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Company Template.dot

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Cadila Healthcare (CDH IN)Pharmaceuticals

Diversified finished dosage business at attractive valuation. CDH has createdmultiple platforms to ensure stable growth over the medium term. We expect France,

US and Japan to drive revenue in the near term. We expect stable EBITDA margindespite Rupee appreciation and higher R&D costs in FY2010-11E. Strong RoE, visiblePAT growth over the next two years and attractive valuations drive our BUY rating.Currently, CDH offers the best upside among generic companies we cover.

CDH has a revenue target of US$1 bn in FY2011E

CDH is targeting revenues of US$1 bn in FY2011E versus revenues of US$620 mn reported inFY2009. To achieve its sales target, CDH needs to grow revenues at a CAGR of 18% in Rupeeterms over FY2009-11E. CDH is ranked fifth in India by revenue. International generic salesaccounted for a third of the companys FY2009 revenues. The company has a presence in

niche consumer segments in India. CDH has invested in NCE research in three segments butbenefits from these investments are not yet visible.

Strong growth in FY2010E likely; Rupee appreciation, R&D costs to constrain FY2011E growth

We expect net sales to increase by 24% in FY2010E to Rs35 bn followed by 14% in FY2011Eto Rs40 bn. We think revenues will be driven by markets in the US and Japan, the consumerbusiness in India and API. We expect EBITDA margin to remain flat at 19% despite increasingR&D costs. We expect PAT to increase 44% in FY2010E due to (1) higher other income and(2) lower effective tax rate due to a new plant in Sikkim. In FY2011E, we expect PAT growth at15%.

Valuation based on sum of the parts leads us to a price target of Rs700We arrive at a 12-month price target of CDH at Rs 700/share based on an SOTP calculation ofits various businesses. The Indian finished dosage remains the most important segment,accounting for over half the target price. This is followed by the US market andconsumer/animal healthcare business. At our target price, CDH will trade at 14.5X FY2012E.Early success in the transdermal and oncology segments can drive the price target even higher.

Key risksregulatory risks remain the most important

Regulatory risks in the form of price controls by the government are the most important. Otherindustry risks relate to (1) pricing reforms in Europe, (2) increasing consolidation of the globalgenerics industry, (3) global generics players using Indias manufacturing cost advantage, and

(4) continuing volatility of the Indian Rupee against the US Dollar.

Company data and valuation summary

Company data Stock data High Low Price performance 1M 3M 12MRating: BUY 52-week range 668 207 Absolute (%) 12.7 42.2 197.6

Priced at close of: Rel. to BSE-30 (%) 4.7 31.2 101.2Current price (Rs) Capitalisation Forecasts/valuation FY2009 FY2010E FY2011E648 Market cap (Rs bn) 88 EPS (Rs) 22.2 33.4 38.6

Net debt/(cash) (Rs bn) 10 P/E (X) 29.2 19.4 16.8Free float (%) 23.8 ROE (%) 26.9 32.9 29.8Shares outstanding (mn) 136 EV/EBITDA (X) 18.2 15.1 13.0

Source: Company, Kotak Institutional Equities estimates

December 3, 2009

BUY

December 04, 2009

INITIATING COVERAGE

Sector view: Attractive

Price (Rs):648

Target price (Rs): 700BSE-30: 16,926

INSIDE At our target price,

CDH would trade at18X FY2011EEPSpg4

CDH has the bestupside amonggeneric stocks wecoverpg7

We expect PAT toincrease 44% in

FY2010E and 15% inFY2011E,,,pg18

Prashant [email protected]

Mumbai: +91-22-6634-1127

Priti [email protected]: +91-22-6634-1551

Kotak Institutional EquitiesResearch

Important disclosures appearat the back


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2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Pharmaceuticals Cadila Healthcare

TABLE OF CONTENTS

Overview................................................................................................3

Valuation................................................................................................4

Strategy and profile................................................................................8

Key risks ...............................................................................................16

Financials..............................................................................................18

Quarterly performance for FY2010E.....................................................23

Appendixboard of directors and key management personnel;

Shareholding structure..........................................................................24

The prices in this report are based on the market close of December 3, 2009.


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KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Cadila Healthcare Pharmaceuticals

OVERVIEWWe initiate coverage on CDH with a BUY rating and price target of Rs700, which implies 8% upside from thecurrent price. CDH has a target of US$1 bn revenues in FY2011E. We think US, Japan, consumer business inIndia and API will be the key revenue drivers in FY2010-11E. We expect earnings growth of 44% and 15% inFY2010-11E. We think higher other income and a lower effective tax rate due to a new plant in Sikkim willdrive PAT growth in FY2010E while Rupee appreciation and higher R&D costs will lead to a modest PATgrowth in FY2011E.

Exhibit 1: Forecasts and valuation, March fiscal year-ends, 2008-2012E (Rs mn)

EPS ROCE ROE P/E(Rs mn) Growth(%) (Rs mn) Growth(%) (Rs mn) Growth(%) (Rs) (%) (%) (X)

2008 22,660 26.9 5,349 20.7 2,576 10.2 20.5 37.8 26.7 31.62009 28,624 26.3 6,971 30.3 3,031 17.7 22.2 39.4 26.9 29.22010E 35,429 23.8 8,513 22.1 4,554 50.3 33.4 41.2 32.9 19.42011E 40,428 14.1 10,016 17.7 5,274 15.8 38.6 47.7 29.8 16.82012E 46,108 14.1 11,801 17.8 6,599 25.1 48.3 58.5 29.9 13.4

Net sales Adjusted EBITDA Net Profit


Exhibit 2: Cadilaabridged profit model, balance sheet, cash model, March fiscal year-ends, 2008-2012E (Rs mn)

2008 2009 2010E 2011E 2012EProfit modelNet revenues 22,660 28,624 35,429 40,428 46,108EBITDA 4,013 5,407 6,520 7,591 9,034EBITDA margin (%) 17.7 18.9 18.4 18.8 19.6Other income 609 778 1,208 1,000 1,000Depreciation 969 1,118 1,272 1,500 1,650Net finance cost 350 1,128 964 739 350PBT 3,303 3,939 5,491 6,351 8,034Tax 613 666 780 953 1,285Minority interest 37 83 125 125 150Extra ordinary expense (income) 69 241 32 Pre acquisition profits/(loss) 8 (82) Reported net profit 2,576 3,031 4,554 5,274 6,599

Balance sheetTotal equity 10,622 11,914 15,756 19,662 24,550Total debt 8,377 12,674 10,585 5,055 1,245Minority interest 194 228 353 478 628

Deferred tax liabilities 1,234 1,316 1,416 1,516 1,616Total liabiilities and equity 20,427 26,132 28,110 26,712 28,039Net fixed assets incl CWIP 14,001 17,187 16,826 17,126 17,476Investments 254 249 187 187 187Net current assets 5,246 6,179 7,798 8,449 9,426Cash 926 2,517 3,300 950 950Total assets 20,427 26,132 28,110 26,712 28,039

RatiosDiluted EPS (Rs) 20.5 22.2 33.4 38.6 48.3ROE (%) 26.7 26.9 32.9 29.8 29.9Debt/equity (X) 79 106 67 26 5



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VALUATIONWe arrive at a 12-month price target of CDH at Rs 700/share based on SOTP calculation of its variousbusinesses. We expect CDHs pre-R&D EBITDA margins to expand in FY2010E, lifted by the finished dosagebusiness. Indian finished dosage remains the most important segment for CDH, accounting for over half ofthe target price. This is followed by the US market and consumer/animal healthcare business. At our targetprice, CDH will trade at 14.5X FY2012E. Early success in transdermal and oncology segments can drive theprice target even higher.

SOTP-based price target is Rs700

Exhibit 1: SOTP-based price target is Rs700SOTP-based price target, March fiscal-year ends, 2011-12E (Rs mn)

P/E2011E 2012E (X) 2011E 2012E

India 3,283 4,094 52,225 65,176Finished Dosage 2,757 3,409

Branded 2,714 3,365 16 43,431 53,836Generics 42 44 12 505 533

API 23 26 10 233 258Consumer & others 503 659 16 8,055 10,548International 2,024 2,504 29,591 36,909Finished Dosage 1,608 2,080 24,596 31,810

Emerging markets 404 529 16 6,461 8,465Europe 189 229 15 2,834 3,439Latin America 134 156 16 2,146 2,492USA 715 953 15 10,724 14,296Japan 33 45 16 524 702Hospira JV 132 168 14 1,907 2,416

API 416 425 4,994 5,099Other Clients 187 207 12 2,244 2,487

Nycomed JV 229 218 12 2,750 2,612

Total 5,307 6,599 81,816 102,085Value per share 599 748Share price target 698

Implied target price multiple (FY2011E) 18.1Implied target price multiple (FY2012E) 14.4

Valuation(Rs mn)PAT (Rs mn)

Source: Kotak Institutional Equities estimates

Valuation: Different PE ratios for different businesses

We have used different PE multiples for different businesses as each business has a differentprofitability profile. Three business segments of CDHIndian finished dosage, US finisheddosage and consumer business in Indiaaccount for nearly 75% of its share price target.

Indian finished dosage. This business remains the most important contributor tovaluations, accounting for just over half of the target price. For valuing the Indianbusiness, we looked at the average multiple of companies when they were largely drivenby Indian operations. We picked Ciplas multiple of 20X 12-month forward earnings asthe benchmark. The multiple used for other companies is based on their sales mixbetween acute and chronic segments (higher multiple for chronic segments) and the rateof growth of the chronic segment (a higher growth rate gets assigned a higher multiple).


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We have used a multiple of 16X 12-month forward earnings as we note that the acutesegment still accounted for 69% of revenues in FY2009 according to ORG IMS and CDHhas not been able to expand margins over the past couple of years as it continues to builda marketing presence in terms of brands and sales team. CDH believes that growth willpick up in the next 12-18 months due to a focus on rural markets, strong new product

introduction in FY2009 and dedicated sales force for new therapeutic areas. We will bewilling to expand our valuation multiple when we see evidence of this.

Exhibit 2: Strength of Indian businessAcute/chronic split of key companies in domestic finished dosage market

Sun Ranbaxy Dr Reddy's Cipla Glenmark NPIL Lupin GSK India CadilaIndia finished dosage P/E multiple (X) 20.0 14.4 19.0 20.0 15.3 16.0 16.0 21.0 16.0

Acute segment (% of sales) 38 78 71 58 78 73 60 90 69Chronic segment (% of sales) 62 21 29 42 23 27 40 10 31

Acute segment, yoy growth rate2006 15 10 19 18 21 21 14 6 182007 14 18 11 17 16 0 17 7 20

2008 (MAT Oct' 08) 16 8 4 14 13 6 13 (2) 42009 (MAT Jun' 09) 18 8 5 14 15 24 7 5 12Chronic segment , yoy growth rate2006 18 17 15 14 28 9 58 1 132007 18 29 18 15 39 6 45 5 162008 (MAT Oct' 08) 15 18 11 14 36 2 21 (12) 102009 (MAT Jun' 09) 14 7 5 15 40 16 25 8 9

Source: Kotak Institutional Equities, ORG IMS

US market accounts for about 14% of share price target. We have looked at theaverage PE ratio for the leading companies for the past several years. Excluding industryleader Teva, the average PE multiple from January 2004 December 2008 is 15.9X 12-month forward earnings. As a result, we use 15X 12-month forward earnings as themultiple for the US business of CDH. For European generic operations of all companies,we have used the same multiple as for the US. We believe European markets wouldincreasingly show the same characteristics as the US and hence end up with similarvaluations over time.

Exhibit 3: US and Indian business valuation comparisonValuation multiples a historical perspective (X)

USUS generics 5-year avg (2004-08) 13.2US generics 5-year avg (2004-08) (ex Teva) 15.9US generics avg since Jan' 2004 till date 14.0

US generics avg since Jan' 2004 till date (ex-Teva) 16.7 Source: Kotak Institutional Equities

Consumer and animal healthcare business in India is the third largest contributorwith 10% share of the price target. CDH is present in consumer products segments withthree strong brands. This business is listed separately under Zydus Wellness. At a currentmarket price of Rs270 per share, the consumer business contributes Rs54 to CDHs shareprice. We think this business is comparable to the Indian finished dosage business and weuse the same multiple of 16X to value the business. The veterinary business earns half therevenues coming from the consumer segment. This business has been growing modestlybut increasing product pipeline can add to its growth rate from FY2010E.

Japan. For the Japanese business, we have used a 5% premium to the multiple that wehave used for the US generic segment. Currently, we think the Japanese business is notas competitive and commoditized as the US generic business, though this could change inthe next several years.


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Emerging markets . We assign a higher multiple of 16X 12-month forward earnings foremerging markets. Emerging markets are getting more recognition from companies asmanagements are realizing that profitability in these markets is significantly higher than indeveloped markets. In addition, these profit streams are more predictable given thenature of the branded generics business.

API. We have two different types of revenue streams coming from Indian andinternational clients. We note that Indian API business comes last in terms of importancegiven to businesses. In some cases, companies sell only surplus quantities in Indian APImarket. We use 10X for valuation of this business. In the international business, we seeCDH making a big push on this segment with focus on developed markets. We thinkthese markets offer better margins with sticky clients and an opportunity to create IP-driven business model. Within this segment, CDH has very profitable but decliningrevenues from its joint venture with Nycomed. We use a 20% higher PE multiple of 12Xfor these segments.

Implied target price multiple is 14X FY2012E estimated earnings

At Rs648, CDH trades at 19X FY2010E and 17X FY2011E our estimated earnings. At thetarget price, it would trade at 18.2X FY2011E and 14.5X FY2012E our estimated EPS. Wethink CDH can surprise us on the upside if its initiatives for transdermal and oncologysegment begin to yield results in the next 18 months.

High holding of the founder family (75% of the company) may act as a dampener for someinvestors but we think the stable growth rate and high RoE make a compelling story.

Valuations hovered around average levels till June 2009

CDH has traded at an average PE of 13X on 12-month forward earnings since January 2006.Since 2008, it has traded below this multiple. We think this could be due to the restructuringof its consumer business, after which there was a perception among investors that minorityshareholders did not get a good deal. In recent past, investors have noticed stable returnsthat CDH can generate and the multiple appears to be expanding. On EV/EBITDA measure,we notice that the average multiple is just under 10X and it has traded below its average in2008 but valuation has expanded since mid-2009.

Exhibit 4: 12 mt olling P/E price band chart

100

200

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Closing price 7X 13X (Avg) 18X

Source: Kotak Institutional Equities, Bloomberg

Exhibit 5: 12 mt month rolling EV/EBITDA band chart

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7

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11

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15

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EV/EBITDA (X) Avg Min Max

Source: Kotak Institutional Equities estimates, Bloomberg


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Where does CDH fit in our sector universe?

Exhibit 6: Valuation KIE generics coverage

Price Mcap Target price Upside Rating(INR) (US$ mn) (INR) (%) 2010E 2011E 2010E 2011E 2010E 2011E

Cipla 346 5,746 285 (17.6) ADD 26.5 20.7 10.8 14.4 27.6 22.9Dr. Reddy's 1,124 4,094 990 (11.9) BUY NM 11.8 8.9 16.6 20.7 18.5GSK Pharma 1,656 3,042 1,450 (12.4) REDUCE 10.0 10.0 10.0 10.7 27.6 25.1Lupin 1,405 2,629 1,430 1.8 ADD 23.4 13.1 25.2 16.2 18.9 16.7Ranbaxy 512 4,432 210 (59.0) REDUCE NM 56.7 (0.2) 13.6 NM 29.0Sun Pharmaceutical 1,495 6,667 1,400 (6.3) ADD (34.3) 13.1 (10.7) 12.1 25.9 22.9Cadila 648 1,922 700 8.1 BUY 50.3 15.8 23.8 14.1 19.4 16.8

EPS growth (%) Sales growth (%) P/E (X)


CDH has the best upside among the generic stocks that we rate BUY or ADD . CDHhas EBITDA margins comparable to its peers. Its RoE is better than most of its peers. Its USbusiness has not been impacted by regulatory issues that are hurting Ranbaxy, Sun Pharmaand Lupin. Liquidity may be a constraint for some investors as daily traded volumes are notlarge. We believe the stock would reward long-term patient investors.

Exhibit 7: KIE generics coverage universe- key operational metrics

FY2009 FY2010E FY2009 FY2010E FY2009 FY2010ECipla 19.1 21.7 18.0 18.1 19.9 19.3Dr. Reddy's 18.3 20.8 12.4 20.5 13.6 23.3GSKPharma 35.4 36.2 39.5 38.3 31.3 29.7

Lupin 17.2 18.0 21.9 22.3 37.1 35.5Ranbaxy 5.4 6.2 1.4 2.3 (13.3) 10.9Sun 44.8 31.9 28.2 12.8 30.2 15.9

Cadila 18.9 18.4 39.4 41.2 26.9 32.9

EBITDA margin (%) ROCE (%) ROE (%)


We prefer to use the PE method to value Indian pharmaceutical stocks. This makescomparisons across time and geography easy. It can also be used to make comparisonsacross other sectors. In the past, questions were raised about the comparability ofinformation with global generic companies due to use of Indian GAAP by Indian companieswhile global generic companies reported results using US GAAP. Over time, this issue hasbecome less relevant, in our view. Significant differences between Indian and US GAAPrelated to the preparation of consolidated accounts, treatment of R&D costs and deferredtaxation. Most Indian companies (CDH included) report quarterly results on consolidatedbasis, treat R&D costs as revenue expenses and account for deferred taxation completely.

The only difference now relates to option-relating suspension of AS11 that was given by thegovernment in preparation of FY2009 accounts. In CDHs case, it is not materially significantany longer as Rupee appreciation till end September 2009 has reduced the impact on futureearnings. As a result, we now use Indian GAAP estimates for valuation and rating decisions.

Valuation of R&D pipeline . We think a valuation of CDH research pipeline is not justifiableyet. We would consider assigning a value to a molecule if CDH can enter into any out-licensing deal and we are able to get independent confirmation of the modelcules scientificand commercial capability.


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STRATEGY AND PROFILECDH wants to achieve revenues of US$1 bn by FY2011E and reach US$3 bn revenues by FY2015E. This growthwill be driven by international markets and alliances for manufacturing with innovators. The company ranksfifth in India by revenue. International generic sales accounted for a third of FY2009 revenues. CDH has apresence in niche consumer segments in India. CDH has invested in NCE research in three segments butbenefits from these investments are not yet visible.

CDH aims at revenues of over US$1 bn by FY2011E

CDH aims at revenues of over US$1 bn by FY2011E. CDH wants to achieve revenues of overUS$3 bn by FY2015E and be a research-based pharmaceutical company by FY2020E.

Exhibit 8: Revenue by business segments, March fiscal year-ends, 2008-2012E (Rs mn)

2008 2009 2010E 2011E 2012EIndia 14,887 16,435 18,544 21,005 23,790 Finished Dosage 11,762 12,880 14,413 16,320 18,493

Branded 11,097 12,137 13,618 15,525 17,698

Generics 665 743 795 795 795 API 506 426 349 366 385 Consumer 1,540 1,956 2,508 2,918 3,371 Animal Health and others 1,079 1,173 1,274 1,402 1,542 International 8,751 12,736 17,277 19,843 22,794 Finished Dosage 6,465 9,676 13,536 16,180 19,057

Emerging markets 1,020 1,865 2,250 2,628 3,154 Europe 1,647 1,980 2,419 2,971 3,417 Latin America 1,230 1,628 1,874 2,110 2,321 USA 2,568 3,984 5,840 7,102 8,522 Japan 219 316 369 443 Hospira JV 837 1,000 1,200

API 2,286 3,060 3,741 3,662 3,737 Other Clients 1,618 2,062 2,817 2,941 3,089

Nycomed JV 668 998 924 721 649

Total 23,638 29,171 35,821 40,848 46,584

Source: Kotak Institutional Equities estimates, Company

Finished Dosage business in India

CDH has a presence in two segments in finished dosage in India(1) branded and(2) generic. In 1HFY10, branded finished dosage sales increased by 12% yoy while genericsegment sales grew 15% yoy.

In FY2009, branded finished dosage accounted for revenues of Rs12 bn, growing at 9%yoy. In the branded segment, CDH has a market share of 3.6% and is ranked fifth in Indiaby sales value. New products accounted for 2.5% growth in sales out of 9% growthachieved in FY2009. The rest came from price increase and volume expansion.

The generic segment accounted for revenues of Rs743 mn, growing at 12% yoy.


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Exhibit 9: Cardiovascular segment is the largest segmentTherapeutic break-up of domestic finished dosage sales, March fiscal year-ends, 2006-2009, (%)

2006 2007 2008 2009Cardiovascular 22 21 21 21 Gastro Intestinal 17 17 16 16 Female Healthcare 11 11 11 11 Respiratory 10 10 10 11 Anti Infective 11 11 10 11 Pain Management 7 7 6 7 Central Nervous System 2 2 2 3 Diagnostics 3 3 3 2 Biologicals 3 4 4 3 Dermatology 3 2 Others 14 14 14 10 Neutraceuticals 3

Source: Company

Cardiovascular is the largest segment. Cardiovascular, Gastro intestinal, FemaleHealthcare and Respiratory account for ~60% of finished dosage revenues in India. Webelieve companies with an increasing focus on chronic segments will do better in India infuture. CDH is one of the companies that fit the bill.

15 brands feature amongst the top 300 in India. The top 10 brands accounted for36% of revenues while top 20 accounted for more than 50% revenues in FY2009. CDHhas five large brands that account for revenues of more than Rs500 mn each per annum.These brands are Aten (atenolol cardiovascular), Deriphyllin (theophylline anti asthma),Ocid (omeprazole anti ulcerant), Pantodac (pataprazole anti ulcerant) and Atorva(atovastatin cholesterol reduction). Aten is the largest brand with revenues of aboutRs800 mn while the other four brands had sales of Rs550 mn each in FY2009. Thesebrands accounted for revenues of Rs2.8 bn in FY2009 or 23% of the Indian brandedfinished dosage segment.

CDH launched more than 25 new products and 30 line extensions in FY2009 . Ofthese, 15 products were launched for the first time in India. CDH in-licensed a globalcontraceptive brandYasmin from Bayer Scheringfor launch in India. We think this laysthe foundation of growth for the next couple of years.

CDH has expanded marketing resources to 3,300 people in India and has addeddedicated task forces for the nutraceutical, rheumatology, diagnostics and COPD (ChronicObstructive Pulmonary Disease) segments. In the nutraceutical segment, CDH haslaunched a range of iron supplements, antioxidants, tonics, vitamin and multi-vitaminsupplements, proteins, nutrients and calcium supplements. A sales force of 250 people ismarketing these products. In the rheumatology segment, CDH has created a sales forceof 50 people for marketing the high-end products for arthritis. It is now focusing on therural market which it thinks may be the next growth driver. CDH has more than 150employees marketing in rural India.

Exhibit 10: Chronic segment accounts for more than half salesCategory wise break-up of domestic finished dosage sales, FY2008-09, (%)

FY2008 FY2009Acute 27 28Chronic 57 57Biologicals 4 3Others 12 12

Source: Company


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Finished Dosage business in international markets

CDH has very ambitious targets for international business and its focus is clearly on finisheddosage business in developed markets. Sales in emerging markets are also expected todouble by FY2011E from FY2008 levels.

Exhibit 11: Focus on developed marketsCDH sales target in international markets, US$ mn

FY2008 FY2011EDeveloped market 105 250Emerging markets 56 120API 57 80Total 218 450

Source: Company

CDH services international markets through various subsidiaries and does not fully own thesebusinesses in some countries.

Exhibit 12: International subsidiaries and % owned by CDHCountry Name of the subsidiary % ownershipUSA Zydus Pharmaceuticals USA Inc. 100France Zydus Frnace SAS 100Spain Laboratories Combix 100Japan Nippon Universal Pharmaceuticals 100Brazil Quimica a Pharmaceutica Nikkho 100Brazil Zydus Healthcare Brazil 100South Africa Simayla Pharma 70USA Zydus Noveltech 85Italy Etna Biotech 100

Source: Company

USA

CDH has been rated one of the fastest growing companies in US by IMS for three years in arow. It is one of the late Indian entrants in the market and started operations in 2005. It was70% owned by CDH till end of FY2008. In FY2009, CDH bought out minority shareholdersand it now owns 100% of its US operations.

Revenues from the US have grown to US$87 mm in FY2009 from US$32 mn in FY2007.CDH has launched 25 products in US in FY2009 and expects to add 8-10 products everyyear. It had filed 93 ANDAs with the US FDA by the end of August 2009 and received 48approvals. This indicates that CDH has a very strong pipeline for this market. It plans to file12-15 ANDAs every year.

CDH focused on oral solid dosage for the first few years but it has now startedfiling for aerosols (four applications filed already) and parenterals (seven applicationsfiled already). CDH thinks that its integrated business gives it an advantage as over half ofits products use own API. It added modified release technology products o the portfolio inFY2009.

Backward integration to API is an advantage in the competitive US market. CDHmanufactures own API for over half the products it sells in US market.

Update on patent challenge pipeline

CDH is involved in the following eight patent challenge cases. We provide a brief update on

the current status of these suits.Abilify (aripiprazole) Orally Disintegrating TabletsCase was filed on May 30, 2008. Barr hasfiled a patent challenge in March 2007. Cases have been consolidated with other patentchallenges for Abilify tablets. Discovery process was to be completed by June 2009.


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Clarinex (desloratadine) and Clarinex (desloratadine) Orally Disintegrating TabletsCDH isone of the several companies to challenge the patents. Schering has been reachingsettlements with many of the challengers in the recent past.

Cozaar (losartan) TabletsCDH is one of the several companies challenging the patents.Case is still in very early stage of litigation.

Depakote (divalproex) Extended Release TabletsCDH is one of the many patent challengersin this case. Abbott has started settling litigation with other challengers such as Teva andMylan.

Effexor XR (venlafaxine) ER CapsulesCDH is one of the several patent challengers in thiscase. Some companies have settled with Wyeth while litigation continues for others.

Hyzaar (losartan and hctz) TabletsCDH is involved in this litigation along with Teva andSandoz. Litigation status is not clear to us.

Strattera (atomoxetine) CapsulesOn August 9, 2007, Eli Lilly brought a suit againstActavis. On September 5, it amended its Complaint to add Zydus and eight other genericcompanies as defendants. All cases involve the same patent, with similar product strengths.Several defendants filed motions for partial summary judgments, which were granted.

Europe

Exhibit 13: CDH has made progress in French marketSales, filings status in France, FY2007-09

0

10

20

30

40

50

60

FY2007 FY2008 FY2009

Gross sales (Euro mn) New filings Site variation filing

Source: Company

Two key markets for CDH in Europe are (1) France and (2) Spain.

France. IMS estimates that the French market is about 2.3 bn p.a. and grew 8% in 2008.CDH entered this market in 2003 with an acquisition. Initially, it was present in thegeneric as well as branded generic segment in France. However, for the past two years,its focus has been exclusively on generics. It is now present in segments where the marketsize is about 1.4 bn. It has launched over 150 presentations in 75 molecules in France sofar. CDH plans to launch about 12-15 products every year in this market.

Revenues from France were 30 mn in FY2009. This was nearly the same level as inFY2008. FY2009 was a challenging year for CDH in the French market, mainly due to theprice reduction in the range of 10-15% ordered by the government. In addition, there

was a change in the terms of payment that reduced credit period to CDH clientpharmacies. This resulted in one-time correction in demand in Jan-March 2009.


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CDH expects the French market to grow at more than 20% in FY2010E. This is acombined effect of changes in FY2009 that led to a low base and patent expiration formajor molecules. Margin expansion in this market can come from shifting manufacturingto CDH facilities in India. To achieve this, site variation filings are necessary. By now, CDHhas filed 45 such applications with the authorities. CDH now supplies over 30% of its

sales in France from its manufacturing sites in India. This will drive up the profitability ofthis market.

We think the French market is likely to see structural changes following a series ofmeasures announced in September 2009. The government has launched a voluntaryscheme under which doctors strive to achieve pre-defined targets with a commitment toprescribe generic versions where available. Government expects to save 200 mn in 2010by using generic versions of Plavix (blood thinner from Aventis). CDH expects toparticipate in generic Plavix opportunity. In the past, the French government had nottaken aggressive steps to promote generic usage by doctors. This led to lower penetrationof generic medicines in France compared to UK or Germany. We think this is about tochange.

Spain. It is the fifth largest generic market in Europe with revenues of 700 mn p.a.Generic medicines accounted for 7% of value and 16% of volumes in Spain in 2008. Thissuggests low penetration of generics in Spain compared to UK or Germany.

CDH acquired Laboratorios Combix in July 2008. It was a marketing organization withproduct portfolio of 17 molecules. Revenues in FY2009 were nearly 2 mn. CDH isfollowing a strategy similar to French market by aggressively shifting the production toIndian facilities. It has now launched 24 products in this markets and plans to expand itsportfolio as it believes there is a good business opportunity in this less penetrated genericmarket.

Japan

IGPA (International Generic Pharmaceutical Alliance) estimates that the Japanese genericmarket is US$3 bn p.a. growing at ~12%. Generic penetration in this market is limited to~5% in value terms and 17% in volume terms.

CDH set up a fully owned subsidiary and also acquired Nippon Universal Pharmaceutical(NUP) which had marketing approvals and a small manufacturing facility. Revenues fromJapan were Rs219 mn (US$7 mn) in FY2009. CDH has big plans for this market and plans toincrease sales forces and in-license products from other generic companies. It launched 20such in-licensed products in Japan in FY2009.

Latin America

CDH is focused on Brazil in Latin America. Brazil has two pharmaceutical markets in thecountry. The larger of the two is the branded segment with US$10 bn revenues p.a. Thegeneric segment is smaller, with US$2 bn revenues p.a. The growth rate for both thesemarkets is estimated to be 15-18% in local currency terms.

CDH addresses the branded generic segment through Quimica e Farmaceutica Nikkho doBrasil (Nikkho) and the generic segment through Zydus Healthcare Brasil. CDH revenues inBrazil were BRL68 mn in FY2009. The generic subsidiary had filed 40 products at end March2009, of which 19 were approved and 12 launched in the market. CDH expects to grow itssales by 20% p.a. for the next few years, but we have built more conservative growth intoour model.

Nikkho was acquired in FY2008. It has a manufacturing facility and strong marketing anddistribution network in Brazil. It is focused on segments such as gynaecology. Given thechallenging business environment in emerging markets in late 2008, CDH completed a staffoptimization program in FY2009, we expect this to lead to an increase in production andsales in FY2010. Nikkho has a portfolio of ~20 brands which has been expanded with thelaunch of several new brands from a pipeline of existing brands and few acquired brands.


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Emerging Markets

CDH has a presence in over 20 emerging markets. These markets are in Asia Pacific, Africa,Middle East and CIS region. CDH believes it is among the leading companies in Sri Lanka,Mynmar, Uganda and Sudan. CDK is now focusing on Russia, South Africa, Taiwan andPhilippines. CDH revenues from these markets have increased to US$40 m in FY2009 from

US$20 mn in FY2007.In June 2008, CDH acquired 70% stake in Simayla Pharma (SP) in South Africa. Theremaining 30% stake is held by company founder Ben Classen. SP had revenues of SouthAfrican rand (ZAR) 19 mn (about Rs100 mn ) in 2007. This grew to ZAR41 mn in 2008. CDHreported revenues of Rs353 mn in FY2009 from this market.

With the public sector providing healthcare for up to 80% of the population, there is largepotential for growth in the generic sector as the South African government focuses onimproving healthcare access while cutting healthcare costs. Industry estimates indicatepotential generic sector CAGR of 19%, touching US$1.3 bn and likely to account for 30%of the total pharma market by 2011E.

SP markets more than 58 SKUs with 62% of its products falling in the chronic segment and38% in the acute segment. IMS reports that 18 of the molecules marketed by Simalyafeature in the top 50 new product launches. The products marketed fall in thecardiovascular, anti-infective, respiratory, CNS, gastrointestinal and womens healthcaresegments. Since this is the focus areas for CDH, there is a synergistic fit.

Over the next three years, the group plans to launch a total of 50 products in the market. Astrong product pipeline for South Africa is already in place with 49 filings, of which 21 havebeen approved for marketing. The products will be manufactured at CDH finished dosagesmanufacturing hub at Ahmedabad. This facility has been approved by the Medicines ControlCouncil (MCC), the regulatory agency of South Africa. SP would market CDH products inNamibia, Angola, Botswana, Swaziland and Mozambique.

Consumer health business in India

CDH operates its consumer health business through Zydus Wellness (ZW), which is 70%owned by CDH. The remaining 30% stake is owned by various investors as ZW is listed inIndia. CDH reports entire revenues and profits of ZW in its income statement and 30% ofprofits attributable to outsiders are shown as minority interest.

There are three large brand familiesSugar Free, Ever Yuth and Nutralite.

Sugar Free is a low calorie sweetener based on aspartame. It was launched in 1988 withthe Indian diabetic patient in mind. It has now expanded the customer group to health-conscious Indians of all ages. CDH has also launched sucralose based variant under brandname Sugar Free Natura. In FY2009, brand revenues crossed Rs770 mn, up 16% yoy.CDH believes that growth drivers were consumer-relevant innovations, marketinginitiatives, focused advertising. Sugar Free is the market leader in the artificial sweetenerscategory in India with over 80% market share.

Ever Yuth is in the niche range of skincare products. It covers soap-free face washes, facemasks and scrubs. It is ranked first in the scrub and peel-off segments and is the secondlargest face wash in Indian brand. Brand revenues were Rs500 mn in FY2009, up 60%yoy. This growth was possible due to changes in its packaging to give it a contemporarylook, focused visibility drive across markets and outlets. Economic slowdown in Indiaimpacted modern retail formats which are an important outlet for the brand. CDH isaddressing these issues in FY2010E.

Nutralite is a leading table spread margarine in India. Nutralite is made from pure refinedvegetable fats which are free from trans fats and hydrogenated fats. India is traditionallya large butter consuming market but butter substitutes are now gaining acceptance. CDHexpects more players to enter this segment in the next couple of years which couldexpand the market further. Brand revenues were Rs660 mn in FY2009, up 19% yoy.


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Exhibit 14: Consumer business driven by three brandsConsumer business by brand, Rs mn

2009 2010E 2011E 2012ESugar Free 778 934 1,074 1,208 EverYuth 500 675 844 1,013

Nutralite 669 870 1,000 1,150 Total 1,947 2,478 2,918 3,371


CDHs global API and intermediates business

There are three revenue streams in this segment.

1. India-based clients (Rs426 mn in FY2009)

2. Revenues from joint venture with Nycomed (Rs998 mn in FY2009)

3. Other international clients (Rs2 bn in FY2009).

Revenues from APIs increased to Rs3.4 bn in FY2009 from Rs2 bn in FY2006. CDH is nowfocusing on the high-margin finished dosage segment so the relative importance of APIbusiness has declined. This segment accounted for 15% of revenues in FY2006 but hasdeclined to 12% in FY2009.

In FY2009, growth was driven by Latin America and the Middle East. US revenues were up93% yoy and Indian revenues declined 16%. CDH gained from depreciation of the IndianRupee in FY2009, but lost due to higher crude oil prices and restricted supplies from Chinawhich is a low price supply source. CDH continues to focus on US market and filed 14 DMFsduring the year.

In 1HFY10, CDH reported revenues of Rs1.3bn from clients excluding Nycomed, up 27% yoy.This was achieved by launching generic Plavix in European markets. CDH thinks thisopportunity will continue for another 4-6 quarters and the size of opportunity will increasewith France opening up in 2010E.

Animal healthcare business

CDH offers a range of products in livestock and poultry segment. FY2009 revenues were Rs1bn, up 9% yoy. This was a challenging year for the business. Depreciation of the IndianRupee increased the cost of materials. The bird flu outbreak in parts of India impacteddemand as well. Seven new products were launched in the year and this helped improveprofitability of the segment. CDH is planning to take this business to international marketsand launch products for pets and companion animals.

Alliances for manufacturing in India

CDH was one of the first companies to exploit cheap manufacturing of chemistry-drivenproducts in India and created its CMO business with separate alliances with three partners.In addition, it has 37 other contracts with innovator and generic MNCs with peak revenuepotential of US$48 mn.

Zydus Nycomed Healthcare (50-50 JV with Nycomed). It was established to manufacturekey starting materials for pantoprazole, which is the largest product for Nycomed. The JVreported revenues of Rs2 bn and PAT of Rs1.3 bn in FY2009. CDH reports its 50% share inrevenues and PAT. This JV accounted for 21% of CDH PAT before extraordinary expenses inFY2009. Investors have been concerned about potential patent expiry of pantoprazole and

its impact on profits of CDH. CDH has increased the scope of work with its partner and isnow planning to produce API instead of intermediates of pantaprazole. In addition, somemore APIs will be produced by this JV. In FY2009, the companys manufacturing capacitywas expanded and revenues from this capacity will begin to flow in FY2011E.


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Zydus Hospira Oncology ( 50-50 JV with Hospira). This company will manufactureoncological injectible products which will be marketed by the partners in pre-determinedcountries. A dedicated facility has been set up in Ahmedabad and commercialmanufacturing and supplies of three products will start in FY2010E. This is meant for theEuropean market. In FY2011E, the number of products will be increased and sales to US will

likely start. FY2011E will be the first full year where impact of this business will be felt onearnings.

Zydus BSV Pharma (50-50 JV with Bharat Serum and Vaccines Ltd). This company was setup to manufacture and market a non-infringing and proprietary Novel Drug Delivery System(NDDS) of an approved anti-cancer product (liposomal doxorubicin) for the global market.The product has been approved by the Drug Controller General of India (DCGI) for India. Anew facility is coming up near Ahmedabad and CDH has manufactured exhibit batches forpreparing ANDA under a contract manufacturing arrangement. While revenues are likely tobegin in FY2010E, we have not shown them separately in our estimates as we do not expectsignificant revenues in the first couple of years.

NCE research

CDH has 335 scientists working in its drug discovery laboratory based in Ahmedabad at acost of US$10 mn in FY2009. CDH is focusing on dyslipidemia, diabetes, obesity andinflammation. CDH has six molecules at various stages of research in India and its moleculeZYT1 for treatment of dyslipidemia is awaiting US FDA approval for starting clinical trials.

CDH has signed a drug discovery and development agreement with Eli Lilly (LLY) focused oncardiovascular research. The collaborative research program may continue for up to six years.CDH will discover and develop potential molecules against novel targets. CDH will initiatethe drug discovery, lead identification and optimization and conduct preclinical studies andclinical trials up to Phase II Human Proof-of-Concept. LLY will provide chemical startingpoints as well as expertise and feedback regarding toxicology, ADME, chemistry, biology,

clinical and regulatory aspects.LLY will have the option to license any resulting molecules at different stages. CDH wouldreceive potential milestone payments of up to US$300 mn and royalties on sales upon thesuccessful launch of a product derived from this program. We are not assigning any value tothe research efforts of CDH.

CDH has acquired a presence in vaccines

In November 2008, CDH acquired Etna Biotech from Crucell. Etna was the dedicatedresearch and development wing of Crucell. Etna Biotech is based in Catania, Italy. It focuseson research and development of vaccines. Currently, Etna Biotech has several innovativetechnologies and vaccines at different development stages in its pipeline. Prominent among

those are programs for developing vaccines against Hepatitis using the Virosome vaccinetechnology platform and against Malaria and HPV using the Measles technology platform.The vaccines segment has limited competition and there are very high entry barriers in thefield. We have not factored any revenues from this acquisition in the absence of details fromCDH.

Entering new areas with high entry barriers

CDH is preparing to enter global markets in pulmonary, transdermal, injectible and oncologysegments over the next three years. Current annual sales of branded products in thesesegments exceed US$100 bn globally. Technologies for manufacturing these products aredifficult and there are a limited number of players in these segments. As a result, profit

margins tend to remain higher for longer than commodity oral products. We will keenlywatch CDH progress in this business.


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KEY RISKSThe most important risks are regulatory risks in form of price control by the government. Other industry risksrelate to (1)attempts to increase penetration of generic sector accompanied with pricing reforms in Europe,(2) increasing consolidation of global generic industry, (3) use of the Indian cost advantage by global genericplayers and (4) continuing volatility of the Indian Rupee against the US Dollar.

A large contribution to profits by Nycomed JV. CDH earned revenues of Rs998 mn fromAPI and intermediates sold to Nycomed and profit of Rs683 mn in FY2009. This accountedfor 21% of CDH consolidated PAT before exceptional items. The share of Nycomed JV wasprobable higher in the past. This JV supplies raw material for pantaprzole, which is facingpatent expiry across the world. We forecast declining revenues and PAT from this JV fromFY2010E. We forecast sales from Nycomed JV to decline by 11% in FY2010E and 25% inFY2012E in local currency terms. Increase in the portfolio of products supplied to Nycomedmay dilute the negative impact on CDH.

Chasing too many new ideas. CDH is entering new businesses and markets veryaggressively over the next three years. Some of these markets such as South Africa andSpain are very different from the markets that CDH has operated in the past. This poses therisk of execution, compliance and regulatory changes in these markets. Hospira JV hasstarted earning revenues from 1Q FY2010 and Bharat Serum JVs may follow soon. These areCMO with the major client being the JV partner. CDH has experience with Nycomed forintermediate and API manufacturing, but challenges with finished dosage manufacturing rundifferent risks. There is a risk that management is spreading itself too thin by startingtoomany new initiatives at the same time.

Lack of diversification among the markets Indian finished dosage business accounted for56% of revenues in FY2009 while international markets accounted for 44%. ThreemarketsUS, Latin America and Europeaccount for 60% of international revenues. The

risk of over dependence on few markets is being addressed by CDH through its businessstrategy of identifying and penetrating other markets across the globe. CDH also pursues apolicy of growing in critical markets of the world through the M&A route provided theacquisition offering strategic fit to the operations. CDH has added Spain, South Africa andJapan to its portfolio.

Portfolio concentration in India. CDH has launched many new brands and line extensionsover the last two years. However, it is still dependent on top five brands. These brandsaccounted for revenues of Rs2.8 bn in FY2009 or 23% of Indian branded finished dosagesegment. Top 20 brands account for more than half the sales in India.

Risks related to generic business in developed markets. CDH faces two key risks inmarkets such as the US and France(1) risk of price erosion of generics which is counteredthrough product portfolio selection, focus on value added and complex products that facelower competition, strict control over cost, leveraging its strengths in backward integrationand economies of scale and (2) risk of revenue concentration. CDH has managed the riskswell by building a diversified portfolio in US with a product basket of 23 and 75 moleculeslaunched in France.

Less than 100% stake in some international operations . CDH entered markets such asUS and South Africa by owning a 70% stake in the operations. The remaining stake in USoperation was held by Joe Renner who was CEO of the US operation and was taken over byCDH in FY2009. In South Africa, the remaining 30% stake is held by company founder BenClassen. CDH has the call option to acquire the remaining stake at the end of third and fifthyear of operation at a price to be determined as per the agreement.


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Risks in industry

Government intervention in pricing decision. The p harmaceutical industry in India andin other parts of the world faces the risk of government intervention in prices. In the recentpast, Indian government wanted to increase the scope of price control but the Cabinet wasdivided on this issue, and hence no final decision was announced by the previous Congressgovernment. A new Congress-led government has taken office in May 2009 and we mayhear new pricing plans in the next few months.

Regulatory changes in international markets. Most European countries are encouraginggenerics though various regulatory measures, but we notice a trend of moving toward apure generic market from the branded generic market. This would lead to lower prices, asseen in Germany, in the short term. However, volume increases may more than compensatefor lower prices in the long term.

Consolidation underway in global generic business. Indian companies are underincreasing pressure to participate in M&A in order to establish scale and presence in globalmarkets. Due to the heterogeneous nature of each market (particularly in Europe),

acquisition is the quickest way to gain scale in the local market. In the recent past, we haveseen some of the biggest acquisitions in generics industryTeva- Barr/Ivax, Actavis-Alpharma, Barr-Pliva and Watson-Andrx. These acquisitions have provided significant scale tothe acquirer and Indian companies are under pressure to step up. This poses the risk ofoverpaying for assets. CDH has so far acquired smaller companies in Spain and South Africa.

Availability of India cost advantage for global players. The cost advantage of Indiangenerics has spread across the industry over the time with global generic companies cominginto India. Daiichis acquisition of Ranbaxy, Mylans acquisition of majority stake in Matrix,Actavis acquisition of Sanmars API division are some of the inbound deals. We see everygeneric company capturing the Indian cost advantage in its supply chain though alliancesor investments in India.

Currency management and foreign exchange-related risk. The Indian Rupee has beenvery volatile against US$ since 2008. CDH has significant exposure to the US market and thecurrency movement has impacted their revenues. CDH has responded with aggressivehedging via forward contracts and derivatives, denominating imports in US$ and increasingraw material purchasing from China.

Our forecasts are based on Rs/US$ rate of Rs 47.25 for FY2010E and Rs46 for FY2011E.Rupee appreciation has taken a toll on the results of many companies, leading to lowerrevenues in Rupee terms and lower EBITDA margins. Those having exposure to Europe havebeen less impacted.

CDHs accounting procedure for the exchange rate differences arising on the long term

foreign currency monetary item is as recently notified by the government. It has adjusted theexchange rate differences arising from long-term loans for funding of the assets to the costof fixed assets. In all other cases, the exchange rate difference is transferred to a separateaccount named foreign currency monetary items translation difference account. Thisreserve amounting to Rs438 mn will be written-off by end of FY2011E. Our model includesthese expenses equally in FY2010-11E. Change in accounting system lowered the PAT ofFY2009 by Rs79 mn net of taxes.

Chinese competition impacting prices for APIs. India is seeing increasing competitionfrom China in the API space. This is leading to price reduction, especially in emergingmarkets. Currently China is behind India in finished dosages segment in developed markets,but we expect increasing competition over the next 3-5 years. During FY2009, prices of APIs

increased due to higher input costs (petroleum prices) and non-availability of material fromChinese sources due to closure of factories ahead of Olympics in August 2008. We expectprices to correct in FY2010E.


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FINANCIALSWe forecast CDH net sales to increase 24% in FY2010E followed by 14% in FY2011E. We think the keyrevenue growth drivers areUS, Japan, Consumer business in India and API. We expect revenues from theHospira JV to start in FY2010E. We expect a 3% Rupee appreciation to create a headwind in FY2011E. Weexpect EBITDA margin to remain flat near 19% in FY2010-11E despite increasing R&D costs. We expect PAT toincrease 44% in FY2010E followed by 15% growth in FY2011E. We think higher other income and a lowereffective tax rate due to a new plant in Sikkim will drive PAT growth in FY2010E.

Exhibit 15: Cadilaprofit model, March fiscal year-ends, 2007-2012E (Rs mn)

2007 2008 2009 2010E 2011E 2012ENet sales 17,855 22,660 28,624 35,429 40,428 46,108Operating expensesMaterials (6,372) (7,903) (9,566) (11,622) (13,131) (14,435)Selling and administration (2,613) (3,430) (4,837) (5,563) (6,369) (7,324)Employee cost (1,850) (2,469) (3,109) (4,487) (5,160) (5,934)R&D (1,344) (1,336) (1,564) (1,993) (2,426) (2,767)Other (2,588) (3,509) (4,141) (5,246) (5,752) (6,615)Total expenditure (14,767) (18,647) (23,217) (28,909) (32,837) (37,074)EBITDA 3,088 4,013 5,407 6,520 7,591 9,034Depreciation and amortisation (823) (969) (1,118) (1,272) (1,500) (1,650)EBIT 2,265 3,044 4,289 5,247 6,091 7,384Net finance cost (223) (350) (1,128) (925) (700) (350)Foreign Currency Monetary Item Expensed (39) (39) Other income 697 609 778 1,208 1,000 1,000Pretax profits before extra-ordinaries 2,739 3,303 3,939 5,491 6,351 8,034Current tax (287) (521) (582) (680) (853) (1,185)Deferred tax (37) (92) (84) (100) (100) (100)Reported net profit 2,415 2,690 3,273 4,711 5,399 6,749Minority interests 72 37 83 125 125 150Reported net profit after minority interests 2,343 2,653 3,190 4,586 5,274 6,599Exceptional items (69) (241) (32)

Pre acquisition profits/(loss) 5 8 (82) Reported net profit after minority interests andexcep. Items

2,338 2,576 3,031 4,554 5,274 6,599

Primary EPS (using wtd. avg. shares) 18.6 20.5 22.2 33.4 38.6 48.3Diluted EPS 18.6 20.5 22.2 33.4 38.6 48.3Year-end no. of shares (mn) 125.6 125.6 136.5 136.5 136.5 136.5Weighted avg. no. of shares (mn) 125.6 125.6 136.5 136.5 136.5 136.5Fully diluted no. of shares (mn) 125.6 125.6 136.5 136.5 136.5 136.5

Margins (%)EBITDA margin 17.3 17.7 18.9 18.4 18.8 19.6PBT margin 15.3 14.6 13.8 15.5 15.7 17.4Net profit margin (w/o extra-ordinaries) 13.1 11.7 11.1 12.9 13.0 14.3

Effective tax rate (%) 11.8 18.6 16.9 14.2 15.0 16.0

Growth yoy (%)Revenues 24 27 26 24 14 14EBITDA 24 30 35 21 16 19PBT 45 21 19 39 16 26Net profit (w/o extra-ordinaries) 43 13 20 44 15 25Diluted EPS 53 10 8 50 16 25



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Sales growth impacted by new businesses and currency assumptions

In FY2010E, we forecast sales growth of 24% in Rupee terms (1HFY10 sales growth was25%). International businesses of US, Japan and Hospira JV were the key drivers of thisgrowth and we expect this to continue in 2HFY10E. We are using a US$/Rupee rate of 47.25and 46 in FY2010-11E versus 46.1 in FY2009. This assumption of 3% appreciation in IndianRupee creates a challenge for revenue growth in FY2011E.

USA. We forecast revenues of US$124 mn in FY2010E growing to US$154 mn inFY2011E.

Japan . We forecast revenues of US$7 mn in FY2010E growing to US$8 mn in FY2011E.

Hospira JV . We expect Hospira JV revenues at Rs837 mn in FY2010E and Rs1 bn inFY2011E.

API revenues to clients other than Nycomed. We expect API revenues to clients otherthan Nycomed to increase to US$60 mn in FY2010E from US$45 in FY2009 mn due toclopidogrel opportunity in Europe where CDH is a key player. These sales are likely tocontinue for the next 4-6 quarters. We expect modest growth in FY2011E at US$64 mnfrom US$60 mn in FY2010E.

India branded finished dosage. This segment has grown 11% in 1HFY10 but CDHexpects growth rate to increase in 2HFY10E. We model in 12% growth for FY2010E,implying 13% growth in 2HFY10E. We expect Indian finished dosage sales growth toincrease to 14% from 12% in FY2010E.

EBITDA margin constrained by higher R&D costs and Rupee appreciation

In FY2010E, we forecast EBITDA margin of 18.4%, 50 bps lower than FY2009. For 1HFY10,EBITDA margin has been comparable with a year-ago period. Our cautious view comes fromthe Rupee appreciation that our Economist is forecasting for 2HFY10E. We are modelingrevenues using Rs46.1 and Rs45.8 per US$ in the third and fourth quarter of FY2010E. Weare factoring in R&D costs of 5.6% of net sales in FY2010E. This is unchanged from FY2009.

In FY2011E, we forecast a 40-bps increase in EBITDA margin to 18.8% while EBITDA marginbefore R&D costs will rise to 24.8%. We model in R&D costs of 6% of net sales in FY2011E.High contribution of the API business in FY2010E makes us more cautious since prices andmargin in this segment are more volatile than dosage business. We would look for marginexpansion in the US, Japan and India branded finished dosage segment.

Exhibit 3: 1% change in US$/Rs rate leads to 20bps change in EBITDA marginEBITDA sensitivity to change in US$/Rs rate

FY2010E FY2011E FY2010E FY2011E FY2010E FY2011EUS$/Rs 47.7 46.5 47.3 46.0 46.8 45.5Net sales 35,438 40,565 35,429 40,428 35,420 40,290EBITDA 6,529 7,607 6,520 7,591 6,511 7,574EBITDA margin (%) 18.42 18.75 18.40 18.78 18.38 18.80

KIE est1% depreciation 1% appreciation


Effective tax rate to decline to 14% in FY2010E and rise thereafter

CDH had provided for an effective tax rate of 17% in FY2009 but this has declined to13.6% in 1HFY10. We are providing for a 15% tax rate for the next two quarters andmaintaining this rate for FY2011E.

One of the reasons for the decline in tax rate in FY2010E is shifting of production for Indianmarket to Sikkim, which has a 10-year tax holiday. In addition, CDH informed us that theyhave created a partnership structure for ownership of this plant. As a result, minimumalternate tax (nearly 18%) applicable only for corporate entities is not applicable to CDH.SUN Pharma has used similar measures to keep its tax rate well below MAT rate of tax.


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CDH brings working capital down to 71 days gross sales in FY2009

CDH managed to reduce the net working capital to gross sales ratio in FY2009 to 71 daysfrom 73 days in FY2008. Levels of debtors increased possibly due to increasing share ofinternational business in total revenues. Inventory levels were maintained at the same levelas FY2008. CDH funded an increasing share of its working capital from creditors for goods

and expenses. We forecast steady but small increase in working capital over FY2010-11E.

Capex to remain at ~Rs2 bn p.a.

In FY2009, CDHs net capital expenditure on tangible assets was Rs2.1 bn, which includesRs1.9 bn as goodwill on acquisition. The amount was spent on the finished dosage unit inSikkim, vaccines joint venture, Hospira joint venture and biotech production. Goodwill onacquisition was related to acquisitions in US, South Africa and Spain. This amount will not beamortized in future but will be tested for impairment at the end of every accounting period.

In 1HFY10, capex was Rs1.4 bn. CDH is guiding for capex of Rs2 bn for FY2010-11E. CDHplans to spend on (1) API plant for clopidogrel, (2) vaccines joint venture, (3) biotechnology-based products, (4) transdermal products and (5) shifting production of consumer productsto Sikkim.

Debt position

Gross debt increased to Rs12.7 bn in FY2009 from Rs8.3 bn in FY2008. The increase in debtwas mainly to finance acquisitions. During FY2009, CDH increased its stake in the USsubsidiary from 70% to 100% and bought businesses in South Africa and Spain. Theamount spent on acquisitions was Rs2.8bn. Out of the total debt, Rs7 bn was foreigncurrency denominated and 55% of this debt was hedged. This debt level has declinedmarginally to Rs12.2 bn at end of September 09.

We expect gross debt to decline to Rs10.6 bn in March 2010E and further fall to Rs5.1 bn byMarch 2011E unless CDH enters in a substantial M&A deal.

Accounting for AS11 impact

At the end of March 2009, CDH had suspended implementation of AS11 as allowed by theGovernment of India. This meant currency-related impact on long-term assets and liabilitieswas routed to balance sheet under foreign currency monetary items translation differenceaccount amounting to Rs438 mn. This has to be written off by end of FY2011E. Sharpappreciation of Indian Rupee against US$ by end September 2009 led to lowering of thisaccount. Going forward, impact on CDH accounts will be minimal if Rupee maintains thelevels reached at end of September 2009 or appreciates further.

Increase in number of shares due to increased stake in Zydus Wellness

During FY2009, the number of shares increased to 136.5 mn from 125.6 mn in FY2008.This was following increased stake in Zydus Wellness under a scheme of arrangement. 100.9mn shares were issued under this arrangement and 90 mn shares were extinguished, leadingto net addition of 10.9 mn shares.

CDH has not issued any dilutive security. Founder family owned 74.8% of the company andnone of the shares were pledged with any institution.


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Exhibit 16: Cadilabalance sheet, March fiscal year-ends, 2007-2012E (Rs mn)

2007 2008 2009 2010E 2011E 2012EEquityShare capital 628 628 682 682 682 682Other reserves 8,027 9,994 11,232 15,073 18,980 23,867

Net worth 8,655 10,622 11,914 15,756 19,662 24,550Secured 3,674 6,402 10,684 10,585 5,055 1,245Unsecured 861 1,975 1,990 Debt 4,535 8,377 12,674 10,585 5,055 1,245Trade creditors 3,721 3,558 5,201 5,782 6,567 7,415Others 1,725 1,493 1,714 2,150 2,417 2,761Current liabilities 5,446 5,051 6,915 7,932 8,985 10,176Minority interests 142 194 228 353 478 628Deferred tax liabilities 1,137 1,234 1,316 1,416 1,516 1,616Total sources of funds 19,915 25,478 33,047 36,042 35,697 38,215

AssetsInventories 3,896 4,729 6,012 7,440 8,490 9,683Sundry debtors 2,784 3,555 4,845 6,090 6,944 7,919Loans and advances 2,201 2,013 2,237 2,200 2,000 2,000Cash and cash equivalents 990 926 2,517 3,300 950 950Current assets 9,871 11,223 15,611 19,030 18,384 20,552Gross block 13,527 19,118 22,870 24,870 26,870 28,870Less: Accumulated depreciation 4,968 6,518 7,572 8,844 10,344 11,994Net fixed assets 8,559 12,600 15,298 16,026 16,526 16,876Capital -WIP 1,192 1,294 1,555 800 600 600Investments 261 254 249 187 187 187Preoperative pending allocation 32 107 334 Total uses of funds 19,915 25,478 33,047 36,042 35,697 38,215

Leverage and return ratios (X)Debt/Equity 0.5 0.8 1.1 0.7 0.3 0.1Debt/Capitalisation 0.3 0.4 0.5 0.4 0.2 0.0Net debt/Equity 0.4 0.7 0.9 0.5 0.2 0.0

Net debt/Capitalisation 0.3 0.4 0.5 0.3 0.2 0.0Net debt/EBITDA 1.1 1.9 1.9 1.1 0.5 0.0ROAE (%) 29.9 26.7 26.9 32.9 29.8 29.9ROACE (%) 36.8 37.8 39.4 41.2 47.7 58.5


Cash flow statement highlights

Strong free cash flow generation continues. CDH has been generating cash flows fromoperations after working capital but before capital expenditure. In FY2009, capex andacquisitions were significant but this will reduce in the next two years.

Increase in working capital. The impact of new businesses will be felt on revenues as wellas on the working capital. This leads to an additional working capital of Rs0.9 bn in FY2010Eand Rs1.3 bn in FY2011E. We do not think this is alarming as the core working capital(debtors + inventory creditors) will remain stableabout 79 days of gross sales.

Capital expenditure of Rs2bn p.a. till FY2011E. The increase in gross block is about Rs2bn in FY2010-11E, cash spent in FY2010E is much smaller due to large CWIP at thebeginning of the year and pre-operative expenses for new ventures.


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Exhibit 17: Cadilacash model, March fiscal year-ends, 2008-2012E (Rs mn)

2008 2009 2010E 2011E 2012EOperatingPre-tax and pre extra-ordinary income 2,613 3,114 4,679 5,399 6,749Depreciation & amortization 1,550 1,054 1,272 1,500 1,650

Taxes paid 92 84 100 100 100Working capital changes (1,965) (1,018) (2,022) (869) (1,321)Cash flow from operations 2,290 3,234 4,029 6,130 7,178

InvestingCapex (5,768) (4,240) (911) (1,800) (2,000)Others 80 (1,092) 500 Cash flow from investing (5,688) (5,332) (411) (1,800) (2,000)

FinancingEquity issue 54 Net proceeds from borrowings 3,842 4,297 (2,089) (5,530) (3,811)Dividends paid (incl. tax) (508) (662) (747) (1,150) (1,367)Cash flow from financing 3,334 3,689 (2,836) (6,680) (5,178)

Net change in CCE (64) 1,591 783 (2,350) Beginning cash 990 926 2,517 3,300 950Ending cash 926 2,517 3,300 950 950

Source: Kotak Institutional Equities estimates, Company

ROE analysis: Decline in FY2011E due to lower debt equity ratio

The sharp increase in ROE in FY2010E is due to a lower effective tax rate, lower financialcosts and improving asset turnover ratio. In FY2011E, we forecast small increase in effectivetax rate, lower financial costs, stable PBIT margin but reduction in debt/equity leads toreduction in ROE. We expect the share of debt in the total capital employed to decline to19% in FY2011E from 48% in FY2009.

Exhibit 18: ROE increases in FY2010ECadilaROE analysis, March fiscal year-ends, 2007-2011E

2008 2009 2010E 2011E 2012EPAT/PBT 78.0 76.9 82.9 83.0 82.1PBT/PBIT 90.4 77.7 85.6 90.1 95.8PBIT/Net sales 16.1 17.7 18.1 17.4 18.2Net sales/Avg. assets 129.9 123.0 130.6 147.5 168.4Avg. assets/Avg. equity 181.0 206.6 196.0 154.8 123.8ROE 26.7 26.9 32.9 29.8 29.9



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APPENDIXBOARD OF DIRECTORS AND KEY MANAGEMENT PERSONNEL; SHAREHOLDINGSTRUCTURE

Exhibit 20: Board of directors

Name Postion

Pankaj R Patel Chairman and managing directorDr Sharvil P Patel Deputy managing directorMukesh M Patel Non executive, Independent directorPranlal Bhogilal Non executive, Independent directorHK Bilpodiwala Non executive, Independent directorH Dhanrajgir Non executive, Independent directorAS Diwanji Non executive, Independent director

Source: Company

Exhibit 21: Key management personnel

Name Position

Ganesh Nayak Executive director, Zydus GroupHT Patel President, APIsPrabodh Joshi President, Group HR & Corporate CommunicationNitin Parekh President and Chief Financial OfficerShirish Belapure President, Formulations manufacturingJoseph Renner CEO, Zydus Pharmaceuticals USA IncDavid Blanksby Head, European marketsAmit Dave Head, Brazil operationsKailash Sharma Head, Japan operationsBen Classen Head, South Africa operations

Source: Company

Exhibit 22: Shareholding pattern ( %, as of September 2009)

Founder family75%

Mutual funds8%

Insurancecompanies

6%

FII3%

Public7%

Source: NSE website


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I, Prashant Vaishampayan, hereby certify that all of the views expressed in this reportaccurately reflect my personal views about the subject company or companies and its ortheir securities. I also certify that no part of my compensation was, is or will be, directly orindirectly, related to the specific recommendations or views expressed in this report.


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