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DRL (REDY.BO): 20+ one-off opportunities drive revenue growth
Source of opportunity
We raise our 12-month target price for Dr Reddy’s Laboratories
(DRL) to Rs 1,507 (from Rs 1,363) yielding potential upside of 1% on
the back of our raised earnings forecast. We believe that DRL is
poised for strong 23% revenue CAGR and 320 bps margin
expansion over FY11E-FY13E driven by multiple upcoming exclusive
and limited-competition launches in the US market. We maintain
our Neutral rating on valuation as we see limited upside from
current levels.
US pipeline revenue potential of US$800mn: With around 30% of
sales from the US market, we believe DRL is well placed to exploit
the impending wave of patent expiries. DRL’s US product pipeline is
second only to Ranbaxy in Indian pharma with sales exposure of
over US$42bn and potential revenue of US$790 mn over 2011-2014.
Key upcoming product launches include Zyprexa and Plavix.
Rebound in domestic business: We expect the domestic business
to grow at 23% CAGR over FY11E-FY13E on the back of renewed
management focus and field force expansion. We also expect
biosimilars to contribute meaningfully to domestic growth over the
next 2-3 years as the product portfolio broadens.
Margin expansion led by one-off launches: We forecast a 320 bps
expansion in operating margins over FY11E-FY13E as a result of
high margin exclusive launches and tighter cost control.
Above consensus on revenue and margins: Our FY12E/FY13E
revenue and net income estimates are 3%/11% and 7%/14% above
consensus, respectively, reflecting our positive view on DRL’s
growth and margin trajectory.
Raise earnings estimates on higher margins: We revise our
earnings estimates by 11%-31% over FY11E-FY13E to reflect
upcoming exclusive launches and resulting margin expansion. We
forecast earnings CAGR of 33% for DRL over FY11E-FY13E.
Valuation: Growth reflected in price; stay Neutral
Our revised 12-month DC-based TP of Rs1,507 implies a FY12E P/E
of 16.4X, which is at a 6% premium to the sector’s implied PE. We
revise our 12-m TP for the ADR to $33.5 from $29.6.
The stock currently trades at a premium of 5% & 10% vs. its peers
on FY12E P/E and one-year forward EV/EBITDA, respectively. We see
limited upside from current levels despite strong revenue and
margin momentum and hence maintain our Neutral rating.
Key risks
Upside: More FTF launches, favorable litigation; Downside: Slower
than expected sales ramp up, FDA delays.
INVESTMENT LIST MEMBERSHIP
Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
DRL (REDY.BO): 20+ one-off opportunities drive revenue growth
Source of opportunity
We raise our 12-month target price for Dr Reddy’s Laboratories
(DRL) to Rs 1,507 (from Rs 1,363) yielding potential upside of 1% on
the back of our raised earnings forecast. We believe that DRL is
poised for strong 23% revenue CAGR and 320 bps margin
expansion over FY11E-FY13E driven by multiple upcoming exclusive
and limited-competition launches in the US market. We maintain
our Neutral rating on valuation as we see limited upside from
current levels.
US pipeline revenue potential of US$800mn: With around 30% of
sales from the US market, we believe DRL is well placed to exploit
the impending wave of patent expiries. DRL’s US product pipeline is
second only to Ranbaxy in Indian pharma with sales exposure of
over US$42bn and potential revenue of US$790 mn over 2011-2014.
Key upcoming product launches include Zyprexa and Plavix.
Rebound in domestic business: We expect the domestic business
to grow at 23% CAGR over FY11E-FY13E on the back of renewed
management focus and field force expansion. We also expect
biosimilars to contribute meaningfully to domestic growth over the
next 2-3 years as the product portfolio broadens.
Margin expansion led by one-off launches: We forecast a 320 bps
expansion in operating margins over FY11E-FY13E as a result of
high margin exclusive launches and tighter cost control.
Above consensus on revenue and margins: Our FY12E/FY13E
revenue and net income estimates are 3%/11% and 7%/14% above
consensus, respectively, reflecting our positive view on DRL’s
growth and margin trajectory.
Raise earnings estimates on higher margins: We revise our
earnings estimates by 11%-31% over FY11E-FY13E to reflect
upcoming exclusive launches and resulting margin expansion. We
forecast earnings CAGR of 33% for DRL over FY11E-FY13E.
Valuation: Growth reflected in price; stay Neutral
Our revised 12-month DC-based TP of Rs1,507 implies a FY12E P/E
of 16.4X, which is at a 6% premium to the sector’s implied PE. We
revise our 12-m TP for the ADR to $33.5 from $29.6.
The stock currently trades at a premium of 5% & 10% vs. its peers
on FY12E P/E and one-year forward EV/EBITDA, respectively. We see
limited upside from current levels despite strong revenue and
margin momentum and hence maintain our Neutral rating.
Key risks
Upside: More FTF launches, favorable litigation; Downside: Slower
than expected sales ramp up, FDA delays.
INVESTMENT LIST MEMBERSHIP
Neutral
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