13 October 2015
SUN PHARMACEUTICAL
SUNP’s FY15 annual report analysis highlights 71% YoY increase in
revenue to INR274b while EBITDA margins declined to 28.7% (FY14:
43.5%), led by Ranbaxy’s merger and Halol issues. Legal and
consultancy charges increased to INR14.2b (21.4% of PBT) v/s
INR4.8b in FY14 while, additional provisioning of INR1.0b (1.5% of
PBT) was recognized toward USD400m deal. Unrealized forex gains
increased to INR7.8b (12% of PBT) v/s INR0.1b in FY14. Tax rate
remained low at 14.2% on account of (a) SPLL structuring leading to
tax savings of INR3.2b, (b) recognition of DTA of INR7.3b and (c) no
taxation in the Dubai entity. Contingent liabilities for tax disputes
increased to INR26.7b (FY14: INR12.1b). Goodwill stood at INR50b
(20% of net worth); of which, INR13.6b pertains to acquisition (part
of which represents brands /products in pipeline); which in our view
should be amortised.
Revenue jumps 71% YoY to INR274b; EBITDA margins decline
1480bp to 28.7%
due to (a) Ranbaxy’s merger related cost and
relatively low-margin business and (b) Halol issues. Operating cash
flow increased 34% YoY to INR53b in FY15.
INR1b of addl. provisioning recognized toward USD400m deal
for
financing Protonix settlement with a third party in FY14. During
FY14, SUNP made an initial provisioning of INR2.3b (USD38.5m).
Legal, professional and consultancy charges increase to INR14.2b
(FY14: INR4.8b); of which, INR6b (FY14: INR2.8b) pertains to
subsidiaries.
Tax rates remained low at 14.2%; contingent liabilities for tax
dispute rise to INR26.7b
v/s INR12.1b in FY14. Tax rates remained
low on account of (a) nil taxation on profits of INR11.3b of the
Dubai subsidiary, (b) INR3.2b of tax savings on account of SPLL
structuring and (c) DTA recognition of INR7.3b.
Goodwill on consolidation increased to INR37b (14.4% of net
worth),
primarily on consolidating subsidiaries of Ranbaxy. Also,
goodwill increased for Sun Pharmaceutical Industries Inc.—a
wholly owned subsidiary—from INR7.3b in FY14 to INR11.5b in
FY15.
Intangibles stood at INR25.1b (9.8% of net worth),
primarily
comprising goodwill (part of which represents for acquisition of
brands/product pipeline) of INR13.6b. We believe that this is
primarily on acquisition of DUSA and URL in FY13 and Ranbaxy in
FY15; though we believe that it should be amortized, the company
tests goodwill for impairment.
ART will present a threadbare portrait of annual reports - statistical, strategic and structured.
We believe ART's wide canvas - from accounting and auditing issues to operating
performance to management insights to governance matters - will help readers paint a
clearer picture of the stock's investment worthiness.
A
NNUAL
R
EPORT
T
HREADBARE
The
ART
of annual report analysis
INR1.0b
of
additional
provisioning made towards
USD400m deal.
Tax rates remained low at
14.2%; contingent liabilities
for tax dispute rise to
INR26.7b.
Goodwill
on
acquisition
(partially
representing brand/products) at INR13.6b
which in our view should be amortised
Stock Info
Bloomberg
CMP (INR)
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b) / (USD b)
SUNP IN
882
2,406.0
1,201/792
0/-14/8
32.0/1.0
Financial summary (INR b)
Y/E March
Sales
EBITDA
Rep. PAT
Rep.EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
2015A
273.7
80.0
47.4
19.7
50.9
110.1
21.1
25.3
21.8
44.7
8.0
2016E
289.5
77.4
47.2
19.6
-0.5
121.4
16.9
19.0
27.7
45.0
7.3
2017E
332.1
106.5
76.3
31.7
61.7
146.1
23.7
28.5
19.7
27.8
6.0
18.3
0.7
EV/EBITDA (x)
25.7
26.0
Div. Yield (%)
0.5
0.6
E: MOSL Estimates (Analyst estimates)
Shareholding pattern (%)
As on
Promoter
DII
FII
Others
Jun-15
54.7
7.8
23.8
13.8
Mar-15
63.6
4.6
20.0
11.9
Jun-14
63.7
5.1
23.0
8.3
Note: FII Includes depository receipts
Auditor’s name
Deloitte Haskins & Sells LLP
Sandeep Gupta
(S.Gupta@MotilalOswal.com); +91 22 3982 5544
Somil Shah
(Somil.Shah@MotilalOswal.com); +91 22 3312 4975
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

ART
|
Sun Pharma
ART #1
ACCOUNTING & KEY FINANCIAL INSIGHTS
Acquisition and corporate restructuring continue
SUNP acquired and merged Ranbaxy Laboratories with itself during FY15,
strengthening its position as the fifth largest generic player globally. Further,
pursuant to an organizational restructuring, SUNP merged Sun Global Inc., BVI—
a wholly owned subsidiary—with the parent. As a result, financials for FY14 and
FY15 are not comparable at both standalone and consolidated basis.
Following the merger, net worth increased by INR176b at standalone level and
INR30b on a consolidated basis.
Exhibit 1:
Acquisitions and restructuring continue over the last three years
Year
Acquisition
Acquisition of Ranbaxy
and merger with the
standalone entity
Acquisition of
Pharmalucence
Acquisition of Dusa
Pharma Inc and URL's
generic business
Restructuring
FY15
FY14
Merger of Sun Pharma Global Inc with the parent entity
Merger of Sun Pharma Global FZE's therapeutic & investment
business with the parent entity
Demerger of domestic formulations business into a wholly owned
subsidiary Sun Pharma Laboratories
Source: Company Annual Report, MOSL
FY13
Revenues grew 71% YOY
while, EBITDA margins
declined 1480bp on
Ranbaxy merger and Halol
issues
Ranbaxy merger leads to revenue growth; weighs on margins
Revenue for the consolidated entity grew 71% to INR 274b (FY14: INR161b),
primarily on the back of Ranbaxy acquisition.
EBITDA margins declined to 28.7% (FY14: 43.5%), with gross margins declining
800bp, employee expenses rising 300bp and other expenses rising 500bp.
We believe the above is primarily due to (a) Ranbaxy’s merger cost, (b) relatively
low-margin business of Ranbaxy, and (c) lower contribution from US markets
due to import alert on the Halol facility.
Exhibit 2:
Margins decline on Ranbaxy merger and Halol issues
Consolidated
Particulars
FY14
(INR b)
Net Revenue
Raw Materials Consumed
Gross Margin
Operating and
Administrative Expenses
Personnel Cost
EBITDA
161
28
133
42
21
70
FY15
Subsidiary (Derived)
FY14
FY15
Standalone
FY14
FY15
(% of
(% of
(% of
(% of
(% of
(% of
(INR b)
(INR b)
(INR m)
(INR b)
(INR b)
revenue)
revenue)
revenue)
revenue)
revenue)
revenue)
100.0
17.3
82.7
26.3
12.9
43.5
274
67
207
84
44
79
100.0
24.6
75.4
30.6
16.1
28.7
133
17
115
28
18
70
100.0
12.9
87.1
20.8
13.5
52.7
194
32
162
48
29
84
100.0
16.6
83.4
24.8
15.2
43.4
28
11
18
15
3
0
100.0
37.7
62.3
80
35
45
100.0
43.8
56.2
51.9
36
44.6
9.9
15
18.5
0.6
(6)
(7.0)
Source: Company, MOSL
INR1b of provisioning made
toward expected discounts
on USD400m deal
Additional provisioning of INR1b on deal to finance Protonix liability
SUNP recognized additional provision of INR1b (USD16.5m, 1.5% of FY15 PBT)
toward the USD400m arrangement with a third party for financing the liability of
Protonix. During FY14, INR2.3b (USD38.5m) of initial provisioning was recognized
toward the expected discounts and incidental expenses of the arrangement. The
provisioning forms part of miscellaneous expenditure, which increased to INR11.8b
(FY14: INR6.3b)
2
13 October 2015

ART
|
SUN Pharma
Exhibit 3:
Miscellaneous expenditure continues to rise(INR b)
Miscellaneous Expenses
% of revenue
4.0%
3.3%
2.0%
4.3%
Misc. expenditure increases
to INR11.6b (4% of revenue)
3.7%
2.1
FY11
1.6
FY12
3.7
FY13
6.4
FY14
11.6
FY15
Source: Company Annual Report, MOSL
Legal, professional and consultancy charges increase to 14.2b
Legal, professional and consultancy charges increased from INR4.8b in FY14 to
INR14.2b in FY15—led by the standalone entity, which merged Ranbaxy and Sun
Pharma global Inc. and reported an increase in legal, professional and
consultancy to INR8.3b (FY14: INR2.1b).
Legal, professional and consultancy charges for subsidiaries increased from
INR2.7b in FY14 to INR6.0b in FY15.
Exhibit 4:
Legal, professional and consultancy charges up at standalone and subsidiaries
(INR b)
Particulars
Professional, Legal and Consultancy
Standalone
FY14
FY15
2.1
8.3
Derived Subsidiary
Consolidated
FY14
FY15
FY14
FY15
2.7
6.0
4.8
14.2
Source: Company Annual Report, MOSL
Caraco’s losses increased
to INR1.2b. DTA of
INR0.7b recognized
Taro reports strong performance; losses incurred in SPLL and Caraco
Taro’s performance improved significantly, with Consolidated PAT increasing
from INR26b in FY14 to INR46b in FY15. Taro and its subsidiaries in contributed
~66% to the consolidated profitability FY15.
DUSA Pharmaceuticals’ PAT increased from INR0.3b in FY14 to INR1.3b in FY15.
Sun Pharmaceutical Laboratories’ PAT declined from INR2.4b in FY14 to a loss of
INR0.2b in FY15.
Sun Pharmaceutical Industries Inc (formerly known as Caraco Pharmaceutical
Laboratories Ltd.) performance declined, with losses increasing from INR0.5b in
FY14 to INR1.2b in FY15. The company has recognized a DTA on losses of
INR0.7b (FY14: INR0.3b)
13 October 2015
3

ART
|
SUN Pharma
Exhibit 5:
Taro’s profitability continued; performance dip in Sun Pharma global (FZE) (INR b)
FY14
Turnover
(net)
PBT
85.3
4.2
39.5
46.7
1.0
31.6
27.1
235.4
31.5
(0.1)
3.5
(0.8)
(1.1)
31.7
159.90
224.6
FY15
Turnover
(net)
PBT
97.3
6.9
43.7
43.2
0.8
22.1
103.4
52.7
2.2
1.8
(2.0)
(1.2)
11.3
(0.02)
Subsidiary
Taro Pharmaceutical Industries
Ltd.(TARO) & its subsidiaries
Dusa Pharmaceuticals Inc
Sun Pharmaceutical laboratories
Sun Pharmaceutical Industries Inc.
Alkaloida Chemical Company Zrt.
Sun Pharma Global (FZE)
Others
Total
Net Worth
104.4
(0.1)
186.3
6.2
6.5
69.1
433.7
806.0
PAT
26.3
0.3
2.5
(0.5)
(1.1)
31.7
156.2
215.4
Net Worth
149.4
1.0
186.1
5.2
35.3
81.9
562.8
1,021.6
PAT
46.4
1.3
(0.2)
(1.2)
(1.2)
11.3
(2.3)
317.4
64.8
54.1
Source: Company Annual Report, MOSL
Tax saving of INR3.2b on demerger of domestic formulation business
SPLL’s structuring leads to
tax expenses being lower by
INR3.2b
SUNP’s consolidated PAT (INR54.9b) before minority interest is higher than the
cumulative PAT of standalone entity (-INR14.7b) and aggregate PAT of
subsidiaries (INR54.1b); we believe this is primarily due to inter-company
transactions, which get eliminated at the time of consolidation.
SUNP demerged its domestic formulation business into a separate entity Sun
Pharmaceuticals laboratories (SPLL) in FY13. The assets were recognized at fair
values, leading to higher depreciation cost (and hence lower book profits)—
which gets eliminated on consolidation.
We believe the fair valuation of assets has led to amortization being higher by
~INR15b and tax expense lower by ~INR3.2b
Exhibit 6:
Aggregate profit of standalone and subsidiaries <consolidated profit (INR b)
Particulars
PAT before Minority Interest
Standalone
Cumulative profits of subsidiaries as per section 129
Total (A)
Consolidated (B)
Difference (B-A)
-14.7
54.1
39.3
54.9
15.6
Source: Company Annual Report, MOSL
FY15
Tax rate remains low at 14.2% …
SUNP’s consolidated tax rate remained low at 14.2% in FY15 (FY14: 15.3%) due
to (a) deferred tax credit of INR7.3b recognized, (b) low tax rates in certain
subsidiaries (Sun Pharma Global FZE—0%) and (c) SPLL.
Deferred tax assets have increased from INR11.9b in FY14 to INR18.5b; of this
increase, INR4.6b is on account of Taro Pharmaceuticals. DTA at Taro increased
from 8.0b in FY14 to INR12.6b in FY15.
SUNP recognized MAT credit entitlement of INR7.5b, which was written off by
Ranbaxy in 3QFY15 on reassessment by the management that the combined
amalgamated entity will pay normal income tax during the specified period; we
believe this may reduce the future cash outflow.
The cash tax paid for FY15 stood at INR17.4b as against the tax expense of
INR9.1b. Advance tax paid stood at INR11.0b (FY14: INR5.7b)
4
13 October 2015

ART
|
SUN Pharma
Exhibit 7: DTA increases in FY15 (INR b)
Particulars
Unpaid Liabilities
Unabsorbed Loss
Intangibles
Deferred Revenue
Others
Total
FY14
FY15
5.8
8.6
0.1
0.1
3.1
3.3
1.4
2.2
1.5
4.3
11.9
18.5
Source: Company Annual Report, MOSL
Exhibit 8: Deferred
tax primarily on account of Taro Pharmaceuticals (INR b)
Particulars
Taro (Consolidated)
Sun Pharma (Consolidated)
FY14
8.0
11.9
FY15
Difference
12.6
4.6
18.5
6.6
Source: Company Annual Report, MOSL
…However, contingent liabilities from income tax demand rise
Contingent liability for tax
disputes rises to INR26.7b
v/s INR12.1b in FY14
Contingent liabilities on a consolidated basis increased steeply from INR14.3b in
FY14 (8% of net worth) to INR33.9 (13% of net worth).
The increase is primarily on account of (a) income tax disputes, which have
increased to INR26.7b (FY14: NR12.1b); (b) DPEA demand toward unintended
benefit of INR3.2b in FY15.
The increase in tax dispute liabilities is driven by subsidiaries—increased from
INR7.2b in FY14 to INR15.6b in FY15.
Exhibit 9:
Income tax demand significantly increase contingent liabilities (INR b)
Particulars
Income tax disputed liabilities
Excise duty disputed liabilities
Claims against the company not acknowledged as debts
Guarantees given by bankers on behalf of SUNP
Other demands
DPEA on account of demand towards unintended benefit
Fine imposed for anti-competitive settlement agreement by
European Commission
Other matters
Total
FY11
2.6
0.3
0.8
0.2
2.4
FY12
5.1
0.3
0.8
0.3
0.0
FY13
7.6
0.5
0.7
0.6
0.1
FY14
12.1
0.6
0.8
0.7
0.1
FY15
26.7
0.6
1.0
0.8
0.5
3.2
6.3
6.6
0.7
0.3
9.4
14.3
33.9
Source: Company Annual Report, MOSL
Exhibit 10:
Contingent liabilities increase to 13% of net worth
Contingent liabilities and demand (INR b)
Contingent liabilities as a % of networth
13%
8%
7%
5%
6%
6.3
FY11
6.6
FY12
9.4
FY13
14.3
FY14
33.9
FY15
Source: Company Annual Report, MOSL
13 October 2015
5

ART
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SUN Pharma
Goodwill on consolidation increases to 14.4% of net worth
Goodwill on consolidation
of existing wholly owned
subsidiary—Sun
Pharmaceutical Inc.—
increases to INR11.5b v/s
INR7.3b in FY14
Goodwill on consolidation increased from INR18.3b in FY14 (9.9% of net worth)
to INR37b (14.4% of net worth) in FY15, primarily on consolidation of Ranbaxy
subsidiaries.
Goodwill on consolidation of existing wholly owned subsidiary Sun
Pharmaceutical Inc. increased from INR7.3b in FY14 to INR11.5b in FY15 despite
increased losses—from INR0.5b to INR1.2b.
Goodwill of INR1.0b (1.5% of PBT) was impaired. The entity for which the
goodwill is written off has not been disclosed.
Exhibit 11:
Goodwill on consolidation increases significantly (INR b)
Particulars
Goodwill
Sun Pharmaceutical Industries Inc
TKS Farmaceutica
Taro Pharmaceutical Industries
Ranbaxy Pharmaceuticals (Pty)
S.C Terapia S.A.
Other subsidiaries
Less: Capital reserve
Alkaloida Chemical Company Zrt
Other subsidiaries
Total
FY11
5.0
0.4
3.2
0.0
0.0
0.0
0.9
0.0
7.7
FY12
6.0
0.4
4.6
0.0
0.0
0.1
0.9
0.0
10.2
FY13
6.8
0.4
4.9
0.0
0.0
0.1
FY14
7.3
0.4
11.4
0.0
0.0
0.1
FY15
11.5
0.4
11.8
1.3
12.0
1.1
0.9
0.9
1.1
0.0
0.0
0.1
11.3
18.3
37.0
Source: Company Annual Report, MOSL
Intangibles at 9.8% of net worth
Intangibles increased 69% YOY to INR25.1b (9.8% of net worth). The increase is
primarily on account of intangibles under development and acquired goodwill.
Goodwill acquired stood at INR13.6b (FY14: INR10.8b), were recognized on
DUSA and URL acquisitions of INR9.1b in FY13 and INR2.8b on Ranbaxy and is
not being depreciated but tested for impairment
We believe that this goodwill may partially pertain to acquisition of brands /
products in pipeline which in our view should be amortised.
Exhibit 12:
Intangibles primarily comprise goodwill on acquisition (INR b)
Particulars
Goodwill
Computer software
Trademarks, Designs and Other
Intangible Assets Under Development
Total Intangibles
FY11
-
-
2.9
-
2.9
FY12
0.6
-
2.5
-
3.2
FY13
FY14
FY15
9.7
10.8
13.6
-
-
0.8
3.8
4.1
5.7
-
-
5.1
13.5
14.8
25.1
Source: Company Annual Report, MOSL
13 October 2015
6

ART
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SUN Pharma
Exhibit 13:
Goodwill rises on consolidation of Ranbaxy’s
subsidiaries
Goodwill (INR b)
Goodwill as % of networth
14.4%
8.1%
8.4%
7.6%
9.9%
20.0
Exhibit 14:
Intangibles up 69% YoY (INR b)
Intangible Assets-Acquired
Intangible Assets Under Development
5.1
7.7
FY11
10.2
FY12
11.3
FY13
18.3
FY14
37.0
FY15
13.5
2.9
FY11
3.2
FY12
FY13
14.8
FY14
FY15
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Cash at 42% of net worth yields 5.2%; debt rises on Ranbaxy acquisition
Cash and investments increased to INR107.1b (42% of net worth) from INR71b
in FY14 (38% of net worth), yielding 5.2% returns; of this amount, INR57.4b
(FY14: INR37.8b) is in Taro Pharmaceuticals.
Debt increased from INR26b in FY14 to INR90b in FY15, primarily on account of
Ranbaxy acquisition.
Exhibit 15:
Yield on investment falling over the years
(INR b)….
Particulars
Income
Investment, cash and loans
Yield on average Basis
FY11 FY12
FY13
FY14 FY15
2.7
4.4
3.5
5.0
4.6
31.9
43.6
45.3
71 107.1
11.3% 11.6% 7.9%
8.6% 5.2%
Source: Company Annual Report, MOSL
Exhibit 16:
Debt increases on Ranbaxy acquisition
(INR b)
89.9
25.6
4.3
FY11
3.2
FY12
2.6
FY13
FY14
FY15
Source: Company Annual Report, MOSL
Other assets maintained at consolidated level, down on standalone
During FY14, USD400m receivable from a third party pertaining to Protonix
settlement was represented as part of other assets (amongst other current
assets)—which stood at INR24b both for standalone and the consolidated
entity.
During FY15, the amount under other assets outstanding on the standalone
entity declined to INR9m while at the consolidated level it stood at INR25.6b.
However, the details pertaining to amount outstanding in FY15 are not
specified.
Exhibit 17:
Other assets decline at standalone, maintained at consolidated (INR m)
Particulars
Other Current Assets - Others
Standalone
FY14
FY15
24,002
9
Consolidated
FY14
FY15
24,002
25,602
Source: Company Annual Report, MOSL
13 October 2015
7

ART
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SUN Pharma
Cash flow continues to improve
Operating cash flow post interest increased 29% YoY to INR51b while the free
cash flow declined 9% YoY on rising capex.
Unrealized forex gains stood at INR7.8b, 12% of PBT (FY14: INR0.1b, 0.2% of
PBT)
Exhibit 18:
Operating cash flow rises 38% while free cash flow declines on higher capex (INR b)
Particulars
PBT
Add/Less: Unrealized forex gains
Add/Less: Non-cash adjustments
Add/(Less): Non-Operating adjustments
Less: Direct Taxes Paid
Operating Profit Before Wkg. Capital Changes
Inventories
Trade Receivables
Loans and Advances
Other Current Assets
Trade Payables
Current Liabilities and Provisions
Cash Generated from Operations after Tax
Less: Financial Cost
Free Cash Flow from Operations post Interest
Less: Capital Expenditure
Free cash flow post interest
Standalone
FY14
FY15
-28
-16
-
-
1
8
-1
-2
-1
-2
-29
-12
0
4
3
3
-1
-1
-24
28
0
1
27
-23
-24
1
0
-3
-24
-2
-4
-10
-29
-12
Subsidiary (derived)
Consolidated
FY14
FY15
FY14
FY15
74
80
46
64
-0.1
-7.8
-0.1
-7.8
3
6
4
13
-4
3
-5
2
-8
-17
-6
-15
54
67
65
38
2
-5
-5
-2
-1
2
-10
-13
4
3
-2
-1
0
0
-24
-29
3
3
3
2
-4
24
7
30
64
52
40
53
0
1
0
-3
64
53
39
51
-5
-13
-9
-23
59
40
30
28
Source: Company Annual Report, MOSL
R&D increases to 7.1% of revenue
R&D increased to 7.1% of revenue (FY14: 6.5%) in FY15 on the back of increased
activities in complex generics and specialty branded products.
Exhibit 19:
Increase in R&D
Expenditure on R&D (INR b)
5.8%
R&D expenditure as % of revenue (%)
7.1%
6.5%
6.2%
5.5%
3.3
FY11
4.4
FY12
7.0
FY13
10.4
FY14
19.6
FY15
Source: Company Annual Report, MOSL
13 October 2015
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SUN Pharma
ART #2
GOVERNANCE MATTERS
Auditor rotation likely as per Companies Act 2013
Statutory auditors to be
mandatorily changed post
FY17, in accordance with
the new Companies Act
Deloitte Haskins & Sells (DHS LLP) has been the auditors of Sun Pharma since
FY04.
The Companies Act 2013 requires mandatory rotation of auditors for listed
entities after serving for 10 consecutive years. The Act further provides a three-
year period (from April 1, 2014) to comply with this requirement.
As required by the new Companies Act, DHS LLP was appointed as the statutory
auditor of the company in FY14 for three years till FY16-17 (subject to
ratification of its appointment at every AGM).
Managerial remuneration as a percentage of PBT dips during FY15
Managerial remuneration stood at INR260m, 0.5% of PBT (FY14: INR221m, 0.6%
of PBT).
Exhibit 20: Managerial remuneration constant (INR m)
Managerial Remmuneration (INR m)
0.7
0.5
0.3
0.6
0.5
Managerial remuneration as % of profits
93
FY11
216
FY12
103
FY13
221
FY14
260
FY15
Source: Company Annual Report, MOSL
13 October 2015
9

ART
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SUN Pharma
NOTES
13 October 2015
10

ART GALLERY
ART COMPANIES

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ART
|
SUN Pharma
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SUN PHARMA
No
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