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Research
Dr. Reddy's Labs - Q4FY12 Result update - Centrum
Posted On : 2012-05-16 11:12:59( TIMEZONE : IST )
Results affected by impairment loss
Results of Dr. Reddy's Labs (DRL) for Q4FY12 were lower than our expectations due to lower than expected sales growth & margin and impairment loss. The company reported sales growth of 32%YoY due to good growth across its global generics and PSAI segments. Its EBIT margin improved by 230bps YoY from 17.3% to 19.6%. The company's other income improved by 35%YoY from Rs147mn to Rs198mn. DRL has provided Rs1.04bn as impairment loss on intangible assets in Germany. The company's net profit grew by 2%YoY due to impairment charges. The company is likely to benefit from the US generic pipeline of 40 Para IV and 7 FTF opportunities. We have retained Buy rating for the scrip with a target price of Rs2087 (based on 23x FY14E estimates + FTF).
- Strong revenue growth: During the quarter, DRL's global generic business (69% of revenues) grew by 30%YoY from Rs14.17bn to Rs18.40bn. The growth in various geographies was: N. America 48%, Russia & CIS 32%, India 17% and Europe (-)10%. DRL's PSAI business (28% of revenues) grew by 35%YoY from Rs5.55bn to Rs7.49bn. The growth across various geographies was: N. America 59%, Europe 33% and India 84%.
- Margin improves: DRL reported 230bps YoY improvement in EBIT margin from 17.3% to 19.6% due to the decline in S,G & A expenses. The company's cost of goods sold increased by 170bps from 45.7% to 47.4% due to the change in product mix. S, G & A expenses declined by 330bps from 30.4% to 27.1% of revenues with higher exports. R & D expenses declined by 90bps from 7.4% to 6.5% of sales.
- Impairment loss: DRL has provided Rs1.04bn as impairment loss on intangible assets in Germany due to stiff competition and reduction in reference prices in the German market. Moreover, high margin generic olanzapine which achieved sales of $99mn in Q3FY12 achieved <$2mn sales during the quarter due to lower generic substitution and shelf stock adjustments.
- Strong product pipeline: DRL has an enviable product pipe line for the US market. During FY11, the company filed 17 ANDAs with US FDA. DRL has cumulative pending approvals of 80 ANDAs, of which 41 are Para IV and 7 FTF opportunities. The company has cumulative DMF filings of 543. We expect these products to drive future growth of the company.
- Attractive valuations, Reiterate Buy: We expect DRL to benefit from the strong growth in global generics and PSAI segments from US, Russia & CIS and European markets. We have revised EPS estimates downwards by 1% for FY13 but increased it by 4% for FY14. At the CMP of Rs1672, the stock trades at 18.8x FY13E EPS of Rs89.1 and 16.3x FY14E EPS of Rs102.7. We retain Buy rating for the scrip with a target price of Rs2087 (based on 23x FY14 Base EPS of Rs90.2+1*FTF EPS of Rs12.4).
