Dr. Reddy's Labs - Steady growth - Centrum

Dr. Reddy's Labs' (DRL) results for Q3FY13 were in line with our expectations. DRL reported 4%YoY growth in revenues, 1150bps decline in EBIT margin and 29%YoY decline in net profit. The lower revenue growth was due to the $99mn (Rs4.55bn) generic olanzapine (Zyprexa) exclusivity sales in the US in Q2FY12. Excluding olanzapine the growth would have been 24% YoY. DRL's global generic business (73% of revenues) declined by 2%YoY whereas the PSAI business (25% of revenues) grew by 28%YoY. The company is likely to benefit from the $170bn (Rs9,180bn) patent expiry opportunity till 2015. DRL has a pipeline of 65 ANDAs pending approval, of which 35 are Para IV and 8 FTF opportunities. The company is also likely to benefit from cumulative 566 DMF filings. We have a Buy rating for the scrip with a target price of Rs2209 (based on 23x FY14E EPS of base EPS of Rs95.5+FTF EPS Rs12.0).

New Product launches in the US: DRL has benefited from the launch of 17 new products globally in Q3FY13. DRL filed ANDAs for 13 products globally during the quarter. Its 31 prescription products feature among the top 3 in the US generic market.

Gaining market share: DRL is gaining market share in global generic products, atorvastatin, metoprolol, ibandronate and montelukast granules.

US business driven by Limited Competition products: DRL's US business growth was attributed to limited competition products, ziprasidone, tactolimus, fondaparinux and ramp-up of the antibiotics portfolio.

Strong growth in PSAI business: DRL's PSAI business (25% of revenues) grew by 28%YoY from Rs5.56bn to Rs7.13bn. This major growth came from Europe 50%, India 47% and other developing markets 13%. The company's Global Generics business (73% revenues) declined by 2%YoY from Rs21.29bn to Rs20.83bn due to the absence of generic olanzapine exclusivity, which contributed $99mn (Rs4.55bn) in Q3FY12.

Revival of domestic business: DRL's domestic formulations business (13% of revenues) revived and reported 11.4%YoY growth in line with the industry growth of 11.1%. The growth was driven by biosimilars, which grew by 47%YoY during the quarter.

Valuations: We expect DRL to benefit from the strong global generic business in US, Russia & CIS and other emerging markets. The company is likely to benefit from the pipeline of 35 Para IV and 8 FTF opportunities in the US. At the CMP of Rs1874, the stock trades at 20.8x FY13E EPS of Rs89.9 and 17.4x FY14E EPS of Rs107.5. We have a Buy rating for the scrip with a target price of Rs2,209 (based on 23x FY14E base EPS of Rs95.5+FTF EPS of Rs12.0).

Source : Equity Bulls

Keywords