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Buy Dr. Reddy's Laboratories - Prabhudas Lilladher
Posted On : 2012-11-08 20:59:28( TIMEZONE : IST )
Dr Reddy's Labs is one of the best play on global generic space: Dr Reddy's has built a very strong global generic business and has emerged as one of the leading Indian companies in the large generic markets like US, Europe and Russia/CIS. Apart from strong formulation business, the company is one of the largest suppliers of API's to global generic companies. We believe that the company will be a key beneficiary of large patent expiries taking place in US and Europe and strong growth movement in branded generic markets like Russia, LatAm and India.
US remains a key performance driver for the company: Dr Reddy's has built a sizable US business on the back of strong product pipeline of niche and limited competition products like Geodon, Lipitor, Toprol XL, Arixtra, Tacrolimus etc. The company has also developed a strong OTC franchise in US market with revenue of USD130m (25% of US revenue). US market remains a key revenue and profit contributor to the company in medium term. We expect topline growth of 37% for US business over FY12-14E.
Branded formulation continues to grow in double digits: Dr Reddy will continue to report strong growth in branded formulation business going forward led by strong franchise in Russia/CIS markets, reviving growth in Indian markets and ramping up revenue from its alliance with GSK for emerging markets. Further, the launch of biologics will be key growth driver in emerging markets. We expect 22% and 15% revenue CAGR for International branded formulation and India formulation over FY12-14E.
Outlook and Valuations: We expect strong earnings CAGR of 31% over FY12-14 led by robust topline growth of 22% over the same period. All the key business segments excluding Europe are likely to contribute to the performance. Further, the company will benefit from the operating leverage going forward. The concerns over FY14 revenue and PAT growth are overdone as we expect 14% YoY earnings growth in FY14 despite a high base. The stock currently trades at 10-15% discount to some of its peers which we feel is unjustified. At current price, the stock trades at 18.1x FY13E and 16x FY14E earnings. BUY with target price of Rs2038.
