Dr. Reddy’s Labs :Good overall growth :Centrum

Good overall growth
Q1FY13 results of Dr. Reddy’s Labs (DRL) were in line with our
expectations. DRL reported 28%YoY growth in revenues, 130bps
improvement in EBIT margin and 28%YoY growth in net profit. The
growth was driven by global generic business (75% of revenues),
which grew by 32%YoY. The company is likely to benefit from the
$170bn (Rs9,350bn) patent expiry opportunity till 2015. DRL has a
pipeline of 73 ANDAs pending approval, of which 36 are Para IV and 6
FTF opportunities. The company is also likely to benefit from
cumulative 550 DMF filings. We have a Buy rating on the scrip with
target price of Rs2087 (based on 23x FY14E EPS of base EPS of
Rs90.2+FTF EPS Rs12.4) with an upside of 26%.
New Product launches in the US: DRL has benefited from the launch of the
following new products in the US in Q1FY13: clopidogrel, lansoprazole OTC,
ziprasidone and quetiapine. DRL’s 29 prescription products feature among
top 3 in the US generic market.
Sequential decline in US revenues: DRL’s US business has witnessed $16mn
sequential fall in revenues from $176mn in Q4FY12 to $159mn due to stiff
competition and price erosion of existing products. The management is
optimistic of improved revenues from the new product launches.

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Strong growth in global generics: DRL’s global generic business (75% of
revenues) grew by 32%YoY from Rs14.4bn to Rs19.1bn. The major growth came
from N. America 38%, Russia & CIS 38% and other developing markets 66%.
Revival of domestic business: DRL’s domestic business (14% of revenues)
revived and has reported 19%YoY growth against the industry growth of
~15%. The growth was driven by volume increase, launch of 10 new brands
and 15% growth in biosimilars.
Moderate growth in PSAI segment: DRL’s PSAI business (22% of revenues)
grew by 14%YoY from Rs4.8bn to Rs5.5bn. The major growth was derived
from: N. America 26% and Europe 32%. However, the revenues in India
declined by 6% and in other developing markets by 1%.
Valuations: We expect DRL to benefit from the strong global generic business
in US, Russia & CIS and other emerging markets. The company is likely to
benefit from the pipeline of 36 Para IV and 6 FTF opportunities in the US. At
the CMP of Rs1655, the stock trades at 18.6x FY13E EPS of Rs89.1 and 16.1x
FY14E EPS of Rs102.7. We have a Buy rating on the scrip with target price of
Rs2,087 (based on 23x FY14E base EPS of Rs90.2+FTF EPS of Rs12.4) with an
upside of 26% over the next 12 months.