Dr Reddy's Laboratories - Niche launches add a brighter picture; company update; upgrade to Buy - Edelweiss

Dr Reddy's Laboratories (DRRD IN, INR 1,924, upgrade to Buy)

We are revisiting our earnings on Dr Reddy's (DRRD) based on recent niche launches (not build in estimates) that offer upside to US sales in FY14. Moreover, enhanced visibility on potential launches lends further upside to FY15E. These niche products offer superior margin that will more than offset price erosion in mature portfolio. Apart from US, Russia continues to post robust growth, offering flexibility to invest in complex opportunities while India's growth is also on the rise. Hence, we revise up our FY15E earnings 6%. With improved earnings CAGR of 16.6% over FY13-15E (earlier estimate 12.6%) and modest valuations (trading at 10% discount to peers), we upgrade to 'BUY' with TP of INR2, 200 per share.

Niche products, potential launches add sizeable upside to US sales

DRRD has bagged limited competition product approvals such as Isotretinoin and Reclast that have market size of USD300m each. Additionally, potential launches like Vidaza, Dacogen and Sumatriptan auto-injector (USD700mn market opportunity) will add ~USD100mn in annual sales to the US base over FY14-15E. On back of these triggers, we estimate US sales at USD940mn by FY15 (15% CAGR). These launches offset price erosion in larger products such as Tacrolimus and Lansoprazole.

India business on a growth path

The Company's focus on field force productivity is propelling India growth. Secondary growth has also surged to double digits (12-14%), outpacing market growth of 8-9% in Q4FY13. Though management is confident of delivering above industry growth, we estimate 13% CAGR over FY13-15E, in line with the industry. We have build in INR540mn negative impact (3% of domestic sales) from pricing policy.

Outlook and valuations: Lucrative launches; upgrade to 'BUY'

We revise up FY15E earnings 6% factoring in: (a) higher US sales; (b) improved traction in domestic market; and (c) better currency realisation. We expect core margin to improve by 55bps (FY13-15) as improved mix offsets negative impact from pricing policy. Our SOTP-based TP at INR2,200 values base business at 18x FY15E core EPS and assigns NPV value of INR74 for Para-IVs (including INR50 per share for Fondaparinaux-10x FY15E EPS of INR5). We upgrade to 'BUY' from 'HOLD' and rate it 'SO'.

Source : Equity Bulls

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