Recommend BUY

CMP 296.25

Target Price 326.00

ISIN: INE028B01011 AUGUST 31st

, 2013

SHARON BIO-MEDICINE LTD. Q4 FY13

STOCK DETAILS

Sector Pharmaceuticals

BSE Code 532908

Face Value 10.00

52wk. High / Low (Rs.) 439.00/290.00

Volume (2wk. Avg ) 8824

Market Cap ( Rs in mn ) 3127.51

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

Years FY13A FY14E FY15E

Net Sales 10594.96 12713.95 14493.91

EBITDA 1209.96 1413.04 1602.81

Net Profit 541.89 620.30 696.00

EPS 51.33 58.76 65.93

P/E 5.77 5.04 4.49

Shareholding Pattern (%)

1 Year Comparative Graph

SHARON BIO-MEDICINE BSE SENSEX

SYNOPSIS

Sharon Bio-Medicine Ltd is a pharmaceutical

company which engaged in the manufacture of APIs

& Pharma Intermediates since 1995.

The company registered total revenue of Rs. 3225.42

million, up by 54.27% versus Rs. 2090.76 million in

the corresponding quarter last year.

During the quarter, the company has posted robust

growth of Net Profit and it is increased by 22.32% to

Rs. 144.92 million.

EBITDA increased by 31.49% to Rs. 325.34 millions

as against Rs. 247.43 millions in the corresponding

period of the previous year.

During the year 2012-13, Sharon achieved its

turnover by 35% to Rs. 10594.96 million as against

Rs. 7857.29 million in previous year.

Sharon Bio-Medicine has set up a Genotoxicity

Laboratory on the line of Toxicology Lab under the

name of SA-FORD at Taloja near Navi Mumbai.

The Company's Toxicology Laboratory namely SA-

FORD, has also got the approval from SENASA a

Toxicology approval authority of Govt of Argentina.

Reported EPS of the company stood at Rs.13.73 a

share during the quarter, registering 22.32%

increase over previous year period.

Net Sales and PAT of the company are expected to

grow at a CAGR of 23% and 17% 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 (%)

Sharon Bio-Medicine Ltd 296.25 3127.51 51.33 5.77 1.28 0.00

Lupin Ltd 800.20 358337.60 29.34 27.27 7.39 200.00

Strides Arcolab Ltd 877.15 51839.70 23.31 37.63 3.78 20.00

IPCA Laboratories Ltd 619.85 78224.50 28.54 21.72 4.98 200.00

Recommendation & Analysis - ‘BUY’

Today, Sharon has got best of the production facilities and its products and would like to sell the products

worldwide. For Q4 FY13, Sharon Bio-Medicine Ltd posted a 54.27% yoy growth in net sales to Rs. 3225.42

millions. During the year 2012-13, Sharon achieved its turnover by 35% and also the margins. Sharon is

increasing its capacity after doing the expansion in Dehradun as well as in Taloja. In future, Sharon would like to

increase its sales market size not only in India but also abroad including United State. The company has reported

a net profit of Rs.144.92 million against Rs.118.48 million in the corresponding quarter ending of previous year,

an increase of 22.32%. The Company's Toxicology Laboratory namely SA-FORD, has also got the approval from

SENASA a Toxicology approval authority of Govt of Argentina. In future, the company will try to get more and

more Toxicology Study approvals from other countries so as to boost the revenue of the company.

During the last year, the Company has been audited by many countries and they have certified their plants fit for

sale of its products. Mainly, these countries are Australia, Canada, and Korea. All these certifications not only

increase the business and margins of the Company but also increase the valuation of the plants and company

management. This leads to overall valuation of the Company in future. India's pharmaceutical industry is on good

growth trajectory and is likely to be among the top 10 global markets in value terms by 2020. The industry has

the potential to grow at an accelerated 15-20 per cent CAGR for the next 10 years to reach between USD 49

billion to USD 74 billion in 2020. Over FY2012-15E, we expect the company to post a CAGR of 23% and 17% in its

top-line and bottom-line respectively. Hence, we recommend ‘BUY’ for ‘Sharon Bio-Medicine Ltd’ with a

target price of Rs. 326.00 on the stock.

FINANCIAL HIGHLIGHTS STANDALONE

Results updates- Q4 FY13,

Sharon Bio-Medicine Ltd is a pharmaceutical

company which commenced as a manufacturing of

Pharma Intermediates in 1995 in India, reported its

financial results for the quarter and year ended 30th

June, 2013.

Months Jun-13 Jun-12 % Change

Net Sales 3225.42 2090.76 54.27

PAT 144.92 118.48 22.32

EPS 13.73 11.22 22.32

EBITDA 325.34 247.43 31.49

The company net profit jumps to Rs.144.92 million against Rs.118.48 million in the corresponding quarter

ending of previous year, an increase of 22.32%. Revenue for the quarter rose 54.27% to Rs. 3225.42 million from

Rs.2090.76 million, when compared with the prior year period. Reported earnings per share of the company

stood at Rs.13.73 a share during the quarter, registering 22.32% increase over previous year period. Profit

before interest, depreciation and tax is Rs.325.34 millions as against Rs.247.43 millions in the corresponding

period of the previous year.

Expenditure :

During the quarter total expenditure rose by 58 per

cent mainly on account of increase in Consumption

of Raw Materials along with consideration of

Purchase of Trading Goods. Total expenditure in Q4

FY13 was at Rs 2939.97 million as against Rs.

1866.23 million in Q4 FY12. Consumption of Raw

Materials is at Rs. 2629.78 millions against Rs.

1540.96 millions in the corresponding period of the

previous year. Staff cost was at Rs. 50.90 million and

Purchase of Trading Goods is Rs. 560.30 millions in

Q4 FY13 are the primarily attributable to growth of

expenditure.

Latest Updates

• SA-FORD which is a division of Sharon Bio-Medicine Ltd has set up a Genotoxicity Laboratory on the line of

Toxicology Lab under the name of SA-FORD at Taloja near Navi Mumbai. With the addition of Genotoxicity

Laboratory, Sharon hopes to get better business of Toxicology testing in future from India & Abroad.

• The Company's Toxicology Laboratory namely SA-FORD, which is approved by Organization of Economic

Development and Cooperation (OECD) countries, has also got the approval from SENASA a Toxicology

approval authority of Govt of Argentina. With this approval the Company can do toxicology studies of various

chemicals including agricultural products of Argentine Companies and Govt. bodies. In future, company will

try to get more and more Toxicology Study approvals from other countries so as to boost the revenue of the

company.

• The Company's Toxicology Laboratories is an independent cost centre and is approved by Department of

Science & Technology, Govt of India. Govt. of India has approved Good Laboratory Certificate to SA-FORD

which is valid as per OECD Countries - GLP.

• During the year 2012-13, Sharon is increasing its capacity after doing the expansion in Dehradun as well as in

Taloja.

• CARE has assigned 'CARE A-' (Single A minus) rating for the Long Term Bank facilities and 'PR1' (PR One)

rating for the Short Term Bank facilities of the Sharon Bio-Medicine Ltd.

Company Profile

Sharon Bio-Medicine Ltd is a pharmaceutical company which commenced as a manufacturing of Pharma

Intermediates in 1995. In the year 2000 the company set up a R&D Block to carry out Process synthesis for API’s

& Intermediates. The company is involved in manufacturing of Intermediates, Active Pharmaceutical Ingredients

and Finished Dosage Sharon also has a division operating under the name of SA-FORD, which is OECD GLP

certified; specialize in Pre-Clinical and Toxicology studies on animal.

Sharon is predominantly known for its strengths in development & manufacturing of Pharmaceutical products in

category of Intermediates & Actives. In 2007 it commissioned its first finished products manufacturing facility at

Dehradoon, Uttarakhand, India.

With setting and successful commercialization of the solid dosage formulation facility at Dehradun, its

formulations are now being marketed in Africa, Latin America and other markets. The company’s Unit-1 API

plant is compliant with ISO 9001:2000 and its Formulation plant is approved by WHOGMP and had been certified

by various authorities such as INVIMA, SFDA etc. Growing at around 50% year on year Sharon now has an annual

turnover of over $130 million, a work force of over 500 personnel, operations spanning across seven locations in

India & one overseas location and a market presence in over 45 countries.

Products

The products of the company are listed as below:

• API’s & PELLETS

• Intermediates

• Formulations

Research & Development

• Toxicology Studies

SA-FORD, A division of Sharon Bio-Medicine Ltd. offers various toxicology services related to animals as per

international rules and regulations (OBCD GLP EPA, ICH, and ISO 10993).

• Intermediates & Actives

Fully equipped Process development Labs & Analytical Labs are managed by highly experienced team of

professionals. The combined expertise in Chemistry, Analytical method development and engineering

provide the necessary advantage to complete projects within short time spans. These labs are complimented

By Kilo-Labs & Commercial-Scale Plants Which Operate As Per Cgmp.

• Finished Dosage Forms

Sharon’s core competency is development of a range of Tablets and Capsules including modified release

products. The laboratory is well equipped with senior scientists to handle technology transfer projects from

the company esteemed partners and carry out variations to suit its manufacturing equipment.

• Regulatory Affairs

A centralized regulatory affairs department at Sharon coordinates with the Development Labs & the

manufacturing facilities for all product relevant data. The company expertise lies in compilation &

verification of DMF & Dossiers as per specific country regulatory requirements.

Global Presence

In the International Markets, Sharon has established a name in APIs and Intermediates serving markets in the

growing Latin America, Middle East, South East Asia and SAARC countries. To name a few it is active in Jorden,

Syria, Egypt, Israel, Bangladesh, Pakistan, Thailand, Indonesia, Malaysia, Russia, Ukrain & Vietnam.

Plant Locations

Based on intended market of the API and ensuring levels of GMP required, Sharon has 2 API manufacturing

facilities located at M.I.D.C. Taloja, Navi Mumbai. Both facilities (Unit 1 – W34, Unit 2 – L6) are capable of

handling range of reactions such as Alkylations, Amination, Benzoylation, Chlorosulphonation, Condensation,

Friedel-Crafts Acylation, Grignard Reactions, Halogenation, Hoffmann Reaction, Nitration, Oxidations,

Reductions, Sulphonation.

Subsidiary company

• Yusur International FZE, UAE (Formerly known as 'Sharon International FZE')

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 7857.29 10594.96 12713.95 14493.91

Other Income 9.13 8.86 8.15 8.48

Total Income 7866.42 10603.82 12722.10 14502.38

Expenditure -6916.46 -9393.86 -11309.06 -12899.58

Operating Profit 949.96 1209.96 1413.04 1602.81

Interest -337.15 -427.72 -504.71 -585.46

Gross profit 612.81 782.24 908.33 1017.34

Depreciation -92.65 -120.35 -144.42 -167.53

Profit Before Tax 520.16 661.89 763.91 849.82

Tax -90.31 -120.00 -143.62 -153.82

Net Profit 429.85 541.89 620.30 696.00

Equity capital 105.57 105.57 105.57 105.57

Reserves 1727.43 2333.70 2954.00 3650.00

Face value 10.00 10.00 10.00 10.00

EPS 40.72 51.33 58.76 65.93

Quarterly Profit & Loss Statement for the period of 31st

Dec, 2012 to 30th Sep, 2013E

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

Description 3m 3m 3m 3m

Net sales 2488.42 2714.31 3225.42 3289.93

Other income 2.53 3.02 1.28 1.34

Total Income 2490.95 2717.33 3226.70 3291.27

Expenditure -2195.38 -2394.19 -2901.36 -2941.20

Operating profit 295.57 323.14 325.34 350.08

Interest -107.85 -114.53 -107.31 -118.04

Gross profit 187.72 208.61 218.03 232.04

Depreciation -28.04 -31.09 -38.61 -42.47

Profit Before Tax 159.68 177.52 179.42 189.56

Tax -27.78 -32.29 -34.50 -36.02

Net Profit 131.90 145.23 144.92 153.55

Equity capital 105.57 105.57 105.57 105.57

Face value 10.00 10.00 10.00 10.00

EPS 12.49 13.76 13.73 14.54

Ratio Analysis

Particulars FY12A FY13A FY14E FY15E

EPS (Rs.) 40.72 51.33 58.76 65.93

EBITDA Margin (%) 12.09% 11.42% 11.11% 11.06%

PBT Margin (%) 6.62% 6.25% 6.01% 5.86%

PAT Margin (%) 5.47% 5.11% 4.88% 4.80%

P/E Ratio (x) 7.28 5.77 5.04 4.49

ROE (%) 23.45% 22.22% 20.27% 18.53%

ROCE (%) 16.15% 14.98% 15.86% 16.31%

Debt Equity Ratio 2.52 2.64 2.21 1.89

EV/EBITDA (x) 8.09 7.85 6.95 6.33

Book Value (Rs.) 173.63 231.06 289.81 355.74

P/BV 1.71 1.28 1.02 0.83

Charts

Outlook and Conclusion

� At the current market price of Rs.296.25, the stock P/E ratio is at 5.04 x FY14E and 4.49 x FY15E

respectively.

� Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs.58.76 and

Rs.65.93 respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 23% and 17% over 2012 to 2015E

respectively.

� On the basis of EV/EBITDA, the stock trades at 6.95 x for FY14E and 6.33 x for FY15E.

� Price to Book Value of the stock is expected to be at 1.02 x and 0.83 x respectively for FY14E and FY15E.

� We recommend ‘BUY’ in this particular scrip with a target price of Rs.326.00 for Medium to Long term

investment.

Industry Overview

India is now among the top five pharmaceutical emerging markets globally and is a front runner in a wide range

of specialties involving complex drugs' manufacture, development, and technology. The Indian pharmaceutical

industry is a highly knowledge based industry which is growing steadily and plays a major role in the Indian

economy. As a highly organised sector, the number of pharmaceutical companies is increasing their operations in

India. The industry is expected to touch US$ 35.9 billion by 2016.

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. 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.

Sector Structure/ Market Size

The domestic pharma market has reported total sales of Rs 6,370 crore (US$ 1.03 billion) in the month of May

2013, registering a growth of 6.8 per cent, as per IMS Health. The major factors responsible are 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$

11,304.91 million during April 2000 to April 2013, according to the latest data published by Department of

Industrial Policy and Promotion (DIPP).

Growth

The Indian pharmaceutical industry would continue to experience strong growth as structural growth drivers

continue to remain impervious. The industry is expected to revert a growth of 10-12 percent in 2013-14,

according to a study by ICRA. It is also expected that in-organic investments will gain momentum in the medium-

term as companies plan to create stronger presence in emerging markets and build expertise in select therapy

areas.

Among the top 10 companies, Cipla with total sales of Rs 302 crore (US$ 49.13 million), Sun Rs 297 crore (US$

48.32 miliion), Alkem Rs 222 crore (US$ 36.12 million) and Sanofi Rs 186 crore (US$ 30.26 million) were the

fastest growing corporations for the month of May 2013.

Exports

Pharmaceutical exports from the country during 2012-13 stood at US$14.6 billion, up from US$13.2 billion the

previous year, as per P V Appaji, Director General, Pharmexcil.

The Ministry of Commerce has targeted Indian pharma sector exports at US$ 25 billion by 2016. 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.

In order to boost the export capability, Export-Import Bank of India (Exim Bank), has decided to expand the

scope of its finance to pharmaceutical companies for extended repayment periods. Eligible export oriented

companies can avail finance from Exim Bank for a maximum repayment period of 10 years with a moratorium of

up to 36 months.

“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'.

Global demand for generic drugs from Indian companies is booming as developed nations battle rising healthcare

costs. As a result, generics companies are increasingly focusing on expanding presence in relatively under-

penetrated markets (i.e. France, Spain & Italy), branded generic markets of East Europe and niche areas like

complex generics, OTCs etc.

Diagnostics Outsourcing/ Clinical Trials

India is fast becoming the preferred destination for high-end pathology and diagnostic services. The highly

fragmented diagnostics and pathology labs market in India is pegged at US$ 3.4 billion, according to a report by

PricewaterhouseCoopers.

An increasing number of hospitals from the UK, US, Middle East and neighbouring countries are tying up with

Indian diagnostic centres to conduct laboratory tests. The Indian diagnostic services market is expected to grow

at a compound annual growth rate (CAGR) of around 26 per cent during 2012-2015 on back of huge investments,

fast expansion into tier II & III cities, and strong government support strengthening the healthcare infrastructure

in the country.

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

domestic and global players has sharply risen. India, over the last decade, has developed significant capabilities

in clinical trials, along with certain capabilities in project management and data management.According to

RNCOs research report “Booming Clinical Trials Market in India”, the number of clinical studies by domestic and

global players has sharply risen. India, over the last decade, has developed significant capabilities in clinical

trials, along with certain capabilities in project management and data management.

Investments

Some of the investments in the sector are:

• Piramal’s healthcare vertical plans to invest US$ 2.5 million to upgrade their antibody drug conjugate

(ADC) manufacturing suites. The upgrade will give Piramal two commercial grade ADC suites at the

Grangemouth facility, while retaining clinical phase manufacturing capacity in other suites on-site

• Dr Reddy's Laboratories (DRL) has launched Donepezil Hydrochloride tablets in the US market following

the approval by the United States Food and Drug Administration (USFDA)

• US-based drug maker MSD has tied up with Mumbai-based Lupin to market MSD's 23-valent

Pneumococcal Polysaccharide Vaccine in India. Lupin would have a non-exclusive licence to market,

promote and distribute the vaccine under a different brand name

• Aurobindo Pharma, Natco Pharma and Glenmark have received approvals from the US Food and Drug

Administration (USFDA) to launch their migraine drugs in the US market

• Elder Pharmaceuticals has acquired UK-based Max Healthcare. The acquisition is through Elder's fully-

owned UK subsidiary, NutraHealth, and will mark the re-entry of Elder Pharma into the over-the-counter

(OTC) pharmaceutical category

• Zydus Group has launched LipaglynTM (Saroglitazar), a novel drug targeted for treating diabetic

dyslipidemia or hypertriglyceridemia in Type II diabetes. The drug has been approved for launch in India

by the Drug Controller General of India (DCGI)

Government Initiatives

The Foreign Investment Promotion Board (FIPB) has cleared seven FDI proposals for investment in the Indian

pharmaceutical companies. Currently, 100 per cent FDI in pharma sector is permitted through automatic

approval route in the new projects but the foreign investment in the existing pharma companies requires FIPB

approval.

In 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.

In order to provide relief to the common man in the area of healthcare, a countrywide campaign in the name of

‘Jan Aushadhi Campaign’ has been initiated by the Department of Pharmaceuticals, Government of India, in

collaboration with the State Governments, by way of opening up of Jan Aushadhi Generic Stores in the

Government Hospitals by way of supply of generic medicines through Central Pharma Public Sector

Undertakings, to make available quality generic medicines at affordable prices to all.

Road Ahead

In spite of some recent adverse developments, with the support of Pharmexcil and the Government in the form of

Brand India Pharma project iPHEX, the sector would continue to grow and meet the healthcare requirements of

the developing world.

The country 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.

The pharma 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.

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

C.V.S.L.Kameswari Pharma

U. Janaki Rao Capital Goods

B. Anil Kumar Diversified

Ashish Kushwaha IT, Consumer Durable & Banking

Suhani Adilabadkar Diversified

M. Vinayak Rao Diversified

Firstcall India also provides

Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO’s, QIP’s, F.P.O’s,Takeover

Offers, Offer for Sale and Buy Back Offerings.

Corporate Finance Offerings include Foreign Currency Loan Syndications,

Placement of Equity / Debt with multilateral organizations, Short Term Funds

Management Debt & Equity, Working Capital Limits, Equity & Debt

Syndications and Structured Deals.

Corporate Advisory Offerings include Mergers & Acquisitions(domestic and

cross-border), divestitures, spin-offs, valuation of business, corporate

restructuring-Capital and Debt, Turnkey Corporate Revival – Planning &

Execution, Project Financing, Venture capital, Private Equity and Financial

Joint Ventures

Firstcall India also provides Financial Advisory services with respect to raising

of capital through FCCBs, GDRs, ADRs and listing of the same on International

Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and

other international stock exchanges.

For Further Details Contact:

3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai 400 071

Tel. : 022-2527 2510/2527 6077/25276089 Telefax : 022-25276089

E-mail: info@firstcallindiaequity.com

www.firstcallindiaequity.com