We recently met Dr. Reddy’s (DRRD) management. The company anticipates higher growth over the next two-three quarters led by strong sequential growth in US & PSAI and continued traction in India & Russia. Moreover, incremental growth will be accompanied by higher currency realisations aiding margin. Given improved growth visibility for balance FY13, the stock may do well over the next three-six months. However, owing to moderate FY14 outlook we continue to maintain ‘HOLD’.
Improved traction in US business
US is set to post higher growth from market share gain in Tacrolimus and ramp up of new products including Atorvastatin, Ibandronate and Lansoprazole OTC. Moreover, DRRD has recently launched Metoprolol XL and Amoxycilin, which will further accelerate growth. The company also expects to launch two unidentified products, each with potential annual contribution of USD30-50mn. Thus, DRRD is confident of achieving over USD825mn sales from US in FY13 (versus USD780mn estimated).
Tacrolimus to add incremental USD30-40mn in six months
Post Mylan’s withdrawal, DRRD has been able to ramp up market share from 15-16% to 35-40%. The former will be able to resume supply by end CY12, by which DRRD could generate incremental USD30-40mn sales from Tacrolimus during six months.
PSAI will surprise positively
DRRD’s traction in PSAI is strong, driven by a robust order book. We believe that PSAI can surprise positively and can touch USD600mn revenue versus estimated USD560mn in FY13. While higher PSAI contribution may impact gross margin, operating leverage from higher sales is likely to drive margin expansion.
Outlook and valuations: Moderate growth; maintain ‘HOLD’
Management is confident of achieving USD2.5bn guidance by FY13 (versus estimated USD2.25bn). However, growth will moderate in FY14, which the company also acknowledges. Hence, we maintain ‘HOLD/Sector Performer’.
Regards,
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