Hold Dr Reddy’s Labs Lacklustre performance; Anand Rathi

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Dr Reddy’s Labs
Lacklustre performance; maintain Hold
Dr Reddy’s (DRL) 3QFY11 results were below estimates mainly
on account of its sustained disappointing performance in EU
generics and pharma services & active ingredients (PSAI). Gross
margin improved 400bps yoy to 54.9%. However, EBIT margin
remained flat at 14.4% due to increase in SG&A expenses.

 3QFY11 results. DRL’s adjusted net profit grew 20.3% yoy
driven by 9.8% revenue growth, a 400bps improvement in gross
margin and lower effective tax rate. However, results were below
our estimates, with flat EBIT margin despite substantial
improvement in gross profit margin.
 US and India – Key growth drivers. The 9.8% yoy revenue
growth was primarily fuelled by 60.2% growth in US generics led
by launch of key products, limited competition and 14.2% growth
in Indian branded formulations. The PSAI segment continued to
be a drag and declined 4.9% yoy.
 Change estimates. We lower our estimates to account for the
lacklustre 9MFY11 performance and non-receipt of USFDA
approval for Fondaparinux. We cut our FY11-13e revenue by 10-
12% and PAT by 1-6%.
 Valuation and risks. The stock trades at 20.6x FY12e and 18.3x
FY13e earnings. We reduce our price target to `1,612 from `1,636
earlier, due to earnings revision of 2.8% for FY12e. Our target
price is based on 20x FY12e EPS and `75 for NPV of para IV
pipeline. Downside/upside risks: Delay or failure/success in
launching para IV products.