CMP 115.00

Target Price 126.00

ISIN: INE794A01010

July 8th

, 2013

NEULAND LABORATORIES LTD

Result Update: Q4 FY13

HOLDHOLDHOLDHOLD

Index Details

Stock Data

Sector Pharmaceuticals

BSE Code 524558

Face Value 10.00

52wk. High / Low (Rs.) 197.95/80.10

Volume (2wk. Avg ) 2389.00

Market Cap ( Rs in mn ) 887.34

Annual Estimated Results (A*: Actual / E*: Estimated)

Years FY13A FY14E FY15E

Net Sales 4639.04 4870.99 5065.83

EBITDA 614.45 648.83 685.25

Net Profit 136.37 149.38 158.85

EPS 17.67 19.36 20.59

P/E 6.51 5.94 5.59

Shareholding Pattern (%)

1 Year Comparative Graph

BSE SENSEX NEULAND LABORATORIES LTD

SYNOPSIS

We initiated coverage of Neuland Laboratories

Ltd and set a target price of Rs. 126.00 for

Medium term Investment.

Neuland Laboratories is a Pharmaceutical

company which manufactures APIs (Active

Pharmaceutical Ingredients) and provides

end-to-end solutions for the pharmaceutical

industry for chemistry related services.

Neuland Laboratories Ltd has entered into

manufacturing collaboration with Tokyo-

based API Corporation (APIC).

The strength of the company lies in its ability

to partner with several companies across the

globe.

Neuland Laboratories achieved a turnover of

Rs. 1104.56 million for the 4th quarter of the

current year 2012-13 as against Rs. 1130.47

millions in the corresponding quarter of the

previous year.

Neuland Laboratories Ltd has recommended

payment of dividend of Rs. 1.20 per share of a

face value of Rs. 10 each for the FY 2012-13.

Net Sales and PAT of the company are

expected to grow at a CAGR of 4% and 98%

over 2012 to 2015E respectively.

Peer Groups CMP Market Cap EPS P/E (x) P/BV(x) Dividend

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

Neuland Laboratories Ltd 115.00 887.34 17.67 6.51 0.91 12.00

Dr Reddys Lab Ltd 2247.50 38,1707.5 74.51 30.16 4.78 300.00

Vivimed Labs Ltd 253.00 4063.4 22.87 11.06 1.29 30.00

Amrutanjan Health Care Ltd 121.20 17.71 9.49 12.77 1.58 150.00

Investment Highlights STANDALONE

Results updates- Q4 FY13,

Neuland Laboratories is a Pharmaceutical company

which manufactures APIs (Active Pharmaceutical

Ingredients) and provides end-to-end solutions for

the pharmaceutical industry for chemistry related

services. It reported its financial results for the

quarter ended 31 March, 2013.

Months MAR-13 MAR-12 % Change

Net Sales 1104.56 1130.47 (2.29)

PAT 41.98 58.30 (27.99)

EPS 5.44 10.66 (48.98)

EBITDA 128.93 162.05 (20.44)

Neuland Laboratories achieved a turnover of Rs. 1104.56 million for the 4th quarter of the current year 2012-13

as against Rs. 1130.47 millions in the corresponding quarter of the previous year. The company has reported an

EBITDA of Rs. 128.93 millions and a net profit of Rs. 41.98 million for the Q4 FY13 against Rs. 58.30 million in the

corresponding quarter of the previous year. The company has reported an EPS of Rs. 5.44 for the 4th quarter as

against an EPS of Rs. 10.66 in the corresponding quarter of the previous year.

Expenditure :

Break up of Expenditure

Rs. In Million

Q4 FY13 Q4 FY12

Consumption of Raw Materials 598.89 688.52

Depreciation 35.65 37.37

Employees Benefit Expenses 97.28 87.41

Other Expenditure 108.34 101.66

Manufacturing Expenses 149.57 94.48

Total Expenditure 989.73 1009.44

Total expenditure of the company has decreased from Rs. 1009.44 million for fourth quarter of FY12 to Rs.

989.73 million of fourth quarter of FY13 which indicates that the management of the company is working

efficiently.

Latest updates

• Neuland Laboratories Ltd has recommended payment of dividend of Rs. 1.20 per share of a face value of Rs.

10 each for the financial year 2012-13.

• Neuland Laboratories Ltd has entered into manufacturing collaboration with Tokyo-based API Corporation

(APIC), a healthcare unit of Mitsubishi Chemical Holdings Group that produces APIs, intermediates and

investigational new drugs, along with fine chemicals and reagents. Under the terms of the agreement, API

Corporation is making an investment in Neuland’s facilities that will provide APIC with dedicated capacity for

meeting the needs of its customers.

• Neuland Laboratories Ltd has entered into an agreement with Concept Public Relation India Limited for

providing strategic communication services which include advertising and publicity.

Company Profile

Neuland is a Hyderabad-based pharmaceutical company which manufactures APIs (Active Pharmaceutical

Ingredients) and provides end-to-end solutions for the pharmaceutical industry for chemistry related services.

From over two decades company has been at the forefront of facilitating and accelerating drug development and

cGMP manufacturing of APIs. The technical and scientific team of the company has been providing reliable

solutions and services to the global pharmaceutical industry.

The manufacturing facilities for the APIs comply with stringent guidelines & requirements of Good

Manufacturing Practices (GMP) and have been inspected by international health and regulatory agencies such as

the USFDA, EDQM, BfArM (Germany), KFDA (Korea) and PMDA (Japan).

The Company has filed 33 DMFs with the USFDA and over 350 DMFs with various health authorities in Europe,

Canada, Japan, Korea and Australia.

The biggest strength of the organization lies in its ability to partner with several companies (across the globe)

from the early stage and throughout the life cycle of the product, with speed and efficiency to be ahead of its

competitors.

Business of the Company

The company performs its business operations in three different categories they are Manufacturing of APIs,

Contract Research and Contract Manufacturing and Clinical Research.

Manufacturing of APIs:

The company has developed processes for over 50 APIs across various therapeutic categories in the laboratory

and scaled them up to plant scale, and selling them to over 700 customers in 80 countries. Since the last decade,

they have been selling in the regulated markets.

Contract Research & Contract Manufacturing Services

These services serve the pharmaceutical industry and provide clients with comprehensive services from drug

development through manufacture. Since 2000, Neuland has been offering Contract Research & Contract

Manufacturing Services. Neuland’s customers include Large MNC's; mid-sized pharmaceutical companies; stand-

alone Research organizations as well as large Generic companies. Currently the company is working with more

than 20 companies worldwide.

Clinical Research

Clinical research services are being developed as a joint venture with US-based Cato Research Inc. to conduct

clinical trials in India. Cato Research has some of the best names in the pharmaceutical industry as its clients, and

Neuland would be supporting the execution of the clinical trials. Initially, the joint venture company will conduct

phase II and III trials in areas such as diabetes, dermatology, oncology and other therapeutic segments.

R & D of the Company

The R&D works with a strategy of producing high-margin products with a pipeline of 18-20 new products every

year and these are at different stages of development. The R&D and manufacturing teams of the company carry

out their work with various cost control and process enhancement initiatives. To further add, the company had

strengthened its product-mix with launch of five new products during the year. With the efficiency to produce

new products, we can expect that the company profits may increase in the future.

Strategy of the Company

The company is planning to produce as many as 19 new products in short to medium term pipeline with a

strategy to maintain an intense launch calendar and do an efficient life cycle management of the portfolio apart

from that the company continues to remain focused on process and efficiency enhancement together with other

measures of cost control.

A big source of strength for Neuland is also its long-standing customers that prefer Neuland because of its no-

conflict business model. Apart from achieving significant penetration in APIs in generic space, Neuland has also

achieved its critical mass of business from Contract Manufacturing. From this we can expect that Company will

be able to achieve profitability in the fiercely competitive business of APIs.

Neuland Labs Collaboration with API Corporation

Neuland labs strengthens its access to Japanese market with new manufacturing collaboration with Mitsubishi

Healthcare Unit APIC that produces APIs, intermediates and investigational new drugs, along with fine chemicals

and reagents. Neuland also intends to continue to independently expand its already-sizeable business in Japan,

building on its significant customer base for both generic API manufacturing and contract manufacturing of APIs

and intermediates. This collaboration with APIC has already been valuable in increasing the understanding of

the unique requirements of the Japanese market.

Diversification in other Geographies The Company serves some of the largest pharmaceutical companies in

the world and export to Europe and North America among others.

Quality and Control

The company believes in providing the quality that the customer wants. Its continuous improvement of products

and process and commitment to quality has led to enhanced attention to detail for products sold in all markets.

The manufacturing facilities ensure compliance and care is taken to continuously monitor the cGMP guidelines

established by ICH (Q7A) and relevant requirements of FDA, ICH, EMEA and EDQM. Stringent controls are built in

to ensure that every single product meets the specification of all pharmacopeias and our customer requirements.

Manufacturing Infrastructure

Neuland has two world-class API manufacturing units close to the city of Hyderabad, capable of handling

complex and hazardous reactions. The manufacturing facilities comply with stringent guidelines & requirements

of Good Manufacturing Practices (GMP) and are successfully inspected/approved by international health and

regulatory agencies.

Unit – 1

In keeping with its commitment to provide assured quality, the manufacturing facility at Bonthapally (Unit I),

Hyderabad adheres to stringent guidelines & requirements of Good Manufacturing Practices (GMP) and is

approved by international health and regulatory agencies such as US FDA, TGA (Australia), PMDA (Japan) and

WHO.

Unit – 2

Unit-II situated at Pashamylaram is about 45 kilometers from Hyderabad airport. The facilities are built in a total

area of 36,800 sq.mts and consist of three main production blocks, engineering workshop and four warehouses.

There is a High volume facility with dedicated production blocks for range of products available in this unit.

Product line includes Fluoroquinlones, Anti-Ulcerants, and Prostaglandins.

Financial Highlight STANDALONE

(A*- Actual, E* -Estimations & Rs. In Millions)

Annual Profit & Loss Statement for the period of 2012 to 2015E

Value(Rs.in.mn) FY12A FY13A FY14E FY15E

Description 12m 12m 12m 12m

Net Sales 4499.34 4639.04 4870.99 5065.83

Other Income -48.75 -32.46 -33.11 -34.10

Total Income 4450.59 4606.58 4837.88 5031.73

Expenditure -3967.12 -3992.13 -4189.05 -4346.48

Operating Profit 483.47 614.45 648.83 685.25

Interest -332.74 -313.30 -328.97 -351.99

Gross profit 150.73 301.15 319.86 333.25

Depreciation -148.91 -146.22 -149.14 -152.13

Profit Before Tax 1.82 154.93 170.72 181.13

Tax 18.50 -18.56 -21.34 -22.28

Net Profit 20.32 136.37 149.38 158.85

Equity capital 54.67 77.16 77.16 77.16

Reserves 684.94 898.33 1047.71 1206.56

Face value 10.00 10.00 10.00 10.00

EPS 3.72 17.67 19.36 20.59

Quarterly Profit & Loss Statement for the period of 30 SEP, 2012 to 30 JUNE, 2013E

Value(Rs.in.mn) 30-Sep-12 31-Dec-12 31-Mar-13 30-Jun-13E

Description 3m 3m 3m 3m

Net sales 1180.46 1074.03 1104.56 1038.29

Other income 0.00 -12.65 4.71 4.38

Total Income 1180.46 1061.38 1109.27 1042.67

Expenditure -1027.21 -884.82 -980.34 -908.50

Operating profit 153.25 176.56 128.93 134.17

Interest -78.49 -90.19 -64.94 -66.24

Gross profit 74.76 86.37 63.99 67.93

Depreciation -36.35 -36.96 -35.65 -36.36

Profit Before Tax 38.41 49.41 28.34 31.56

Tax -7.55 -16.68 13.64 -6.53

Net Profit 30.86 32.73 41.98 25.03

Equity capital 77.16 77.16 77.16 77.16

Face value 10.00 10.00 10.00 10.00

EPS 4.00 4.24 5.44 3.24

Ratio Analysis

Particulars FY12A FY13A FY14E FY15E

EPS (Rs.) 3.72 17.67 19.36 20.59

EBITDA Margin (%) 10.75% 13.25% 13.32% 13.53%

PBT Margin (%) 0.04% 3.34% 3.50% 3.58%

PAT Margin (%) 0.45% 2.94% 3.07% 3.14%

P/E Ratio (x) 30.94 6.51 5.94 5.59

ROE (%) 2.75% 13.98% 13.28% 12.37%

ROCE (%) 24.15% 26.79% 25.89% 25.08%

Debt Equity Ratio 2.54 1.91 1.74 1.60

EV/EBITDA (x) 1.30 1.44 1.37 1.29

Book Value (Rs.) 135.29 126.42 145.78 166.37

P/BV 0.85 0.91 0.79 0.69

Charts

Outlook and Conclusion

� At the current market price of Rs.115.00, the stock P/E ratio is at 5.94 x FY14E and 5.59 x FY15E

respectively.

� Earning per share (EPS) of the company for FY14E and FY15E is seen at Rs.19.36 and Rs.20.59 respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 4% and 98% over 2012 to 2015E

respectively.

� On the basis of EV/EBITDA, the stock trades at 1.37 x for FY14E and 1.29 x for FY15E.

� Price to Book Value of the stock is expected to be at 0.79 x and 0.69 x respectively for FY14E and FY15E.

� We recommend ‘HOLD’ in this particular scrip with a target price of Rs.126.00 for Medium term investment.

Industry Overview

India is now among the top five pharmaceutical emerging markets. The Indian pharma industry has been

growing at a compounded annual growth rate (CAGR) of more than 15 per cent over the last five years and has

significant growth opportunities.

The Indian pharmaceutical sector is expected to grow five-fold to reach Rs 5 lakh crore (US$ 91.45 billion) by

2020, as per Dr A J V Prasad, Joint Secretary, Department of Pharmaceuticals (DoP). The industry, particularly,

has been the front runner in a wide range of specialties involving complex drugs' manufacture, development, and

technology. With the advantage of being a highly organized sector, the number of pharmaceutical companies are

increasing their operations in India.

The pharmaceutical industry in India is an extremely fragmented market with severe price competition and

government price control. The industry meets around 70 per cent of the country's demand for bulk drugs, drug

intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals, and injectables.

Sector Structure/ Market Size

The domestic pharmaceutical market is expected to register a strong double-digit growth of 13-14 per cent in

2013 on back of increasing sales of generic medicines, continued growth in chronic therapies and a greater

penetration in rural markets.

The cumulative drugs and pharmaceuticals sector has attracted foreign direct investments (FDI) worth US$

10,308.75 million during April 2000 to February 2013, according to the latest data published by Department of

Industrial Policy and Promotion (DIPP).

Growth

Drug sales to retailers in India registered a growth of 7.7 per cent in February 2013, according to a data compiled

by market research firm AIOCD AWACS. This was probably due to a high base given the strong performance last

year and higher substitution of branded drugs with their unbranded equivalents.

Among the listed companies, ZydusCadila topped the list, recording 25.3 per cent growth in February. Other

companies that managed to grow faster than the industry include Sun Pharma (14.8 per cent), JB Chemicals (13.7

per cent), IPCA Labs (13 per cent), Lupin (11.6 per cent), Glenmark (10.3 per cent) and Cipla (9 per cent).

Exports

The Ministry of Commerce has targeted Indian pharma sector exports at US$ 25 billion by 2014 at an annual

growth rate of 25 per cent.

Last year, the industry registered exports of US$ 13 billion at a growth rate of 30 per cent, as per Dr P V Appaji,

Director-General, Pharmaceutical Exports Council of India (Pharmexcil). The Government has also planned a

‘Pharma India’ brand promotion action plan spanning over a three-year period to give an impetus to generic

exports.

“Of the export markets, Indian pharma will focus on the US market which presents significant opportunities for

the next two years for generics, due to patent cliffs and recent changes in healthcare policies,” said the India

Ratings report on outlook for Indian pharmaceuticals for 2013.

Generics

Generics will continue to dominate the market while patent-protected products are likely to constitute 10 per

cent of the pie till 2015, according to McKinsey report 'India Pharma 2015- Unlocking the potential of Indian

Pharmaceuticals market'.

Dr Reddy's Laboratories Ltd has launched Finasteride tablets, a bio-equivalent generic version of Propecia

(Finasteride) tablets, in the US market. The tablets are used for treating male pattern hair loss.

Diagnostics Outsourcing/ Clinical Trials

Indian diagnostics and labs test services, in view of its growth potential, is expected to reach Rs 159.89 billion

(US$ 2.93 billion) by 2013. The Indian market for both therapeutic and diagnostic antibodies is expected to grow

exponentially in the coming years. Findings from the report by “Corporate Catalyst India” suggest that more than

60 per cent of the total antibodies market is currently dominated by diagnostic antibodies.

According to new RNCOs report, “Booming Clinical Trials Market in India”, the number of clinical studies by

domestic and global players has sharply risen. Besides, availability of skilled manpower and good medical

infrastructure will augment the number of clinical trials from 1300 in 2009 to more than 1900 by 2013. Further,

the report also indicates that, India, over the last decade, has developed significant capabilities in clinical trials,

along with certain capabilities in project management and data management. The country is able to provide

significant cost savings of 50-60 per cent for clinical trials.

Investments

Some of the investments in the sector are:

Orchid Chemicals and Pharmaceuticals has entered into a partnership with Europe-based Allecra Therapeutics to

develop antibiotics to treat multi-drug resistant bacterial infections

Ranbaxy Pharmaceuticals Inc has entered into an in-licensing agreement with Alembic Pharmaceuticals to

exclusively market desvenlafaxine base extended release tablets in the US. The drug is used for treatment of

major depressive disorder

Biocon has entered into an agreement with Mylan for the global development and commercialisation of Biocon's

generic insulin analog products (long lasting insulins), which has a global addressable market of US$ 11.5 billion

ZydusCadila has received tentative approval for Doxepin Hcl tablets from the US drug authorities. Cadila will

launch the drug in 2020 after original drug maker's patent expires

Aurobindo Pharma Ltd has received US Food and Drug Administration (USFDA) approval to manufacture and

market Tamsulosin Hydrochloride Capsules and Clindamycin Palmitate Hydrochloride for oral solution

Sun Pharma has received a tentative approval from the US Food and Drug Administration (USFDA) for a generic

version of Januvia. Sun Pharma is expected to launch the drug in 2022.

Government Initiatives

FDI, up to 100 per cent, under the automatic route, would continue to be permitted for Greenfield investments in

the Pharmaceuticals sector. 100 Per cent FDI is also permitted for Brownfield investment (i.e. investments in

existing companies), under the Government approval route.

According to the Union Budget 2013-14, investment allowance of 15 per cent on new plant and machinery has

been allowed. The allowance is expected to increase investments in new projects while simultaneously providing

tax benefit to the industry.

The Department of Pharmaceuticals has prepared a 'Pharma Vision 2020' document for making India one of the

leading destinations for end-to-end drug discovery and innovation and for that purpose, the department

provides requisite support by way of world class infrastructure, internationally competitive scientific manpower

for pharma research and development (R&D), venture fund for research in the public and private domain and

such other measures.

Road Ahead

In order to encourage production of drugs by indigenous industries, the 12th Five Year Plan (2012-17) has

recommended capacity building of private sector to meet WHO-GMP standards and other international

manufacturing standards.

The pharmaceutical companies such as Cipla, Ranbaxy, Dr Reddy's Labs and Lupin might soon be part of the

government's ambitious 'Jan Aushadhi' project. In an attempt to commercialise the project, the Government is

likely to rope in the private sector to bulk-procure generic drugs from them. There are 117 Jan Aushadhi stores

across the country and the plan is to expand to at least 600 in the next two years and 3,000 by 2016.

Further, India will see the largest number of merger and acquisitions (M&A) in the pharmaceutical and

healthcare sector, according to consulting firm Grant Thornton. A survey conducted across 100 companies has

revealed that one-fourth of the respondents were optimistic about acquisitions in the pharmaceutical sector.

Exchange rate used INR 1= US$ 0.01829 as on May 14, 2013

References: Consolidated FDI Policy, Department of Industrial Policy & Promotion (DIPP), Press Information

Bureau (PIB), Media Reports, Pharmaceuticals Export Promotion Council

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale

of any financial instrument or as an official confirmation of any transaction. The information contained herein is

from publicly available data or other sources believed to be reliable but do not represent that it is accurate or

complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. This document is provide for assistance only and is not intended to be and must

not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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