Dr Reddy’s Laboratories - US growth a positive surprise… :: ICICI Securities

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US growth a positive surprise… • Revenues grew 8.8% YoY to | 3843.1 crore, higher than I-direct estimates of | 3444.4 crore on account of higher-than-expected growth in developed markets • EBITDA margins reduced 683 bps to 24.1% against I-direct estimate of 23.7%. EBITDA declined 15.2% to | 926.8 crore against I-direct estimate of | 816.3 crore • Net profit declined 7.1% to | 574.1 crore against I-direct estimate of | 519.1 crore and the positive miss was on account of better-thanexpected operational performance and higher net finance income Global Generics to piggyback on strong and sustainable US traction Global Generics (GG) segment is expected to grow at a CAGR of 17% in FY14-17E driven by strong US traction, which is likely to grow at a CAGR of ~20% 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 European slowdown. The US pipeline includes 220 filed ANDAs including 68 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 ~15.3% 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. Q3 numbers a beat but structural concerns remain; maintain HOLD Q3 numbers were a beat on account of better-than-expected US traction. Even segments such as PSAI and Europe, which are persistent draggers chipped in with a surprise growth. However, these segments remain lumpy and unpredictable. With Russia now struggling the US and India together hold the key for the 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 68 ANDAs, which include 43 Para IVs and 13 FTFs. The company is investing heavily in the R&D to bring 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. We have ascribed a target of | 3332 based on 18x FY17E EPS of | 185.1.

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 http://content.icicidirect.com/mailimages/IDirect_DrReddys_Q3FY15.pdf