Dr. Reddy's Laboratories - Diwali Picks 2012 - IIFL

One of the Best bet to play on US business

Dr. Reddy's (DRDY) has strong presence in the US in generics as well in OTC segment. The company has a sturdy track record of monetising one-off (FTFs and PIVs) opportunities. We believe the trend will continue and the growth will remain robust with niche generic launches in next two years. DRDY has a strong US drug portfolio of 63 ANDAs pending for approval with the USFDA, of which 33 are Para IVs and 7 have 'First To File' status. In launched product, DRDY has ~24 Rx products ranking among the top 3 in the category. Unlike other generic players from India, DRDY also has a good traction in OTC business with products like Ranitidine, Famotidine and Omeprazole taking total to 11 drugs in OTC segment.

In US, the growth in H1FY13 has been better than expected; we believe new H2 launches including two undisclosed limited competition opportunities will drive growth in FY13. The launch of products like Quetiapine, Clopidogrel, Fexofenadine etc will help to sustain growth in FY14 and beyond.

Improving PSAI segment to abet growth

DRDYs' troubled PSAI segment (26% of revenue), is now on mode of recovery. The recent quarters' stellar performance substantiate our belief that worst is over in the PSAI segment. We believe the growth in active Ingredients business will be led by strong order book and new customer orders. Additionally, growth would also aided by Mexico facility which was under the import alert since June 2011. The plant generated ~US$60m in annual revenue, of which 50-60% was from the US market. Company's focus in enhancing specialty revenue is again depicted by its Intention to acquire OctoPlus N.V.; a service based specialty pharmaceutical company. DRDY has ~560 cumulative DMF filings as on date.

Biologics; a long term growth driver

In long term biologics is going to play major role in pharma sector. We are confident that Dr Reddy's, an early mover in the biologic segment, is definitely at advantageous position to cash in the opportunity. Biologics contributed about 5% to DRDY's domestic sales in FY12. The company has three major biological products in domestic market; Reditux, Grafeel and Cresp. We believe real value would be extracted after 7-8 years of gestation period.

One of the attractive bet in large cap space

In next two years, we believe the company will gain maximum from the patent cliff. Robust Domestic and International generic market growth along with improving outlook of PSAI (muted growth in PSAI segment was a challenge in the past) provides us comfort. We expect core Revenue and PAT to witness a CAGR of 14% and 16% over FY12-14E, respectively. We recommend BUY with a target price of Rs1,980.

Source : Equity Bulls

Keywords