Dr. Reddy's Laboratories - Investing in next leg of growth; visit note; Hold; Edelweiss, PDF link

Dr. Reddy’s Laboratories (DRRD IN, INR 1,649, Hold)

We met Mr. Satish Reddy, MD & COO, Dr. Reddy’s (DRRD). Though management agrees that revenue growth will moderate beyond FY13, it remains focused on building niche pipeline in US while maintaining steady growth in emerging markets. OTC portfolio focus and biosimilars will be key growth drivers in emerging markets. US growth may remain challenging and may come with lower margins due to increase in customer consolidation, which has led to higher price erosion in generics. We expect earnings growth of 9.5% over FY13-15E. Maintain ‘HOLD’.

��

India growth to revive over next two quarters

Growth traction in India is expected to improve to 16-17%, in line with the industry. DRRD has taken various corrective measures including: (a) focus on improving field force execution; and (b) scaling up of high value mature brands in tier II/III markets. The company’s long-term goal is to grow 1-2% higher than the industry.

Focus on niche product opportunities in US

As US generics approaches scale of USD800mn-900mn by FY13, management anticipates growth to temper on a higher base. However, focus will be on developing more limited competition products, where growth sustainability is better. It expects to launch 10-12 products/annum in US with incremental revenue of USD100mn-200mn.

Higher price erosion from customer consolidation to hurt margins

DRRD believes that consolidation of market share within retailers and distributors in US will hurt profitability of generics from aggressive pricing. All the recent launches such as generic Plavix, Olanzapine, Lipitor, Seroquel have seen more than 95% price erosion on day 1 generic launch. This could be structurally negative for all generics players.

Outlook and valuations: Moderate outlook; maintain ‘HOLD’

We expect earnings momentum to continue till FY13 (27% earnings CAGR over FY11-13E); however, the pace of growth is likely to slow down to 9.5% over FY13-15E. We maintain ‘HOLD/Sector Performer’ on the stock.  

Dr. Reddy’s Laboratories - Investing in next leg of growth; visit note; Hold

Regards,