One of the better managed mid-cap pharma companies in India.

Initiating Coverage

Sector: Healthcare

IPCA Laboratories

BSE SENSEX

S&P CNX

17,705

5,327

CMP: INR254

TP: INR378

Buy

Smoother road ahead

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1,6,12 Rel Perf. (%)

M.Cap. (INR b)

M.Cap. (USD b)

IPCA IN

125.7

352/225

-9/-9/-10

31.9

0.7

APIs, Brands, Capacity expansion



Y/E March

2011 2012E 2013E

22.3

2.8

22.0

26.4

11.5

25.8

8.1

1.6

23.6

24.0

26.3

3.4

27.0

22.9

9.4

33.4

6.7

2.1

24.7

24.4

Revenue (INR b) 19.0

Income (INR b)

2.2

EPS (INR)

% Chg YoY

P/E (x)

CEPS (INR)

EV/E (x)

17.4

9.3

14.6

25.3

9.9

One of the better managed mid-cap pharma companies in India with (1)

vertically integrated business model, (2) strong domestic formulations

business, and (3) profitable international business.

Sharp 30% correction in stock price on short-term headwinds offers lucrative

long-term entry opportunity.

Long-term story intact; offers balanced play on growing domestic

formulation opportunity and international formulations on the back of strong

API capabilities.

Dividend Yield (%)1.5

RoCE (%)

22.7

RoE (%)

22.8

Consistent industry outperformer in domestic formulations:

Over FY05-11, IPCA's

domestic formulation business clocked revenue CAGR of 22.5%, over 1.5x the industry

CAGR of 14%. As a result its market share has improved from 1.18% in FY06 to

1.42% in FY11. IPCA has consistently outperformed the market growth rate on the

back of multiple drivers: (1) Growing share of chronic therapeutic segments in revenue

mix, (2) Focus on product selection, brand building and new launches, (3) Expansion

in the field force, and (4) Proper divisionalization of products. Given all these positives,

we expect IPCA to maintain its track record of outperforming the industry growth rate.

After a muted 10% growth in FY12, we expect growth to rebound to 18% levels in

FY13, translating into FY11-13 CAGR of 14% (v/s 14% for the industry).

APIs offer core competitive advantage of vertical integration:

IPCA is one of

India's largest manufacturers of APIs, and the global leader in select APIs, with market

share of 50%+ coupled with healthy profitability. IPCA is aiming to be world leader in

~25 APIs in the next 3-4 years (15 currently). This augurs well for the company as (1)

it offers core competitive advantage of vertical integration benefit, and (2) it creates

opportunity to grow revenues beyond captive demand.

Geographic expansion and new Indore SEZ to drive international formulations

growth:

IPCA has built a strong international formulation business with presence in

110 countries across regulated and emerging markets. This business has two main

segments: (1) Branded generics, and (2) Pure generics. We believe IPCA's branded

generic business will grow at CAGR of 20-25% over the next two years on the back of

(1) Strong sales force, (2) Geographic expansion to South/Central American and Western

African countries; and (3) Introduction of new products. The key drivers of pure generics

business are: (1) Europe: Geographic expansion beyond UK, (2) US: FDA approval

for Indore SEZ, and (3) Africa: Lucrative opportunity in Artemether-Lumefantrine, an

anti-malaria formulation.

Expect 25% earning CAGR over FY11-13; Initiate with Buy and price target of

INR378:

We expect IPCA to clock FY11-13 PAT and EPS CAGR of 25% on the back

of 18% revenue CAGR coupled with margin expansion. Further, despite INR5b capex

to sustain growth, the company is likely to sustain healthy return ratios and low gearing.

At 9x FY13 earning, the stock trades at 25-50% discount to its historic and peer

valuation. Initiate coverage with

Buy

rating and target price of INR378 (14x FY13E

EPS), 50% upside.

Shareholding pattern % (Sep-11)

Others,

21.6

Promoter, 46.1

Foreign,

10.1

Domestic

Inst, 22.2

Stock performance (1 year)

IPCA Labs

Sensex - Rebased

360

320

280

240

200

1 November 2011

IPCA Laboratories

One of the better managed mid-sized pharma companies

Leveraging core competitive advantage of strong API manufacturing



4 segments of IPCA's

business model

Internl.

APIs

18%

Dom.

APIs

Dom.

formul.

37%

Internl.

formul.

37%

Business strategy is to leverage its strength in manufacturing API

APIs offer core competitive advantage

Domestic formulations is consistently outperforming the industry

International formulations - presence across countries

Established in 1949, IPCA Labs is one of India's better managed mid-sized pharma

companies. IPCA has presence in (1) domestic branded formulations, (2) global branded

and generic formulations, and (3) global APIs (active pharmaceutical ingredients).

IPCA's core business strategy is to leverage its strength in manufacturing API to develop

vertically integrated and highly competitive formulations. Most of the company's formulations

are backed by its own APIs.

APIs (26% of FY11 revenue): Core competitive advantage

Strong capability in API manufacturing is at the core of IPCA's business success. IPCA

is one of India's largest manufacturers of APIs, and markets them both in the domestic

and international markets. The company has attained global leadership position in select

APIs where it is the lowest cost producer and largest supplier with market share of 50-

70%. The company manufactures APIs mainly in three therapeutic segments: (1) CVS,

(2) Pain management, and (3) Anti-malaria.

Domestic formulations (37% of revenue): Consistent outperformance

IPCA has outperformed the industry growth over the past 5 years on the back of its rising

presence in fast-growing chronic therapy segments, which contribute ~65% of domestic

formulation revenue. It is India's largest player in anti-malaria segment, and is also among

the leaders in CVS and Pain management therapeutic segments.

Revenue trend in API

API

Grow th (%)

31.0 30.4

13.8

4.2

-4.8

8.5

Revenue trend in DF

DF Revenues

Grow th (%)

41.2

21.5 22.0

10.4

25.4

16.5

Revenue

trend

international formulation

Pure generic exports

Branded generic exports

Grow th

8,800

6,600

4,400

2,200

11.9

-11.2

30.1 25.1 27.9

41.4

International formulations (37% of revenue): Presence in 110 countries

IPCA has built a strong international formulation business with presence in 110 countries

across regulated and emerging markets. This business has two main segments: (1) Pure

generics, and (2) Branded generics.

Pure generics:

IPCA has a larger presence in pure generics compared to branded

generics. Europe is its largest market followed by US. Here, the company sells its

products through distributors and partners.

Branded generics:

IPCA has small presence in this segment, primarily in Asia and

CIS countries. Here, it employs its own field force to market its products.

Further IPCA has sizable institutional business through which it supplies anti-malaria drugs

primarily to African countries.

1 November 2011

IPCA Laboratories

Stock correction of 30% in last 4 months offers good

entry point

Headwinds are temporary; company to perform well in long term



Stock has corrected 30% over last 4 months

Correction was led by disappointing performance in domestic formulation

business and consequently guidance downgrade

Headwinds are temporary; long-term business prospects positive

IPCA has underperformed

Sensex by 20% over the last

4 months. The stock

correction offers good

opportunity to buy

Stock has corrected 30% over last 4 months

IPCA stock has corrected significantly in the last 4 months. In absolute terms the stock

price is down 30% over the last 4 months. On a relative basis, the stock has underperformed

Sensex by 20% during the same time. We believe this correction is on the back of a few

recent headwinds -



Lower growth in domestic formulation business



Muted EBITDA margins guidance



Likely forex losses due to weak rupee.

IPCA stock had significantly outperformed till June 2011 …

IPCA Labs.(INR) - LHS

Rel. to BSE HC (%) - RHS

400

325

250

175

100

Nov-10

Rel. to Sensex (%) - RHS

-10

-25

Oct-11

… and then the underperformance began

IPCA Labs.(INR) - LHS

Rel. to BSE HC (%) - RHS

390

315

240

165

Jul-11

Rel. to Sensex (%) - RHS

-12

-25

Oct-11

Source: BSE/MOSL

Jan-11

May-11

Aug-11

Sep-11

(Include BSE Healthcare as a 3rd line in both the charts)

Muted growth of 7%

reported in domestic

formulation segment in

1HFY12.

Headwinds are temporary; long-term business prospects positive

We believe headwinds facing the company for last two quarters are temporary in nature:

Lower growth in domestic formulation business:

IPCA has lowered its domestic

formulation business FY12 growth guidance from 18-20% to 8-10% recently on account

of (1) lower incidence of malaria, infection, etc, and (2) restructuring of CVS and Pain

management divisions. We feel these reasons are temporary/one-off, and the company

should resume reporting above-industry growth rate from FY13 onwards on account

of (1) revival in domestic formulation industry, (2) stabilization of the sales force in

IPCA's CVS and Pain management divisions, and (3) improvement in MR productivity.

1 November 2011

IPCA Laboratories

The company has guided for

margin expansion of only

100bps in FY12 on account

of slowdown in domestic

business and pending

USFDA approval for Indore

SEZ

Muted EBITDA margin guidance:

IPCA has guided for only 100bp margin

expansion in FY12 owing to (1) lower growth in domestic formulation business, and

(2) pending USFDA approval for Indore SEZ. We believe FY13 could see strong

margin expansion led by (1) rebound in domestic business, and (2) ramp-up in US

revenues following USFDA approval.

Forex losses due to weak rupee:

IPCA has forex hedges worth USD140-160m on

its books which cover its net P&L exposure for next 18 months. We note that the

hedges are at an average USD/INR of 48.3 and unlikely to cause any significant

forex losses if USD/INR remains at current level of 49.5. Further, the company has

USD90m foreign currency debt on its books. But the risk of forex loss on these loans

is naturally hedged by equivalent amount of forex receivables on the balance sheet.

New Pharma Pricing Policy 2011 to have limited impact on the company

The government has released draft of the National Pharmaceuticals Pricing Policy, 2011

(NPPP). Under the policy, all the 348 drugs, which are currently a part of the National

List of Essential Medicines (NLEM) will be subjected to price control by the government.

Currently only 74 drugs are under price control. The price control will be implemented on

the formulations of these drugs as compared to the current practice of controlling bulk

drug price. Further, the policy will have market based pricing. The government notified

ceiling price (CP) for the formulations covered will be the weighted average price (WAP)

of the top three brands (by value) for individual formulations. Pharma companies will have

to price their respective formulations either below or at the WAP.

The management mentioned that, under the existing pricing policies followed by the

company, it sells the products at a premium pricing in the categories where the company

is market leader. In all other categories, the prices of the company's drugs are not at the

higher end of the market. So the pricing impact will be felt primarily in Anti-malaria and

Rheumatoid Arthritis segment where the company is market leader. However, management

has indicated that the overall pricing impact in these therapeutic areas won't be more than

2-3%.

We believe IPCA's long-term prospects remain positive (as discussed in

subsequent pages). Thus, the 30% price correction offers a good entry point

into the stock.

The NPPP(2011) unlikely to

have significant impact on

the business.

1 November 2011

IPCA Laboratories

Growing stronger in lucrative domestic formulation

business

Focused strategy; multiple drivers; expect FY11-13 CAGR of 14%



Consistently outperforming the industry

Chronic therapies drive growth led by NSAID

Focus on product selection, brand building and new launches

Strong brand equity with doctors in anti-malaria and pain management;

improvement in rankings

Expansion in field force; impact to kick in going forward

IPCA, traditionally an anti-

malaria company, has shown

strong growth in domestic

formulation business over

the past few years

IPCA, traditionally an anti-malaria company, has shown strong growth in domestic

formulation business over the past few years albeit on a small base. The company has

grown this business at CAGR of 22.5% over FY05-11 versus industry growth of just

14%. Apart from growing in size, depth and breadth, the quality of business has also

improved. The company has been continuously increasing share of chronic segments in its

business mix over the years. The company has also demonstrated strong brand building

capabilities with 4 of its brands featuring among top 300 brands in the industry. We expect

the company to grow this business at 14% CAGR over FY11-13 (despite near term

headwinds) led by expansion in field force, improving field force productivity, brand building

exercise, new product launches and entry into new therapeutic areas.

Consistently outperforming the industry

Over FY05-11, IPCA's domestic formulation business clocked revenue CAGR of 22.5%,

over 1.5x the industry CAGR of 14%. As a result its market share has improved from

1.18% in FY06 to 1.42% in FY11. IPCA has consistently outperformed the market growth

rate on the back of multiple drivers:



Growing share of chronic therapeutic segments in revenue mix



Focus on product selection, brand building and new launches



Expansion in the field force and



Proper divisionalization of products.

Over FY05-11, IPCA's

domestic formulation

business clocked revenue

CAGR of 22.5%, over 1.5x

the industry CAGR of 14%

IPCA has outperformed industry in most years over FY06-11… … leading to market share expanding from 1.18% to 1.42%

Company grow th (%)

25.3

Industry grow th (%)

25.6

20.3

15.4

9.9

4.4

15.4

14.3

14.8

11.0

10.1

17.7

16.3

14.3

Mkt share

1.3

1.2

1.3

1.4

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY05

FY06

FY07

FY10

FY11

Source: Company/Industry/MOSL

1 November 2011

IPCA Laboratories

Over time, IPCA has

managed to sharply lower its

dependence on acute

therapy segments

Chronic therapies and NSAID drive growth

Over time, IPCA has managed to sharply lower its dependence on acute therapy segments,

viz, anti-malaria, anti-bacteria, gastro-intestinal and others. The combined share of acute

therapy segments is down from 51% of revenue in FY06 to 38% in FY11. Consequently,

revenues under DPCO coverage reduced from as high as 50% in FY02 to ~10% in FY11.

The rise in share of chronic therapeutic segments and strong market share gain in NSAID

(non-steroidal anti-inflammatory drugs) segment led to the overall growth.

Chronic therapy areas contribute 62% to the revenues

Cough

Preparatio, 4

Derma, 4

CNS, 4

GI, 6

FY11

Others, 1

CVS and

anti diabetic,

DF therapeutic contribution (%)

FY07

CVS and anti diabetic

NSAID

Anti bacteria

Anti malaria

CNS

Derma

Cough Preparatio

Others

FY08

FY09

FY10

FY11

}

Anti malaria,

Anti

bacteria, 8

Source: Company/MOSL

NSAID, 28

One of the key success

factors for IPCA in domestic

formulations business has

been its product selection

and brand building

approach

Focus on product selection, brand building and new launches

One of the key success factors for IPCA in domestic formulations business has been its

product selection and brand building approach. The company carefully chooses products

with high growth potential. Also it has been the first one to launch few new molecules in

the market, gaining significant traction in those products.

Key products launched in recent years

Molecule

Aceclofenac

Hydroxy Chloroquine Sulphate

Quetiapine

Metoprolol Succinate and Amlodipine

Ceftazidime & Sulbactum

Brand

Zerodol

'HCQS’

Quel SR

Revelol AM

GARDCEF

Comment

Today it is a INR800m brand for the company

Has again emerged as one of the key growth

drivers for the company over the years

NDDS based products

Sustained release combination formulation

A novel injectable anti-biotic combination

Source: Company/MOSL

The company has guided to

maintain steady rate of

15-25 new product launches

every year for the next few

years.

Modest but steady rate of product introductions:

IPCA's new product launch rate

has been moderate compared to industry peers. In the last four years, it has launched 22

new products annually (including line extensions). The company has guided to maintain

steady rate of 15-25 new product launches every year for the next few years.

Brand strategy paying off:

IPCA's strategy of launching fewer products compared to

peers but making good and sustainable brands out of them has paid off well. IPCA's

strong branding strategy is evident from the fact that products launched in last three

financial years have contributed upwards of 15% to total domestic formulation revenues.

1 November 2011

IPCA Laboratories

IPCA has just 150 brands in the market which is very low compared to peers; but still, it

has 4 brands among top 300 brands of the industry (up from two brands three years ago).

Moderate in number but highly successful product launches… … contribute 6-8% to revenue growth

No. Of launches

88.3

Avg rev. per launch

88.5

New Launches Grow th

Existing Brands Grow th

61.6

52.8

19.7

10.4

3.4

6.1

8.4

6.9

CY09

6.0

CY10

Source: Industry/MOSL

11.5

CY07

CY08

CY09

CY10

CY07

CY08

In anti-malaria, IPCA ranks

No1 with prescription

market share of 43% while

in pain management, it

ranks No7 with prescription

market share of 3.3%

Strong brand equity with doctors in anti-malaria and pain management;

improvement in rankings

IPCA enjoys strong brand equity in anti-malaria and pain management segments. In anti-

malaria, IPCA ranks No1 with prescription market share of 43% while in pain management,

it ranks No7 with prescription market share of 3.3% which has improved from 2.5% four

years ago. In anti-diabetics, the company has improved its ranking from 15 in Jan-2007

(2.2% share) to 12 in Oct-2010 (2.5% share). Even in other therapy areas like CVS,

IPCA has been able to maintain its prescription market share or ranking despite growing

competition.

IPCA has maintained its prescription market share and ranking in various therapy segments

PMS*/Rank

1QCY07

1QCY08

1QCY09

1QCY10

4QCY10

Anti-malaria

41.2/1

36.3/1

37.4/1

42.5/1

42.7/1

Pain management

2.5/11

2.6/11

2.6/12

3.0/10

3.3/7

CVS

2.5/15

2.5/14

2.3/15

2.4/14

2.2/16

2.2/15

1.9/19

1.9/16

2.4/11

2.5/12

Source: Industry/MOSL

* Prescription market share

IPCA has doubled its field

force over the last three

years. It employs one of the

largest field forces in the

industry with MR strength of

4,200

IPCA has already increased

its doctor coverage from

200,000 doctors three years

ago to 400,000

Expansion in field force; impact to kick in going forward

IPCA has doubled its field force over the last three years. It employs one of the largest

field forces in the industry with MR strength of 4,200. We feel the impact of this field

force addition is yet to reflect in the revenue, and will help maintain strong growth

momentum over the next 4-5 years.

Further, the company does not plan to increase the field force going forward. Instead, it

plans to focus on improving field force productivity, which is very low compared to its

large peers. IPCA has already increased its doctor coverage from 200,000 doctors three

years ago to 400,000. We believe the company has ample scope to leverage the strong

field force to penetrate deeper into the markets.

1 November 2011

IPCA Laboratories

IPCA has doubled its field force in last 3 years…

…but its MR productivity is still much below that of

large players

7.8

Revenues Per MR (INR m)

4.9

3.2

3.6

1.6

4,200

7.1

3,000

2,300

FY09

Chart on MR trend

FY10

FY11

Source: Company/Industry/MOSL

IPCA has created a robust

marketing set-up with 13

marketing divisions. These

different divisions focus on

different therapeutic

segments

Proper divisionalization of products ensures focus

IPCA has created a robust marketing set-up with 13 marketing divisions. These different

divisions focus on different therapeutic segments and channelize the efforts of MRs who

are divided into these divisions. Unlike many other companies, IPCA has limited number

of doctors in each MR's list in order to ensure high visit frequency and quality relationship

through innovative customer relationship management (CRM) strategies. We believe that

this focused approach has worked successfully for the company, as reflected in its rising

prescription share in most ailment segments.

Marketing divisions

Division Name

General Pharma

Intima

Activa

Innova

Hycare

Bionova

Altus

Nephro Sciences

Urosciences

Year

1976

2002

2003

1997

2001

2004

Apr-06

Apr-07

Apr-10

Focus therapeutic classes

CVS, Malaria, NSAID, cough prep

Malaria, Anti-bacterial, GI

Ortho, GI

CVS and Anti-diabetics

CNS

CVS and Anti-diabetics

Derma

Anti-biotic

CVS

Nephrology

Urology

Source: Company/MOSL

IPCA to maintain its track

record of outperforming the

industry growth rate

Expect 14% revenue CAGR over FY11-13

Given all the positives discussed above, we expect IPCA to maintain its track record of

outperforming the industry growth rate. After a muted 11% growth in FY12, we expect

growth to rebound to 20% levels in FY13, translating into FY11-13 CAGR of 14%.

1 November 2011

IPCA Laboratories

Temporary headwinds impacted domestic performance

Revenue

29.4

Grow th

Expect IPCA's industry outperformance to continue

DF Revenues

41.2

7,661

6,964

5,978

Grow th (%)

9,039

16.1

2,219

1,682

1,775

1,288

11.7

5.1

1,890

2,913

21.5

22.0

4,766

25.4

4,319

16.5

10.4

18.0

10.0

12.3

2,064

5.1

3,540

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company/MOSL

1 November 2011

IPCA Laboratories

API: Core component of IPCA's business model

Provides vertical integration; growth beyond captive demand from FY13



Focus on cost competency and market leadership

Benefit of vertical integration

Expect healthy growth from FY13

IPCA is one of India's largest API producers. IPCA's expanding API basket augurs well

for the company in terms of vertical integration benefit and growing revenues beyond

captive demand.

Key APIs

Furosemide

Chlroquine Phosphate

Losartan

Atenolol

Hydrochlorothiazide

Metoclopramide HCl

Hydroxychloroquine Sulphate

Metorprolol Succinate

Pyrantel Pamoate

Propranolol HCl

Metoprolol Tartrate

Source: Company/MOSL

Focus on cost competency and market leadership

IPCA always strived to establish itself as the lowest cost global market leader in select

APIs, and the strategy has paid off well. IPCA is the lowest cost and the largest producer

of 15 APIs globally. This number is up from 10 about four years ago, and is expected to

reach 25 over next 3-4 years. It enjoys 50-70% market share in these APIs. Further,

unlike some of its peers, the company has been making good margins in this business.

Benefit of vertical integration

IPCA's cost leadership in its select APIs creates its core competitive advantage of vertical

integration in the formulation business. This is most relevant in the pure generics business

where product cost is the key success factor. This is evident from the fact that despite

being a late entrant in the US, IPCA has managed decent market share coupled with

healthy profitability in its products launched so far. On the back of cost competitiveness,

IPCA has become a partner of choice for many formulation companies across the globe.

It is evident from IPCA's cumulative DMF fillings with USFDA (up from 22 in FY05 to 57

in FY11) and API filings in Europe (up from 7 in FY05 to 29 in FY10).

Expect healthy growth from FY13

We expect healthy revenue growth in this business from FY13, supported by increasing

number of products where IPCA has cost advantage. Further, many global players have

re-filed their products changing their API source to IPCA. The business has clocked

13% CAGR over FY05-11. However, FY11 API revenue growth was muted at 4% despite

~20% increase in production, given higher captive demand. With increase in capacities

going forward, we model in API revenue CAGR of 8% over FY11-13.

API's market mix is well-diversified

Africa

10%

Australasia

Europe

32%

Expect healthy revenue

growth in this business from

FY13, supported by

increasing number of

products where IPCA has

cost advantage

API growth to resume after muted 4% in FY11

API

Grow th (%)

31.0

30.4

14.5

8.5

13.8

7.1

4.2

8.6

Asia

26%

-4.8

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

CIS

US/America's

29%

Source: Company/MOSL

1 November 2011

IPCA Laboratories

International formulations: Expect 20-25% CAGR in

branded generics

USFDA approval for Indore SEZ is key for pure generics ramp-up



Branded formulations - key growth driver

Europe: Strong product pipeline, vertical integration and geographic expansion

to drive growth

US: Significant advantage despite late entry; Indore SEZ approval likely in

CY11

IPCA has comparatively small presence in international formulation segment in terms of

revenues compared to some of its peers. However, it has wide reach as it markets its

products in 110 countries. IPCA has established its presence in both branded generic

markets (with its own field force) and pure generic market (through partners, distributors).

Branded formulations - key growth driver

Though small in size, branded formulations is one of the most profitable businesses for

IPCA with gross margins of 70-75% and EBITDA margins of 27-28%. This segment

contributed INR1.6b (8%) to IPCA's total revenues in FY11. Over the years, IPCA has

been investing resources in growing its international branded business.

CIS contributes 50% to branded formulation business

Grow th (%)

Africa

33%

Branded formulations is one

of the most profitable

businesses for IPCA

Trend in branded formulations revenue

Branded Formulation (INR m)

57.7

33.9

26.3

10.5

-2.1

23.3

20.0

CIS

50%

-41.1

FY05 FY06

FY07 FY08

FY09

FY10 FY11 FY12E FY13E

Asia

17%

Source: Company/MOSL

Strong sales force of 500

In 40 branded generic markets, IPCA has a sales force of 500 people, which is one of the

highest among Indian pharma companies. It has registered formulation dossiers in 70

countries. The company's thrust is on brand-building in pain management, CVS, CNS,

anti-infective and anti-malaria segments.

Major markets for the company include CIS, Africa and Asia



CIS remains the largest branded generic market for the company with revenues of

INR750m in FY11. Among CIS, IPCA's major markets are Russia, Ukraine and

Belarus. The company has ~300 MRs employed in this region. The company's product

portfolio is dominated by fast growing CVS therapeutic segment.

CIS remains the largest

branded generic market for

the company

1 November 2011

IPCA Laboratories



Similarly, in Africa the company sells its products in ~40 countries with field force of

~150.



In Asia, it has presence in Middle East and South east countries. The expansion of

product portfolio would be a key growth driver in these markets for the company.

Expect 20-25% CAGR

We believe that the IPCA's branded generic business will grow at CAGR of 20-25% over

the next two years on the back of:



Strong sales force;



Geographic expansion to South and Central American and Western African countries;

and



Introduction of new products (IPCA has identified 50 existing formulations for

registration and launch across geographies).

Pure generics - USFDA approval for Indore SEZ is key to ramp-up

IPCA derives 29% of its revenue from pure generics exported to Europe, US, Australasia

and Africa. Europe is the largest generic market for IPCA, of which 90% of revenue

comes from UK alone. This is followed by Africa where the company sells anti-malaria

drugs through various institutions. IPCA is a late entrant in the US markets having started

business here as recent as in FY09. Australasia is a highly profitable market for IPCA, but

revenues from this market are low as of now.

The key drivers of pure generics business are -



Europe:

Geographic expansion beyond UK



US:

US FDA approval for Indore SEZ



Africa:

Lucrative opportunity in Artemether-Lumefantrine, an anti-malaria formulation.

Europe: Strong product pipeline, vertical integration and geographic

expansion to drive growth

Unlike in the past, when IPCA used to market plain vanilla generic products based on

dossiers purchased from other companies, IPCA's product portfolio now consists of complex

products. This gives it an edge in the highly competitive UK market. Further, the company

has developed a large product basket with 38 products already registered and 16 products

under registration in UK and other European countries like Portugal. Importantly, most of

these products are backed by its own API which offers the company good profitability

despite very high pricing pressure. Also the company has started diversifying its presence

in other European countries to reduce its dependence on UK. In a few geographies, IPCA

is also selling the product dossiers to other companies against milestone payments and

long-term supply arrangements.

Product registered and under registration over the years

Dossier filed

Dossier registered

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Source: Company/MOSL

We believe that the

IPCA's branded generic

business will grow at CAGR

of 20-25%

Trend in pure generics

revenue

Pure Generics (INR m)

Grow th (%)

70.6

57.6

35.0

53.3

37.8

23.7

5.8

Source: Company/MOSL

1 November 2011

IPCA Laboratories

The company has so far filed

22 ANDAs and has received

approval for 12, of which it

has launched 7 products

US: Significant advantage despite late entry; Indore SEZ approval likely in

CY11

Though IPCA is a late entrant in US, it has demonstrated ability to scale up the business

rapidly. Within three years of its entry in the US, IPCA earns revenue of ~USD25m in this

market. Here, IPCA has adopted the partnership model rather than marketing on its own.

It has three partners, Ranbaxy being the largest. It has tied up with Ranbaxy for supply of

25 ANDAs for which IPCA supplies the final product with manufacturing margins. Further,

IPCA and Ranbaxy equally share the profits generated through selling the products. The

company has so far filed 22 ANDAs and has received approval for 12, of which it has

launched 7 products so far. IPCA intends to file 10-12 ANDAs every year for next few

years.

We like the company's strategy to focus on select products where it has vertical integration

advantage. It will enable the company to garner higher market share in various products

launched. We believe US will be a key long-term growth driver for the company. However

in the near term, early USFDA approval for Indore SEZ is key to ramp up revenues in US.

Currently, IPCA has only one USFDA formulation facility at Silvassa which is running at

full capacity. The company has invested INR1.5b in construction of new SEZ at Indore

which is built specifically for the US market. The facility is awaiting USFDA approval for

last 2 years and is expected to finally receive the same in CY11. Once approved, this

facility can generate peak revenues of USD100m for IPCA. We have modeled in revenue

from Indore SEZ beginning FY13.

Africa: Anti-malarial formulation presents significant revenue ramp-up

potential

IPCA has obtained WHO pre-qualification for Artemether-Lumefantrine, an anti-malaria

formulation. This is a USD400m market with only 3 other players. This is a lucrative

product opportunity with significantly high EBITDA margins at ~32%. We note that IPCA

is the only fully integrated player hence enjoys significant advantage over other players in

terms of ramping up the business. Currently Novartis has the largest share in the institutional

tender business for the product. IPCA's revenue from this product has increased from

INR300m in FY10 to INR1.2b in FY11. We are very positive on IPCA's prospects in this

opportunity and believe that IPCA will manage to garner much higher market share going

forward. We expect revenues of INR2.5b from this business in FY12 and INR3b in FY13.

Approved ANDAs

Filed

FY07

FY08

FY09

FY10

FY11

Approved

Source: Company/MOSL

IPCA has obtained WHO

pre-qualification for

Artemether-Lumefantrine, an

anti-malaria formulation.

This is a USD400m market

with only 3 other players

1 November 2011

IPCA Laboratories

Expect 18% revenue CAGR, 25% EPS CAGR

Operating leverage to drive earnings growth; return rations sustainable



Branded formulations and institutional business to drive 18% revenue CAGR

EBITDA to grow at 22.5% CAGR; Margin improvement to sustain

EPS CAGR of 25% led by strong operating performance and lower tax expense

INR5b capex planned to support revenue scale-up

Strong returns ratios to sustain despite large capex

Expect IPCA to clock topline

CAGR of 18% over FY11-13

led by branded formulations,

both in the domestic and

international markets

We expect IPCA to clock topline CAGR of 18% over FY11-13 led by branded formulations,

both in the domestic and international markets. Margins would expand 170bp over this

period led by higher capacity utilization and improving product mix, in turn, driving PAT

and EPS CAGR of 25%. Further, we expect strong return ratios to sustain going forward

despite high capex of INR5b planned over next two years.

Branded formulations and institutional business to drive 18%

revenue CAGR

We expect IPCA to report revenue CAGR of 18% over FY11-13 led by strong traction in

domestic formulation segment (14% CAGR), branded formulation exports (22% CAGR)

and institutional business (57% CAGR). We expect back-ended growth for regulated

markets like US and Europe due to slowdown in Europe and capacity constraints for US

market. API segment is expected to grow at 8% led by new product launches.

Branded formulations to drive revenue growth

FY08

Domestic formulation

YoY Growth (%)

International formulation

YoY Growth (%)

Europe

America's

4,319

22.0

3,417

25.1

1,873

557

204

696

741

4.9

1,943

-8.0

10,419

14.6

139

16.5

10,559

14.6

FY09

4,766

10.4

4,372

27.9

1,741

242

1,023

177

1,099

1,083

46.2

2,432

25.2

12,653

21.4

-36.6

12,742

20.7

FY10

5,978

25.4

4,892

11.9

2,483

664

120

658

173

524

270

1,416

30.7

3,169

30.3

15,456

22.1

-20.5

15,526

21.9

FY11

6,964

16.5

6,917

41.4

2,800

1,159

242

742

258

496

1220

1,443

1.9

3,335

5.2

18,659

20.7

163

132.1

18,822

21.2

FY12E

7,661

10.0

9,317

34.7

3,220

1,449

303

927

323

595

2500

1,515

5.0

3,601

8.0

22,094

18.4

196

20.0

22,290

18.4

FY13E

9,039

18.0

11,453

22.9

3,542

2,318

378

1,113

387

714

3000

1,667

10.0

3,890

8.0

26,049

17.9

235

20.0

26,284

17.9

12.5

41.4

25.0

22.5

20.0

56.8

7.5

8.0

18.2

20.0

18.2

FY11-13

CAGR (%)

13.9

28.7

Topline growth led by

branded formulation

institutional business and

US market

Australasia

CIS

Asia

Africa

Institutional business

Domestic APIs

YoY Growth (%)

International APIs

YoY Growth (%)

Net Sales

YoY Growth (%)

Other operating income

YoY Growth (%)

Income from operations

YoY Growth (%)

Source: Company/MOSL

1 November 2011

IPCA Laboratories

FY12 margins are likely to

remain under pressure

EBITDA to grow at 22.5% CAGR; Margin improvement to sustain

We expect FY11-13 EBITDA CAGR of 22.5% on the back of strong revenue growth

and improvement in the margins. FY12 margins are likely to remain under pressure owing

to:

1) Muted growth in domestic formulation revenues;

2) Higher spend in domestic formulation segment due to (a) increased field force, (b)

entry into newer therapeutic segments, and (c) start-up cost of Sikkim facility; and

3) Fixed costs at Indore SEZ without commensurate revenues, pending USFDA approval

(we expect revenues to start only in FY13).

We expect margin improvement from FY13 with (1) normalcy in domestic formulation

business, and (2) revenue contribution from Indore SEZ. Historically, IPCA has steadily

improved EBITDA margin from 14.8% in FY06 to 19.8% in FY11.

EPS CAGR of 25% led by strong operating performance and lower tax

expense

IPCA's earnings are likely to grow at 25% CAGR over FY11-13, in-line led by strong

operating performance. We feel that the interest will remain stagnant with stable debt

level. However we expect tax rate to come down owning to commencement of Sikkim

facility in this month for domestic formulation business and Indore SEZ being taken under

MAT. Over the last seven years the earnings have gone up at CAGR of 20%

IPCA's earnings are likely to

grow at 25% CAGR over

FY11-13, in-line led by

strong operating

performance

Earnings growth to accelerate FY13 onwards…

EPS (INR m)

109.5

80.9

Grow th (%)

…in line with higher EBITDA and EBITDA margins

EBITDA (INR m)

21.8

17.3

26.4

22.9

2,653

3,335 3,761

4,645

17.1

14.8

5,648

20.6

EBITDA Margin (%)

21.3

19.8

20.8

21.5

15.7

0.0

-18.1

5.9

4.8

10.1

-24.1

7.6

13.8

16.0

8.9

2,038 1,817

17.4

22.0

27.0

1,175 1,117

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company/MOSL

INR5b capex planned to support revenue scale-up

IPCA expects to spend ~INR5b over FY12 and FY13 to increase capacities in sync with

the strong traction in revenue. The company is planning a greenfield manufacturing facility

at Baroda and likely to expand its API capacities at various locations. Besides, INR500m

would be invested in Indore SEZ and Sikkim facility before they start commercial production.

1 November 2011

IPCA Laboratories

IPCA's return ratios have

improved remarkably over

the years

Strong returns ratios to sustain despite large capex

IPCA's return ratios have improved remarkably over the years - RoCE up from 17.2% in

FY06 to ~23% in FY11, and RoE up from 15.9% to ~23% over the same period. Our

estimates suggest that despite the INR5b capex, IPCA will sustain its high return ratios on

the back of improving profitability driven by higher asset utilization and operating leverage.

Impressive return ratios to sustain…

RoCE (%)

32.0

27.0

RoE (%)

…despite strong capex to support revenue scale-up (INR b)

Gross Block

Capex

12.2

9.9

8.8

7.8

5.8

14.5

22.0

17.0

12.0

3.8

1.0

4.5

5.1

0.7

0.8

1.4

0.9

1.3

1.8

2.3

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company/MOSL

1HFY12 performance review: Robust growth despite slowdown in

domestic business



IPCA achieved robust growth in both revenue and profits during first half of FY12.

Revenue was up 23.2%YoY to INR11.5b. EBITDA grew 33.8%YoY to INR2.53b

while adjusted PAT grew 47.4%YoY to INR1.58b.



Topline growth was driven by 57.2%YoY growth in export formulation to INR4.67b

on the back of ~5x increase in institutional business led by anti-malaria segment and

~60% growth in US market albeit on a low base. Domestic formulation business

reported muted growth of 7.2%YoY to INR4.18b during the period due to 1) lower

revenue in anti-malaria and anti-bacterial segments, 2) restructuring of various

marketing divisions 3) attrition in field force and 4) overall slowdown in the industry.



API revenue reported muted growth of 7.3%YoY to INR2.59b primarily due to

increase in captive consumption to support increase in demand in formulation

segment. During 1HFY12, the company could not sell Artemether API outside due

to increased captive consumption.



EBITDA grew 33.8%YoY to INR2.53b while EBITDA margins expanded 177bp

to 21.3%. The margins expansion came on the back of favorable product mix as

the share of high margin business segments going up.



Adjusted PAT grew by 47.4%YoY to INR1.58b led by strong operational

performance and lower tax expense.

1 November 2011

IPCA Laboratories

Buy with target price of INR378, 50% upside

Trading at discount to historical and peers valuation



Vertically integrated business model with core competitive advantage of APIs

De-risked revenue streams, both in terms of product lines and geographies

25% EPS CAGR: We expect the company to report earning CAGR of 25% over

FY11-13 on the back of strong revenue growth and margin expansion.

We initiate coverage with a Buy rating and target price of INR378 (14x FY13E

EPS), a 50% upside.

Key qualitative arguments

We believe IPCA is one of the best managed mid-sized pharma company in India. Our

key qualitative arguments are:



Vertically integrated business model with core competitive advantage of APIs;



De-risked revenue streams, both in terms of product lines and geographies;



Solid business strategy around branded formulations; and



Conservative, yet proactive, management.

Key financial and valuation arguments



25% EPS CAGR:

We expect the company to report earning CAGR of 25% over

FY11-13 on the back of strong revenue growth and margin expansion.



High return ratios, low gearing: The company is likely to sustain healthy return ratios

going forward; gearing is low and expected to fall further (FY13E D/E at 0.50 v/s

0.53 in FY11).



Significant valuation discount: At 9x FY13 earning, the IPCA stock trades at 25-50%

discount to its own historic valuation and that of peers.



Buy for 50% upside:

We initiate coverage with a

Buy

rating and target price of

INR378 (14x FY13E EPS), a 50% upside.

Historical valuation bands

One year forward P/E

One year forward P/BV

P/E (x)

Avg(x)

16.6

Peak(x)

Min(x)

9.0

7.0

P/B (x)

Avg(x)

Peak(x)

Min(x)

4.1

11.4

10.2

7.2

5.0

3.0

1.0

3.2

2.8

2.0

Source: MOSL

IPCA: Peer valuations

Company

IPCA Labs

Biocon

Glenmark Pharma

Torrent Pharma

CMP

(INR)

254

349

309

578

EPS (INR)

FY11 FY12E FY13E

17.4

18.4

12.5

31.9

22.0

16.9

16.4

40.2

27.0

20.2

20.8

50.1

FY11

14.6

19.0

24.8

18.1

P/E (x)

FY12E

11.6

20.6

18.8

14.4

FY13E

9.4

17.2

14.9

11.5

EV/EBITDA (x)

FY11 FY12E FY13E

9.9

10.9

17.3

12.2

8.1

11.1

10.2

9.3

6.7

9.3

10.5

7.6

RoE (%)

FY11 FY12E

22.8

18.1

17.4

29.2

FY13E

24.0

24.4

14.9

15.9

18.8

19.0

29.2

28.7

Source: MOSL

1 November 2011

IPCA Laboratories

Key investment risks

Regulatory risks

National Pharmacutical Pricing Policy (NPPP) 2011:

The newly proposed NPPP

intends to bring total 348 drugs under price control resulting in a significant increase in

span of control to 50-60% from the current 20%. The policy if implemented could

have negative impact on the industry including Ipca.

Mitigant:

IPCA's management has indicitated that if the policy is implemented in its

current form the company will have to reduce the prices for pain management and

Anti Malaria durgs. However the company as stated that the impact would be minimul

at 2-3%.

US - Strict FDA norms:

In the recent times, we have observed that USFDA is

becoming more and more stringent regarding cGMP norms and has taken action against

many pharma companies including Indian companies. Any similar action taken by

USFDA may impact company's US business.

Pricing risks

UK:

High competition in UK poses a risk of further price erosion.

Mitigant:

We believe IPCA's vertical integration will help cushion any major impact

on its profitability.

API:

This is a commodity business, and is vulnerable to competitive pricing.

Mitigant:

We believe IPCA's global market leadership in its select segments, lowest

cost producer status and reasonable pricing strategy do not leave much room for

under-cutting.

Currency risk

As 55% of IPCA's revenue comes from exports, sustained appreciation of the Indian

rupee vis-à-vis global currencies would adversely impact revenue and profits.

Mitigant:

IPCA's six-month forward cover hedging policy partly mitigates short-term

currency risk. Over the long-term, the only possible mitigant is to sustain cost competitiveness

via economies of scale.

1 November 2011

IPCA Laboratories

Financials and valuation

Income statement

Y/E March

Net Revenues

Change (%)

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income - Rec.

PBT before EO Expense

Extra Ordinary Expense/(Income)

PBT after EO Expense

Current Tax

Deferred Tax

Tax

Tax Rate (%)

Reported PAT

Less: Minority Interest

Net Profit

Adj PAT

2008

10,652

13.8

1,817

17.1

325

1,492

204

1,316

-436

1,753

296

358

27.2

1,395

958

2009

12,888

21.0

2,653

20.6

397

2,257

318

1,960

777

1,183

155

233

11.9

951

1,727

2010

15,622

21.2

3,335

21.3

467

2,868

264

2,629

-33

2,663

485

142

627

23.9

2,035

2,002

2011

18,969

21.4

3,761

19.8

558

3,203

314

2,973

-434

3,407

770

784

26.4

2,623

2,189

2012E

22,290

17.5

4,645

20.8

662

3,983

407

112

3,689

181

3,508

738

184

922

25.0

2,586

2,766

(INR Million)

2013E

26,284

17.9

5,648

21.5

800

4,848

473

157

4,532

906

227

1,133

25.0

3,399

Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Deferred liabilities

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventory

Account Receivables

Cash and Bank Balance

Loans & Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

2008

251

5,642

5,892

574

3,530

9,996

5,789

1,646

4,143

1,276

6,055

2,676

2,595

690

1,574

1,371

203

4,481

9,996

2009

250

6,063

6,313

651

4,594

11,554

7,790

2,022

5,768

144

412

7,392

3,062

3,391

107

832

2,162

1,962

200

5,230

11,554

2010

250

8,399

8,649

793

4,545

13,981

8,812

2,433

6,379

383

325

8,992

3,802

3,880

108

1,201

2,097

1,850

247

6,895

13,981

2011

251

10,265

10,516

807

5,308

16,625

9,884

2,892

6,992

1,132

408

10,586

4,664

4,637

104

1,182

2,493

2,073

420

8,093

16,625

2012E

251

12,333

12,585

992

6,308

19,885

12,184

3,554

8,630

1,132

634

12,908

5,533

5,471

537

1,368

3,419

2,797

622

9,489

19,885

(INR Million)

2013E

251

15,052

15,304

1218

6,308

22,830

14,484

4,354

10,130

1,132

634

15,111

6,595

310

1,612

4,177

3,297

879

10,935

22,830

1 November 2011

IPCA Laboratories

Financials and valuation

Ratios

Y/E March

Basic EPS (INR)

EPS

Cash EPS

BV/Share

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per Share

Return Ratios (%)

EBITDA Margins (%)

Net Profit Margins (%)

RoE

RoCE

Working Capital Ratios

Asset Turnover (x)

Fixed Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Working Capital Turnover (Days)

Growth (%)

Sales

EBITDA

PAT

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

E: MOSL Estimates

3.8

7.3

0.6

3.4

7.1

0.7

4.3

10.9

0.5

4.2

10.2

0.5

3.8

9.8

0.5

3.6

10.2

0.4

2008

7.6

13.7

47.0

2009

13.8

10.8

50.5

2010

16.0

20.0

69.1

2011

17.4

25.3

83.7

2012E

22.0

25.8

100.1

2013E

27.0

33.4

121.7

14.6

10.0

3.0

2.0

9.9

1.5

3.9

11.5

9.8

2.5

1.7

8.1

1.6

4.6

9.4

7.6

2.1

1.4

6.7

2.1

7.4

17.1

9.0

18.0

18.4

20.6

13.4

28.3

22.4

21.3

12.8

26.8

24.0

19.8

11.5

22.8

22.7

20.8

12.4

24.0

23.6

21.5

12.9

24.4

24.7

1.8

2.7

150

1.7

2.6

145

1.8

2.6

159

1.9

2.8

154

1.8

2.9

147

1.8

2.8

148

13.8

-10.8

-23.8

21.0

46.0

80.2

21.2

25.7

15.9

21.4

12.8

9.3

17.5

23.5

26.4

17.9

21.6

22.9

1 November 2011

IPCA Laboratories

Financials and valuation

Cash Flow Statement

Y/E March

Oper. Profit/(Loss) before Tax

Interest/Dividends Recd.

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

EO Expense / (Income)

CF from Operating incl EO Exp.

(inc)/dec in FA

(Pur)/Sale of Investments

CF from Investments

Issue of shares

(Inc)/Dec in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

2008

1,817

-296

-1,260

290

-436

726

-1,386

-9

-1,395

1,141

-204

-235

-41

662

-7

101

2009

2,653

-155

-736

1,784

777

1,007

-869

-316

-1,185

-1

1,060

-318

-323

-227

191

107

2010

3,335

-485

-1,664

1,212

-33

1,245

-1,261

-1,174

-50

-264

-409

653

-70

107

108

2011

3,761

-770

-1,203

1,872

-434

2,307

-1,821

-83

-1,904

762

-314

-468

-388

-407

-4

108

104

2012E

4,645

112

-738

-963

3,057

181

2,876

-2,300

-225

-2,525

1,007

-407

-517

434

104

537

(INR Million)

2013E

5,648

157

-906

-1,673

3,226

-2,300

-473

-680

-1,153

-227

537

310

1 November 2011

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