PHARMA SECTOR PICKS

*Organic growth led by emerging markets and contract
manufacturing:*Top-line growth for Jun-08 quarter was strong for many
companies, led mainly
by acquisitions, double-digit growth in emerging markets (including India ),
expanding product portfolio in the US and strong outsourcing by the MNC
Pharma companies. Overall top-line growth was 23.5% to Rs98.2b with
acquisitions contributing about Rs4.5-5b, while organic top-line growth was
18% (excluding one-off Para-IV upsides). Emerging markets continue to drive
both the top-line and the profitability for most of the generic companies
while the CRAMS players are witnessing the benefits of increased outsourcing
from India . We believe that revenue growth for the quarter would have also
been aided by the recent depreciation of the INR vs the US $ and the Euro.

*Higher RM costs being offset by better product and geographical mix:* RM
costs for our universe has increased by 17.6% YoY and 15% sequentially led
by lower supplies of inputs from China (due to the onset of Olympics) and
depreciation of the INR vs the US$. However, these cost pressures are being
offset by improved product-mix as well as due to higher contribution from
emerging markets (which enjoy higher margins). RM cost as % of revenues has
declined by 400bps to 39.7% YoY. We believe that inventory valuations gains
would have also helped to report a lower number.

*EBITDA Margins in-line, but PAT impacted by forex losses:* Overall EBITDA
Margins for the Jun-08 quarter were in-line with estimates but higher MTM
forex losses on forward covers and foreign currency loans impacted PAT
growth. Key companies to be impacted by forex losses include Ranbaxy,
Jubilant and Cipla given their high level of forex borrowings.

*Outlook*

We continue to be selectively bullish on the pharmaceutical sector. The key
determinants of future success will be:

1. Generics – Geographically diversified presence, broad product portfolio
including a pragmatic mix of normal, low-competition and patent challenge
products, backward integration and cost effectiveness. *Top picks include
Dr. Reddy's Labs, Lupin and Sun Pharma.*

2. CRAMS – Strict IPR compliance, chemistry skills, established relations
with MNC pharmaceutical companies and ability to undertake front-ended capex.
*Piramal** Healthcare is our top pick in the CRAMS space.*

3. MNC Pharma – Parent's commitment, brand building ability and a pipeline
of new launches. *GSK Pharma is our top pick in this space.*