Dr Reddy’s Labs Reasonable valuations; growth prospects intact; upgrade to Buy : Anand Rathi

Dr Reddy’s Labs
Reasonable valuations; growth prospects intact; upgrade to Buy
Having corrected ~15% in the last two months, Dr Reddy’s Labs now
offers ~20% upside potential. We are optimistic of its business outlook
and growth prospects, led by its US generics business, due to its
product launches with limited competition and expected recovery in
domestic formulations. We upgrade the stock from a Hold to a Buy,
due to its reasonable valuations and our expectations of sustained
strong performance in the medium term. However, we lower the price
target to `1,900 (from `1,910 earlier) as approval for Lipitor has not
come in.

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 Growth prospects in global generics unaffected. In the medium term,
Dr Reddy’s Labs’ (DRL) growth prospects are intact and we believe that
the US would be a key growth driver, followed by Russia and India. Over
FY12-14, we expect 20.9% CAGR in its US base business revenue, 19%
in Russia and the CIS and 13% in domestic formulations.
 PSAI to grow steadily. The pharma services and active ingredients
(PSAI) sub-segment is likely to sustain a steady 10.3% CAGR over FY12-
14, led by patent expiries in regulated markets. Growth in the PSAI
segment is likely to be largely driven by the US and the EU.
 Raise estimates. We raise our estimates of DSL’s revenue 5-8% to
factor in the higher growth in US generics and favourable currency shifts
in FY13 (assuming `52/$, from `50 earlier). However, we raise our net
profit estimate for FY13 and FY14 just 2.3% and 0.9%, respectively, due
to a higher tax rate and depreciation charge.
 Valuation. Considering the strong growth outlook and reasonable
valuations, we upgrade the stock from a Hold to a Buy, with a revised
price target of `1,900 (earlier `1,910). The lower target is due to the
removal of the Lipitor opportunity. Risks: Regulatory challenges and any
delay/failure in monetising para-IV opportunities.