Eurion - Sample ICR

2009

Eurion Constellation

June 2009

XYZ Pharma: Sample ICR

Eurion Constellation | Sample Initial Coverage Report 2

Explanations and Disclaimers

This is only an indicative sample ICR and the following specs need attention:

Financial analysis and forecasts for the basis of company research and stock

analysis. This is work is beyond the scope of the following sample ICR have not

been made.

On the basis of forecasted figures, the valuations are done and recommendations

made.

The following is more condensed work focussing on performance, risks &

opportunities, and strategic initiatives.

More detailed work in the form of recent developments or guidance regarding

future plans form part of a typical ICR.


XYZ Pharma

July 1, 2009

Initial Coverage Report

Share Data

Market Cap Rs/$

Price Rs/$

BSE/NASDAQ Index Rs/$

Scrip Id XYZ

Avg. Vol. (52 Week)

52-Week High/Low Rs/$

Shares Outstanding

Valuation Ratios

2010E 2011E

EPS (Rs.)

PE Ratio

Shareholding (%)

Promoters 48.83

Individuals 30.14

Non-Institutional 13.98

Others 6.76

FIIs 0.29

Cut-throat competition forces XYZ into losses

On June 30, 2009, XYZ Pharma Ltd came out with

its annual results for the year ended March 31,

2009, reporting huge losses of Rs/$ mn. In FY 2009,

the sales grew by approx. 36%, including inorganic

growth from the acquisition of MN (Druggists) Ltd

and ABC Ltd. However, on account of increased

employee cost (105%) and other expenses (46%),

EBITDA fell by 28.7%. some of the increased

expenditure is explained by the acquisition of ABC

made during the year. Increase in interest costs by

almost 80% has put further pressure on the net

income, pushing the company into losses.

Since FY 2007, XYZ has not been able drive its sales

growth in the API (Active Pharmaceuticals

Ingredient's) segment organically, mainly due to

stiff competition from countries like China,

oversupply, and resultant, downward pressure on

the prices. The two key acquisitions made in

January and August 2008, have contributed to the

increase in the top line in FY 2008 and FY 2009, to

some extent.

Year to March FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 E FY 11 E

(Figures in Rs/$ mn, except per share data)

Sales 1,388.3 2,545.3 3021.2 2,525.1 2,704.8

EBITDA 164.2 320.2 394.6 166.6 416.7

Net Income (Adj) 82.6 205.6 228.9 67.9 157.3

Equity 442.5 1,023.1 1,196.3 1,264.2 1,418.5

Margins (%)

EBITDA 11.83 12.57 13.06 6.6 11.02

Net Income 5.95 8.08 7.58 2.69 5.8

ROE 18.67 20.09 19.13 5.37 11.08

Per share data

EPS 0.83 0.57 0.64 0.19 0.43

PE Ratio 5.05x 55.88x 35.5x 26.84x 43.14x


Debt Equity Ratio

Foreign Currency

Convertible Bonds

Competition

Rising costs

Domestic Industry

Growth

Contract R&D

Strategic initiatives

Valuation

[This section covers the valuation done, the fundamental

bases of assumptions, and logics, thereof.]

Downside Risks

XYZ is a leveraged company, with Debt Equity ratio of

2.14, 2.51, and 2.53 for FY 2008, FY 2007, and FY 2006,

respectively. Higher debt is putting pressure on its

margins, and considering its net losses in the most recent

reported year, this leverage poses a higher downside risk.

Foreign Currency Convertible Bonds of XYZ, raised in

November, 2005, stood at Rs/$ at March 31, 2008. These

bonds have a much higher conversion price than the

current stock price. If these convertible notes are held till

maturity, in November, 2010, they will become

redeemable at 145.2% of their face value.

The company is facing stiff competition from foreign as

well as, domestic players. With the entry of Chinese

players in the market, the prices of Ciprofloxacin and

Ranitidine have fallen considerably, which form the major

chunk of its bulk segment.

Increasing cost of fuel, raw materials, and other inputs

are further, narrowing the company’s margins in the short

term. Rising cost pose a significantly higher threat to a

smaller, yet leveraged player like XYZ.

Advantages

India is increasingly becoming an outsourcing hub for

Active Pharmaceuticals Ingredient's (APIs), which is a core

domain of XYZ. The per capita medical spending in India

remains amongst the lowest in the world, opening up a

large untapped market. Rising income levels are further

expected to help this industry grow.

Commercial R&D on contract basis is an upcoming area

and is expected to be another business driver for XYZ in

the medium to long term.

To deal with the increasing competition from countries

like China, XYZ has directed its focus on US and UK

markets. Its recent acquisitions in the booming, generic


XYZ targets the large

and highly lucrative

generic drugs market in

UK

drugs section of these regulated markets is likely to

provide it with front end sales capabilities with wider

international reach and will help in geographical risk

diversification.

Financial Overview

[This section, broadly, covers the historical performance,

as well as, expectations about future revenues and

profitability.]

Mergers and Acquisitions made during the financial

year

In August 2008, XYZ Pharma Ltd aquired UK based ABC, a

marketing and distribution company dealing in generic

drugs. This acquisition will give XYZ Pharma, a wider sales

and marketing capability in the UK markets. The highly

regulated UK generic drugs market is one of the largest

and most potential markets in the world. XYZ’s strategic

rationale behind the deal was to utilize the established

track record of a profitable company like ABC for gaining

entry into UK’s generic drugs market and achieving cost

advantage by keeping Indian as the production base for

ABC’s licensed drugs. ABC has 47 acquired licenses and 36

pending licenses for generic drugs across Europe. It is a

profitable company with considerable regulatory know-

how and a proven track record for acquiring MHRA

approvals. This is further expected to help XYZ Pharma in

launching its pipeline products in UK. The value of the

deal was estimated to be Rs/$ (EUR mn) and was funded

by a combination of cash and new debt.

Stock Performance

[Explanations and details]


Profile: A company, well

integrated along the

industry value chain

Strategy: Expecting to

derive over 50% of the

global revenues from

Western markets

Management

Company Background

Headquartered in Mumbai (India), XYZ Pharma Ltd. is a

pharmaceuticals company with backward integration from

manufacturing Active Pharmaceuticals Ingredient's (APIs)

up to the level of biopharmaceutical formulations. It

mainly deals in the prescription drugs and is the second

largest manufacturer of Ciprofloxacin and Ranitidine in

India. In addition, it is engaged in commercial R&D

activities. It began as a wholly-owned subsidiary of GM

Laboratories Ltd. in 2001 and started operating as GM

Laboratories Ltd, an independent entity after being

divested in 2003. XYZ Pharma was formed by a merger

between GM Laboratories and TS Pharmaceuticals Ltd. in

2005.

In January 2008, XYZ acquired HX Group Ltd, a UK based

manufacturer of licensed drugs and wholesale marketer

of over-the-counter pharmaceutical products. The deal

was done through XYZ Pharma (UK) Ltd., a subsidiary of

XYZ Pharma Ltd. HX Group is the parent company of

druggist MN Ltd, which owns manufacturing license for 38

products. MN is a zero debt company with well

established market for its product portfolio.

[This part tells about key management personnel.]

22720

4930

18550

4140

0

5000

10000

15000

20000

25000

Mar/06 Mar/07 Mar/08 Mar/09

Value of Rs 1,000 invested SENSEX


Financial Performance:

H1 2008 results

Industry Overview

[This part presents a brief overview of the ‘last’

reported results.]

[This portion covers industrial overview and outlook in

brief.]


Past Financial Performance

Documents

Eurion - Sample ICR