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DRL recently reported Q3FY15 results, which were above street estimates. Given below are some of the key highlights, which we came across while reviewing the results. Key highlights of Q3FY15 results: DRL reported consolidated revenue of Rs.3,843.1 cr, y-o-y growth of 8.8% on account of robust performance in the PSAI business. Gross profit margin at 58.2% in Q3FY15 was down by 230 bps vs Q3FY14. EBIDTA margins for the quarter stood at 18.8%, down sharply by 570 bps y-o-y on account of higher R&D spend. PAT was down 7.1% y-o-y on the back of lower EBDITA but was better than expected on account of higher other income
Revenues from North America in the Global Generics segment for Q3FY15 stood at Rs.1,681.9 cr, a y-o-y growth of just 4%. Growth was impacted due to price erosion (of ~6-7%) led by channel consolidation. The management said that the consolidation of channel was a huge programme but now, there is not much left for it to get over. Also low number of launches (only 1 new product launched in Q2FY15) resulted in the sluggish growth. Also the company faced price erosion in Decitabine due to entry of Sandoz. This was partly countered by increase in market share in key molecules namely divalproex sodium ER, metoprolol succinate and ziprasidone. Also the performance of FY14 ‘limited competition’ launches namely decitabine, azacitidine and divalproex sodium ER, sustained during the quarter. DRL filed 2 ANDAs during the quarter. So cumulatively it has 72 ANDAs which are pending for approval with the USFDA of which 45 are Para IVs and 11 to have ‘First to File’ status. Revenues in Russia de-grew by 10% y-o-y on account of Rouble devaluation while on constant currency, the growth was 27% on back of healthy sales. Rouble depreciated ~30% y-o-y during the quarter. As per IMS YTD November, 2014 growth was faster than the market in volume terms. DRL is 6th fastest growing OTC company in Top 25 (volume wise) with a growth rate of 10% against market decline of 1%. OTC revenues stood at 36% to sales. DRL is planning to launch Rituximab biosimilar in the Russian market in FY15E, though approval of the same is uncertain. Given that it is a ~$240m market in Russia with only one approved generic other than the innovator, it could be a very interesting opportunity for DRL. Emerging Markets, Ex-Russia at Rs.4.6 bn recorded y-o-y growth of 51% primarily driven by strong performance in Venezuela on the back of continued volume upsides. Venezuela sales grew 185% y-o-y, driven by strong volume growth in the region. However, management expressed concerns over currency volatility in the country and has US$15-20 mn cash exposure to this country, which is yet to be repatriated. PSAI segment sustained growth momentum, expanding by 21% y-o-y at Rs.611.2 cr, led by 74% y-o-y growth in North America region. Management however highlighted that PSAI business would rather focus on profitability and is unlikely to register strong growth in the coming quarters. Improvement was due to better product mix, structural changes, reducing cost etc. During the quarter 14 DMFs were filed globally, filed 9 in the ROW and 5 in Europe. The cumulative number of DMF filings as of December 31, 2014 is 720. Domestic business, which contributes 11% to overall revenue, has reported growth of 10.6%. The growth is driven by healthy continued focus on new product launches and prescription growth. Deferment of order to Q4FY15 impacted growth somewhat, adjusting for which the company outpaced industry growth. The company had launched 4 new products namely, Telsartan-CT80, Venusia, Acrofy and Reclimet-XR. R&D expenses rose to Rs.431.6 cr for Q3FY15, up from Rs.297.9 cr in Q3FY14, up by 45%. As a percentage to sales, R&D expense was 11.2% in Q3FY15 as compared to 8.4% in Q3FY14. The increase is in line with the planned scale-up in development activities. SG&A expenses at Rs.871.63 cr, y-o-y increase of 9% was largely due to annual increments, additional manpower deployment in the past 12 months and other sales and marketing spend. The Nexium API is produced from the Srikakulam plant which has 68 pending ANDAs. The company has addressed the concerns posed by the USFDA. Any delay in resolution could impact the launch. Copaxone has received set of deficiencies which need to addressed, the company would receive the approval only after it receives reply on the queries which would take a couple of months. During the quarter DRL completed acquisition of Habitrol franchise from Novartis Consumer Health Inc and began marketing the product in the US territory. Total consideration paid was US$ 80 mn for US$ 60 mn revenues
Tax rate during the quarter stood at 30.7% while the management expects it to be 21-22% for FY15E. R&D expenditure was 11.2% of the net sales in Q3FY15 and is expected to be 11% plus for FY15E. Capex for the quarter was at Rs.2.7 bn. Net working capital increased by USD65m in Q3, owing to anticipated launches in US and higher receivable days. Balance sheet hedges stand at US$411 mn, while outstanding cash flow hedges are at US$591 mn (at average rate of INR59-62/USD). Russian exposure could see partial benefit from Ruble hedges worth RUB 945 mn (for FY15). Outlook: The management reaffirmed its guidance of the first NDA filing for its lead candidate from the proprietary products basket in Q4FY15. Fondaparinux, Dacogen, Vidaza, Sumatriptan auto-injector and Reclast are all expected to see incremental competition in FY15, meaning that new launches are critical if it has to sustain 10-15% revenue growth in the US. Unfortunately, there is little visibility for new launches as Copaxone and Aloxi 505 are going to launch in FY16. DRL has guided for capex of Rs10bn+ in FY15 as it invests in creating a state of art manufacturing infrastructure in Vizag. The company believes that post an aggressive capex phase over the next 2-3 years, the capex intensity should reduce significantly. The management also guided for a potential R&D day later in the year to explain the pipeline. Concerns Severe pricing pressure (competition or regulation led) in the developed markets such as the US and Europe including Germany could affect revenues. There has been de growth in the Europe generics for some time now. Regulatory pressure on pricing in Russia/CIS. Currency fluctuations for USD/Ruble/Euro could have an impact on the sales from US/Russia/Europe. Sustained appreciation in the value of Rupee vs the USD or Euro could hit DRL badly. Delay in approvals and launch in US could impact growth in revenues. Nexium API is produced in Srikakulam which has received a 483 and could see a delay in launch. Copaxone launch in October 15 may be delayed as the company has received queries on the product, which has to be addressed. Additional competition in key products / lower-than-expected ramp-up in market share Stiffer competition / regulatory pressure on pricing in Russia/CIS. Further change in the healthcare model in Russia could impact DRL’s growth rate going forward. Over FY09-13, DRRD’s generics R&D saw 8% CAGR despite overall R&D seeing a 17% CAGR, as spends on proprietary products/biosimilars increased significantly over the period. However sufficient returns from these high spends on biosimilars/proprietary products are not visible in the near future.
Conclusion & Recommendation DRL’s Q3FY15 results were ahead of street estimates. It reported revenues of Rs.3,840 cr which were ahead of estimates led by the Russia and Venezuela businesses. EBIDTA at Rs.980 cr was up 19% largely due to lower-than-expected SG&A expenses. We believe Dr Reddy’s has done well to maintain margins at healthy levels despite multiple pressures (US channel consolidation, a weak ruble, higher R&D spend) and no meaningful launches in the US. Competition and pricing in its US injectables portfolio bear watching but a few interesting recent launches like Xopenox and Sirolimus and a potentially better Q4FY15 should form a good bridge to a stronger FY16. There are possible risks to the US story due to increasing competitive intensity. There could be further hit in realisations in the US in FY16 due to incremental competition for the key limited-competition products. DRL has made sizeable capital allocation to proprietary products, but the potential from this spending is uncertain. While limited visibility on value unlocking from the aggressive R&D investments is a challenge, there could be significant value creation possibilities given DRL’s proven capabilities in these high potential areas. While the management has done a credible job in Russia, the full impact of Russian Ruble depreciation to reflect in coming quarters, as cash flow hedges expire. US growth is likely to come under pressure due to delays in Nexium (1HFY16) and Copaxone (FY2017). In Venezuela, while DRL might be able to fight the currency devaluation partially through higher prices and volume growth, given the 90% devaluation that is on the cards, a steep fall in revenues next year and a possible (almost complete) write off of $20 mn receivables could impact the results going forward. In our Q3FY15 result update dated October 31, 2014, we had asked investors to buy the stock on dips between Rs.2,968 and 3,044 for a target of Rs.3,348 over the next quarter. Post the issue of the report, the stock made a low of Rs.3,013.55 on January 7, 2015 and made a high of Rs.3,662 on December 1, 2015. We have maintained our FY15 and FY16 estimates. At the CMP of Rs.3,138.45, the stock is trading at 23.8x FY15E EPS of Rs.135.0 and 20.6x FY16E EPS of Rs 152.2 We think investors could buy the stock on dips between Rs.2,968 and 3,044 (19.5-20x FY16E EPS) for a target of Rs.3,273 (21.5x FY16E EPS) over the next quarter.
LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011100
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
DRL recently reported Q3FY15 results, which were above street estimates. Given below are some of the key highlights, which we came across while reviewing the results. Key highlights of Q3FY15 results: DRL reported consolidated revenue of Rs.3,843.1 cr, y-o-y growth of 8.8% on account of robust performance in the PSAI business. Gross profit margin at 58.2% in Q3FY15 was down by 230 bps vs Q3FY14. EBIDTA margins for the quarter stood at 18.8%, down sharply by 570 bps y-o-y on account of higher R&D spend. PAT was down 7.1% y-o-y on the back of lower EBDITA but was better than expected on account of higher other income
Revenues from North America in the Global Generics segment for Q3FY15 stood at Rs.1,681.9 cr, a y-o-y growth of just 4%. Growth was impacted due to price erosion (of ~6-7%) led by channel consolidation. The management said that the consolidation of channel was a huge programme but now, there is not much left for it to get over. Also low number of launches (only 1 new product launched in Q2FY15) resulted in the sluggish growth. Also the company faced price erosion in Decitabine due to entry of Sandoz. This was partly countered by increase in market share in key molecules namely divalproex sodium ER, metoprolol succinate and ziprasidone. Also the performance of FY14 ‘limited competition’ launches namely decitabine, azacitidine and divalproex sodium ER, sustained during the quarter. DRL filed 2 ANDAs during the quarter. So cumulatively it has 72 ANDAs which are pending for approval with the USFDA of which 45 are Para IVs and 11 to have ‘First to File’ status. Revenues in Russia de-grew by 10% y-o-y on account of Rouble devaluation while on constant currency, the growth was 27% on back of healthy sales. Rouble depreciated ~30% y-o-y during the quarter. As per IMS YTD November, 2014 growth was faster than the market in volume terms. DRL is 6th fastest growing OTC company in Top 25 (volume wise) with a growth rate of 10% against market decline of 1%. OTC revenues stood at 36% to sales. DRL is planning to launch Rituximab biosimilar in the Russian market in FY15E, though approval of the same is uncertain. Given that it is a ~$240m market in Russia with only one approved generic other than the innovator, it could be a very interesting opportunity for DRL. Emerging Markets, Ex-Russia at Rs.4.6 bn recorded y-o-y growth of 51% primarily driven by strong performance in Venezuela on the back of continued volume upsides. Venezuela sales grew 185% y-o-y, driven by strong volume growth in the region. However, management expressed concerns over currency volatility in the country and has US$15-20 mn cash exposure to this country, which is yet to be repatriated. PSAI segment sustained growth momentum, expanding by 21% y-o-y at Rs.611.2 cr, led by 74% y-o-y growth in North America region. Management however highlighted that PSAI business would rather focus on profitability and is unlikely to register strong growth in the coming quarters. Improvement was due to better product mix, structural changes, reducing cost etc. During the quarter 14 DMFs were filed globally, filed 9 in the ROW and 5 in Europe. The cumulative number of DMF filings as of December 31, 2014 is 720. Domestic business, which contributes 11% to overall revenue, has reported growth of 10.6%. The growth is driven by healthy continued focus on new product launches and prescription growth. Deferment of order to Q4FY15 impacted growth somewhat, adjusting for which the company outpaced industry growth. The company had launched 4 new products namely, Telsartan-CT80, Venusia, Acrofy and Reclimet-XR. R&D expenses rose to Rs.431.6 cr for Q3FY15, up from Rs.297.9 cr in Q3FY14, up by 45%. As a percentage to sales, R&D expense was 11.2% in Q3FY15 as compared to 8.4% in Q3FY14. The increase is in line with the planned scale-up in development activities. SG&A expenses at Rs.871.63 cr, y-o-y increase of 9% was largely due to annual increments, additional manpower deployment in the past 12 months and other sales and marketing spend. The Nexium API is produced from the Srikakulam plant which has 68 pending ANDAs. The company has addressed the concerns posed by the USFDA. Any delay in resolution could impact the launch. Copaxone has received set of deficiencies which need to addressed, the company would receive the approval only after it receives reply on the queries which would take a couple of months. During the quarter DRL completed acquisition of Habitrol franchise from Novartis Consumer Health Inc and began marketing the product in the US territory. Total consideration paid was US$ 80 mn for US$ 60 mn revenues
Tax rate during the quarter stood at 30.7% while the management expects it to be 21-22% for FY15E. R&D expenditure was 11.2% of the net sales in Q3FY15 and is expected to be 11% plus for FY15E. Capex for the quarter was at Rs.2.7 bn. Net working capital increased by USD65m in Q3, owing to anticipated launches in US and higher receivable days. Balance sheet hedges stand at US$411 mn, while outstanding cash flow hedges are at US$591 mn (at average rate of INR59-62/USD). Russian exposure could see partial benefit from Ruble hedges worth RUB 945 mn (for FY15). Outlook: The management reaffirmed its guidance of the first NDA filing for its lead candidate from the proprietary products basket in Q4FY15. Fondaparinux, Dacogen, Vidaza, Sumatriptan auto-injector and Reclast are all expected to see incremental competition in FY15, meaning that new launches are critical if it has to sustain 10-15% revenue growth in the US. Unfortunately, there is little visibility for new launches as Copaxone and Aloxi 505 are going to launch in FY16. DRL has guided for capex of Rs10bn+ in FY15 as it invests in creating a state of art manufacturing infrastructure in Vizag. The company believes that post an aggressive capex phase over the next 2-3 years, the capex intensity should reduce significantly. The management also guided for a potential R&D day later in the year to explain the pipeline. Concerns Severe pricing pressure (competition or regulation led) in the developed markets such as the US and Europe including Germany could affect revenues. There has been de growth in the Europe generics for some time now. Regulatory pressure on pricing in Russia/CIS. Currency fluctuations for USD/Ruble/Euro could have an impact on the sales from US/Russia/Europe. Sustained appreciation in the value of Rupee vs the USD or Euro could hit DRL badly. Delay in approvals and launch in US could impact growth in revenues. Nexium API is produced in Srikakulam which has received a 483 and could see a delay in launch. Copaxone launch in October 15 may be delayed as the company has received queries on the product, which has to be addressed. Additional competition in key products / lower-than-expected ramp-up in market share Stiffer competition / regulatory pressure on pricing in Russia/CIS. Further change in the healthcare model in Russia could impact DRL’s growth rate going forward. Over FY09-13, DRRD’s generics R&D saw 8% CAGR despite overall R&D seeing a 17% CAGR, as spends on proprietary products/biosimilars increased significantly over the period. However sufficient returns from these high spends on biosimilars/proprietary products are not visible in the near future.
Conclusion & Recommendation DRL’s Q3FY15 results were ahead of street estimates. It reported revenues of Rs.3,840 cr which were ahead of estimates led by the Russia and Venezuela businesses. EBIDTA at Rs.980 cr was up 19% largely due to lower-than-expected SG&A expenses. We believe Dr Reddy’s has done well to maintain margins at healthy levels despite multiple pressures (US channel consolidation, a weak ruble, higher R&D spend) and no meaningful launches in the US. Competition and pricing in its US injectables portfolio bear watching but a few interesting recent launches like Xopenox and Sirolimus and a potentially better Q4FY15 should form a good bridge to a stronger FY16. There are possible risks to the US story due to increasing competitive intensity. There could be further hit in realisations in the US in FY16 due to incremental competition for the key limited-competition products. DRL has made sizeable capital allocation to proprietary products, but the potential from this spending is uncertain. While limited visibility on value unlocking from the aggressive R&D investments is a challenge, there could be significant value creation possibilities given DRL’s proven capabilities in these high potential areas. While the management has done a credible job in Russia, the full impact of Russian Ruble depreciation to reflect in coming quarters, as cash flow hedges expire. US growth is likely to come under pressure due to delays in Nexium (1HFY16) and Copaxone (FY2017). In Venezuela, while DRL might be able to fight the currency devaluation partially through higher prices and volume growth, given the 90% devaluation that is on the cards, a steep fall in revenues next year and a possible (almost complete) write off of $20 mn receivables could impact the results going forward. In our Q3FY15 result update dated October 31, 2014, we had asked investors to buy the stock on dips between Rs.2,968 and 3,044 for a target of Rs.3,348 over the next quarter. Post the issue of the report, the stock made a low of Rs.3,013.55 on January 7, 2015 and made a high of Rs.3,662 on December 1, 2015. We have maintained our FY15 and FY16 estimates. At the CMP of Rs.3,138.45, the stock is trading at 23.8x FY15E EPS of Rs.135.0 and 20.6x FY16E EPS of Rs 152.2 We think investors could buy the stock on dips between Rs.2,968 and 3,044 (19.5-20x FY16E EPS) for a target of Rs.3,273 (21.5x FY16E EPS) over the next quarter.
LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011100
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