Dr. Reddy's Laboratories -Beats estimate; geared for strong 2H :Macquarie Research,

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Dr. Reddy's Laboratories
Beats estimate; geared for strong 2H
Event
 DRRD reported 2Q FY12 numbers with revenue at Rs22.7bn (up 21% YoY)
and PAT of Rs3.1b (up 8% YoY). The 2Q EBITDA margin was at 23.1%. The
result was ahead of our and street estimates on account of higher than
expected growth in the PSAI segment (up 28%YoY). While the US (up 42%
YoY) and Russia (up 23% YoY) continue to deliver strong growth, the India
business has regained some momentum (up 9% YoY). We maintain our
Outperform with an increased TP of Rs1930.
Impact
 Sequential growth: Revenue grew 15% QoQ driven by growth across all
geographies. Adj. EBITDA came at Rs5.2b (up 26% YoY, 26% QoQ) in Q2
FY12, with margins at 23%. PAT grew 17% QoQ, ahead of our estimates.
 US key to our thesis: DRRD posted US$137m in sales in the US (up
42%YoY; 9%QoQ) driven by key launches. Fonda market share is ~11%
currently and DRRD expects the peak share to hit by 4QFY12 end. The
product portfolio in the US looks robust, as we anticipate Olanzapine 20mg &
ODT, Augmentin, Geodon, Plavix, Lipitor, Seroquel and Toprol XL to further
fuel growth in coming quarters.
 Domestic sales: India (up 9% YoY, 18% QoQ) is regaining some momentum.
DRRD has not been able to exploit the full benefit of the field force expansion
and re-organization yet. Sept secondary sale IMS data is encouraging, with
DRRD growing at 14%. We are building 12% YoY growth in India for FY12.
DRRD is guiding for a recovery in 2H, which would be key data to watch.
 RCIS continued growth momentum (up 23% YoY): largely driven by
volume growth in key brands and strong OTC portfolio growth. OTC
represents 25% of Russia sales and DRRD is looking to grow it to 50% of its
portfolio over the next 3 to 4 years.
 PSAI and Europe: While PSAI growth (up 28% YoY) was strong, Europe
sales declined 10%YoY due to the continuing impact of tenders in
Betapharm.
Earnings and target price revision
 Our FY12\FY13E EPS are Rs97/114 (Rs90/105 earlier), as we now include
Olanzapine and Geodon into base EPS. We introduce FY14 estimates and
our TP is revised to Rs1930 based on 17x FY13 EPS (earlier 20x FY12 EPS).
Price catalyst
 12-month price target: Rs1,930.00 based on a Sum of Parts methodology.
 Catalyst: Growth momentum in US
Action and recommendation
 We believe sufficient growth levers exist in US sales to buffer our earnings
estimate. Adjusting for exclusivity, DRRD is trading at ~ 16x FY12E and 14x
FY13E PER. DRRD remains our top large cap pharma pick.