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Dr Reddy's Lab — Stay invested for pipeline
triggers; Buy
Price Objective Change
Retain Buy despite recent news flow
Cut EPS forecasts by 13%/7% over FY12/13E to factor (a) transition to IFRS
financials (from IGAAP earlier), and (b) impact of import alert on Mexico facility
and (c) moderation to domestic formulations growth. Following 5% YTD
underperformance, we reiterate Buy rating with revised PO of Rs1860 (7% lower).
Mexico facility import alert to impact earnings by ~2%
DRL’s Mexican API facility was put on import alert by the USFDA on 28th June
following a Warning letter issued earlier, citing cGMP violations. This facility
accounts for US$30mn sales to the US, with estimated 30% gross margins. While
key products like Naproxen, Saquinavir have been exempted from the import
alert, we are taking a more conservative approach knocking the entire
contribution. As a result, the EPS impact is 2%/yr.
Key growth engines to deliver
We retain our forecasts for US (23% of sales) & Russia (19% of sales) on steady
spate of new launches as well as strong prescription growth reported from
secondary sources (IMS, Pharmexpert). We believe limited competition products
in the US like generic Arixtra (2HFY12), Zyprexa (Oct-11), and Geodon (Mar-12)
would enhance visibility. However, we prune domestic formulations (17% of
sales) growth slightly to factor gradual pick up in recently hired fieldforce
productivity.
IFRS transition impacts reported earnings
We shift to reporting IFRS financials which impacts reported earnings due to
difference in tax treatment as well as recognition of other income. As a result our
IFRS estimates are marginally below IGAAP numbers reported earlier.
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