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Dr Reddy’s reported better than expected 2Q revenues on robust growth in US, Russia and PSAI
business. On a yoy basis, margins remained flat; whereas sequentially gross margin and EBIT
margin expanded 46bps and 241bps respectively. Higher tax resulted in muted earnings growth
of 7% yoy.
2Q12: US and PSAI business leads the pack
Dr Reddy’s reported 2Q12 revenues of Rs22.7bn (21% yoy), 9% ahead of our forecast of
Rs20.8bn. The top-line growth was largely driven by stronger growth witnessed in the US
generics business (led by new launches), PSAI business (led by strong API growth in Europe
and contracts in pharma services business) and Russia business (led by robust growth in
OTC portfolio).
US generics business (25% of FY11 revenues) recorded a robust 42% yoy growth on the
back of the launch of its long awaited Allegra D24 OTC and Fondaparinux (marginally
impacted by lower ramp-up) and depreciating rupee.
While we were expecting the adverse fallout of the US FDA import alert on its Mexico facility
to negatively impact the PSAI business, the PSAI business (26% of FY11 revenues)
witnessed a 29% yoy growth. This was led by Europe (+48% yoy) and North America (+31%
yoy) which grew on account of new launches in Europe and market share improvement.
Russia/CIS (15% of FY11) witnessed revenues growth of 23% yoy to Rs3.4bn. This growth
was aided by OTC portfolio growth of 33% yoy, which now represents 25% of the overall
Russian portfolio. In constant currency terms the Russia/CIS business grew by 30%.
The domestic formulation business (16% of FY11 revenues) posted muted growth of 9% yoy
to Rs3.5bn (vs 6% growth seen in 1QFY12) largely on account of ongoing headwinds in key
brands (Nise, Razo) and sales force re-organisation. Management expects another 2 quarters
of muted growth before returning to 14-15% yoy growth.
Betapharm (7% of FY11 revenues) continued to remain weak with revenues declining 27%
yoy to Rs1.2bn due to continuing impact of tender based pricing pressure.
Earnings ahead of expectations
Gross margins improved marginally to 53.8% in 2Q12 from 53.4% in 2Q11 owing to the
favorable business mix. While the gross margins of global generics were largely flat at 63%
(vs 63.5% in 2QFY11), gross margins improvement in PSAI business from 22% in 2QFY11 to
28% (on account of operating leverage benefits) was a key positive.
R&D expense was reported at Rs1.5bn (+15% yoy), we highlight that R&D as a % of sales
dropped to 6.4% in 2Q12 as against 6.8% during FY11. Management expects R&D spend to
increase to 7-8% of sales in 2HFY12.
Dr Reddy’s reported EBIT of Rs3.5bn (+17% yoy), 17% ahead of our forecast of Rs3bn. On a
sequential basis, EBIT margins witnessed an expansion of 241 bps to 15.6% largely on
account of better product mix despite higher OTC related SG&A spend in Russia, higher staff
costs and overhead costs in the Bristol and Shevreport facility.
The company reported PAT of Rs3.1bn (7% yoy) as higher tax rate of 17% (10.2% in 2Q11)
negatively impacted earnings.
Net debt gearing increases while working capital days remains unmoved
Net debt increased 28% on a sequential basis to Rs23.7bn as of end-September 2011 largely
due to rupee depreciation. This resulted in net gearing increasing from 38% as of end-June
2011 to 49% as of end-September 2011.
As against a 15% qoq increase in FY11 revenues, debtors grew by 20%, inventory by 7%
while trade payables increased 6% yoy. As a result core working capital increased by 16%
qoq with holding period remaining at 167 days as of end-September 2011 compared to 168
days as of end-June 2011.
Company has forex cashflow hedges of US$775m (at INR/ US$ 45-49) spread over 6
quarters and balance sheet hedges of US$280m.
Analyst meeting highlights
The management maintained revenue guidance at US$2.7bn for FY13. The company expects
base tax rate to increase to 17% in coming quarters on account of Dr Reddy’s Baddi facility
completing it’s the 5-year tax exemption.
The management expects the US business to be even stronger in 2HFY12 led by new
launches (olanzapine) and ramp-up in Bristol and Shevreport facility. The management stated
the company increased market share in Tacro (28% in June 2011 to ~32% in September
2011), Lansoprazole (14% to ~20%) and Omeprazole (16% to ~20%). However ramp-up in
fondaparinox have been slower than expectation with Dr Reddy’s having achieved only 8-
10% market share. The company expects Fondaparinux to reach hospital in the next 1 to 2
quarters.
The management stated that its JV with GSK in the emerging markets are still in initial stages,
and the company expects ramp-up in FY14 post the registration in key markets. The company
is also expected to sign a definitive agreement with Fuji Films by year-end following which it is
likely to enter generics market of Japan.
On its USFDA import alert on its Mexico facility, the management stated that USFDA is
reviewing the case and expect USFDA to re-inspect in near to medium term.
Olanzapine launch kicks-off
Generic Zyprexa (Olanzapine) tablets have been launched by Dr Reddys and Teva and ODT
(orally disintegrating tablets) by Dr Reddys, Par and Apotex. Lilly (innovator company of
Zyprexa) has appointed Prasco as AG (authorised generics) with all versions. We have
assumed Rs5.1bn (40% price erosion, 40% market share in 20mg) revenues and Rs2.7bn of
PAT from this product.
We value the stock at Rs1,360
We have SOTP based TP of Rs1,360 is derived by valuing its core business at Rs1,309
(FY12F PE of 21.4x) and Para-IV pipeline at Rs51.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dr Reddy’s reported better than expected 2Q revenues on robust growth in US, Russia and PSAI
business. On a yoy basis, margins remained flat; whereas sequentially gross margin and EBIT
margin expanded 46bps and 241bps respectively. Higher tax resulted in muted earnings growth
of 7% yoy.
2Q12: US and PSAI business leads the pack
Dr Reddy’s reported 2Q12 revenues of Rs22.7bn (21% yoy), 9% ahead of our forecast of
Rs20.8bn. The top-line growth was largely driven by stronger growth witnessed in the US
generics business (led by new launches), PSAI business (led by strong API growth in Europe
and contracts in pharma services business) and Russia business (led by robust growth in
OTC portfolio).
US generics business (25% of FY11 revenues) recorded a robust 42% yoy growth on the
back of the launch of its long awaited Allegra D24 OTC and Fondaparinux (marginally
impacted by lower ramp-up) and depreciating rupee.
While we were expecting the adverse fallout of the US FDA import alert on its Mexico facility
to negatively impact the PSAI business, the PSAI business (26% of FY11 revenues)
witnessed a 29% yoy growth. This was led by Europe (+48% yoy) and North America (+31%
yoy) which grew on account of new launches in Europe and market share improvement.
Russia/CIS (15% of FY11) witnessed revenues growth of 23% yoy to Rs3.4bn. This growth
was aided by OTC portfolio growth of 33% yoy, which now represents 25% of the overall
Russian portfolio. In constant currency terms the Russia/CIS business grew by 30%.
The domestic formulation business (16% of FY11 revenues) posted muted growth of 9% yoy
to Rs3.5bn (vs 6% growth seen in 1QFY12) largely on account of ongoing headwinds in key
brands (Nise, Razo) and sales force re-organisation. Management expects another 2 quarters
of muted growth before returning to 14-15% yoy growth.
Betapharm (7% of FY11 revenues) continued to remain weak with revenues declining 27%
yoy to Rs1.2bn due to continuing impact of tender based pricing pressure.
Earnings ahead of expectations
Gross margins improved marginally to 53.8% in 2Q12 from 53.4% in 2Q11 owing to the
favorable business mix. While the gross margins of global generics were largely flat at 63%
(vs 63.5% in 2QFY11), gross margins improvement in PSAI business from 22% in 2QFY11 to
28% (on account of operating leverage benefits) was a key positive.
R&D expense was reported at Rs1.5bn (+15% yoy), we highlight that R&D as a % of sales
dropped to 6.4% in 2Q12 as against 6.8% during FY11. Management expects R&D spend to
increase to 7-8% of sales in 2HFY12.
Dr Reddy’s reported EBIT of Rs3.5bn (+17% yoy), 17% ahead of our forecast of Rs3bn. On a
sequential basis, EBIT margins witnessed an expansion of 241 bps to 15.6% largely on
account of better product mix despite higher OTC related SG&A spend in Russia, higher staff
costs and overhead costs in the Bristol and Shevreport facility.
The company reported PAT of Rs3.1bn (7% yoy) as higher tax rate of 17% (10.2% in 2Q11)
negatively impacted earnings.
Net debt gearing increases while working capital days remains unmoved
Net debt increased 28% on a sequential basis to Rs23.7bn as of end-September 2011 largely
due to rupee depreciation. This resulted in net gearing increasing from 38% as of end-June
2011 to 49% as of end-September 2011.
As against a 15% qoq increase in FY11 revenues, debtors grew by 20%, inventory by 7%
while trade payables increased 6% yoy. As a result core working capital increased by 16%
qoq with holding period remaining at 167 days as of end-September 2011 compared to 168
days as of end-June 2011.
Company has forex cashflow hedges of US$775m (at INR/ US$ 45-49) spread over 6
quarters and balance sheet hedges of US$280m.
Analyst meeting highlights
The management maintained revenue guidance at US$2.7bn for FY13. The company expects
base tax rate to increase to 17% in coming quarters on account of Dr Reddy’s Baddi facility
completing it’s the 5-year tax exemption.
The management expects the US business to be even stronger in 2HFY12 led by new
launches (olanzapine) and ramp-up in Bristol and Shevreport facility. The management stated
the company increased market share in Tacro (28% in June 2011 to ~32% in September
2011), Lansoprazole (14% to ~20%) and Omeprazole (16% to ~20%). However ramp-up in
fondaparinox have been slower than expectation with Dr Reddy’s having achieved only 8-
10% market share. The company expects Fondaparinux to reach hospital in the next 1 to 2
quarters.
The management stated that its JV with GSK in the emerging markets are still in initial stages,
and the company expects ramp-up in FY14 post the registration in key markets. The company
is also expected to sign a definitive agreement with Fuji Films by year-end following which it is
likely to enter generics market of Japan.
On its USFDA import alert on its Mexico facility, the management stated that USFDA is
reviewing the case and expect USFDA to re-inspect in near to medium term.
Olanzapine launch kicks-off
Generic Zyprexa (Olanzapine) tablets have been launched by Dr Reddys and Teva and ODT
(orally disintegrating tablets) by Dr Reddys, Par and Apotex. Lilly (innovator company of
Zyprexa) has appointed Prasco as AG (authorised generics) with all versions. We have
assumed Rs5.1bn (40% price erosion, 40% market share in 20mg) revenues and Rs2.7bn of
PAT from this product.
We value the stock at Rs1,360
We have SOTP based TP of Rs1,360 is derived by valuing its core business at Rs1,309
(FY12F PE of 21.4x) and Para-IV pipeline at Rs51.
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