Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4Q operating profits were in-line with 'core' PAT marginally ahead of our expectations. DRL's
ROCE in FY11 was 17.5% below its guidance of 18-22% and it also reduced its FY13 revenue
outlook by 10%. Despite aggressively factoring one-offs in the US into our model, we find
valuations unattractive. Maintain Sell
4Q: Inline operating profit but one-offs results in earnings surprise
�� Dr Reddy's (DRL) reported 4Q11 revenues of Rs20.2bn (23% yoy), 4% ahead of our estimate
of Rs19.4bn. Excluding contribution from one-offs, we estimate core revenue growth of 13%
yoy. DRL reported EBIT of Rs3.3bn (46% yoy) aided by operating margin expansion of
260bps yoy to 16.5%. We were expecting a stronger margin (17.1%) to factor in the
contribution of the high margin one-off products. R&D expense as a percentage of sales has
increased to 7.4% in 4Q11 (5.8% in 4Q10).
�� While EBIT was in-line with our expectation, reported PAT (Rs3.3bn, 101% yoy) was 14%
ahead of our estimate due to: (a) one-off gain like profit of Rs292m on sale of land, benefit of
Rs73m towards negative goodwill as per IFRS purchase price allocation accounting on
account of acquisition; and (b) lower tax rate of 13.5% (vs.22.7% in 4Q10) due to benefit of
higher weighted deduction on R&D expenditure. Tax rate for FY11 was 11% and is expected
to increase to about c15-16% for FY12.
�� PAT excluding exceptional items (profit on land sale, impairment, etc) grew 58% yoy to
Rs3.1bn, 5% ahead of our estimate. If we strip gain from one-off product launches, core PAT
increased only 7% yoy to Rs2.1bn.
US and Russia leads the pack; domestic formulation and Betapharm disappoints
�� North America business (25% of FY11 revenues) reported revenues of Rs5.9bn (+68% yoy)
benefiting from several one-off opportunities like tacrolimus, lansoprazole, fexofenadine
pseudoephedrine 180/240mg etc. Excluding contribution from one-off products, we estimate
DRL's core North America revenue growth of 20%. Management reaffirms this market would
continue to be its key growth market.
�� Russia/CIS (15% of FY11) was robust with revenues growing 26% yoy to Rs2.7bn aided by
DRL's thrust on OTC business which remains unaffected by the recent healthcare reforms.
The OTC portfolio now represents 25% of its overall Russian portfolio. However, RoW
formulation business was muted with 6% revenue growth.
�� The PSAI business (26% of FY11 revenues) finally showed some recovery with revenues
growing 13% yoy to Rs5.6bn largely led by the API business. While it reported -4% revenue
growth for FY11, we have already built in 5/12% yoy growth for FY12/13F.
�� We were disappointed at the muted domestic formulation business (16% of FY11) growth of
5% yoy. Management attributed the weakness to price competition in the market, aggressive
promotional strategies adopted by its competitors and the benefits of its expanded field force
not being fully realised as yet (added 1000 sales force in last 15 months). However
management stated that even after accounting for the price impact, adjusted revenue growth
was muted at 10%. DRL launched 48 new products in India in FY11 compared to 62 in FY10
�� Betapharm continued to remain weak with revenues declining 29% yoy to Rs1.0bn due to
tender based pricing pressures. Management has however commented that there has been a
some margin improvement due to rationalization of operations.
Balance sheet - debt increases, working capital stretches
�� Net debt increased from Rs8.1bn as of end-March 2010 to Rs17.8bn as of end-March 2011
largely due to the issue of bonus debentures of Rs5.1bn and acquisitions seen in the recent
past. This has resulted in net gearing increasing from 19% to 39% over the same period. As
against a 6% yoy increase in FY11 revenues, debtors grew by 47%, inventory by 20% while
trade payables declined 9% yoy.
�� Core working capital has therefore increased by 57% yoy with holding period increasing from
83 days to 123 days. Management has attributed the increase in inventory to a planned
product build up in anticipation of product launches in the next three-six months. The increase
in debtors was due to the higher sales in API and fexofenadine pseudoephedrine 180/240mg
sales in 4Q.
Analyst meet and other highlights
�� DRL's RoCE in FY11 was 17.5% below its guidance of 18-22%. Management has decided
not to give any guidance as the performance of its US business which is its key growth driver
is subject to contingencies like regulatory approvals, legal outcome etc. It however stated that
its base case FY13 revenue outlook is US$2.7bn as compared to its earlier US$3bn target.
�� The Board of Directors has recommended a dividend of Rs11.25 ps
�� Cumulative ANDA filings as of 31-Mar-2011 were 170 with 75 ANDAs pending approval of
which 37 are Para IVs and 10 are FTFs.
�� Capex in FY11 was Rs8.8bn and a similar run-rate is expected in FY12F
Despite factoring in US pipeline, the stock appears expensive; maintain Sell
�� Our TP of Rs1,355 is derived by valuing DRL's core business at Rs1,308ps (21.4x FY12F
core EPS at par to the sector) and its Para IV pipeline at Rs48ps. We like DRL's ANDA
pipeline but believe that it is already factored in our forecasts. We also highlight that while
DRL's ANDA pipeline is attractive, there has been some disappointment in recent times -
delayed approval of generic Arixtra by the US FDA, shift of generic Allegra D-24 prescriptions
to OTC and unexpected entry of authorised generic Accolate. Its Russian formulation
business is robust but its receivables period needs to be monitored. The nascent recovery
seen in its PSAI business is offset by the muted performance in its domestic formulation
business. We retain our Sell rating on unfavorable business mix and rich valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4Q operating profits were in-line with 'core' PAT marginally ahead of our expectations. DRL's
ROCE in FY11 was 17.5% below its guidance of 18-22% and it also reduced its FY13 revenue
outlook by 10%. Despite aggressively factoring one-offs in the US into our model, we find
valuations unattractive. Maintain Sell
4Q: Inline operating profit but one-offs results in earnings surprise
�� Dr Reddy's (DRL) reported 4Q11 revenues of Rs20.2bn (23% yoy), 4% ahead of our estimate
of Rs19.4bn. Excluding contribution from one-offs, we estimate core revenue growth of 13%
yoy. DRL reported EBIT of Rs3.3bn (46% yoy) aided by operating margin expansion of
260bps yoy to 16.5%. We were expecting a stronger margin (17.1%) to factor in the
contribution of the high margin one-off products. R&D expense as a percentage of sales has
increased to 7.4% in 4Q11 (5.8% in 4Q10).
�� While EBIT was in-line with our expectation, reported PAT (Rs3.3bn, 101% yoy) was 14%
ahead of our estimate due to: (a) one-off gain like profit of Rs292m on sale of land, benefit of
Rs73m towards negative goodwill as per IFRS purchase price allocation accounting on
account of acquisition; and (b) lower tax rate of 13.5% (vs.22.7% in 4Q10) due to benefit of
higher weighted deduction on R&D expenditure. Tax rate for FY11 was 11% and is expected
to increase to about c15-16% for FY12.
�� PAT excluding exceptional items (profit on land sale, impairment, etc) grew 58% yoy to
Rs3.1bn, 5% ahead of our estimate. If we strip gain from one-off product launches, core PAT
increased only 7% yoy to Rs2.1bn.
US and Russia leads the pack; domestic formulation and Betapharm disappoints
�� North America business (25% of FY11 revenues) reported revenues of Rs5.9bn (+68% yoy)
benefiting from several one-off opportunities like tacrolimus, lansoprazole, fexofenadine
pseudoephedrine 180/240mg etc. Excluding contribution from one-off products, we estimate
DRL's core North America revenue growth of 20%. Management reaffirms this market would
continue to be its key growth market.
�� Russia/CIS (15% of FY11) was robust with revenues growing 26% yoy to Rs2.7bn aided by
DRL's thrust on OTC business which remains unaffected by the recent healthcare reforms.
The OTC portfolio now represents 25% of its overall Russian portfolio. However, RoW
formulation business was muted with 6% revenue growth.
�� The PSAI business (26% of FY11 revenues) finally showed some recovery with revenues
growing 13% yoy to Rs5.6bn largely led by the API business. While it reported -4% revenue
growth for FY11, we have already built in 5/12% yoy growth for FY12/13F.
�� We were disappointed at the muted domestic formulation business (16% of FY11) growth of
5% yoy. Management attributed the weakness to price competition in the market, aggressive
promotional strategies adopted by its competitors and the benefits of its expanded field force
not being fully realised as yet (added 1000 sales force in last 15 months). However
management stated that even after accounting for the price impact, adjusted revenue growth
was muted at 10%. DRL launched 48 new products in India in FY11 compared to 62 in FY10
�� Betapharm continued to remain weak with revenues declining 29% yoy to Rs1.0bn due to
tender based pricing pressures. Management has however commented that there has been a
some margin improvement due to rationalization of operations.
Balance sheet - debt increases, working capital stretches
�� Net debt increased from Rs8.1bn as of end-March 2010 to Rs17.8bn as of end-March 2011
largely due to the issue of bonus debentures of Rs5.1bn and acquisitions seen in the recent
past. This has resulted in net gearing increasing from 19% to 39% over the same period. As
against a 6% yoy increase in FY11 revenues, debtors grew by 47%, inventory by 20% while
trade payables declined 9% yoy.
�� Core working capital has therefore increased by 57% yoy with holding period increasing from
83 days to 123 days. Management has attributed the increase in inventory to a planned
product build up in anticipation of product launches in the next three-six months. The increase
in debtors was due to the higher sales in API and fexofenadine pseudoephedrine 180/240mg
sales in 4Q.
Analyst meet and other highlights
�� DRL's RoCE in FY11 was 17.5% below its guidance of 18-22%. Management has decided
not to give any guidance as the performance of its US business which is its key growth driver
is subject to contingencies like regulatory approvals, legal outcome etc. It however stated that
its base case FY13 revenue outlook is US$2.7bn as compared to its earlier US$3bn target.
�� The Board of Directors has recommended a dividend of Rs11.25 ps
�� Cumulative ANDA filings as of 31-Mar-2011 were 170 with 75 ANDAs pending approval of
which 37 are Para IVs and 10 are FTFs.
�� Capex in FY11 was Rs8.8bn and a similar run-rate is expected in FY12F
Despite factoring in US pipeline, the stock appears expensive; maintain Sell
�� Our TP of Rs1,355 is derived by valuing DRL's core business at Rs1,308ps (21.4x FY12F
core EPS at par to the sector) and its Para IV pipeline at Rs48ps. We like DRL's ANDA
pipeline but believe that it is already factored in our forecasts. We also highlight that while
DRL's ANDA pipeline is attractive, there has been some disappointment in recent times -
delayed approval of generic Arixtra by the US FDA, shift of generic Allegra D-24 prescriptions
to OTC and unexpected entry of authorised generic Accolate. Its Russian formulation
business is robust but its receivables period needs to be monitored. The nascent recovery
seen in its PSAI business is offset by the muted performance in its domestic formulation
business. We retain our Sell rating on unfavorable business mix and rich valuations.
No comments:
Post a Comment