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Regulatory risks on the rise

Indian pharma company valuations will be severely hit if their facilities
do not comply with USFDA norms. Increasing number of Form 483s,
warning letters and import alerts for Indian pharma companies have
raised concerns over their manufacturing practices. This was apparent
in recent actions taken against Ranbaxy Labs (RLL), Wockhardt and
Agila Specialities. The adoption of progressively higher standards of
product safety and quality has led to greater focus on data integrity
and compliance with current Good Manufacturing Practices (cGMP).
The time taken for corrective action adds to the risks and valuable
management time. They also face higher cost for remedial measures.
US FDA inspection and Form 483: The FDA inspectors record the
deviations from cGMP in Form 483 in order of significance. The % of
companies issued Form 483 after inspection ranged from 20.5% to
23.7% during 2008-2013. In 2008 this % was the lowest at 20.5% and
highest at 23.7% in 2010. The US FDA usually re-inspects the facility
only after clearance from independent auditors, thereby saving
valuable time of the inspectors.
Import alert: US FDA informs the public at large that the agency
thinks the companys products present safety problems. Indian
pharma companies received two import alerts in 2009 and 2012 each
and seven in 2011. However, in 2013, they have already received 19
import alerts till date. This is very alarming. The US FDA does not
approve any pending ANDA applications till the company resolves
the cGMP issue.
Import alert for RLL: RLLs three manufacturing facilities face import
alert that would take 3-4 years to resolve. Till then, RLL will not receive
any approval for pending ANDAs from these facilities. The company
will also have to spend heavily on remedial measures. RLL has signed
a consent decree with Department of Justice (DoJ) of the US and paid
$500mn (Rs31.0bn) fine to settle various charges. Moreover, it would
not be able to supply generic Diovan, Valcyte and Nexium from these
facilities for which it has 180-days marketing exclusivity.
Benefits & risks: We expect companies like Sun Pharma, Lupin, Cipla,
Dr. Reddys Labs and Aurobindo Pharma (APL) to benefit from their
compliance to cGMP norms as they can wrest good growth from the
worlds largest pharma market, the US. Ranbaxy Labs (RLL) will take 3-
4 years to fully comply with US FDA norms for its Dewas, Paonta Sahib
and Mohali facilities and hence its revenues from the US will be
impacted. Indian companies constantly face regulatory risks of non-
compliance leading to suspension of US supplies, incurring of higher
remedial cost and freezing of pending ANDA approvals.
Price Performance* (%)
1M 3M 6M 1Yr
Aurobindo
11.3 9.1 24.1 31.7
Biocon
(0.6) 16.2 17.1 26.4
Cipla
(1.0) 6.4 6.3 19.7
Dishman
30.0 (1.5) (8.8) (34.4)
Dr. Reddy's Labs
6.8 2.2 28.3 42.0
Lupin
7.3 6.5 43.4 68.6
Ranbaxy Laboratories
(11.1) 17.9 (10.9) (25.3)
Sun Pharma
12.0 13.4 44.2 74.7
Nifty
3.1 1.5 9.0 6.8
Source: Bloomberg, Centrum Research
* as on 11th October 2013
Share price chart of Aurobindo vs. Nifty-one year




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AUROBINDO PHARMA NSE CNX NIFTY INDEX
Share price chart of Ranbaxy vs. Nifty-one year
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RANBAXY LABS LTD NSE CNX NIFTY INDEX
Ranjit Kapadia
ranjit.kapadia@centrum.co.in
+91 22 4215 9645

PARTICULARS Rating TP CMP Upside M Cap EPS Rs P/E (x) EV/EBIDTA (x) P/BV(x)
(Y/E March) Rs. Rs. (%) Rs mn FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E
Aurobindo Pharma Buy 330 208 58.5 60,528 10.1 20.0 32.2 20.6 10.4 6.5 10.4 6.8 5.3 2.3 1.9 1.5
Biocon Buy 465 335 38.9 67,000 15.2 20.0 26.2 22.0 16.8 12.8 11.6 9.1 7.2 2.5 2.3 2.0
Cipla Buy 645 429 50.3 344,444 18.0 20.8 26.4 23.9 20.6 16.2 16.6 13.8 10.9 3.8 3.3 2.8
Dishman Buy 90 62 45.0 5,003 12.4 14.2 16.5 5.0 4.4 3.8 4.5 3.5 2.8 0.5 0.4 0.4
Dr. Reddy's Labs Buy 2,960 2,402 23.2 407,860 102.0 96.3 115.2 23.6 24.9 20.9 16.1 15.9 13.4 5.6 4.8 4.1
Lupin Buy 1,140 922 23.6 412,595 29.4 35.9 45.5 31.4 25.7 20.3 18.6 16.0 12.2 7.9 6.2 4.9
Ranbaxy Labs * Sell 355 399 (11.1) 168,777 27.2 10.7 17.9 14.7 37.3 22.2 11.0 19.1 11.8 4.0 3.2 2.8
Sun Pharma Buy 740 626 18.1 1,296,571 17.2 21.7 26.4 36.4 28.9 23.7 13.1 21.3 17.4 3.9 7.6 6.1
Source: Company, Centrum Research Estimates, Prices as on 11th October 2013,*Year End December
Pharma
Inspections and approvals 14 October 2013
INDIA
US FDA issues





2
US FDA issues
Pharma industry facing increased scrutiny

US FDA getting stricter

After the death of many children in the US due to contaminated heparin supplied by China, the US FDA has
become very strict on compliance of pharma manufacturing facilities to Good Manufacturing Practices (cGMP)
norms across the world. The adoption of progressively higher standards of product safety and quality has led
to greater focus on data integrity and cGMP compliance. However, the lack of awareness, inadequate training
of employees, lack of involvement of top management and changes in Standard Operating Procedures (SOP)
have led to pharma companies failing to meet stringent US FDA requirements.

Increasing recalls, 483s, warning letters and import alerts for Indian manufacturing facilities have raised
concerns about the manufacturing practices of the companies. India has the second highest number of US
FDA approved manufacturing facilities of over 200, only next to the US. Moreover, India is one of the largest
suppliers of APIs to US pharma companies.

To have better control, US FDA has added 7 inspectors in India, which will bring its staff strength to 19
inspectors. This indicates the agencys added concern on drugs exported to US from India.

US FDA inspection and Form 483

A typical inspection of the manufacturing facility starts with a team of US FDA inspectors visiting the
manufacturing facility. The visit may be with or without prior intimation. The inspectors disperse to their
specific areas of inspection namely: factory premises, manufacturing areas, warehousing, utilities, quality
control and testing, stability studies, equipments and instruments etc. The inspection is carried out in
accordance with the cGMP norms. Any deviation from these norms is recorded in Form 483 and given to the
company at the end of inspection. The company has to reply on remedial measures taken within 15 days
regardless of the number of observations. While a response is not compulsory, a good response can usually
help the company avoid warning letters from the US FDA, withholding of ANDA approvals or plant shut-
downs.

The FDA inspectors record the observations in Form 483 in order of significance. If the observation made
during prior inspection was not corrected it would be noted in 483. The FDA will typically include only
significant observations directly linked to cGMP violations.

The details of 483 issued to the companies under our coverage are mentioned in appendix-1 at the end of this
report.

The following table indicates the quarter-wise number of inspections carried out globally and the number of
483s issued to companies during 2008-2013. Note that the third quarter in 2013 is for July-August13 only.

Exhibit 1: US FDA inspection and 483 issued
YEAR PARTICULARS JAN-MAR APR-JUNE JULY-SEPT OCT-DEC TOTAL
2008 No. of inspections 10,827 10,567 10,256 7,898 39,548
No. of 483 issued 2,190 2,117 2,110 1,690 8,107
% of total 20.2 20.0 20.6 21.4 20.5
2009 No. of inspections 11,277 11,285 11,214 8,809 42,585
No. of 483 issued 2,444 2,518 2,599 2,180 9,741
% of total 21.7 22.3 23.2 24.7 22.9
2010 No. of inspections 11,978 12,260 10,265 9,777 44,280
No. of 483 issued 2,626 2,861 2,603 2,388 10,478
% of total 21.9 23.3 25.4 24.4 23.7
2011 No. of inspections 12,343 12,090 11,547 10,234 46,214
No. of 483 issued 2,795 3,047 2,819 2,215 10,876
% of total 22.6 25.2 24.4 21.6 23.5
2012 No. of inspections 12,496 11,631 10,103 7,838 42,068
No. of 483 issued 2,798 2,621 2,210 1,644 9,273
% of total 22.4 22.5 21.9 21.0 22.0
2013 No. of inspections 4,993 5,154 1,942 12,089
No. of 483 issued 1,107 1,099 462 2,668
% of total 22.2 21.3 23.8 22.1
Source: US FDA, Centrum Research, 2013-JULY-AUG (2months only)








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US FDA issues
The above data suggests that the % of 483s issued ranges from 20.5% to 23.7% with the lowest of 20.5% in
2008 and highest of 23.7% in 2010. The number of inspections has come down in 2013 as the US FDA is
considering the appointment of independent auditors to certify the facilitys compliance with cGMP norms.
The US FDA inspectors re-inspect the facility only after clearance from independent auditors thereby saving
valuable time of inspectors.

Warning Letters
A warning letter is a correspondence that notifies the violations US FDA has documented during its
inspections. It is only issued for violations of regulatory significance. It is the US FDAs principal means of
achieving prompt voluntary compliance with the Act. A warning letter usually will not be issued if US FDA
finds that corrective actions have been implemented and violations have been rectified.
The US FDA has issued 67 warning letters in the past 42 months (Jan10 to June13). Of these ~two-thirds were
related to formulation facilities and the rest for Active Pharmaceutical Ingredients (API) facilities. Hence, the US
FDA focuses more on formulation facilities. The data reveals that 66 companies received warning letters
during this period. Apotex received two warning letters. Others who received warning letter are: Boehringer
Ingelheim, Hospira, Merck KGaA, Novartis, Novo Nordisk, Sanofi Aventis, Teva and Wyeth. It has been observed
that both innovator and generic companies from all geographies have received warning letters from US FDA.

Among the companies under our coverage 5 were issued warning letters. The details are shown in the
following table:

Exhibit 2: Warning letters
COMPANY ISSUE DATE FACILITY
Aurobindo 20.5.2011 Unit III and VI, Bachupally, Hyderabad
Dr. Reddy's Labs 3.6.2011 Mexico
Lupin 7.5.2009 Mandideep, Bhopal
Ranbaxy Labs 11.2.2002 Princeton, New Jersey, US
21.12.2009 Ohm Labs, US
15.06.2006 Paonta Sahib, Punjab
16.9.2008 Paonta Sahib, Punjab
16.9.2008 Dewas, Madhya Padesh
Sun Pharma(Caraco) 11.10.2002 Michigan, US
31.10.2008 Michigan, US
Sun Pharma(Taro) 5.2.2009 Ontario, Canada
Source: US FDA

As shown in the above data, Ranbaxy Labs (RLL) received the highest number of warning letters (five) among
our coverage companies followed by SPIL with three, Caraco two and Taro one.

Indian companies well placed

Indian pharma companies which account for ~40% of DMFs and ~35% of ANDAs filed in 2012, got only 12% of
warning letters. Hence, Indian pharma companies are better placed than their global counterparts. In 2013,
over 19 drug manufacturing facilities in India including those of Ranbaxy Labs (RLL), Wockhardt, RPG Life
Sciences and Aarti Drugs were barred from supplying drugs to the US market. In addition, Agila Specialties
(Strides Arcolabs injectable arm), Fresenius Kabis West Bengal manufacturing facility and Hospira Healthcare
India received warning letters from US FDA.

The main problem Indian pharma companies face is due to underestimation of the stringent cGMP norms.
They try to compromise and try short cuts leading to non-compliance.


Import Alert

An import alert by US FDA is to inform the public at large that the agency thinks the companys products
present safety problems. The US FDA has sufficient evidence to conclude that the companys products appear
to be adulterated, misbranded or unapproved and hence refuse admission to the US.

Indian pharma companies received two import alerts each in 2009 and 2012 and seven in 2011. They did not
receive any import alert in 2010 but received 19 alerts in 2013.








4
US FDA issues

Country-wise import alerts from US FDA during 2009-2013 are as follows:
Exhibit 3: Key country wise import alert from US FDA (2009-2013)
Country 2009 2010 2011 2012 2013(till date)
India 2 0 7 2 19
China 9 8 3 3 7
UK 2 0 0 1 0
Australia 1 0 0 0 2
Canada 0 0 1 2 0
Germany 7 0 1 0 1
Japan 0 0 0 0 2
S.Africa 0 1 0 0 0
Total 21 9 12 8 31
Source: US FDA
Compared to other countries, Indian companies received 19 import alerts in 2013, which is alarming. After the
company receives an import alert, the US FDA does not approve pending ANDA applications till the company
resolves the cGMP issues with US FDA.
Product recall
In November 2012, RLL voluntarily recalled 41 lots of generic atorvastatin tablets from the US market due to
suspected contamination of glass particles of <1mm in size. Other companies, Aurobindo Pharma (APL), Dr.
Reddys Labs (DRL) and Glenmark Pharma (GPL) have also voluntarily recalled a few batches from the US
market due to contamination.
Independent auditors
After receiving observations in Form 483 and the warning letter, the US FDA recommends engaging the
services of independent auditors. Independent auditors help companies identify technical deficiencies and
overcome them. They also help the companies upgrade their SOPs and suggest improvements in quality
standards.
Drug recalls

The drug recall could be initiated by the US FDA or the company itself. In the later case, it is known as
voluntary recall. Recalls could be genuine in nature due to the contamination of a product, improper packing,
product mix up issues, labeling errors, improper storage conditions and presence of foreign particles.

Import alert on Ranbaxys Mohali plant
US FDA imposed import alert on 13
th
Sept13 on RLLs Mohali manufacturing facility after finding cGMP
violations. This effectively stops all drug shipments from Mohali to US markets. The Mohali facility is also now
subject to the terms of the consent decree that RLL agreed to in January12. The cGMP violations included
failure to adequately investigate manufacturing problems and establish procedures to ensure manufacturing
quality. The import alert has created a hurdle to the companys plans to manufacture generic Diovan, Valcyte
abd Nexium where RLL is eligible to 180-days marketing exclusivity.
RLL started shipping generic atorvastatin in April12 from its Mohali facility. But after a period of six months, it
announced the voluntary recall of 41 lots from the US market owing to the alleged presence of glass particles.
Post this, the company had to stop shipping the product from its Mohali facility as well as Ohms Labs, US. RLL
resumed supplies from Ohm Labs in April13. Moreover, RLL will not receive any fresh approval from Mohali till
the plant is cleared by US FDA.
RLLs Dewas and Paonta Sahib facilities have been on US FDA import alert since 2008. In May12, the company
pleaded guilty to seven criminal and civil wrong doings related to drug safety, manufacturing of adulterated
drugs as well as data and document falsification in the US and paid a fine of $500mn (Rs31.0bn) to settle these
charges.












5
US FDA issues
Conclusion
We expect companies like Sun Pharma, Lupin, Cipla, Dr. Reddys Labs and Aurobindo Pharma (APL) to
benefit from their compliance to cGMP as they could gain good growth from the worlds largest
pharma market of the US.
India accounts for ~40% of generic drugs and OTC products and10% of finished drugs used in the US.
US FDA is under pressure to ensure that the quality of drugs given to the US patients is not
compromised and hence raised the bar.
The Indian pharma companies have to invest in regulatory compliance systems and procedures to
ensure that they continue to supply to the worlds largest US market.
The Indian pharma companies require the involvement of the top management for regulatory issues
as these would determine their future presence in the developed markets.
While US has a central drug authority US FDA for dealing with non-compliance, India lacks such an
authority. The FDAs function is controlled by the states while the approval of new drugs is controlled
by the central agency, Drug Controller General of India (DCGI). Due to the lack of centralized
regulatory authority, the norms of the Indian FDAs are not as stringent as that of the US FDA.
Major risks
Valuations of pharma companies will be severely hit if they receive 483 leading to warning letters and
import alerts.
Indian pharma companies which ventured into the US market know of the stringent regulatory
practices of US FDA. But, they did not meet these standards leading to non-compliance.
The Indian pharma companies face the risk of high cost for remedial measures and delay in approval
of pending ANDAs.
Some Indian pharma companies do not take adequate time bound corrective action.
The main problem the Indian pharma companies face is lax Indian cGMP norms that are not as
stringent as that of the US FDA. This makes companies compromise and resort to short cuts leading to
non-compliance.


























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US FDA issues

Appendix-1
Exhibit 4: Company- wise 483s issued by US FDA
Company Inspection date Plant location
Aurobindo Pharma 21.9.2012 Unit VI, Survey no. 329/39 & 329/47, Hyderabad
26.6.2012 Unit XII,Formulations, Hyderabad
No. of 483s: 13 8.6.2012 Unit XI, Survey no.61-66, IDA, Srikakulam
29.9.2011 Unit V, IDA chemical zone, Hyderabad
8.9.2011 Bachupally, Hyderabad
29.7.2011 Dayton,New Jersey, US
26.5.2011 Unit VIII, No.10 and 13, Medak
22.12.2010 Unit VI, Survey no. 329/39 & 329/47, Hyderabad
17.9.2010 Formulation unit XII, Hyderabad
30.7.2010 Unit VII, formulation plant, Mehbubnagar
9.4.2009 Unit XII,Formulations, Hyderabad
1.4.2009 Unit V, IDA chemical zone, Hyderabad
20.3.2008 Unit VIII, No.10 and 13, Medak
Biocon 29.1.2009 Plot 2-4, Phase IV, Bommasandra, Bangalore
Cipla 30.5.2013 Plot L-139 and L-146, Verna, Goa
28.6.2012 Old Madras Road, Bangalore
No. of 483s: 10 1.12.2011 Kurkumbh, Dist. Pune, Maharashtra
8.11.2011 Plot L-139 and L-146, Verna, Goa
22.9.2011 LBS Marg, Vikroli, Mumbai
17.2.2011 Plot L-139 and L-146, Verna, Goa
17.4.2009 Plot L-139 and L-146, Verna, Goa
9.4.2009 Old Madras Road, Bangalore
26.3.2009 Kurkumbh, Dist. Pune, Maharashtra
6.2.2009 Plot Nos. A2, A33, A42 , Khalapur
Dishman 17.3.2012 Survey No.47, Sanand, Ahmedabad
Dr. Reddy's Labs 13.2.2012 Shreveport, USA
21.9.2012 Shreveport, USA
13.2.2009 Unit I,Venkateshwara, Hyderabad
No. of 483s: 11 15.6.2012 Unit I,Venkateshwara, Hyderabad
6.2.2009 Nalgonda, Andhra Pradesh
1.5.2012 Nalgonda, Andhra Pradesh
16.4.2012 Unit IV, IDA, Hyderabad
13.11.2009 Quthbullapur, Andhra Pradesh
24.11.2011 Quthbullapur, Andhra Pradesh
10.9.2010 Unit III, Bollaram, Hyderabad
21.8.2008 Visakhapatnam,Andhra Pradesh
Lupin 18.11.2009 SEZ, Indore
22.6.2012 SEZ, Indore
23.3.2012 R & D centre, Pune
No. of 483s: 10 23.12.2011 Baltimore, USA
12.11.2008 Mandideep, Bhopal
30.11.2009 Mandideep, Bhopal
23.9.2011 Mandideep, Bhopal
4.3.2009 Verna, Goa
12.2.2010 Verna, Goa
23.2.2009 MIDC, Tarapur
Source: US FDA











7
US FDA issues
Company-wise 483s issued by US FDA (Cond.)
Company Inspection date Plant location
Ranbaxy Labs 21.12.2012 Noida, India
19.11.2009 Toansa, Punjab
25.11.2011 Toansa, Punjab
14.12.2012 Toansa, Punjab
No. of 483s: 13 26.9.2012 SEZ Mohali, Punjab
12.12.2012 SEZ Mohali, Punjab
29.9.2009 Princeton, New Jersey, USA
22.6.2011 Princeton, New Jersey, USA
22.6.2011 Phase III, SAS Nagar, Mohali
7.3.2008 Sector 18, Gurgaon
12.5.2009 Sector 18, Gurgaon
7.3.2008 Paonta Sahib, Punjab
12.2.2008 Dewas, Madhya pradesh
Sun Pharma
Caraco 28.6.2013 Bryan, USA
6.3.2008 Detroit, Michigan, USA
11.6.2008 Detroit, Michigan, USA
12.5.2009 Detroit, Michigan, USA
No. of 483s: 17 14.12.2011 Detroit, Michigan, USA
3.8.2012 Detroit, Michigan, USA
11.1.2013 Detroit, Michigan, USA
30.5.2013 Detroit, Michigan, USA
22.12.2008 Farmington, Michigan, USA
Taro Pharma 1.2.2008 Hawthorne, New York, USA
29.5.2009 Hawthorne, New York, USA
8.3.2012 Hawthorne, New York, USA
18.4.2013 Hawthorne, New York, USA
31.7.2008 Brampton, Canada
11.2.2011 Brampton, Canada
10.9.2009 Haifa Bay, Israel
28.5.2010 Haifa Bay, Israel
Source: US FDA







8
US FDA issues
Appendix A
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9
US FDA issues
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constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such
opinions, estimate or projection.
This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company
or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by
the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of
the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its
contents or otherwise arising in connection therewith.
Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months.
Centrum and affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve
months from the date of this report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or
other advisory services in a merger/acquisition or some other sort of specific transaction.
As per the declarations given by them, Mr. Ranjit Kapadia, research analyst and and/or any of his family members do not serve as an officer,
director or any way connected to the company/companies mentioned in this report. Further, as declared by him, he has not received any
compensation from the above companies in the preceding twelve months. He does not hold any shares by him or through his relatives or in
case if holds the shares then will not to do any transactions in the said scrip for 30 days from the date of release such report. Our entire
research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research
analyst or member of which the research analyst knows of has reason to know at the time of publication of the research report or at the time
of the public appearance.
While we would endeavour to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and
employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons
that may prevent Centrum from doing so.
Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with
applicable regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any
certain other circumstances.
Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager

Registration Nos.
CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233
DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)
CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-661-2012
PMS REGISTRATION NO.: INP000004383
MCX SX (Currency Derivative segment) REGN. NO.: INE261454230
Website: www.centrum.co.in
Investor Grievance Email ID: investor.grievances@centrum.co.in
Compliance Officer Details:
Mr. Ashok Devarajan; Tel: (022) 4215 9000; Email ID: compliance@centrum.co.in
Centrum Broking Limited
Registered Office Address
Bombay Mutual Building ,
2nd Floor,
Dr. D. N. Road,
Fort, Mumbai - 400 001
Correspondence Address
Centrum House
6th Floor, CST Road, Near Vidya Nagari Marg, Kalina,
Santacruz (E), Mumbai 400 098.
Tel: (022) 4215 9000