Dr Reddy's: Short-term temperance, outlook depends on US • : ICICI Securities, PDF link

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Short-term temperance, outlook depends on US
• Revenues grew 6.9% YoY to | 3587.8 crore lower than I-direct
estimate of | 3830.3 crore. The miss was attributable to lower US
growth of 8% (I-direct estimate: 25%) and Russian de-growth of 10%
vs. I-direct estimate of 10% growth
• EBITDA margins declined 360 bps to 23.5%, in line with I-direct
estimate of 23.2%. EBITDA in absolute terms declined 7.4% to
| 842.2 crore vs. I-direct estimate of | 888.6 crore, in sync with the
revenue growth miss
• Net profit declined 16.8% to | 574.1 crore vs. I-direct estimate of
| 551.8 crore. The positive miss was on account of lower taxation
Global generics to piggyback on strong, sustainable US traction
The global generics (GG) segment is expected to grow at a CAGR of 16%
in FY14-17E driven by strong US traction, which is likely to grow at a
CAGR of ~17% during the same period. DRL has developed a knack for
exclusivity/FTF launches on a fairly continuous basis in the US. We expect
this trend to continue further but the focus has now shifted to more
unique launches such as OTC, complex generics, controlled releases, etc.
The US traction is also likely to nullify the European slowdown. The US
pipeline includes 220 filed ANDAs including 72 pending approvals.
Russia CIS becomes volatile, India to provide more stability
Global generics (ex US, Europe) is likely to grow at a steady CAGR of
~14% in FY14-17E driven by growth in India as the Russian performance
remains volatile. These two markets are more or less identical in nature
(branded generics and OTC) with similar growth potential and similar
kinds of risks. DRL is well versed with the dynamics in Russia by virtue of
being an early mover. However, the recent currency volatility and political
unrest have caused disturbances in an otherwise safe market for the
company. For India, the growth is expected to be largely from launches in
the oncology and biosimilars space besides an improvement in
productivity of the enhanced field force.
Portfolio realignment eminent
We envisage a fall in share of low margin/high risk segments such as
PSAI and European generics (especially Betapharm), going ahead. Thus,
growth in FY14-17E is likely to emanate from more productive and
sustainable segments such as the US and India. Similarly, in terms of
product offering, we envisage more launches in the fields of injectables,
OTC, complex/limited competition products and biosimilars, besides
legacy generics.
Q2 numbers a miss but no red flag; maintain HOLD
The miss was on the back of slower US growth and negative Russian
growth. With Russia now struggling, the US and India together hold the
key to global generics growth and for that matter DRL’s overall growth.
Among them, the US is the main catalyst with a pending product portfolio
of 72 ANDAs, which includes 45 Para IVs and 11 FTFs. The company is
investing heavily in R&D to bring in more and complex generics and
limited competition products mainly from non-oral category, which is
likely to take care of sustained US growth for the next two or three years.
India is showing promising growth as well with a recalibrated approach.
On the flip side, Russia has become a new matter of concern besides
Europe and the PSAI segment. We have ascribed a target price of | 3273
based on 18x FY17E EPS of | 181.8.

LINK
http://content.icicidirect.com/mailimages/IDirect_DrReddysLabs_Q2FY15.pdf