INITIAL PUBLIC OFFERING- ALKEM INDUSTRIES

For many growing companies, "going public" is more than just selling stock. It's a signal to the world that the business

has made it.

The pharmaceutical industry develops, produces, and markets drugs or pharmaceuticals licensed for use

as medications. Needless to say, the importance of the progress of this industry in an economy cannot be ignored as the

companies involved in the industry deal with medications that are branded and various medical devices used for the

identification and treatment of diseases of humans and animals. Hence, for the sake of well being of all citizens in a country, the

country should ensure enough resources being allocated towards the development of existing medicines and innovation of new

ones. Fortunately, the Pharmaceutical industry in India is the world's third-largest in terms of volume. According to Department

of Pharmaceuticals of the Indian Ministry of Chemicals and Fertilizers, the total turnover of India's pharmaceuticals industry

between 2008 and September 2009 was US$21.04 billion. According to India Brand Equity Foundation, the Indian

pharmaceutical market is likely to grow at a compound annual growth rate (CAGR) of 14-17 per cent in between 2012-16. India

is now among the top five pharmaceutical emerging markets of the world.

The above graph shows that the growth of the pharmaceutical sector in India has been the highest over the years

acquiring a growth rate of nearly 15%.

About us :

Established in 1973 and headquartered in Mumbai, India, Alkem began operations as a health care marketing company. Alkem

has, after three and a half decades grown to become India’s seventh largest pharmaceutical company with sales revenues

exceeding USD 500 million with a CAGR of 16% over the last five years. With our products being sold in over 40 countries

worldwide, we have significant international presence with exports both in formulation and bulk drugs. The special focus is on

Cephalosporins. Other drugs exported include Omeprazole, Celecoxib, and iron complexes. The company's popular products

include cephalosporin brands like Taxim, Taxim-O, besides A to Z, Clavam and Alcipro. Alkem has five marketing divisions

covering key therapeutic areas and together we have a field force of about 2,000 people.

Management Structure :

Alkem Labs has been shaped by veterans in the pharmaceutical industry who have leveraged their strong industry expertise to

develop a world-class pharmaceutical organization, in India. Governed by the overarching social objective of providing

universal quality healthcare, Alkem’s growth can be attributed to the remarkable foresight and exceptional business sense of the

key members of the management team.

Chairman: Mr. Samprada Singh. Under his able leadership, Alkem has shown a spectacular growth, and is poised for greater

times ahead.

Managing Director: Mr. Basudeo Narain Singh is co-founder and Managing Director of Alkem Laboratories Ltd. Leading with

his exemplary work ethic and discipline, Mr. Singh is an ideal mentor to the team at Alkem and is keenly involved in the

organization’s daily operations.

Post-IPO, the management shall be answerable to the stakeholders. The main shareholders will be the Directors of the company

and its promoters. The other equity share holders shall be the general public, the other companies investing in the shares of Alkem

and other financial institutions.

VISION OF THE COMPANY:

Alkem wishes to achieve this milestone through organic growth as well as through its affiliations with international associations,

partnerships and strategic alliances. Alkem’s vision, as an organization, is to achieve value driven leadership through consistent

hard work in developing enduring quality products, marked by exceptional service. The belief that quality health care services

have no boundaries in a global world drives Alkem to deliver the best health care products in its markets. A ‘People-First Policy’

ensures that Alkem meets and surpasses the evolving expectations of its customers, at all times.

Key Highlights

Ranked No 1 in the Anti-infective segment in India.

Ranked No 2 in the Anti-Osteoporosis & Multivitamins segment in India.

Two of Alkem’s leading brands, Taxim and Clavam, are among the top 25 brands in India and 14 brands are among the

top 300 in the Indian pharmaceutical market

Global presence, with products marketed in 48 countries worldwide

State-of-the-art R&D and global standard-complaint manufacturing facilities for API and Finished Dosage forms

Strong development pipeline, with over 100 products under development with 25 products pending approval in the US,

EU and Australasia markets

R&D facilities for development of Biosimilars and Biologics

New Chemical Entity (NCE) development program

SWOT ANALYSIS

a) Strengths

• Cost competitiveness due to lower labour cost and production cost

• Higher GDP growth leading to increased disposable income in the hands of general public and their positive attitude

towards spending on health care.

• Growing treatment naive patient population.

• Well-developed industry with strong manufacturing base

• Well established network of Laboratories and R & D infrastructure for new drug discovery and development

• Access to pool of highly trained and skilled scientists, both in India and abroad

• Strong marketing and distribution network in domestic as well as international market

• Expertise in reverse engineering and development of new Chemical process made Indian pharmaceutical industry as one

of the strongest generic industry

b) Weaknesses

• Poor all-round infrastructure is a major challenge.

• Presence of more unorganized players versus the organized ones, resulting in an increasingly competitive environment,

characterized by stiff price competition.

• Lack of strong linkages between industries and academia

• Lack of culture of innovation in the industry

• Poor health insurance coverage.

• Inadequate regulatory standards

c) Opportunities

• Rapid OTC and generic market growth.

• Increased penetration in the non - metro markets.

• Large demand for quality diagnostic services.

• Significant export potential to the developing as well as developed countries

• Opening of the health insurance sector and increase in per capita income - the growth drivers for the pharmaceutical

industry.

• Licensing deals and collaborations with MNCs for New Chemical Entities and New Drug Delivery Systems

• Public-Private Partnerships for strengthening Infrastructure.

• India, a potentially preferred global outsourcing hub for pharmaceutical products due to low cost of skilled labour.

• Providing marketing operations to sell MNC products in domestic market

• India can be niche player in global pharmaceutical R & D by developing world class infrastructure

• Potential for developing India as a centre for International Clinical Trials.

d) Threats

• R & D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory requirement. For instance,

restrictions on animal testing out-dated patent office.

• DPCO puts unrealistic ceilings on product prices and profitability and prevents pharmaceutical companies from

generating investible surplus.

• Exports effort hampered by procedural hurdles in India as well as non-tariff barriers imposed abroad.

• Other low-cost countries such as China and Israel affecting outsourcing demand for Indian pharmaceutical products.

• Entry of foreign players (well equipped technology-based products) into the Indian market.

RISK FACED BY THE COMPANY:

A high degree of risk is involved with investment in equity shares of any company, and hence one must consider all the possible

pros and cons before taking an investment decision. We at ALKEM think that it is our duty to try and give our prospective

shareholders a rough picture of the risk and uncertainties involved which may adversely affect our business, financial

position and thus affect our operations.

1. Alkem enters into transactions with the government and government funded entities in India as well as globally. Thus

any change in governmental policies may adversely affect the business.

2. Certain approvals and licenses are required in the everyday course of the business and any failure to obtain it may affect

the result of our operations.

3. Prices of equity shares may be volatile and our ability to pay dividends will depend upon the financial condition of the

company at that point of time. Moreover a further issuance of equity shares may dilute your shareholding. Also, conditions in

the securities market may affect the price an liquidity of our equity shares.

4. There are various restrictions imposed on the daily movements in the prices of equity shares which may affect a

shareholder's ability to sell, or the price at which it can sell equity shares at a particular point of time.

5. The exchange rate also has an effect on our company's operations since our financial statements are prepared in Indian

rupees while foreign transactions are made in US dollars.

6. The business is subject to various tax regimes and a change in these policies may contribute to their risk. Moreover we

are receiving tax benefits which may not be available in the future. Thus, a loss of this tax might reduce our margins.

7. The buyers have prescribed various standards which have to be complied with and they conduct regular audits to check

customary regulatory compliance.

8. The company may not be able to correctly assess the demand for its products. If we fail to keep pace with the

advancements in the Pharma industry or respond to changes in market demand or client requirements, it adversely affect our

financial position.

9. In addition to normal price competition, Alkem is exposed to government price controls in many countries including

India.

10. Our success is dependent on our distribution and marketing arrangements. If any of these arrangements is terminated or

the commercialization of products delayed, it adversely affects our business.

11. The Indian sluggish economic growth and financial instability in other nations can cause our business to suffer.

12. Political instability, terrorist attacks, civil unrest and risk of loss due to fire, explosions, etc also has a detrimental

impact on our business. Moreover, our insurance coverage may not protect us adequately from all losses.

SYNOPSIS OF FINANCIAL ACCOUNTS

PROFIT AND LOSS ACCOUNT:

INCOME Amount(in crores)

Sales Turnover 3200

Excise Duty 0

NET SALES 3200

Other Income 0

Total Income 3200

EXPENDITURE Amount(in crores)

Estimated Operating Expenses 2280

Expenses capitalised 0

Provisions made 0

TOTAL EXPENDITURE 2280

EBITDA 1080

Depreciation 350

Other write offs 0

EBIT 830

Interest 175

EBT 655

Taxes 35

Profit/Loss for the year 620

BALANCE SHEET:

L I A B I L I T I E S A m o u n t A S S E T S A m o u n t

N E T W O R T H 1120

1750

T O T A L L I A B I L I T Y 2870 T O T A L A S S E T S 2870

( i n R s . c r o r e ) ( i n R s . c r o r e )

S h a r e C a p i t a l 500 F i x e d A s s e t s of t h e c o m p a n y 2500

R e s e r v e s a n d S u r p l u s 620 I n v e s t m e n t s 150

S u n d r y D e b t o r s 100

S e c u r e d L o a n s 500 C a s h at B a n k 120

U n s e c u r e d L o a n s 1250

Note: The above figures have been estimated on the basis of study of companies of similar ranks.

Particulars Amount( in Rs. crore)

Share Capital 800

Earnings of the company during the year 3200

Estimated Operating Expenses 2280

Net Profit 620

The company is presently worth over Rs. 2500 crores with healthy reserves and surplus and a faired account of secured loans.

Its annual growth is estimated at 16%.

The operating expenses include manufacturing expenses, materials consumed, miscellaneous and selling expenses.

Depending on market requirements and to globalize it, the company requires huge amounts for further expansion which it

intends to raise through public issue to shares.

THE IPO:

Alkem Laboratories has a revenue of almost $500 million and has grown at a compounded annual growth rate of 16% in the last

five years. Alkem has seven manufacturing facilities and a portfolio of 800 brands.

We estimate that the net proceeds from the sale of shares of our common stock in this offering will be approximately

Rs.15 billion, based on the initial public offering price of Rs.150 per share. The company would issue 100 million shares

of Rs. 150 each, hence aggregating Rs. 15 billion

However, the exact size of stake sale that would be undertaken by the promoters during the issuance.

VALUATION:

PARTICULARS AMOUNT(IN CRORES)

EBITDA 1080

ENTERPRISE VALUE(EV)

=EBITDA*multiplier

1080*28.47

=30747.6

MARKET VALUE(MV)

=EV-funded debt+cash

30747.6-1750+120

=29117.6

POST IPO VALUATION

=MV+expected money raised from the public

29117.6+1500

=30617.6

PRICE

=POST IPO VALUATION/total no. of shares including those

newly offered on sale

30617.6/8

=3827.2

~3827

PRICE FLOOR 3500

PRICE CEILING 4200

NOTE: We have selected Stride Aerolab as our peer listed company with multiplier i.e. EV/EBITDA=28.47

USE OF PROCEEDS:

Alkem laboratories’ last plant was that of Sikkim manufacturing facility established in Rangpo in 2007. In 2011, it acquired the

generic marketing license in the USA. We intend to use the net proceeds from this offering, together with existing cash

resources, as follows:

Alkem’s next venture is into the food processing units. It has already established the world’s largest sucralose

( artificial sweetener) producing unit in India. Hence, approximately Rs.3 billion shall be invested in the Research and

Development sector to enhance research into this unit.

The US marketing company crossed 500 million. With approximately Rs.2 billion, the company seeks to expand their

services to the UK market with which it already has two manufacturing arrangements.

In the recent summit to Germany, the company plans to invest in biotechnology (approximately Rs.3 billion). For this,

it intends to collaborate with the US manufacturing sector.

The company aims at certain acquisition plans in India as well. It intends to buy companies in areas like Anti-cancer,

Cardiac, Diabetic, Neuropsychiatry etc. (approximately Rs.4 billion)

Further, it will file its dossiers in many European countries soon. The emphasis is more on exports. Once we file our

dossiers, and tie up with more companies, exports are expected to go up.

The remainder for working capital and other general corporate purposes.

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business

conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our

actual expenditures may vary significantly depending on numerous factors, including the progress of our development,

feedback from regulatory authorities, the status of and results from clinical trials, as well as any collaborations that we may

enter into with third parties for our drug candidates, and any unforeseen cash needs. Accordingly, our management will have

broad discretion in using the net proceeds from this offering.

Pending use of the proceeds as described above, we intend to invest the proceeds in a variety of capital preservation

investments, including short-term, interest-bearing, and government securities.

DIVIDEND POLICY TO ITS INVESTORS:

Under the Companies Act, the Company can pay dividends upon a recommendation by its Board and approval by a majority of

its shareholders at the annual general meeting. The shareholders of the Company have the right to decrease but not to increase

the amount of dividend recommended by the Board .The dividend may be paid out of profits of the Company in the year which

the dividend is declared or out of the undistributed profits or reserves of previous fiscal years or out of both. The Articles of

Association also give the Board the discretion to declare and pay interim dividends without shareholder approval at an annual

general meeting.

The Company does not have any formal dividend policy for the Equity Shares. The declaration and payment of dividend are

governed by the applicable provisions of the Companies Act and the Articles of Association of our Company and will depend on

a number of other factors, including the results of operations, financial condition, capital requirements and surplus, contractual

restrictions and other factors considered relevant by the Board. Further, under the terms of certain loans obtained by our

Company, our Company may be required to obtain the prior written consent of the lenders of our Company before declaring any

dividend.