Dr Reddy :: 4Q Results Ahead of Estimates; Management Tempers Expectations, Leaves Room for Positive Surprises. Raise PT to Rs2300:: JPMorgan,

DRRD reported 4Q revenue growth of 26% YoY ahead of expectations driven by
strong growth in NA, PSAI business. EBITDA margins declined 570bps YoY on
account of higher S,G&A costs. DRRD refrained from giving guidance for FY14
due to uncertainty in US on account of delays in regulatory approvals for new
products. In our view, following disappointments on guidance in the past on
account of similar delays, mgmt seems to be taking a more conservative view.
While we do not rule out potential delays in the US, we believe the product
pipeline remains strong and focus on complex generics bodes well. Despite the
stock being up 24% over past 12m, it still trades at 18xFY14E P/E, at 5%/39%
dis. to LPC/SUNP. We believe with mgmt tempering expectations, likelihood of
positive surprises are high. We maintain OW with revised PT of Rs2,300

�� -->

 US strong; mgmnt cautious on near term outlook. North America (NA)
revenues grew 31% YoY driven by finasteride (180-day excl.), Zometa, and
other limited competition products. Mgmt refrained from giving guidance on
US growth and noted following factors affecting visibility: 1) Increasing
regulatory constraints and large backlog of new products with USFDA resulting
in delayed approvals, 2) Increase in R&D costs as most new filings in complex
products and 3) Consolidation among distributors / retailers putting pressure on
generic drug prices. Overall pipeline for US remains strong and we believe
mgmnt tempering street expectations leaves room for positive surprises.
 Domestic growth holding up despite industry slowdown. 4Q domestic
revenues grew 9% YoY, ahead of industry (IMS MAT DRRD growth at 13.7%
vs. IPM growth at 10.2%). Mgmt attributed this to sales force realignment,
volume increase across key brands and new product launches. DRRD launched
2 new brands during 4Q, taking the total in FY13 to 24 new brands.
 Emerging markets/PSAI continue strong momentum. 4Q Russia/CIS
revenues grew 28% YoY driven by strong performance of OTC business/new
products in a seasonally strong Q. 4Q PSAI revenues increased 36% YoY
driven by patent expirations and custom pharma services. DRRD expects PSAI
growth momentum to continue on new launches /new customer orders.
 4QFY13 result highlights. Revenues up 26% YoY driven by NA (+31% YoY)
and PSAI (+36% YoY). EBITDA margins down 570bps YoY mainly due to
poor mix, higher S,G&A and higher raw materials (+210bps YoY). Adj. for
one-time settlement costs recd. from Nordion, PAT grew 18% YoY.
Raise TP to Rs2,300. We raise our FY14/FY15 estimates by 7%/10% on better
than expected revenue and margin growth in PSAI business. Our new Sep-13 TP
is Rs2300 (Rs2125 previously), is still based on SOTP