Dr. Reddy's Lab - US, PSAI Outperform; Maintain BUY - Karvy

Dr. Reddy's Laboratories (DRL) revenues has outperformed on back of US and PSAI business. With higher revenues and lower SGA, EBDITA is better than estimates. Forex gain and Other income has too some extent mitigated the impact of impairment of intangibles and goodwill. We are enthused by the scale up and retierate BUY on the stock.

- Quarter Details: DRL's revenues reported a 27.0% y-o-y improvement to Rs.28,809 mn higher than our estimates of Rs.26,529 mn primarily due to outperformance in the US and PSAI business. US revenues rose 47.4% YoY to Rs. 9,270 mn (US$187 mn) in Q2FY13 on back of 4 launches during the quarter and ramp up in revenues from limited competition opportunities. The Company's revenues from Russia improved 13.6% YoY to Rs. 3,841mn - lower than our estimates - due to delayed winter. Its EBITDA margins stood at 25.4% higher than our estimates of 21.9%. The Company's net profit stood at Rs. 4,075 mn (including Rs. 340 mn forex gain) in Q2FY13.

- Road Ahead: Domestic formulations will continue to show in line market performance while Russian market will benefit from higher off take in the month of October. Launch of exclusive Propecia in Q4FY13, 2 niche launches in FY14, hospital launch of Fondaparinux and EU approval for the same will aid revenue growth.

- Outlook & Valuation: We upgrade our FY13 revenue estimates by 1% to Rs.113 bn and for FY14 by 2.9% to Rs.125.2 bn owing to upgrade in the PSAI business. We upgrade our EBDITAM from 21.6% to 22.9% for FY13E and from 22.1% to 23.3% for FY14E due to lower R & D, higher other income. We upgrade our EPS estimates by 5.2% in FY13E to Rs. 95.5 and by 9.3% to Rs.111 owing to higher other income in FY13E. We value DRL's core business at 19.5xFY14E at a price of Rs. 2,164 and add option value of Rs. 6 for Olanzapine ODT, Propecia and Clarinex D12 & D24. We maintain our "BUY" recommendation on the stock and upgrade our target price by 9.5% to Rs.2170.

- Risks: Lower ramp up in domestic formulations, Russia CIS and decline in market share of key products would lead to downgrade in earnings.

Source : Equity Bulls

Keywords