EURION - Sample ICR

							2009

XYZ Pharma: Sample ICR

Eurion Constellation
June 2009

Explanations and Disclaimers
This is only an indicative sample ICR and the following specs need attention:



Financial analysis and forecasts for the basis of company research and stock analysis. This is work is beyond the scope of the following sample ICR have not been made. On the basis of forecasted figures, the valuations are done and recommendations made. The following is more condensed work focussing on performance, risks & opportunities, and strategic initiatives. More detailed work in the form of recent developments or guidance regarding future plans form part of a typical ICR.







Eurion Constellation | Sample Initiatial Coverage Report

2

XYZ Pharma
July 1, 2009

Initiating Coverage Report

Share Data
Market Cap Price BSE/NASDAQ Index Scrip Id Avg. Vol. (52 Week) 52-Week High/Low Shares Outstanding Rs/$ Rs/$ Rs/$ XYZ Rs/$

Cut-throat competition forces XYZ into losses
On June 30, 2009, XYZ Pharma Ltd came out with its annual results for the year ended March 31, 2009, reporting huge losses of Rs/$ mn. In FY 2009, the sales grew by approx. 36%, including inorganic growth from the acquisition of MN (Druggists) Ltd and ABC Ltd. However, on account of increased employee cost (105%) and other expenses (46%), EBITDA fell by 28.7%. some of the increased expenditure is explained by the acquisition of ABC made during the year. Increase in interest costs by almost 80% has put further pressure on the net income, pushing the company into losses. Since FY 2007, XYZ has not been able drive its sales growth in the API (Active Pharmaceuticals Ingredient's) segment organically, mainly due to stiff competition from countries like China, oversupply, and resultant, downward pressure on the prices. The two key acquisitions made in January and August 2008, have contributed to the increase in the top line in FY 2008 and FY 2009, to some extent.
FY 06
3021.2 394.6 228.9 1,196.3 13.06 7.58 19.13 0.64 35.5x

Valuation Ratios
EPS (Rs.) PE Ratio

2010E

2011E

Shareholding (%)
Promoters Individuals Non-Institutional Others FIIs 48.83 30.14 13.98 6.76 0.29

Year to March
Sales EBITDA Net Income (Adj) Equity Margins (%) EBITDA Net Income ROE Per share data EPS PE Ratio

FY 04
1,388.3 164.2 82.6 442.5 11.83 5.95 18.67 0.83 5.05x

FY 05
2,545.3 320.2 205.6 1,023.1 12.57 8.08 20.09 0.57 55.88x

FY 07
2,525.1 166.6 67.9 1,264.2 6.6 2.69 5.37 0.19 26.84x

FY 08
2,704.8 416.7 157.3 1,418.5 11.02 5.8 11.08 0.43 43.14x

FY 09

FY 10 E

FY 11 E

(Figures in Rs/$ mn, except per share data)

Eurion Constellation | Sample Initiatial Coverage Report

3

Valuation
[This section covers the valuation done, the fundamental bases of assumptions, and logics, thereof.]

Downside Risks
XYZ is a leveraged company, with Debt Equity ratio of 2.14, 2.51, and 2.53 for FY 2008, FY 2007, and FY 2006, respectively. Higher debt is putting pressure on its margins, and considering its net losses in the most recent reported year, this leverage poses a higher downside risk. Foreign Currency Convertible Bonds of XYZ, raised in November, 2005, stood at Rs/$ at March 31, 2008. These bonds have a much higher conversion price than the current stock price. If these convertible notes are held till maturity, in November, 2010, they will become redeemable at 145.2% of their face value. The company is facing stiff competition from foreign as well as, domestic players. With the entry of Chinese players in the market, the prices of Ciprofloxacin and Ranitidine have fallen considerably, which form the major chunk of its bulk segment. Increasing cost of fuel, raw materials, and other inputs are further, narrowing the company’s margins in the short term. Rising cost pose a significantly higher threat to a smaller, yet leveraged player like XYZ.

Debt Equity Ratio

Foreign Currency Convertible Bonds

Competition

Rising costs

Advantages
India is increasingly becoming an outsourcing hub for Active Pharmaceuticals Ingredient's (APIs), which is a core domain of XYZ. The per capita medical spending in India remains amongst the lowest in the world, opening up a large untapped market. Rising income levels are further expected to help this industry grow. Commercial R&D on contract basis is an upcoming area and is expected to be another business driver for XYZ in the medium to long term. To deal with the increasing competition from countries like China, XYZ has directed its focus on US and UK markets. Its recent acquisitions in the booming, generic Eurion Constellation | Sample Initiatial Coverage Report 4

Domestic Industry Growth

Contract R&D

Strategic initiatives

drugs section of these regulated markets is likely to provide it with front end sales capabilities with wider international reach and will help in geographical risk diversification.

Financial Overview
[This section, broadly, covers the historical performance, as well as, expectations about future revenues and profitability.]

Mergers and Acquisitions made during the financial year
In August 2008, XYZ Pharma Ltd aquired UK based ABC, a marketing and distribution company dealing in generic drugs. This acquisition will give XYZ Pharma, a wider sales and marketing capability in the UK markets. The highly regulated UK generic drugs market is one of the largest and most potential markets in the world. XYZ’s strategic rationale behind the deal was to utilize the established track record of a profitable company like ABC for gaining entry into UK’s generic drugs market and achieving cost advantage by keeping Indian as the production base for ABC’s licensed drugs. ABC has 47 acquired licenses and 36 pending licenses for generic drugs across Europe. It is a profitable company with considerable regulatory knowhow and a proven track record for acquiring MHRA approvals. This is further expected to help XYZ Pharma in launching its pipeline products in UK. The value of the deal was estimated to be Rs/$ (EUR mn) and was funded by a combination of cash and new debt.

XYZ targets the large and highly lucrative generic drugs market in UK

Stock Performance
[Explanations and details]

Eurion Constellation | Sample Initiatial Coverage Report

5

25000 20000 15000 10000 5000 0

22720 18550

4930 Mar/07 Value of Rs 1,000 invested Mar/08 SENSEX

4140 Mar/09

Mar/06

Company Background
Headquartered in Mumbai (India), XYZ Pharma Ltd. is a pharmaceuticals company with backward integration from manufacturing Active Pharmaceuticals Ingredient's (APIs) up to the level of biopharmaceutical formulations. It mainly deals in the prescription drugs and is the second largest manufacturer of Ciprofloxacin and Ranitidine in India. In addition, it is engaged in commercial R&D activities. It began as a wholly-owned subsidiary of GM Laboratories Ltd. in 2001 and started operating as GM Laboratories Ltd, an independent entity after being divested in 2003. XYZ Pharma was formed by a merger between GM Laboratories and TS Pharmaceuticals Ltd. in 2005.

Profile: A company, well integrated along the industry value chain

Strategy: Expecting to derive over 50% of the global revenues from Western markets

In January 2008, XYZ acquired HX Group Ltd, a UK based manufacturer of licensed drugs and wholesale marketer of over-the-counter pharmaceutical products. The deal was done through XYZ Pharma (UK) Ltd., a subsidiary of XYZ Pharma Ltd. HX Group is the parent company of druggist MN Ltd, which owns manufacturing license for 38 products. MN is a zero debt company with well established market for its product portfolio.

Management

[This part tells about key management personnel.]

Eurion Constellation | Sample Initiatial Coverage Report

6

Financial Performance: H1 2008 results

[This part presents a brief overview of the ‘last’ reported results.]

Industry Overview

[This portion covers industrial overview and outlook in brief.]

Eurion Constellation | Sample Initiatial Coverage Report

7

Past Financial Performance

Eurion Constellation | Sample Initiatial Coverage Report

8