Back on track; upgrade to Buy
from Underperform
Upgrade on increased business visibility
We revert to a Buy rating on DRL from Underperform with a PO of Rs1830. Our
discussions with management alleviates concern over key markets, driving
revisions to (1) base sales in US and Russia, which will be reflected from H2, and
(2) exclusivities, with additional 2 launches each in H2 and FY12. Our forecasts
are 12%-15% ahead of consensus over FY11-12, and we expect street upgrades.
Base business sales estimates raised
We raise FY12E base business sales growth to 16% from 13% earlier, mainly (1)
Russia (18% of sales) at 20% from 15% earlier, on lower than expected impact of
pricing reforms, and (2) US (21% of sales), at 24% from 13% earlier, through
recent and new launches aiding recovery in market share. On other markets, we
have retained our estimates in line with trends.
Visibility for niche opportunities and exclusivities
We expect launch of 4 niche/exclusive products, which had not been factored
earlier, estimated to contribute 30% of reported profit. This includes generic
Prevacid (est. brand sales US$1.2bn, Q3 FY11), Accolate (US$45mn, Q3 FY11),
Zyprexa (US$750mn, Q3 FY12) and Geodon (US$1.2bn, Q4 FY12). We maintain
launch of difficult to make generic Arixtra (US$275mn) in H2 FY11 and favorable
ruling but delayed launch of Allegra D24 (US$180mn, FY12).
Re-rating base business, prudent on exclusivities
We have raised base business multiple to 22x FY12E P/E (valued at Rs1733/sh),
marginally ahead of sector average, compared to earlier 17x, justified by fastest
growth amongst large cap peers, and switch valuation methodology of
exclusivities to NPV (Rs97/sh) instead of valuing on 12x FY12E P/E earlier.
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