Dr Reddy, In-line quarter; we raise FY12 estimates -- IIFL,

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In-line quarter; we raise FY12 estimates
Dr Reddy’s reported 2QFY11 result was in line with our expectation—revenue, at Rs18.7bn, was
1% below our estimate; gross profit was 2% above our estimate on better gross margin at
53.4%. The US business is back on the growth track, and the key branded markets of Russia and
India continue to grow at 20%+ annually. Higher R&D expense, however, hit EBIT margin—EBIT,
at Rs3.0bn, came 7% below our estimate; we expect this to normalise in the quarters ahead. We
maintain our EPS estimate for FY11, and raise it for FY12 by 18% on addition of fondaparinux,
olanzapine and ziprasidone products in our projections. We retain BUY and raise our price target
to Rs1957 (from Rs1803).
US getting back on the growth track: The US generics business has shown signs of recovery after three
quarters of decline following the fexofenadine recall—2QFY11 US revenues were up 3% YoY at Rs4.4bn.
Apart from improving market share in traditional products such as fexofenadine and ciprofloxacin, significant
ramp-up in new products—tacrolimus and generic Lotrel—too contributed to the growth. Going forward, new
product launches and a ramp-up in OTC products could provide growth momentum.
Russia, India going strong: Revenues from domestic formulations grew 25% YoY and those from Russia
grew 28% YoY; we expect continued strong performance. Revenues from Betapharm in Germany grew 20%
QoQ, suggesting a bottoming-out there. The CRAMS business remained under pressure globally—revenues
were down 14% YoY.
We raise FY12 EPS estimate: We are adding fondaparinux to our estimates starting late FY11, as we have
better visibility on approval. We are also adding olanzapine and ziprasidone as one-time opportunities. Our
target price of Rs1957 is 23x FY12ii core earnings plus the value of cash and one-off items per share.