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Event Update | Pharmaceutical

September 16, 2013

Ranbaxy Labs
Mohali plant likely to be under USFDA import alert
After the problems at Ponta Sahib and Dewas, the USFDA is said to have issued an import alert on Ranbaxy Laboratories (Ranbaxy) Mohali unit. The Mohali plant, being a new one, wasnt manufacturing full scale, but most of the companys new drugs were being slated to be manufactured at this plant. The company was earlier issued Form 483 for Mohali in 2012. This means there were certain manufacturing practices which the USFDA had already pointed out before to the company and the company had time to comply with the problems the USFDA had bought up, which it however failed to rectify.

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 19,347 1,564 1.2 564/254 232,724 5 19,733 5,851 RANB.BO RBXY@IN

`457 -

Implication of possible import alert for the Mohali facility


Since Ranbaxy could not comply with the issues raised in Form 483, the same have now converted into an import alert. While the Ponta Sahib and Dewas units are out of trouble with the USFDA decree, the Mohali plant is crucial for the companys future growth, as in the last three years the company has made filings from Ohm and Mohali. According to the company, the filings from Ohm and Mohali total to around US$6bn of brand value at present and these new facilities were expected to contribute more than 75% to the business even after Dewas and Ponta Sahib get cleared from issues five years down the line.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.5 13.4 13.1 10.0

Road cleared for Ponta Sahib and Dewas facilities but timelines uncertain
Post the USFDAs adverse action in early CY2009 (AIP invoked on Ponta Sahib facility and import alert issued for Dewas facility), Ranbaxys US sales had been impacted but for first-to-file (FTF) products. Ranbaxy has signed a consent decree with the USFDA regarding the ongoing Current Good Manufacturing Practices (CGMP) issues. We note that the consent decree lays out a plan of action as agreed by the two parties to resolve the outstanding issues. However, the timeline regarding the resolution is still unclear. As per Ranbaxys Management, the company has taken corrective actions, as per suggestions by a consultant, and has been working closely with the USFDA to resolve issues. Ranbaxy settled a US suit by pleading guilty to felony charges relating to manufacture and distribution of certain adulterated drugs made at two of its Indian manufacturing units. The US subsidiary of Ranbaxy agreed to pay a penalty of US$500mn, which is the largest settlement with a generic medicine maker till date. With this settlement, the long lawsuit is now over for the company but the timeline for the final approval and subsequent export of products from these facilities is not yet certain. Outlook and valuation: Given that sometimes import alters take longer to resolve, as seen in the case of Ranbaxy (came in in 2008 and still unresolved), they could be a huge setback for Ranbaxy as it now has only Ohm Labs to service its US business. We await more clarity from the Management on the exact impact of the development on the financials of the company, especially on the OPM. On the sales front, it is unlikely to have a major impact as the Mohali facility is fairly new (has been approved in October 2011) and has been supplying to the US only since 1QCY2012. Hence we are not changing our estimates on the stock as of now. However, given the likely impact the development can have on the future growth of the company and the adverse impact on profitability (unless the issue is resolved soon), the stock will trade at a huge discount to its peers. Hence we reduce our, rating to Neutral on the stock.
Please refer to important disclosures at the end of this report

Abs. (%) Sensex Ranbaxy

3m 2.9 20.9

1yr 6.9 (15.5)

3yr 1.6 (9.3)

Sarabjit Kour Nangra


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

Ranbaxy Labs | Event Update

Exhibit 1: Key Financials


Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) CY2011 9,967 16.8 638 (44.7) 15.1 14.4 30.3 15.1 12.9 6.7 2.3 15.7 CY2012 12,166 22.1 2,507 293.1 59.3 22.3 7.7 72.1 24.3 4.7 1.7 7.7 CY2013E 10,400 (14.5) 481 (80.8) 11.4 6.6 40.2 11.1 3.3 4.2 2.0 29.5 CY2014E 11,331 8.9 642 33.6 15.2 8.4 30.1 13.1 5.2 3.7 1.7 20.8

Source: Company, Angel Research; Note: CMP as of September 13, 2013

Exhibit 2: Recommendation summary


Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco. Buy Buy Buy Buy Accumulate Buy Neutral Buy Neutral Neutral Neutral Neutral Neutral CMP (`) 136 183 664 438 2,243 47 2,286 66 695 866 457 2,386 556 Tgt. price Upside (`) 165 271 894 504 2,535 73 78 % PE (x) 21.3 48.1 9.9 8.9 FY2015E EV/Sales (x) 1.3 1.1 1.9 2.9 2.5 0.7 6.1 0.9 2.2 2.8 1.7 2.2 6.7 EV/EBITDA (x) 6.8 6.7 12.0 12.8 12.6 3.3 25.9 5.8 10.4 12.7 20.8 14.3 16.2 FY12-15E CAGR in EPS (%) 25.5 26.4 18.1 12.1 10.8 16.3 (7.3) 28.0 33.8 21.0 (49.4) 15.0 9.2 FY2015E RoCE (%) 34.2 13.1 15.2 16.8 18.3 11.4 30.6 15.0 25.1 29.0 5.2 14.7 29.6 RoE (%) 34.7 18.9 22.9 16.8 21.8 11.0 27.5 14.4 25.7 25.8 3.7 17.1 22.0

34.6 14.9 15.1 18.4 13.0 17.7 55.3 18.2 2.6 8.7 - 36.1 - 14.4 - 20.1 - 30.1 - 23.5 - 27.9

Source: Company, Angel Research; Note: CMP as of September 13, 2013

September 16, 2013

Ranbaxy Labs | Event Update

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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 Labs. No No No No

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Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

September 16, 2013

Ranbaxy Labs | Event Update


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September 16, 2013