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Dr Reddy's Laboratories (DRRD)
Pharmaceuticals
In-line quarter. PAT excluding forex gain and VRS reversal at Rs2.9 bn were in line
with our estimates. Sales, up 21%, were 7% higher than our estimate mainly due to
higher PSAI segment sales with generics in line; however, we continue to see muted
sales growth in 27% of business. Margin pressures remain and are likely to get
accentuated in 2HFY12E due to sharp increase in R&D, lower DEPB benefits. We expect
muted base business EPS growth in FY2012E due to (1) lower margin, (2) pick-up in tax
rate to 17% in FY2012E from 11%, (3) higher interest costs. However, we expect core
EPS growth to be strong at 25% in FY2013E. We value DRL at (1) 20X base business
EPS of Rs83 (2) Rs16 from limited competition US launches. Maintain REDUCE, PT at
Rs1,660 (unchanged).
Sales at Rs22.7 bn were up 21% yoy, 7% higher than our estimate due to higher PSAI sales
Sales grew 21% yoy to Rs22.7 bn, 7% higher than our estimate with generics segment sales in
line with our estimate and PSAI beating our estimate. (1) India finished dosage (20% of sales)
grew poorly for the 3rd quarter in a row with sales growth at 9%, in line with estimate, (2) USA,
Russia (60% of sales) reported impressive growth, 3% higher than our estimate, however, (3)
Germany+ RoW declined yoy and continue to witness pressure largely on account of (a) pricing
decline in Germany and (b) acute inflation in Venezuela, DRL’s main ROW market which is
witnessing high inflation leading to devaluation of local currency. PSAI segment (26% of sales)
sales growth was impressive at 29% despite import ban at Mexican facility driven by (1) lower
base of last year, (2) turnaround in services business, (3) higher sales from API business.
EBITDA margin at 21.7%, down 100 bps yoy and 90 bps lower than our estimate
EBITDA margin adjusted for VRS reversal of Rs94 mn was at 21.7%, and missed our estimate by
90 bps. While gross margin at 53.8% was 30 bps higher than our estimate and up 40% yoy,
mainly due to improvement in PSAI business, generics gross margin was lower by around 50 bps
yoy. The sharp increase in SG&A and R&D led to lower margin—(1) SG&A expenses at Rs6 bn
were up from Rs5.4 bn in 1QFY12 due to higher salary, freight costs (50% of SG&A is salary costs)
and (2) R&D expenses grew 15% yoy, 14% higher than our estimates. Although EBIT was 4%
higher than our estimate, forex income of Rs151 mn led to PAT being 8% higher than estimate.
We increase FY2012E PAT by 4%, FY2013E unchanged
We factor in base business sales growth of 25% in 2HFY12E versus 19% in1HFY12. However, we
expect base business margin to remain muted in 2HFY12E due to sharp increase in R&D leading to
EBITDA margin of 21% in FY2012E versus 21.4% in 1HFY12. While reported PAT is up 15% in
1HFY12 excluding forex gain of Rs309 mn in 1HFY12 and forex loss of Rs274 mn in 1HFY11, PAT
growth is 4% in 1HFY12. We expect base business EPS to grow by 2.5% in FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dr Reddy's Laboratories (DRRD)
Pharmaceuticals
In-line quarter. PAT excluding forex gain and VRS reversal at Rs2.9 bn were in line
with our estimates. Sales, up 21%, were 7% higher than our estimate mainly due to
higher PSAI segment sales with generics in line; however, we continue to see muted
sales growth in 27% of business. Margin pressures remain and are likely to get
accentuated in 2HFY12E due to sharp increase in R&D, lower DEPB benefits. We expect
muted base business EPS growth in FY2012E due to (1) lower margin, (2) pick-up in tax
rate to 17% in FY2012E from 11%, (3) higher interest costs. However, we expect core
EPS growth to be strong at 25% in FY2013E. We value DRL at (1) 20X base business
EPS of Rs83 (2) Rs16 from limited competition US launches. Maintain REDUCE, PT at
Rs1,660 (unchanged).
Sales at Rs22.7 bn were up 21% yoy, 7% higher than our estimate due to higher PSAI sales
Sales grew 21% yoy to Rs22.7 bn, 7% higher than our estimate with generics segment sales in
line with our estimate and PSAI beating our estimate. (1) India finished dosage (20% of sales)
grew poorly for the 3rd quarter in a row with sales growth at 9%, in line with estimate, (2) USA,
Russia (60% of sales) reported impressive growth, 3% higher than our estimate, however, (3)
Germany+ RoW declined yoy and continue to witness pressure largely on account of (a) pricing
decline in Germany and (b) acute inflation in Venezuela, DRL’s main ROW market which is
witnessing high inflation leading to devaluation of local currency. PSAI segment (26% of sales)
sales growth was impressive at 29% despite import ban at Mexican facility driven by (1) lower
base of last year, (2) turnaround in services business, (3) higher sales from API business.
EBITDA margin at 21.7%, down 100 bps yoy and 90 bps lower than our estimate
EBITDA margin adjusted for VRS reversal of Rs94 mn was at 21.7%, and missed our estimate by
90 bps. While gross margin at 53.8% was 30 bps higher than our estimate and up 40% yoy,
mainly due to improvement in PSAI business, generics gross margin was lower by around 50 bps
yoy. The sharp increase in SG&A and R&D led to lower margin—(1) SG&A expenses at Rs6 bn
were up from Rs5.4 bn in 1QFY12 due to higher salary, freight costs (50% of SG&A is salary costs)
and (2) R&D expenses grew 15% yoy, 14% higher than our estimates. Although EBIT was 4%
higher than our estimate, forex income of Rs151 mn led to PAT being 8% higher than estimate.
We increase FY2012E PAT by 4%, FY2013E unchanged
We factor in base business sales growth of 25% in 2HFY12E versus 19% in1HFY12. However, we
expect base business margin to remain muted in 2HFY12E due to sharp increase in R&D leading to
EBITDA margin of 21% in FY2012E versus 21.4% in 1HFY12. While reported PAT is up 15% in
1HFY12 excluding forex gain of Rs309 mn in 1HFY12 and forex loss of Rs274 mn in 1HFY11, PAT
growth is 4% in 1HFY12. We expect base business EPS to grow by 2.5% in FY2012E.
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