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"For Private Circulation only" and "Important disclosures appear at the back of this report"

OUTPERFORMER

Mkt Cap: Rs273bn; US$6.1bn

CiplaRESULT NOTE

Analyst : Nitin Agarwal, (91-22-6622 2568; nitin.agarwal@idfc.com)

Ritesh Shah, (91-22-6622 2571; ritesh.shah@idfc.com)

Result : Q4FY10

Comment : Below estimates

Last report : 28 January 2010 (Price Rs319; Recommendation: Outperformer)

Key financials

As on 31 March Net sales (Rs m) Adj. net Profit (Rs m) Adj. EPS (Rs) % growth PER (x)

FY08 42,032 7,014 8.7 5.7 39.0

FY09 52,346 7,768 9.7 10.6 35.3FY10 56,300 10,154 12.6 30.8 27.0

FY11E 62,922 11,893 14.8 17.1 23.0

FY12E 72,351 14,341 17.9 20.6 19.1

Key Result Highlights

Ciplas adjusted (for extraordinary items) net profits for Q4FY10 declined by 15%yoy to Rs2.1bn, 34% below

estimates. While 7% yoy revenue growth was lower than estimates of 11% growth, EBITDA margins at 16.8% were

sharply lower than estimates of 22.7%. Higher other income compensated for lower other operating income. Cipla

booked Rs950mn extraordinary profits on sale of i-Pill to Piramal Healthcare.

Net sales grew by 6.7%yoy to Rs13.1bn, below our estimates of Rs13.7bn. Domestic sales and exports grew by 9% and5% respectively. Formulation exports grew by 10%; whereas API saw 14%yoy decline on back of seasonal variations.

Ciplas net sales for FY10 grew by 7.7%yoy to Rs5.4bn with 10% growth in domestic formulations, disappointing

7.3% growth in export formulations and flat API sales. Management cited conscious efforts to control receivable

cycles (reduced by 15-20day over last year) and lower proportion of ARV tender business along with negative impact

of INR appreciation and issues over inhaler gas availability as reasons responsible for lower revenue growth in

export formulations for the year.

EBITDA margins for the quarter stood at 16.8% (v/s our estimates at 22.7%) after adjusting for Rs200mn forex loss.

Sharp 27%qoq jump in other expenses (to Rs4bn) along with higher staff cost led to margin contraction. Operating

margins for the quarter are 600bps lower than average 9MFY10 (at 22-24%) which is surprising. As per management,

ramp-up in field force (~4000now) and manufacturing staff in newer plants coupled with wage revision had resulted

to higher staff costs.

Other operating income for the quarter declined by 57%yoy to Rs570mn (we saw at Rs1000m). Management

indicated substantial one- time technical services income in Q4FY09 had set up a high base; adjusted for which, other

operating income grew by 11%yoy. Cipla expects to maintain current levels of other operating income (~Rs2.5-3bn)

for FY11 with technological fees expected to contribute ~Rs1-1.5bn of the total income.

Other income at Rs450mn was higher compared to Rs155mn last year.

7 May 2010

BSE Sensex: 16769

Rs341

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Post repayment of debt during the quarter, Ciplas net debt now stands at nil. Resultant of debt repayment, Ciplas

interest costs has declined to Rs5m for the quarter. Cipla incurred Rs200m of forex losses for the quarter. Despite INR appreciation, Cipla continues to maintain its

hedging policy of locking in 3rd of its export receivables and 1month of forward sales under forward contracts. Cipla

currently has US$200m of forward contracts hedged at USD/INR 47.

During the quarter, Cipla has also bought 2 US FDA manufacturing plants for a consideration of Rs820mn.

Management indicated acquired facilities were exclusively catering to contract manufacturing for Cipla and acquired

facilities would lead to better control of supplies. Majority shareholders in these plants are relatives of the promoters

Cipla remains highly positive on its inhaler business in the regulated markets. Cipla has received approvals for

Budesonide inhaler in Germany and Portugal, and for Salbutamol in UK, Denmark, Spain and Portugal. Cipla has

already commenced export of Salbutamol inhalers to UK from Q4FY10. Cipla till date has developed 8 HFA products

for EU markets of which 6products have already been submitted for registrations/approvals. Management indicated

trials for multi-dosage DPIs for EU were on-going and guided for a 18-24month window to undergo registrations

and meet compliance requirements, before actual launch. Cipla indicated that it has filed some inhalers for US and

Canadian markets.

While Salbutomol and Budesonide are interesting generic opportunities in EU given limited competition,

combination inhalers (Seretide and Symbicort) account for >70% of the inhaler market and therefore are the drugs totarget. Cipla estimates this EU market opportunity to worth more than $1.8bn and hopes to address this over the next

two to three years. Cipla is expecting the regulatory approval for its first combination inhaler in the key EU markets

by FY11 /12 which will open up a potentially large opportunity and would truly mark the effective initiation of

regulated market opportunity for Ciplas inhalers business. According to the management, Cipla is partnering with

large global generic players to ensure faster and deeper penetration of the EU inhaler market as and when it opens

up. This can provide significant upsides to estimates from FY11 onwards. Additionally, Cipla is looking to further

grow its inhaler franchise across non EU/US markets which are growing fast and where Cipla has limited market

share currently

Cipla has a total of 98 ANDA filings. Cipla has commercialized only 35 of the total of 57 approved products and has

41 ANDAs awaiting approvals.

On Biosimilars, Cipla indicated the Chinese JV was progressing smoothly and the companies were currently workingon 5-6products.

Cipla incurred capex of Rs6.25bn in FY10. Cipla has guided to incur a capex of Rs6bn in FY11 and Rs4-4.5bn from

FY12 onwards. Capital expenditure in FY11 would be primarily used towards setting up API and R&D facilities at

Patalganga and API facility and R&D centre at Bangalore and Vikhroli respectively. Ciplas capex guidance does

not include any investments towards its biosimilars portfolio.

Cipla has guided for consolidated 8-10% revenue growth for FY11 with exports and domestic sales expected to grow

in the range of 10-12% and 10-12% respectively and flat other operating income.

Cipla has guided for 20% effective tax rate for FY11 which could come down in later years with commercialization of

Indore SEZ

Cipla continues to talk to multiple MNC players including Pfizer for potential large scale outsourcing opportunitieswhich can provide further upsides. In particular, we anticipate deals involving leveraging of Ciplas inhaler franchise

in RoW markets.

We reduce Ciplas FY11 and FY12 earnings by 7.6% and 7.4% to Rs14.8 and 17.9 respectively as we lower expected

revenue growth rates for FY11-12 with higher costs.

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Valuations and view

Ciplas adj. net profits for Q4FY10 declined by 15%yoy to Rs2.1bn, 34% below our estimates. At 7.7% yoy topline

growth for FY10, this is probably the weakest revenue growth recorded by Cipla in several years (probably the

lowest ever). Combination of tepid domestic growth and challenges in export formulations business caused this

slowdown leading to pressure on EBITDA margins also. Although management has guided conservatively (8-10%

topline growth) for FY11, we continue to believe that this is only a transitory phase and the company will regain

growth momentum in the forthcoming quarters as its significant investments in filings and plants begin to pay-off.

Despite the near term challenges, we continue to believe that with its RoW focused footprint, Cipla remains one of

the best placed companies to play the global generics opportunity. Further, Ciplas growing optimism on unlocking

the potential of its inhalers business in regulated markets over the next 18-24 months is very encouraging as it can

materially impact the growth trajectory of the company going forward. Maintain Outperformer with a 12-month

price target of Rs370 (25x FY11 and 20.7x FY12 EPS estimates). Developments on outsourcing opportunities with

MNC pharma companies and visibility on regulated market inhalers launches can provide upside to earnings

estimates.

Quarterly results

Particulars (Rs m) Q4FY09 FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Comments

Net Sales 12,352 49,609 13,253 13,712 13,442 13,175 Sales marginally below our estimates

Operating Expenses 10,076 37,769 10,075 10,695 10,346 11,167

Cost of Sales 5,665 23,474 6,067 6,396 6,248 6,108

Other Expenses 4,411 14,295 4,009 4,300 4,099 5,059

EBITDA 2,276 9,483 3,177 3,016 3,095 2,008

EBITDA 18.4 19.1 24.0 22.0 23.0 15.2 Higher other expenses and staff costs

squeeze margins

Tech know-how 999 257 508 703 136

Other Non-Op 317 2,737 251 209 241 437

Forex losses (100) (2,284) (270) 75 (240)

Other Income 155 924 120 128 178 451

Total Other Income 1,370 1,377 358 920 882 1,023

Depreciation 557 1,518 458 478 457 495

Interest 133 329 105 84 44 5 interest cost decline on back of debt reduction

PBT 2,957 9,013 2,464 2,658 2,533 2,531

Extraordinary - - - - 950

Provision for Taxation 428 1,010 555 618 587 726

PAT 2,529 8,003 1,909 2,040 1,947 2,755

Adjusted PAT 2,529 7,768 1,909 2,040 1,947 2,090 Adj. profits below our estimates (at Rs3.2bn)

yoy growth

Net Sales 14.2 24.1 9.8 1.2 0.2 6.7

EBITDA 40.3 51.6 17.7 (4.4) (8.6 (11.8)

Net Profit 40.9 26.2 8.2 0.2 (12.9) 8.9

Adjusted Profit 46.5 10.7 8.2 0.2 (12.9) (17.4)

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Exhibit: Sales breakup

Particulars (Rs m) Q4FY10 Q4FY09 %chg yoy FY10 FY09 %chg yoy

Domestic 5,688 5,245 8.5 25,113 22,790 10.2

Exports 7,602 7,242 5.0 28,989 27,427 5.7

Formulations 6,139 5,553 10.6 23,188 21,619 7.3

APIs & others 1,463 1,689 (13.4) 5,802 5,808 (0.1)

Source: Company

Exhibit: Other operating income

Particulars (Rs m) Q4FY10 Q4FY09 %chg yoy FY10 FY09 %chg yoy

Technology knowhow/fees 136 999 (86.4) 1,603 2,178 (26.4)

Others 437 276 57.9 1,116 787 41.9

Total 572 1,275 (55.1) 2,719 2,964 (8.3)

Source: Company

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Analyst Sector/Industry/Coverage E-mail Tel. +91-22-6622 2600

Pathik Gandotra Head of Research; Financials, Strategy pathik.gandotra@idfc.com 91-22-662 22525Shirish Rane Construction, Power, Cement shirish.rane@idfc.com 91-22-662 22575Nikhil Vora FMCG, Media, Mid Caps, Education, Exchanges nikhil.vora@idfc.com 91-22-662 22567Ramnath S Automobiles, Auto ancillaries, Real Estate, Oil & Gas ramnath.subramaniam@idfc.com 91-22-662 22570Nitin Agarwal Pharmaceuticals nitin.agarwal@idfc.com 91-22-662 22568Chirag Shah Metals & Mining,Telecom, Pipes, Textiles chirag.shah@idfc.com 91-22-662 22564Bhoomika Nair Logistics, Engineering bhoomika.nair@idfc.com 91-22-662 22561Hitesh Shah, CFA IT Services hitesh.shah@idfc.com 91-22-662 22565Bhushan Gajaria Retailing, FMCG, Media, Mid Caps bhushan.gajaria@idfc.com 91-22-662 22562Salil Desai Construction, Power, Cement salil.desai@idfc.com 91-22-662 22573

Ashish Shah Construction, Power, Cement ashish.shah@idfc.com 91-22-662 22560Probal Sen Oil & Gas probal.sen@idfc.com 91-22-662 22569Chinmaya Garg Financials chinmaya.garg@idfc.com 91-22-662 22563Aniket Mhatre Automobiles, Auto ancillaries aniket.mhatre@idfc.com 91-22-662 22559Abhishek Gupta Telecom abhishek.gupta@idfc.com 91-22-662 22661Ritesh Shah Pharmaceuticals, IT Services ritesh.shah@idfc.com 91-22-662 22571Saumil Mehta Metals, Pipes saumil.mehta@idfc.com 91-22-662 22578Vineet Chandak Real Estate vineet.chandak@idfc.com 91-22-662 22579Kavita Kejriwal Strategy, Financials kavita.kejriwal@idfc.com 91-22-662 22558Swati Nangalia Mid Caps, Media, Exchanges swati.nangalia@idfc.com 91-22-662 22576Sameer Bhise Strategy, Financials sameer.bhise@idfc.com 91-22-662 22574Nikhil Salvi Construction, Power, Cement nikhil.salvi@idfc.com 91-22-662 22566Shweta Dewan Mid Caps, Education, FMCG shweta.dewan@idfc.com 91-22-662 22577Dharmendra Sahu Database Analyst dharmendra.sahu@idfc.com 91-22-662 22580Rupesh Sonawale Database Analyst rupesh.sonawale@idfc.com 91-22-662 22572

Dharmesh R Bhatt, CMT Technical Analyst dharmesh.bhatt@idfc.com 91-22-662 22534

Equity Sales/Dealing Designation E-mail Tel. +91-22-6622 2500

Naishadh Paleja MD, CEO naishadh.paleja@idfc.com 91-22-6622 2522

Paresh Shah MD, Dealing paresh.shah@idfc.com 91-22-6622 2508Vishal Purohit MD, Sales vishal.purohit@idfc.com 91-22-6622 2533Nikhil Gholani MD, Sales nikhil.gholani@idfc.com 91-22-6622 2529Sanjay Panicker Director, Sales sanjay.panicker@idfc.com 91-22-6622 2530V Navin Roy Director, Sales navin.roy@idfc.com 91-22-6622 2528Nirbhay Singh SVP, Sales nirbhay.singh@idfc.com 91-22-6622 2595Suchit Sehgal AVP, Sales suchit.sehgal@idfc.com 91-22-6622 2532Pawan Sharma MD, Derivatives pawan.sharma@idfc.com 91-22-6622 2539

Jignesh Shah AVP, Derivatives jignesh.shah@idfc.com 91-22-6622 2536Sunil Pandit Director, Sales trading suniil.pandit@idfc.com 91-22-6622 2524Mukesh Chaturvedi SVP, Sales trading mukesh.chaturvedi@idfc.com 91-22-6622 2512Viren Sompura VP, Sales trading viren.sompura@idfc.com 91-22-6622 2527Rajashekhar Hiremath VP, Sales trading rajashekhar.hiremath@idfc.com 91-22-6622 2516

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