2QCY2011 Result Update | Pharmaceutical

August 5, 2011

Ranbaxy
Performance Highlights
Y/E Dec. (` cr) Net sales Other income Operating profit Forex loss/(gain) Net profit 2QCY2011 2,054 39 143 (172) 243 1QCY2011 2,143 128 365 21 304 (20.0) % chg qoq (4.1) (69.8) (60.8) 2QCY2010 2,099 397 365.1 349 325 (25.2) % chg yoy (2.1) (90.3) (60.8)

ACCUMULATE
CMP Target Price
Investment Period

`520 `578
12 months

Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 21,935 0.9 625/414 166,706 5 17,306 5,211 RANB.BO RBXY@IN

Source: Company, Angel Research

Ranbaxy reported lower-than-expected 2QCY2011 results. While the companys top line was more or less in-line with our expectations, its bottom line has been much lower than expected on the back of a significant hit on its OPM. The companys OPM during the quarter dipped to 7.0% vis--vis 17.4% during 2QCY2010. Management reiterated that it is making good progress in negotiations with the USFDA/DOJ and is optimistic of monetising Lipitor and other key FTFs in the US. We recommend Accumulate on the stock. Lower-than-expected 2QCY2011: Ranbaxy reported net sales of `2,054cr, down 2.1% yoy, just in-line with our estimates of `2,143cr. Gross margin fell by 300bp yoy to 60.2% (63.2%), lower than our estimate of 65%. Ranbaxy reported OPM of 7.0% (17.4%), which was lower than our estimate of 17.4% for the quarter, which consequently led to a drop of 25.2% yoy to `243cr (`325cr) in net profit. Outlook and valuation: The stock is trading at EV/Sales (ex. FTF) of 3.2x CY2011E and 2.5x CY2012E. We recommend Accumulate on the stock with a revised target price of `578, valuing the base business at `483 at 2.2x CY2012E EV/Sales and attaching `95/share for Para IVs.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.8 14.5 10.5 11.2

Abs. (%) Sensex Ranbaxy

3m (5.0) 22.0

1yr (4.8) 16.4

3yr 15.7 0.8

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

CY2009 7,329 1.5 296 7.1 6.1 73.8 3.3 2.4 5.0 3.3 54.3

CY2010 8,535 16.5 1,497 404.8 35.5 16.9 14.6 21.8 10.1 3.9 2.8 16.4

CY2011E 10,196 19.5 1,239 (17.2) 29.4 17.0 17.7 20.1 17.4 3.4 2.2 11.8

CY2012E 12,023 17.9 2,222 79.3 52.8 24.0 9.9 25.9 26.8 2.8 1.7 7.3

Sarabjit Kour Nangra

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

Please refer to important disclosures at the end of this report

Ranbaxy | 2QCY2011 Result Update

Exhibit 1: 2QCY2011 performance

Y/E Dec. (` cr) Net sales Other Income Total income Gross profit Gross margin Operating profit Operating margin Interest Depreciation & amortisation PBT & exceptional items Forex loss/ (gain) Profit before tax Provision for taxation Minority & share of associate Net profit EPS (`)
Source: Company, Angel Research

2QCY2011

1QCY2011

% chg qoq

2QCY2010

% chg yoy 1HCY2011 1HCY2010

% chg yoy

2,054 39 2,093 1,238 60.2 143 7.0 17 74 91 (172) 264 18 2 243 5.8

2,143 128 2,271 1,391 64.9 365 17.0 14 74 405 21 385 78 2 304 7.2

(4.1) (69.8) (7.8) (11.0) (60.8) 15.2 (0.1) (77.4) (938) (31.4) (76.4) 36.3 (20.0)

2,099 397 2,495 1326 63.2 365.1 17.4 11 70 681 349 332 (0) (6.3) 325 7.7

(2.1) (90.3) (16.1) (7) (60.8) 50.5 5.8 (86.6) (149.3) (20.4) (7541.9) (25.2)

4,198 167 4,364 2,629 62.6 508 12.1 31 147 497 (152) 649 97 4 547 13.0

4,571 459 5,030 3,061 67.0 1,109 24.3 36 170 1362 (371) 1,733 452 2 1,286 30.6

(8.2) (63.7) (13.2) (14.1) (54.2) (13.3) (13.5) (63.5) (59.1) (62.6) (78.6) 68.7 (57.5)

Exhibit 2: 2QCY2011 Actual vs. Angel estimates

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

Actual 2,054 39 143 17 18 131

Estimates 2,143 38 374 15 65 259

Variation (%) (4.1) 1.9 (61.7) 14.8 (71.5) (49.3)

In-line top-line performance in 2QCY2011: Ranbaxy reported net sales of `2,054cr, down 4.1% yoy, just in-line with our estimates of `2,143cr. With higher contribution of FTFs in 2QCY2010, there is no like-to-like comparison due to the higher base effect. However, excluding this effect, the base business registered double-digit growth for the quarter. Also, sustained performance by key geographies was witnessed during 2QCY2011. With respect to the geographical performance, US sales dropped by 32% mainly due to the larger exclusivity contribution of generics Valtrex in 2QCY2010. European sales increased by 15% yoy to `355.7cr, with Romania being the key growth driver reporting sales of US$30mn. Sales in the CIS and Africa regions grew by 5% and 33%, respectively. On the domestic front, India sales grew by 11.0% yoy to `482.2cr, led by the benefits from Project Viraat, which also improved the market share of Ranbaxy during the quarter. The API segment, Ranbaxys second line of business, reported sales of US$40mn during 2QCY2011.

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Ranbaxy | 2QCY2011 Result Update

Exhibit 3: Formulations sales trend

2,500 2,000 477 1,500 343 397 493 277 738 491 229 472 337 583 769 436 337 482 356 498 428

(` cr)

449 1,000 500 0 2QCY2010 320

3QCY2010 4QCY2010 North America Europe

1QCY2011 2QCY2011 India ROW

Source: Company, Angel Research

OPM drops to 7.0%: Gross margin dropped by 300bp yoy to 60.2% (63.2%) but was higher than our estimate of 65%. Ranbaxy reported OPM of 7.0% (17.4%), which was lower than our estimate of 17.4% for the quarter.

Exhibit 4: OPM trend

30.0 25.0 20.0 17.4 17.0 28.4

(%)

15.0 10.0 5.0 0.0 4.7 9.1

7.0

1QCY2010 2QCY2010 3QCY2010 4QCY2010 1QCY2011 2QCY2011

Source: Company, Angel Research

Decline in profits higher than expected during the quarter: A sharp dip in the companys OPM led its adjusted net profit to vary significantly from expectations. Adjusted net profit at `131cr was much lower than the expected `259cr. Accounting for forex gains, the decline in net profit was restricted to 25.2% yoy to `243cr (`325cr) during the quarter.

August 5, 2011

Ranbaxy | 2QCY2011 Result Update

Exhibit 5: Net profit trend

1,200 1,000 800 961

(` cr)

600 400 200 0 (200) (98) 1QCY2010 2QCY2010 3QCY2010 4QCY2010 1QCY2011 2QCY2011 326 308 304 243

Source: Company, Angel Research

Concall takeaways
With respect to the filings, Ranbaxy made 38 filings with 26 approvals. For the API segment, it made 33 filings during 2QCY2011. Gross and net debt post the FCCB redemption stood at US$630mn and US$260mn, respectively. As of June 2011 end, the company had outstanding forex exposure of US$750mn. On Nexium, management reiterated that it expects to commence formulation supplies in 2HCY2011. Management reiterated that it is making good progress in negotiations with the USFDA/DOJ and is optimistic of monetising Lipitor and other key FTFs in the US.

August 5, 2011

Ranbaxy | 2QCY2011 Result Update

Recommendation rationale
FDA issues still an overhang on the US: Post the USFDAs adverse action in early CY2009 (AIP invoked on Poanta Sahib facility and import alert issued for Dewas facility), Ranbaxys US sales declined by 13% in CY2009. However, in CY2010, US sales increased by 80% to `2,744.8cr. On the FTF front, the companys fortunes were mixed with the timely launch of Valacyclovir, but partial monetisation of the Flomax opportunity. In CY2010, the company launched Aricept in the US. On USFDA and DOJ issues, the company is still unclear on the timeline by which resolution can be expected. Ranbaxy also plans to ramp up ANDA filings in the US at a significant pace. In spite of the regulatory issues, US would continue to be a dominant market for the company. Ranbaxy would also focus on increasing its base business revenue by targeting the OTC and branded dermatology segments. The company continues to be confident of monetising all its future FTFs. India back in focus: Ranbaxy Indias domestic formulation business has been reporting below-industry average growth rate of 78% from the past few years. In CY2010, Ranbaxys domestic sales grew by 14%, contributing 22% to the companys total sales turnover. 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 from 2,500 to 4,000 MRs in CY2010, 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 realised 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 3.2x CY2011E and 2.5x CY2012E. We recommend a Accumulate on the stock with a revised target price of `578, valuing the base business at `483 at 2.2x CY2012E EV/Sales and attaching `95/share for Para IVs.

August 5, 2011

Ranbaxy | 2QCY2011 Result Update

Exhibit 6: Key assumptions

CY2011E Domestic sales growth Export sales growth Growth in employee expenses Operating margins Capex (`cr)
Source: Company, Angel Research

CY2012E 11.0 19.5 17.9 24.0 425.3

11.0 21.7 19.2 17.0 298.5

Exhibit 7: One-year forward EV/Sales

45,000 40,000 35,000 30,000 (` cr) 25,000 20,000 15,000 10,000 5,000 0 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
Source: Company, Angel Research

4x

3x 2x 1x

Exhibit 8: Recommendation summary

Company Reco CMP (`) Aurobindo Pharma Aventis* Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sun Pharma Buy Neutral Buy Buy Buy Neutral Buy Accumulate Buy Accumulate Neutral 158 2,040 835 304 1,535 82 2,126 408 324 446 175 520 498 Tgt Price (`) 278 1,053 377 1,920 133 658 358 593 373 578 Upside % 76.3 26.1 24.2 25.1 63.1 61.3 10.5 33.0 113.4 11.1 FY2013E FY11-13E FY2013E EV/Sales EV/EBITDA CAGR in PE (x) RoCE (%) ROE (%) (x) (x) EPS (%) 8.2 22.7 16.3 16.5 16.0 7.0 24.5 6.2 11.8 15.0 4.7 9.9 21.2 1.2 2.8 2.6 3.0 2.8 1.3 5.6 0.8 1.8 2.5 1.2 1.6 5.3 6.4 18.3 12.9 14.1 11.0 7.1 15.8 4.8 8.2 12.5 5.5 6.8 16.9 29.5 15.6 21.6 23.8 22.7 8.6 14.6 25.8 14.8 24.0 29.6 43.1 15.8 13.8 15.8 28.3 17.0 17.7 7.4 41.0 17.6 23.3 23.9 11.7 26.8 20.2 19.0 17.1 35.2 18.2 25.2 9.2 30.7 19.3 24.9 30.8 23.4 25.9 20.4

Cadila Healthcare Buy

Orchid Chemicals Buy

Source: Company, Angel Research; Note: *December year end.

August 5, 2011

Ranbaxy | 2QCY2011 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 Exp./(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 CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E 6,826 45 6,781 133 6,914 12.8 6,065 2,722 363 892 2,089 716 (5.5) 10.6 218 498 (13.1) 7.3 141 201 29.1 691 6.2 (307) 998 212 21.2 786 12 774 467 (8.5) 11.4 20.7 20.7 51.3 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 (394) (157.0) 1,106 (1,500) (565) 0.0 (935) 8 8 (951) (121) (126.0) (13.2) 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 54.2 817 (307.5) (193) 1,010 699 69.2 311 14 296 144 (218.5) 4.0 7.1 7.1 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 1,911 134.0 410.5 2,322 585 25.2 1,737 240 1,497 1,086 654.7 17.5 35.5 35.5 404.1 10,257 60 10,196 143 10,339 15.4 8,463 3,762 693 1,795 2,213 1,733 20.4 17.0 310 1,423 60.5 14.0 74 93 5.9 1,585 (17.0) 1,585 331 20.9 1,254 15 1,239 1,239 14.1 12.2 29.4 29.4 (17.2) 12,067 44 12,023 214 12,237 18.4 9,137 3,595 818 2,116 2,609 2,885 66.5 24.0 336 2,550 79.2 21.2 64 100 3.6 2,800 76.6 2,800 563 20.1 2,237 15 2,222 2,222 79.3 18.5 52.8 52.8 79.3

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Ranbaxy | 2QCY2011 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 WIP Goodwill Investments Current Assets Cash Loans & Advances Others Current liabilities Net Current Assets Total Assets 3,587 1,313 2,275 357 1,930 240 4,476 438 904 3,134 2,133 2,343 7,145 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 9,982 5,284 2,502 2,783 200 1,901 498 8,308 1,770 1,377 5,161 5,161 3,330 8,713 5,710 2,830 2,880 200 1,901 498 9,782 3,684 1,153 4,945 5,876 3,966 9,445 187 2,617 2,803 57.1 4,142 143 7,145 210 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) 9,982 211 6,355 6,566 79.7 2,104 (37) 8,713 211 7,756 7,967 94.8 1,424 (40) 9,445 CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E

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Ranbaxy | 2QCY2011 Result Update

Cash flow statement (Consolidated)

Y/E Dec (` cr) Profit before tax Depreciation Change in WC Less: Other income Direct taxes paid Cash Flow from Oper. 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 Fin. Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances CY2007 CY2008 CY2009 CY2010 CY2011E 999 218 57 22 (116) 1,136 436 23 22 437 9 433 (364) (635) (556) 143 295 438 (1,500) 282 (237) 22 (136) (1,612) 434 662 22 1,074 3,615 (450) (262) 1,742 4,644 1,958 438 2,395 1,010 268 (27) 105 (243) 902 490 (52) 105 333 1 (446) (1,279) (1,723) (1,154) 2,395 1,242 2,322 553 (299) 661 (619) 1,297 426 (56) 661 (290) 27 825 (98) (317) 436 2,023 1,242 3,264 1,585 310 (89) 93 (317) 1,397 299 93 206 (2,231) (290) 30 (2,491) (1,300) 3,264 1,770 CY2012E 2,800 336 1,155 100 (560) 3,631 425 100 325 (680) (520) (56) (1,256) 2,050 1,770 3,684

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Ranbaxy | 2QCY2011 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.) 1.3 5.2 3.5 0.4 4.8 0.5 5.4 2.5 0.2 0.7 14.4 0.1 0.2 19.3 (0.3) (0.8) 39.8 7.2 11.5 17.3 2.4 5.8 3.3 10.1 22.1 21.8 15.4 31.3 20.4 28.5 61.7 30.6 7.3 78.8 1.1 6.1 2.7 1.3 10.6 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 14.0 79.1 1.5 16.9 1.8 0.1 17.7 21.2 79.9 2.0 33.3 2.9 33.3 20.7 20.7 26.6 8.3 75.1 102.2 7.1 7.1 13.4 103.3 35.5 35.5 48.7 2.0 133.1 29.4 29.4 36.8 5.9 155.9 52.8 52.8 60.7 10.6 189.2 25.1 19.6 6.9 1.6 3.4 32.3 3.2 5.1 0.0 3.3 60.3 3.2 73.8 38.8 5.0 0.0 3.3 54.6 3.2 14.6 10.7 3.9 0.4 2.7 16.0 2.3 17.7 14.1 3.3 1.1 2.2 12.8 2.6 9.9 8.6 2.8 2.0 1.6 6.8 2.1 CY2007 CY2008 CY2009 CY2010 CY2011E CY2012E

2.0 86 81 50 105

1.9 89 70 52 35

1.9 91 76 67 4

2.0 82 70 86 40

2.0 79 80 62 47

2.2 73 77 38 24

August 5, 2011

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Ranbaxy | 2QCY2011 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%)

August 5, 2011

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