.46 81.95 2.21

FY12E
250.67 367.34 35.06 332.29 00 -81.26 -0.36 250.67 79.15 5.00 166.52 63.50