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FUNDAMENTALS VALUATION

ELDER PHARMACEUTICALS

LIMITED

01 June, 2011

ANALYTICAL CONTACT

Ms. Revati Kasture +91-22-6754 3465 [email protected]

BUSINESS DEVELOPMENT CONTACTS

MUMBAI

Mr. P. N. Satheeskumar +91-22-6754 3555 [email protected]

KOLKATA

Mr. Sukanta Nag +91-33- 2283 1800 [email protected]

CHENNAI

Mr. V Pradeep Kumar +91-44-2849 7812 [email protected]

AHMEDABAD

Mr. Mehul Pandya +91-79-40265656 [email protected]

NEW DELHI

Ms. Swati Agrawal +91- 11- 2331 8701 [email protected]

BANGALORE

Mr. G. Sundara Vathanan +91-80-2211 7140 [email protected]

HYDERABAD

Mr. Ashwini Kumar Jani +91-40-40102030 [email protected]

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ELDER PHARMACEUTICALS LTD.

1 www.careratings.com

EQUIGRADE

EQUIGRADE – Analytical Power for Investment Decision

ELDER PHARMACEUTICALS LTD. Pharmaceuticals: Bulk Drugs

Good Fundamentals , Considerable Upside Potential CMP : Rs. 366.05 / CIV: Rs. 468.5 1

Sensex: 18,503.28

CARE Equity Research assigns 3/5 on fundamental grade to Elder

Pharmaceuticals Limited (EPL)

CARE Equity Research assigns fundamental grade of 3/5 to EPL.

This indicates ‘Good Fundamentals’. The grading draws its

strength from EPL’s presence in niche therapeutic segments across

women’s healthcare, nutraceuticals, pain management and anti-

infective all of which are growing at a high growth with strong

brands both owned and in-licensed. EPL also has a healthy mix of

formulations and APIs and has developed 8 new APIs in past using

its internal R&D. The company has around 6 manufacturing units

in India, all as per international standards. Post increasing its stake

in Elder Biomeda AD and Neutrahealth PLC, EPL will also have

access to the manufacturing units of these companies in Bulgaria

and Birmingham, UK respectively coupled with distribution

network and brands of the same. This is expected to help EPL

increase its reach in developed markets; the company at present is

primarily a domestic pharmaceutical player.

Valuation

CARE Equity Research assigns valuation grade of 5/5 to EPL

based on the current Intrinsic Value (CIV) of Rs. 468.5 as against

Current Market Price (CMP) of 366, indicating ‘Considerable

Upside Potential’ from CMP. The valuation is arrived using the

DCF methodology.

Financial Information Snapshot

(Rs. Millions) FY10 FY11 E FY12 P FY13 P

Operating Income 7,216 9,603 12,496 14,252

EBITDA 1,224 1,761 2,249 2,565

PAT (After minority interest) 472 635 917 1,196

Fully Diluted EPS* (Rs.) 25.0 31.0 44.7 58.3

Dividend Per Share (Rs.) 3.5 3.5 3.9 4.2

P/E (times) 14.6 11.8 8.2 6.3

EV/EBITDA (times) 9.7 6.7 5.3 4.6

* Calculated on Current Face Value of Rs. 10/- per share

1st

June 2011


www.careratings.com 2

EQUIGRADE

Primarily a domestic pharmaceuticals play; growth be supported by the growing economy and changing

lifestyle

Elder Pharmaceuticals Limited [EPL] is primarily a domestic pharmaceutical player – domestic segment

constitutes around 95% of its sales. The domestic pharmaceuticals market is still at its nascent stage when

compared with the developed countries. The healthcare expenditure in India stands at around USD 10 per capita

as compared with a world average of around USD 191 per capita. Given, low penetration with changing

demographics, higher urbanisation, rising reach of health insurance policies and private sector hospitals along with

expansion of other medical infrastructure the domestic pharmaceutical market is expected to grow at a CAGR of

14-15%. Within the domestic market, demand is expected to be higher especially for branded generics given the

cost consideration. The demand for therapeutic segments related to lifestyle related diseases such as cancer,

obesity, infective, respiratory, cardiovascular, CNS diseases and immune system disorders given rapid urbanization

and increase life-expectancy is expected to be higher. Alongside, the niche segment of nutraceuticals (currently is

about Rs. 44 billion market) and women’s healthcare (around Rs 24 billion market) is expected to witness strong

growth supported by the changing lifestyles. CARE Equity Research believes, the market growth and the

therapeutic mix are expected to auger well for EPL and assist it in sustaining the growth in revenues.

Healthy mix of own and in-license brands with presence in both formulations and API’s

EPL has a healthy mix of owned brands and 24 in license agreements with a total product portfolio of around 250

-270 formulations across the niche therapeutic segments like women’s healthcare, nutraceuticals, pain management

and anti-infective most of which are growing at a high growth rate having strong brand recognition in the domestic

market. The in-license agreement helps strengthen the product offerings with minimal risk and costs. Also, most of

the in-license agreements are with relatively small international players which helps in maintaining the margins, on

account of lower bargaining power of the innovator company. Also, as a strategy the company plans to enter into

molecule in-license agreements as against brand in-license, thereby helping the company build and develop its own

brands. EPL is also positioning itself to become a prominent API (Active Pharmaceutical Ingredient) and

advanced pharmaceutical intermediates supplier. EPL has developed about 8 new APIs using internal R&D. It

has also expanded API capacity at several locations and started manufacturing these API’s in-house thus moving

up the value chain. The company is also planning to venture into high margin APIs for the export market. This

multi segment format helps EPL in maintaining sustainable revenues.

FUNDAMENTAL GRADE Good Fundamentals 3/5



EQUIGRADE

EPL’s revenue from key therapeutic segment

Source: Company and CARE Equity Research

In-licensing deals across various therapies improves product portfolio


Well established brands; most are market leaders

EPL caters to niche therapeutic segments like women’s healthcare, pain management, nutraceuticals, anti-infective

and lifestyle disease care and has strong brands in each of these segments. Shelcal, with a turnover of Rs 175 crores

in FY11 (estimated) is 25th

largest brand in Indian Pharmaceutical Industry and 4 other brands - Chymoral,

Formic–O, Eldervit, and Amifru are also market leaders in their respective segments. The company has also been

Product Segment Partner Value (Rs Mn)

Somazina Neuro-protective Ferrer, Spain 188.0

Tantum Pain Management Angelini, Italy 53.5

Hibor Anti Thrombotic Farmeceuticos Rovi, Spain 39.9

Phytomega Dietary supplement Enzymotec, Israel 27.0

Sampure Vitamins Gnosis, Italy 25.0

Imbran Nutritional supplement Daiwa, Japan 16.0

1947.13

822.7682.21

949.28

577.52

1596.5

711.84575.81

788.6

499.63

0

500

1000

1500

2000

2500

Women's

Healthcare

Pain

Management

Nutraceuticals Anti- Infectives Lifestyle Diseases

CareFY2011 FY2010

(Rs. Million)



EQUIGRADE

able to enhance the existing brand portfolio further by introducing sub-brands of different dosages with regularity

(key being Somazina Plus, I-Vit Plus and Shelcal CT in FY11), which has helped it in increasing the sales of these

brands over the time. While, EPL has been successful in maintaining its brand leadership so far, it will have to

ensure continued efforts in this direction to maintain revenue and growth. The company expects to introduce

around 13 - 14 new products in the next two years, and we believe this would be a critical monitor-able for

sustaining the growth in EPL’s top-line going forward.

Market share of EPL’s leading brands

Source: ORG-IMS Data December 2010

Product - launches and revenue growth trend


Product Segment Ranking Market Share (%)

Shelcal Calcium Supplement 1 24.7

Chymoral Wound healing enzyme 1 83.3

Formic-O Anti-Bacterial 1 41.1

Eldervit-12 Vitamin B-12 injectible 1 37.8

Amifru-40 Anti-Hypertension 1 69.5

Product Segment

Product Revenues (Rs Mn.)

Launch FY07 FY08 FY09 FY10

Formic Anti-infective 2006 63 89 180 249

Somazina Brain disorder 2006 65 112 154 150

Somazina 500mg Brain disorder 2007 - 59 134 100

Chymoral Plus Pain Management 2007 - 43 100 102

Eldervit-ZC Nutraceuticals 2007 19 69 71 64

Shelcal CT Women Healthcare 2008 - 14 154 183

Hibor Anti Thrombotic 2008 - 19 35 38

Elfi Range Women Healthcare 2008 - - 35 64

Elpod Range Pain Management 2008 - - 12 30

Imbran Cap

250mg Cancer 2008 - - 5 30

Augpod Range Anti-infective 2009 - - 19 40



EQUIGRADE

Product Launches in FY11


Fairly decent marketing and distribution footprint; further efforts in that direction

With tier II and III cities expected to account for around half of the pharmaceuticals demand, enhancing reach

into these markets is an important consideration for the pharmaceuticals sector. EPL currently has around 2300

medical representatives, more than 3000 authorised distributors, 31 stock points and 350 managers managing the

sales network with a contact base of around 350,000 doctors (of 750,000 physicians in the country) and 80,000

pharmacies. To further strengthen its sales presence and reach EPL has forayed into these markets by setting up

two distinct divisions each with around 300-400 member strong team: Elvista which focuses on the rural markets

targeting categories like anti-peptic ulcerates, anti-malaria, anti-infectives, NSAIDS, quinolones and cough

medication. Adventtus on the other hand is a multi speciality division focussing on sales through General

Practitioners in class I & II towns. The company has also roped well experienced personnel to head the company’s

domestic marketing initiatives. While the initiatives coupled with new product launches has increased the

employee and selling and marketing expenses in the short term, we believe the same would augur well over the

longer term to strengthen its presence and expand reach.

Products Month of Launch Therapeutic Category

NRT Jun-10 Anti Smoking

Eldervit Plus tablet Jun-10 Nutraceutical

Elmecob PG Sep-10 Lifestyle Disease Portfolio

Eldoflam MR Oct-10 Pain Management

Somazina Plus Nov-10 Lifestyle Disease Portfolio

Eltrodar GM Nov-10 Pain Management

Junimol suspension Nov-10 Antipyretic

Acebrolin capsules & syrups Dec-10 Cough and Cold

Eldocort Dec-10 Pain Management

Prexan Dec-10 Haematinic

Shelcal K Dec-10 Anti Osteoporosis

Elfecol syrup Dec-10 Cough and Cold

Bronconil Syrup Jan-11 Cough and Cold

Plasmorid Jan-11 Anti Malarial

Samplus Jan-11 Lifestyle Disease Portfolio

I-Vit Plus Jan-11 Nutraceutical



EQUIGRADE

Middle order player; R&D budget would be constrained, however the same doesn’t have any immediate

impact

India adopted product patent regimen with effect from January 1st

2005 after which Indian pharma companies

were forced to innovate new products. Although government allows 200% weighted deduction on in-house

research and development (R&D) expenses not many Indian companies in the pharma industry have leading R&D

centres that can invest in new molecule (new drug discovery) development given huge cost considerations and long

gestation period. While, EPL has in past developed APIs which were previously outsourced and also been able to

introduce products based on New Drug Delivery Systems (“NDDS”) including mouth dissolving tablets

(chewable), taste mask tablets and sustained release/controlled release formulations in different dosage forms using

internal R&D. It is still ranked at 28th

in the Indian Pharmaceutical Industry making it a middle order player and

fairly small in size when compared with the international players, we believe the R&D budgets could be

constrained to certain extent to be successful in timely developing the various products in the R&D pipeline in

future. However, given the current focus on enhancing its already established drugs by introducing the different

dosages and delivery systems, coupled with an increase in the product profile on account of the acquisition in

Neutrahealth PLC, the company would not see any immediate impact of this.

R&D product pipeline


Geographically diversified manufacturing units; most as per international standards

EPL has 6 manufacturing plants in India located across Maharashtra (Nerul, Patalganga, Pawane), Uttarakhand

(Selaqui, Langa Road) and Himachal Pradesh (Paonta Sahib) possessing a capability to manufacture various

dosage forms like tablets, capsules, syrups, injectibles, topical creams and ointments. Two of the Uttarakhand

facilities are in the excise free zones. Since both the Uttarakhand facilities are equipped to manufacture all dosage

forms, higher utilisation of the same will help the company avail higher excise benefits in the future.

The company has periodically invested to enhance their manufacturing capacities. The company’s Nerul, Paonta

Therapeutic Segment No. of Products

Women's Healthcare 5

Pain Management 5

Neutraceuticals 8

Anti Infectives 6

Cough & Cold 8

Others 4



EQUIGRADE

Sahib and Selaqui facilities are certified as per WHO GMP, Selaqui facility is also expected to get the UK MHRA

certification. The recently commissioned Langha Road facility is as per USFDA. Also, its Patalganga facility has

recently been accredited by the Ministry of Health – Japan which will open its access to the Japanese market, the

world second largest pharma market. We believe the international certifications are key for the company to

enhance its reach in exports market and also to further its in-licensing strategy.

EPLs manufacturing facilities - capacities and accreditations


Combined capacity details for formulations


Patalganga Paonta Sahib Selaqui Nerul API Pawane Langa Road

Maharashtra HP Uttarakhand Maharashtra Maharashtra Uttarakhand

ISO 9001:2000

WHO cGMP

WHO cGMP WHO cGMP GMP

USFDA USFDA

USFDA

USFDA

eDMF- AFSSAPS UK MHRA

(Expected)

Ministry of

Health, JAPAN

APIs API API

Injectibles Creams, Lotions,

Ointment

Tablets,

Capsules

Liquids, Tablets,

Capsules, Ointments,

Sachets

Liquids Liquids,

Tablets

R&D Centre

Formulations Units FY2008 FY2009 FY2010

Tablets Million Units 160 206 299

Capsules Million Units 233 299 481

Injectables* Million Units -- -- 156

Ointments Tonnes 1255 1255 1255

Syrups/Liquids Kilo Litres 1056 1056 8616

API/ Powder Tonnes 381 261 233

*includes manufactures by loan licensees



EQUIGRADE

Subsidiaries may be a future bright spot for knowledge share and market reach

EPL has two key step down subsidiaries held through its wholly owned Dubai based subsidiary, ‘Elder

International FZCO, Dubai’ – Elder Biomeda AD, Bulgaria and Neutrahealth PLC, UK. EPL has recently

increased its stake in both these subsidiaries to 92.2 percent and 100 per cent respectively.

Elder Biomeda AD in turn holds 100% stake in both Biomeda 2000 EOOD (which is amongst the top 10

distributors and markets about 200 companies’ pharma products) and the manufacturing arm Elder Bulgaria

EOOD. The company expects to make its Bulgarian step-down subsidiary EU compliant by upgrading quality

control systems which in turn will help the company to further penetrate the EU and CIS markets.

Neutrahealth PLC which offers high quality vitamins and supplements (VMS) and probiotics, again has two

subsidiaries - Brunel Healthcare Manufacturing Limited, which primarily caters to private labels with a MHRA

approved manufacturing facility in Birmingham, UK and Biocare Limited, which is involved in prescription drugs

business primarily through its online portal.

The company is in the process of en-cashing the synergies between itself and Neutrahealth PLC. To start with,

EPL plans to manufacture a part of the API requirement for Neutrahealth PLC in India. EPL’s procurement team

is also revamping the sourcing for Neutrahealth PLC, from low cost destination like India and China. Also, the

company plans to introduce the existing brands of Neutrahealth PLC in India. CARE Equity Research believes the

increased stakes in these subsidiaries will provide EPL an access to the European markets for its own brands and

also help bring some of their private labels in the domestic market. Going forward, the revenues from these

subsidiaries are expected to form around 18 - 20 per cent of total the revenue for the company.



EQUIGRADE

EPL’s subsidiaries


Corporate governance in compliance with listing norms

EPL board comprises of eleven directors, three of who are executive and remaining eight are non executive

directors. The board is headed by the promoter and managing director Mr. J Saxena. As per annual report the

board has formed two sub committees for audit and remuneration. The audit committee comprises of four

members, all non-executive and independent and have financial and accounting knowledge - headed by the Mr.

Michael Bastian with effect from 29th April 2009s. The remuneration committee comprises of three directors

Dr.R Srinivasan, Dr. S Jayaram, Mr. J Saxena, and is headed by the non-executive and independent chairman Dr.

R Srinivasan. The practices are in compliance with the clause 49 of the listing agreement with the stock exchanges.

NeutraHealth

Plc, UK

Elder International

FZCO, Dubai

Elder

Pharmaceuticals Ltd

Elder Biomeda

AD, Bulgaria

Biomeda 2000 EOOD

100%

92.2%100%

100%

Elder Univeral

Pharmaceuticals, Nepal

49%



EQUIGRADE

CARE Equity Research values Elder Pharmaceuticals Limited (EPL) at Rs. 468.5 per share

According to CARE Equity Research, the Current Intrinsic Value (CIV) of EPL stands at Rs.468.5 per share. This

translates into Enterprise Value (EV) of Rs. 1600 crore. Thus, EPL has ‘Considerable Upside Potential’ from the

current market price of Rs 366 per share.

The CIV is calculated based on Discounted Cash Flow model

CARE Equity Research has arrived at CIV of the stock on the basis of Discounted Cash Flow (DCF) model.

The overall firm Weighted Average Cost of Capital (WACC) is calculated based on our long term

assumptions of cost of financing summarized in below table.

CARE Equity Research has used Free Cash Flow (FCF) methodology to arrive at the firm value, as EPL’s

business is (working) capital intensive in nature.

The forecasted FCF is as per CARE Equity Research estimates.

Terminal value is arrived at by using Gordon Growth Model.

CARE Equity Research has assumed that in the long-run, EPLs’ capital expenditure shall be Rs. 400 crore.

The terminal value forms 77 per cent of the firm’s total equity value, which appears to be reasonable.

EPL: Valuation Based on Discounted Cash Flows (DCF)

Source: CARE Equity Research

VALUATION GRADE Considerable Upside Potential 5/5

Item Value Basis

Risk Free Rate 8.25% 10 year G-Sec yields

Equity Risk Premium 6.00%

Beta 0.6 Adjusted Beta

Cost of Equity 11.58%

Cost of Debt 9.6% Long term cost of debt

Tax Rate 30.00% Long term tax rate

Debt/Equity Ratio 0.68 Long term target D/E ratio

WACC 9.62%

Terminal growth rate 2.50%



EQUIGRADE


EPL: Sensitivity Analysis – Share price


(Rs Millions except per share data)

2011-12 2012-13 2013-14 2014-15 2015-16

PAT 917 1,196 1,578 1,967 2,416

Depreciation 341 358 376 395 415

Interest (1-Tax Rate) 578 533 487 421 342

Capital Expenditure 0 -369 -437 -459 -530

Increase in Working Capital -1,180 -745 -1,081 -1,246 -1,413

Free Cash Flow (FCF) 655 973 924 1,079 1,231

Discount Rate 0.91 0.83 0.76 0.69 0.63

PV of FCF 598 810 701 747 778

PV of Terminal Value 12,367

Total Discounted Value of Firm 16,001

Less: Net Debt (FY11) 6,384

Present Value of equity 9,617

No of Equity Shares (Million) 21

CIV 468.5

Weighted Average Cost of Capital (%)

9.00% 9.25% 9.62% 10.00% 10.25%

Term

inal

Year

Gro

wth

Rat

e

2.00% 496.8 467.0 426.2 388.8 366.0

2.25% 521.7 489.9 446.7 407.1 383.0

2.50% 548.4 514.5 468.5 426.6 401.1

2.75% 577.3 541.0 491.9 447.4 420.4

3.00% 608.6 569.7 517.2 469.7 441.0



EQUIGRADE

The CIV of Rs. 468.5 per share translates into EV/EBITDA multiple of 7.1 times FY12P EBITDA and

P/E of 10.5 times FY12P EPS

The CIV of EPL at Rs.468.5 per share as arrived by CARE Equity Research translates into Enterprise Value to

EBITDA (EV/EBITDA) multiple of 7.1 times the FY12P EBITDA of Rs. 224.9 crore. This seems reasonable, as

the average one year forward rolling EV/EBITDA multiple since April 2007 stands at 7.6 times.

EPL: Implied EV/ EBITDA and P/E Multiples

(Rs Millions except per share data)


Similarly, the CIV of Rs. 468.5 per share translates into price-earnings (P/E) multiple of 10.5 times the FY12P EPS

of Rs. 44.7 per share. This too seems reasonable, as the average one year forward rolling P/E multiple for EPL

from April 2007 stands at 10.3 times.

EPL: One year forward

rolling EV/EBITDA multiple

EPL: One year forward

rolling P/E multiple


Implied EV/ EBITDA

EBITDA (FY12) 2,249.3

Fair Value 468.5

No. of Shares (Mn) 20.5

Market Cap 9588.7

Net Debt (FY11) 6,384.0

EV 16,000.8

Implied EV/ EBITDA 7.1

Implied P/E

PAT (FY12) 916.9

Fair Value 468.5

No. of Shares (Mn) 20.5

EPS (FY12) 44.7

Implied P/E 10.5



EQUIGRADE

Peer Set Comparisons

(Rs. Mn) Elder Pharma Glenmark Cadila Healthcare Lupin

Financial Statements FY09 FY10 FY09 FY10 FY09 FY10 FY09 FY10

Net Operating Income

6,203.4

7,216.0

20,402.0

24,123.7

29,275.0

36,868.0

38,666.4

48,707.9

EBITDA

981.0

1,224.1

3,791.5

5,312.9

6,058.0

8,086.0

7,392.8

9,838.9

EBIT

865.8

1,052.1

3,934.2

4,106.8

4,940.0

6,747.0

6,512.9

8,599.8

PAT

608.3

472.2

1,934.7

3,310.3

3,031.0

5,051.0

5,015.4

6,816.3

Margins

EBITDA 15.8% 17.0% 18.6% 22.0% 20.7% 21.9% 19.1% 20.2%

EBIT 13.7% 14.4% 17.8% 16.7% 16.8% 18.2% 16.8% 17.6%

PAT 9.7% 6.5% 8.7% 13.4% 10.3% 13.6% 13.0% 14.0%

Per Share Data

EPS 32.3 26.3 7.7 12.3 14.8 37.3 11.2 15.3

DPS 2.9 3.5 0.5 0.5 3.9 6.0 2.7 3.2

BVPS (Tangible) 207.1 246.9 27.3 48.4 61.4 53.0 31.9 54.2

Valuations Ratios (Trailing)

P/E - 13.9 - 24.7 - 24.3 - 30.5

EV/ EBITDA - 9.7 - 18.7 - 24.0 - 22.1

Price /Sales - 1.0 - 3.4 - 5.0 - 4.3

Profitability Ratios

ROCE - 10.9% - 13.3% - 27.3% - 26.4%

ROE - 11.0% - 33.3% - 43.1% - 35.5%

- - - -

* Per share data for Lupin has been

adjusted for split.

Source: Company annual reports and CARE Equity Research



EQUIGRADE

Company Background

Elder Pharmaceuticals Ltd (EPL), incorporated in 1989 is a India based integrated pharmaceutical player involved

in the manufacturing of pharmaceutical-based intermediates, formulations and bulk drugs (API) along with a

specialized in-house R&D unit. It has presence across several niche therapeutic segments with some market leading

brands in its respective segments. EPL is the 28th

largest pharmaceutical company in India and one of the fastest

growing companies in terms of revenue, according to ORG-IMS. The company has 6 manufacturing units located

across India in states like Maharashtra, Himachal Pradesh and Uttarakhand and produces between 250-270

formulations. Over the years the company has built-up over 24 in-licensing agreements and strategic alliances with

international pharma companies operating in similar therapeutic segments to further augment their revenues in the

domestic market. The company has recently acquired stakes in pharma companies in the UK and Bulgaria to

diversify into international markets. In FY2010, only 5 per cent of their total revenues were sourced from overseas

market.

Business Mix

EPL is present in several niche therapeutic segments in India all of which are growing at a healthy rate. Some of the

dominant segments where it is present includes women’s healthcare, pain management, anti-infectives’, lifestyle

related diseases, and nutraceuticals. Four of their products have market share in excess of 30% in their respective

categories. Women’s healthcare, pain management and nutraceuticals are some of the leading growth drivers

amongst all other business segments.

a. Women’s Healthcare - EPL famous brands in this segment includes Shelcal, Deviry, B-Long, Bonviva. The

segment caters to various therapeutic needs such as pre-menstrual, infertility, labor/ parturition and hormonal

imbalance and vitamin necessities. Shelcal has firmly established itself as the No. 1 drug in the calcium

supplement market, and is the 25th

largest brand in the Indian Pharmaceutical market.

b. Pain Management– The products in this segment address a wide range of wound applications and pain

management requirements during pre & post-operative stages and also during the course of surgery.

Chymoral is a market leader in this segment with over 33 per cent market share. Other key brands in this

segment include Oxoferin, Tantum and Clotan.

c. Nutraceuticals– EPL’s key brands in the nutraceuticals segment include the Eldervit range, I-Vit, Phytomega,

Elmecob Plus, Thrive Group and Nephrocaps. The products include vitamin supplements and vitamins

combinations capable of handling problems of diabetes, arthritis, neurological issues and cardiac ailments.

COMPANY BACKGROUND



EQUIGRADE

d. Anti-Infectives– EPL’s anti-infectives’ portfolio comprises of cephalosporin’s, aminoglycosides and

amoxicillin which help in the cure of several bacterial infections, UTI and RTI. Formic-O is a leading brand

in anti-bacterial segment with market share of over 46%. Other key brands include Widcef, KefBactum,

Tobraneg and Elfi

e. Life style disease– EPL’s focus key areas include anti-hypertensive, LMWH and neuro-protection in the

event of stoke. Carnisure is the major product in this category. Other key brands are Somazina, Hibor and

Amifru.

f. API – EPLs focus in the API segment is towards speciality products with a gradual shift from the amoxicillins.

The company has received accreditation for its Patalganga plant from the Ministry of Health – Japan, thereby

opening opportunities for supply contracts with Japanese generic companies. The company also plans to

manufacture API for its recently acquired UK based subsidiary Neutrahealth PLC.

Segment-wise growth in FY11


The company also has in-licensing deal/agreements with foreign pharmaceutical companies in existing therapeutic

segments for manufacturing and marketing of their formulations. The in-licensing division which contribute

approximately 12-13% of the total revenue has witnessed healthy growth.

Segments Growth %

Women's Healthcare 22%

Pain Management 16%

Nutraceuticals 18%

Anti- Infectives 20%

Lifestyle Diseases Care 16%

API 15%



EQUIGRADE

Trend in segment wise revenue break-up


Export Business

Exports form a miniscule part of EPL’s total revenue and it earned 2.5 per cent of its total revenue from exports in

FY2010 compared to approximately 5 per cent in FY2009. It exports mainly to Asian and African countries which

are typically semi-regulated markets and also to a few developed countries.

FY2011

FY2010

Wome

n's

Healthc

are, 24

%

Pain

Manage

ment, 1

0%

Nutrace

uticals,

8%

Anti-

Infectiv

es, 11%

Lifestyle

Disease

s

Care, 7

%

API, 40

%

Wome

n's

Healthc

are, 23

% Pain

Manage

ment, 1

0%

Nutrace

uticals,

8%

Anti-

Infectiv

es, 11%

Lifestyle

Disease

s

Care, 7

%

API, 41

%



EQUIGRADE

Promoter and Management


Name Designation held Qualification

Mr. Jagdish Saxena Chairman and MD Science Graduate

Mr. Alok Saxena Wholetime ED B.A.

Mr. M V Thomas** Wholetime Director (Finance) Chartered Accountant

Dr. R Srinivasan Independent, NED Ph.D.(Banking & Finance), Ex Chairman

& MD-Bank of India

Mr. Peter C Bibby* Independent, NED Science Graduate

Dr. J S Juneja Independent, NED Ph.D. (Applied Economics),M.B.A.

Dr. S Jayaram Independent, NED M.D. Medical Practitioner

Dr. Sailendra Narain Independent, NED Ph.D.(Humanity), M.A.(Economics)

Mr. Saleem Sherwani Independent, NED Member of Parliament

Mr. Edoardo C. Richter NED

Mr. Michael Bastian Additional NED CA, Ex-CMD of Syndicate Bank.

Mr. Yusuf Karim Khan Executive Director BA.LLB,

Mrs. Urvashi Saxena* NED

* Mrs. Urvashi Saxena was appointed in place of Mr. Peter Bibby w.e.f April 29th 2009

** Resigned from the Directorship of the Company w.e.f. 1st July 2010



EQUIGRADE

The Indian Pharmaceutical Industry (IPI) has grown to around US$20 bn (Rs 95,000 crore) industry. It is now the

3rd

largest in the world in terms of volume and 13th

largest in terms of value thereby accounting for around 10% of

world’s production by volume and 2% by value due to lower prices. The industry now produces about 400 bulk

drugs (APIs) and almost entire range of formulations belonging to all major therapeutic groups requiring complex

manufacturing technologies. It is supported by strong scientific and technical manpower and pioneering work done

in process development. However, the industry is highly fragmented with around 20,000 odd players of which

approximately 250 medium to large corporations controlling about 70% of the total domestic market. The industry

has been growing at a healthy rate of 11-12% CAGR over the last 10 years, with growth in exports outstripping

steady growth in the domestic market.

The key drivers of growth for the IPI would be –

Large generic opportunity arising out of significant patent expiries in the regulated markets

Outsourcing by global pharmaceutical companies

Growth in domestic pharmaceutical market

Opportunity presented by bio-similars

Pharmaceutical industry growing at a healthy rate backed by robust exports

Export market which constitutes around 41 per cent of the total IPI/ API sales has shown a robust growth rate of

nearly 18 -20 per cent CAGR over last five years. Indian exports are destined to more than 200 countries around

the globe including highly regulated markets of US (21 per cent export share), Europe (24 per cent export share),

Japan and Australia. This can be attributed to growing share of generic drugs in the regulated markets and

opportunities from CRAMs (Contract Research and Manufacturing Services) on account of outsourcing by global

pharmaceutical companies to low cost destinations like India. Within exports, formulations constitute

approximately 58 per cent of the total exports and the other 42 per cent comprises of APIs/ bulk drugs exports.

Formulations exports have been growing at a healthy rate of around 26 per cent, while, the APIs have grown at

around 19 per cent over the last four years. Although, currently majority of the API exports from India are to less-

regulated markets. However, the trend is changing and the share of exports to regulated markets is on the rise with

growing number of Drug Master File (DMF) filings from Indian companies with regulators in the regulated markets.

Going forward we expect the API/ bulk drugs export to grow at a faster pace than formulations given the changing

dynamics and increased outsourcing by global companies.

SNAPSHOT OF THE INDIAN PHARMACEUTICAL INDUSTRY



EQUIGRADE

Domestic market to grow at a higher trajectory in future

The domestic market has been growing at around 10 -12 per cent over the last decade. Going forward, the market

is expected to shift to a higher growth trajectory of around 14 -15 per cent on the back of increase in incomes levels,

higher penetration of health care and increase in health awareness among masses. The higher growth would be

supported by strong growth in the tier II, III cities, semi-urban and rural markets. These markets currently

constitute around 20% of the total domestic market and are expected to grow at around 25-30 per cent in the future

and thus forming around half the market over the next decade.

Key industry demand drivers

Source: CARE Research

Key Therapeutic segments in India

In the Indian pharmaceutical industry, anti-infective remain the most crucial segment and accounts for

approximately 18 per cent of the total market revenue. Cardiovascular preparations, cold remedies, pain killers and

respiratory solutions have a proportion of approximately 10 per cent each. Chronic therapies like anti-diabetes,

cardiovascular (CVS) & central nervous system (CNS) have grown at a higher rate compared to other therapy

classes indicating a shift in disease profile towards that prevailing in the developed countries. Moreover, the market

for treating diseases such as diabetes and obesity, or so-called lifestyle drugs such as anti-depressants, anti-wrinkle

drugs etc, is of less significance at present, but is expected to grow at faster rate in the future given changing

demographics pattern. The top 10 therapies have remained constant over the last 4 years and consistently

contributed to over 87 per cent of the IPI. New introductions are driven growth was the highest for the therapeutic

segments of Anti-infectives, Anti-diabetic, Vitamins/Minerals/Nutrients.

•Increase in penetration of health insurance

•Increase in disposable incomes and the number ofmiddle-class households

•Expansion of medical infrastructure including privatesector hospitals

•Adoption of product patent laws

• Rapid urbanization and rising prevalance of chronicdiseases coupled with increased life expectancy

•Market penetration in rural hinterland to expandreach and availability to the masses

Factors influencing domestic growth



EQUIGRADE

Key Therapeutic segments in India

Source: ORG-IMS and CARE Research

Anti-

infectives, 18

%

Gastro, 11%

Cardiac, 11%

Respiratory, 9

%Pain, 9%

Vitamins, 8%

Gynaec, 6%

CNS, 5%

Dema, 5%

Anti-

diabetic, 5%

Others, 13%



EQUIGRADE

Consolidated Income Statement

(Rs Million) FY08 FY09 FY10 FY11 E FY12 P FY13 P

Operating Income 5,512 6,203 7,216 9,603 12,496 14,252

EBITDA 1,051 981 1,224 1,761 2,249 2,565

Depreciation and amortization 106 115 172 296 341 358

EBIT 944 866 1,052 1,465 1,908 2,207

Interest 210 260 573 736 825 762

PBT 734 606 479 730 1,083 1,445

Ordinary PAT (After minority interest) 687 608 472 635 917 1,196

PAT (After minority interest) 687 608 472 635 917 1,196

Fully Diluted Earnings Per Share* (Rs.) 36.5 32.3 25.0 31.0 44.7 58.3

Dividend, including tax 55 55 66 72 79 87

* Calculated based on ordinary PAT on Current Face Value of Rs. 10/- per share

Consolidated Balance Sheet

(Rs Million) FY08 FY09 FY10 FY11 E FY12 P FY13 P

Tangible Net worth (incl. Minority Interest) 3,629 3,905 4,655 5,801 6,639 7,748

Debt (incl. Preference Shares) 3,416 4,991 5,739 8,985 7,518 7,164

Deferred Liabilities / (Assets) 52 50 38 38 38 38

Capital Employed 7,097 8,946 10,432 14,824 14,194 14,950

Net Fixed Assets, incl. Capital WIP, net of reval

reserve 3,308 4,217 5,308 7,110 6,769 6,780

Investments 879 502 660 100 100 100

Loans and Advances 707 1,246 1,494 1,830 2,280 2,527

Inventory 837 881 1,434 2,402 2,910 3,319

Receivables 1,396 1,776 1,953 2,775 3,631 3,944

Cash and Cash Equivalents 790 1,464 786 2,601 1,133 1,278

Current Assets, Loans and Advances 3,771 5,393 5,702 9,608 9,954 11,068

Less: Current Liabilities and Provisions 861 1,166 1,238 1,994 2,628 2,997

Total Assets 7,097 8,946 10,432 14,824 14,194 14,950

Ratios based on Consolidated Financials

FY08 FY09 FY10 FY11 E FY12 P FY13 P

Growth in Operating Income 22.7% 12.5% 16.3% 33.1% 30.1% 14.1%

Growth in EBITDA 34.7% -6.6% 24.8% 43.9% 27.7% 14.1%

Growth in PAT 30.1% -11.4% -22.4% 34.6% 44.3% 30.5%

Growth in EPS 28.6% -11.7% -22.4% 23.6% 44.3% 30.5%

EBITDA Margin 19.1% 15.8% 17.0% 18.3% 18.0% 18.0%

PAT Margin 12.5% 9.8% 6.5% 6.6% 7.3% 8.4%

RoCE 14.8% 10.8% 10.9% 11.6% 13.2% 15.1%

RoE 20.1% 16.1% 11.0% 12.2% 14.7% 16.6%

Net Debt-Equity (times) 0.7 0.9 1.1 1.1 1.0 0.8

Interest Coverage (times) 5.0 3.8 2.1 2.4 2.7 3.4

Current Ratio (times) 4.4 4.6 4.6 4.8 3.8 3.7

Inventory Days 55 52 73 91 85 85

Receivable Days 92 105 99 105 106 101

Price / Earnings (P/E) Ratio 14.6 11.8 8.2 6.3

Price / Book Value(P/BV) Ratio

1.5 1.2 1.0 0.9

Enterprise Value (EV)/EBITDA 9.7 6.7 5.3 4.6

Source: Company, CARE Equity Research

FINANCIAL STATISTICS



EQUIGRADE

CARE Equigrade Grid (CEG)

Through CEG, CARE Equity Research addresses two critical factors considered by an investor while investing in a

particular company’s equity shares:

1. Fundamentals: Whether the company is fundamentally sound with respect to its business, its financial position, its

management and its prospects.

2. Valuation: What is the Current Intrinsic Value (CIV) of the stock and how it compares vis-a-vis its Current

Market Price (CMP)

These factors are answered assigning quantitative grades to both these parameters. CEG is the snapshot of

‘Fundamental Grade’ and ‘Valuation Grade’ assigned by CARE Equity Research.

Fundamental Grade

This grade represents how sound the company is fundamentally, vis-à-vis other listed companies in India. This grade

captures:

1. Business Fundamentals and Prospects

2. Financial Soundness

3. Management Quality

4. Corporate Governance Practices

The grade is assigned on a five-point scale as under:

CARE Fundamental Grade Evaluation

5/5 Strong Fundamentals

4/5 Very Good Fundamentals

3/5 Good Fundamentals

2/5 Modest Fundamentals

1/5 Weak Fundamentals

Valuation Grade

This grade represents the potential value in the company’s equity share for the investor over a 1 year period. The

Current Intrinsic Value (CIV) or the price arrived by CARE Equity Research on fundamental basis is compared with

the current market price (CMP) of the stock and the grade is assigned based on the gap between CIV and CMP of the

stock.

EXPLANATION OF GRADES



EQUIGRADE

The grade is assigned on a five-point scale as under:

CARE Valuation Grade Evaluation

5/5 Considerable Upside Potential

(>25% from CMP)

4/5 Moderate Upside Potential

(10-25% from CMP)

3/5 Fairly Priced

(+/- 10% from CMP)

2/5 Moderate Downside Potential

(Negative 10-25 from CMP)

1/5 Considerable Downside Potential

(<25% from CMP)

Grading determination is a matter of experienced and holistic judgment, based on relevant quantitative and qualitative factors of

the company in relation to other listed companies.

+

DISCLOSURES

Each member of the team involved in the preparation of this grading report, hereby affirms that there exists no conflict of interest that can

bias the grading recommendation of the company.

This report has been sponsored by the company.

DISLCLAIMER

This report is prepared by CARE Research, a division of Credit Analysis & REsearch Limited [CARE]. CARE Research has taken utmost care to

ensure accuracy and objectivity while developing this report based on information available in public domain or from sources considered reliable.

However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Research operates independently

of ratings division and this report does not contain any confidential information obtained by ratings division, which they may have obtained in the

regular course of operations. Opinions expressed herein are our current opinions as on the date of this report.

CARE’s valuation of the security is mainly based on company specific fundamental factors. Equity prices are affected by both fundamental factors

as well as market factors such as – liquidity, sentiment, broad market direction etc. The impact of market factors can distort the price of the

security thereby deviating from the intrinsic value for extended period of time. This report should not be construed as recommendation to buy,

sell or hold a security or any advice or any solicitation, whatsoever. It is also not a comment on the suitability of the investment to the reader. The

subscriber / user assumes the entire risk of any use made of this report or data herein. CARE specifically states that it or any of its divisions or

employees have no financial liabilities whatsoever to the subscribers / users of this report. This report is for personal information only of the

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CARE Research is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information

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This report is for the information of the intended recipients only and no part of this report may be published or reproduced in any form or

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EQUIGRADE

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