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Dr Reddy’s Laboratories
n Operating performance lagged expectations
Dr Reddy’s Laboratories’ (DRRD) Q3FY11 adjusted PAT of INR 3.1 bn (28% Y-o-Y) was
below our estimate of INR 3.87 bn, led by lower than expected sales in new launches and
charge back on account of g Lotrel (~USD5mn impact). Net sales of INR 18.9 bn (10%
Y-o-Y), was impacted from poor performance at Betapharma, PSAI as well as Russia (4%
growth vs. est. of 20%) and lower-than-expected contribution from new products.
Operating profit margin of 15.5% was flat Y-o-Y and had impact from one-time fixed
costs (USD 9 mn because of litigation expenses for Allegra-D, one time cost on debt
refinancing and higher promotion expenditures on OTC products in Russia). Adj. for
these operating margins was 17.6% (up 26% YoY) driven by higher realization in niche
products.
n Charge back & lower off-take impacted US performance
US generics business growth of 8% Q-o-Q to INR 4.76 bn has been below our estimate
of INR 5.3 bn, largely from slower than expected contribution from new launches in US
(USD 5 mn vs. est. of USD 17-18mn). Moreover, incremental market share gain from
Tacrolimus (launched in Q1 FY11) and Omeprazole OTC was offset by price erosion in
generic Lotrel (estimated 4-5 mn impact). Europe declined by 18% Y-o-Y (versus -12%
estimated), while Russia & CIS sales (4% Y-o-Y) had negative impact from higher base
in Q3 FY10. PSAI sales growth remains sluggish (-4% Y-o-Y) with small signs of pick -up
in order volumes.
n Gaining traction in limited competition products; Execution key
Consolidation in existing products and new product launches is expected to drive DRL’s
US revenues going forward. Some of its limited competition products such as
Omeprazole & Tacrolimus have already started gaining traction in the last few months.
We expect g Prevacid to gain market share as the initial channel dumping by the
competitors has already been exhausted. Though we do believe that DRRD has built up
robust pipeline of niche and limited competition products in the US, successful execution
of the same will drive valuations of the stock.
n Outlook and valuations: Maintain core earnings
Owing to strong growth visibility in branded generic business, improved traction in
limited competition products and potential upside from GSK deal, we maintain our core
earnings estimate of INR78.2 for FY12 and introduce FY13 numbers with an EPS of
INR87. Our SOTP based fair value for DRRD works out to be INR1736, valuing base
business at 21x FY12 core earnings and Rs94 per share as NPV of Para IV. Stock has
been corrected more than 10% in last one month and believes that any further
correction is a good buying opportunity. We maintain “HOLD/Sector Outperformer”
rating on the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Dr Reddy’s Laboratories
n Operating performance lagged expectations
Dr Reddy’s Laboratories’ (DRRD) Q3FY11 adjusted PAT of INR 3.1 bn (28% Y-o-Y) was
below our estimate of INR 3.87 bn, led by lower than expected sales in new launches and
charge back on account of g Lotrel (~USD5mn impact). Net sales of INR 18.9 bn (10%
Y-o-Y), was impacted from poor performance at Betapharma, PSAI as well as Russia (4%
growth vs. est. of 20%) and lower-than-expected contribution from new products.
Operating profit margin of 15.5% was flat Y-o-Y and had impact from one-time fixed
costs (USD 9 mn because of litigation expenses for Allegra-D, one time cost on debt
refinancing and higher promotion expenditures on OTC products in Russia). Adj. for
these operating margins was 17.6% (up 26% YoY) driven by higher realization in niche
products.
n Charge back & lower off-take impacted US performance
US generics business growth of 8% Q-o-Q to INR 4.76 bn has been below our estimate
of INR 5.3 bn, largely from slower than expected contribution from new launches in US
(USD 5 mn vs. est. of USD 17-18mn). Moreover, incremental market share gain from
Tacrolimus (launched in Q1 FY11) and Omeprazole OTC was offset by price erosion in
generic Lotrel (estimated 4-5 mn impact). Europe declined by 18% Y-o-Y (versus -12%
estimated), while Russia & CIS sales (4% Y-o-Y) had negative impact from higher base
in Q3 FY10. PSAI sales growth remains sluggish (-4% Y-o-Y) with small signs of pick -up
in order volumes.
n Gaining traction in limited competition products; Execution key
Consolidation in existing products and new product launches is expected to drive DRL’s
US revenues going forward. Some of its limited competition products such as
Omeprazole & Tacrolimus have already started gaining traction in the last few months.
We expect g Prevacid to gain market share as the initial channel dumping by the
competitors has already been exhausted. Though we do believe that DRRD has built up
robust pipeline of niche and limited competition products in the US, successful execution
of the same will drive valuations of the stock.
n Outlook and valuations: Maintain core earnings
Owing to strong growth visibility in branded generic business, improved traction in
limited competition products and potential upside from GSK deal, we maintain our core
earnings estimate of INR78.2 for FY12 and introduce FY13 numbers with an EPS of
INR87. Our SOTP based fair value for DRRD works out to be INR1736, valuing base
business at 21x FY12 core earnings and Rs94 per share as NPV of Para IV. Stock has
been corrected more than 10% in last one month and believes that any further
correction is a good buying opportunity. We maintain “HOLD/Sector Outperformer”
rating on the stock.
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