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Results in-line; more to gain in H2FY11
Domestic formulation reports growth momentum
Dr Reddy has reported a 25% YoY growth in sales to INR3.1bn on the
back of new launches of differentiated products. Foray into tier-II and
tier-III cities and focused marketing in selected therapeutic areas are
other major reasons for the company’s growth momentum in
domestic formulation business. Dr Reddy’s reported India formulation
business is at INR5.9bn, implying a 21% YoY growth in H1FY11.
US core generics under pricing pressure, Para-IV to ramp up sales
The company’s US business has reported 3% YoY growth to INR4.4bn.
While the core business in generics is under pricing pressure, the
company is gaining significantly from new launches of para-IVs. With
the scheduled launch of couple of para-IV products, we expect the
company to report a better growth in H2FY1. The benefit of new
launches such as generic Lotrel and Prevacid is expected in H2FY11.
PSAI continues to disappoint, Russia on a high with re-stocking
We observe the weak visibility in the revival of PSAI business in near
future due to languishing order book from large pharma companies
and small biotech enterprises. Russia has reported a 23% YoY growth
on the back of re-stocking by distributors as well as a price rise.
Valuations: Upgrade to Accumulate
We increase our target price to INR1,859, following the average of
FCFF and target PEx methodologies. Our target price implies a 12%
upside to the current market price. With the assumption of an 8.1%
risk-free rate, 10% WACC and a 2% terminal growth rate, we derive
the value of the company at INR1,832 under the FCFF methodology.
With a target PEx of 23 to FY13 earnings, we value the company at
INR1,885 under the relative valuation methodology. In the wake of
robust para-IV pipeline for the US market, new launches along with
marketing expansion in India and robust secondary sales, we upgrade
our recommendation to ‘Accumulate’.
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