Dr. Reddy's Laboratories --Muted quarter! 2H to compensate ::Macquarie Research

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Dr. Reddy's Laboratories
Muted quarter! 2H to compensate
Event
 DRRD reported 1Q FY12 numbers with revenue at Rs19.8bn (up 18% YoY)
and tax adj PAT of Rs2.5b (up 20% YoY) below our estimates. 1Q EBITDA
margin was healthy at 21%. While the US (up 48% YoY) and Russia (up 23%
YoY) sales were above our estimate, muted India sales (up 6% YoY, v/s. Macq
est. of 15%) were the key miss. We maintain our OP rating and TP of Rs1,820.
Impact
 What drove lower earnings in 1QFY12: Adjusted EBITDA came in at
Rs4.1bn vs. our estimate of Rs4.3bn. Higher SG&A expense was on account
of GSK facility consolidation (US$5m /qtr expense) and higher OTC-related
marketing cost in Russia. Higher amortization, one-time voluntary retirementrelated
expense (US$3m) and higher Interest on bonus debentures (US$3m)
were other factors that led to lower PAT in 1QFY12.
 US key to our thesis – Surprised positively: DRRD posted US$129m in
sales in the US (up 48% YoY; Macq est. US$120m) driven by market share
gains in key products and the successful launch of fexofenadine OTC. The
launch pipeline in the US looks robust as we anticipate Fonda, Allegra D24,
Augmentin /Amoxil and Olanzapine to further fuel growth in coming quarters
and provide a cushion to our earnings estimate. We now forecast the US to
grow at 45% YoY in FY12 (v/s our earlier estimate of 35% YoY).
 Muted domestic and Betapharm sales: India (up 6% YoY) was a
disappointment and would be a key concern near term. NISE (nimesulide – the
largest domestic brand for DRRD ~Rs800m in annual sales) declined ~15%
given the bad press it received about regulators concerns over the safety of the
product. Also DRRD has not been able to exploit the full benefit of the field force
expansion and re-organization yet. DRRD is guiding for a recovery in 2H, but
we now build a lower 12% YoY growth in India for FY12 (in line with market).
Betapharm sales declined 9%YoY on the back of a weak pricing scenario. The
AOK tender win supply should help volume uptake in coming quarters.
 Russia was strong (up 23% YoY) largely driven by volume growth in key
brands and strong OTC portfolio growth. OTC now represents 30% of Russia
sales versus 25% in FY11.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,820.00 based on a Sum of Parts methodology.
 Catalyst: 1) Pick up in domestic sales 2) Key launches in the US
Action and recommendation
 While a muted quarter and lower India sales might put pressure near term, we
believe sufficient growth levers exist in US sales to buffer our earnings estimate.
Adjusting for exclusivity, DRRD is trading at ~ 17x FY12E and 15x FY13E PER.