PHARMACEUTICALS Budget impact on pharma :Edelweiss,

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Finance minister has increased the scope of MAT for partnership firms
claiming profit deductions. Sun, Cadila and Torrent report profit from
domestic operations under partnership firm (in Sikkim) where profits are
exempt. However, in proposed policy, the partnership profit would be
taxable at MAT rate, thereby increasing tax liability for the firms. We
estimate impact of 8%, 10% and 4% on the companies respectively, but
will revisit our estimates post clarity.
• Budget proposes increase in excise duty from 10% to 12% on API and form 5% to
6% on formulations which would have negative impact on cash flows
• Budget extends weighted average deduction of 200% on R&D investment which is :
positive for the sector
• Budget increases the scope of MAT to partnership firms: Negative for Sun, Cadila
and Torrent Pharma
• Sun Pharma (SUNP): The share of profit from partnership unit in FY11 was
INR11.7bn. Assuming a 15% growth in earnings and MAT rate on these profits,
we see an additional tax burden of INR2.34bn in FY13 (8‐9% impact on EPS).
• Cadila (CDH): The share of profit from partnership unit in FY11 was INR4.1bn.
Assuming 12% earnings growth and MAT rate on these profits, we see an
additional tax burden of INR823mn in FY13 (10% impact on EPS).
• Torrent Pharma (TRP): Torrent benefited from lower tax rate in FY12 under
partnership (Sikkim facility). We estimate tax rate to increase from 19% in
FY12 to 21.5% in FY13 with negative impact of 4% on FY13 EPS.
Edelweiss view
The companies could have window to claim MAT credit entitlement, if they could
recover the same over next 8‐10 years. In this case, impact on P&L will be limited
however cash flow would have negative impact.