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Dr. Reddy's Laboratories (REDY.BO) Rs1,567.00
Negative News – Estimates Under Review Equity Research
First Take: 1QFY12 disappoints on domestic growth, higher SG&A
News
Dr Reddy’s (DRL) reported 1QFY12 revenue of Rs19.8bn (+17.5% yoy), in line
with Bloomberg consensus estimates but 3.4% below GSe on lower domestic
revenue growth. EBIT margin came in at 14.1% vs. GSe/consensus of
17.5%/17.2% on higher-than-expected SG&A expense, resulting in a 22%/18%
miss on the operating profit level (EBIT). However, net income of Rs2.6bn was
only 14%/3% below GSe/consensus due to lower-than-expected tax rate (at
4.4%). Despite a tepid quarter, management reiterated that the company is on
track to achieve US$2.7bn revenue target by FY13.
Analysis
1) While yoy revenue growth remained strong in North America and Russia/CIS
(+39%/+18% yoy), domestic formulations witnessed a second consecutive
quarter of only 5% yoy growth due to competitive pressure on some top brands;
2) SG&A was up 23% yoy (or 32.1% of sales vs. 29% in 4QFY11) largely due to
increased staff costs, higher S&M costs in OTC business in Russia, and overhead
costs from recently acquired Bristol penicillin facility (US$5mn); 3) Management
indicated that the revenue impact of the US import ban on its Mexico facility
would be about US$30mn annually, implying 1.8% of DRL’s FY11 revenues; 4)
Net income included a one-time charge of Rs136mn related to Voluntary
Retirement Scheme; 5) DRL stated that it will launch Fondaparinux in a phased
manner over the next three months. It also received approval for Allegra D-24
OTC from US FDA and is hoping to launch it in the US in the near term. It now
has 76 ANDAs pending for approvals in the US, 36 of which are Para IVs and 11
are FTF opportunities, reinforcing our view that DRL has one of the strongest
product pipelines among the Indian generic companies operating in the US.
Implications
We maintain our Neutral rating on the stock, but place our estimates and
target price under review pending further clarity from management on (1)
recovery of domestic business in 2HFY12 in a competitive market; (2) EBIT
margin trajectory over FY12; and (3) clarity on normalized tax rates over
the next 1-2 years.
INVESTMENT LIST MEMBERSHIP
Neutral
India Equity Research Reports, IPO and Stock News
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Dr. Reddy's Laboratories (REDY.BO) Rs1,567.00
Negative News – Estimates Under Review Equity Research
First Take: 1QFY12 disappoints on domestic growth, higher SG&A
News
Dr Reddy’s (DRL) reported 1QFY12 revenue of Rs19.8bn (+17.5% yoy), in line
with Bloomberg consensus estimates but 3.4% below GSe on lower domestic
revenue growth. EBIT margin came in at 14.1% vs. GSe/consensus of
17.5%/17.2% on higher-than-expected SG&A expense, resulting in a 22%/18%
miss on the operating profit level (EBIT). However, net income of Rs2.6bn was
only 14%/3% below GSe/consensus due to lower-than-expected tax rate (at
4.4%). Despite a tepid quarter, management reiterated that the company is on
track to achieve US$2.7bn revenue target by FY13.
Analysis
1) While yoy revenue growth remained strong in North America and Russia/CIS
(+39%/+18% yoy), domestic formulations witnessed a second consecutive
quarter of only 5% yoy growth due to competitive pressure on some top brands;
2) SG&A was up 23% yoy (or 32.1% of sales vs. 29% in 4QFY11) largely due to
increased staff costs, higher S&M costs in OTC business in Russia, and overhead
costs from recently acquired Bristol penicillin facility (US$5mn); 3) Management
indicated that the revenue impact of the US import ban on its Mexico facility
would be about US$30mn annually, implying 1.8% of DRL’s FY11 revenues; 4)
Net income included a one-time charge of Rs136mn related to Voluntary
Retirement Scheme; 5) DRL stated that it will launch Fondaparinux in a phased
manner over the next three months. It also received approval for Allegra D-24
OTC from US FDA and is hoping to launch it in the US in the near term. It now
has 76 ANDAs pending for approvals in the US, 36 of which are Para IVs and 11
are FTF opportunities, reinforcing our view that DRL has one of the strongest
product pipelines among the Indian generic companies operating in the US.
Implications
We maintain our Neutral rating on the stock, but place our estimates and
target price under review pending further clarity from management on (1)
recovery of domestic business in 2HFY12 in a competitive market; (2) EBIT
margin trajectory over FY12; and (3) clarity on normalized tax rates over
the next 1-2 years.
INVESTMENT LIST MEMBERSHIP
Neutral
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