Dr. Reddy's Labs -Strong growth outlook:: UBS

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UBS Investment Research
Dr. Reddy's Labs
Strong growth outlook
�� US business momentum remains strong
We expect revenue from the US to almost double, from US$414m in FY11 to
US$818m in FY13, driven by Zyprexa (FY12), Geodon (FY13) exclusivity, the
launch of Fondaparinux, Allegra D-12 and D-24, and further ramp-up in Prilosec
OTC. With 74 ANDAs (including 39 Para 4s and 12 FTFs) pending US FDA
approval, we expect US-based business growth to remain strong in FY12-13.


�� Strong growth momentum in branded generic market
Dr Reddy’s continues to execute successfully in all its branded generic markets—
India (15% of revenue), Russia/CIS (13% of revenue) and ROW (4% of revenue).
We forecast a 20% revenue CAGR for these markets for FY10-13. Dr Reddy’s has
a partnership with Cipla and is promoting the latter’s products in Russia. Given
strong product launch momentum, growth could continue to surprise on the upside
in these markets. We believe the GlaxoSmithKline deal and launch of biogenerics
will be meaningful drivers of the Russia and ROW markets after FY13.

�� Core business profitability continues to improve
We believe improvement in core business profitability remains underappreciated.
With increasing scale in the US and branded markets, we believe base business
profitability will continue to surprise on the upside. The Q2 FY11 EBITDA margin
was 22.4% despite the weak gross margin in the pharmaceutical services and active
ingredient businesses. Our earnings estimates remain 16%/14% ahead of consensus
for FY12/13.
�� Valuation: maintain Buy rating and price target of Rs1,970
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11%.