Dr. Reddy's Laboratories Limited - Inline performance, outlook no longer hostage to guidance - Antique

Inline operating performance, other income exceptionally high

Revenues, EBITDA and Net profit beat our estimates by 4%,6% & 31% primarily driven by large other income . However Net Profit was significantly higher than estimates on account of higher other income which included USD 20.5m settlement amount by Nordion. Remaining USD2mn was recorded above the EBITDA level in the R&D cost. When adjusted for claim of USD 22.5m, profits beat estimates marginally by 2%. This was considering the fact that depreciation was higher at INR1.49bn vs.INR1.39bn estimates and higher tax rate of 27% vs. 19% estimates which was largely offset by higher interest income at INR390m.

Other highlights

- Consolidated revenues for Q4 FY13 at INR33.39.bn, recorded 25.6% YoY growth of 17 %QoQ which was primarily, driven by North America generics which grew by 31 % yoy in INR terms. Russia & CIS grew by 27% to INR4.52bn. PSAI business grew robustly at 45% led by strong growth in the North America, Europe & India.

- Gross profit margin for the quarter was at 50.4%. Global Generics and PSAI segment margins for the quarter were at 58% and 34% respectively. The margins were impacted due higher contribution by low margin products and market mix. Also there were specific adjustment related to inventory write-off due to the dropped product and some delayed product.

- EBITDA grew by for 14%YoY to INR7.14bn and the EBIDTA margin expanded by around 200bps QoQ on lower S,G&A expenses better product mix

- The company launched 18 new generic products, filed 14 new product registrations and filed 17 new DMFs globally.

- Company gained market share in some of its key products like Metoprolol, Lansoprazole, Tacrolimus & Ziprasidone.

Valuation and outlook

For FY13 the company was a beneficiary of opportunities like Lipitor, Plavix, Seroquel, Geodon, Avelon, Fosamax & Aciphex. The management commentary indicates that the Fy13 base effect is an unfounded concern. The stock performance in our view no longer remains hostage to an ambitious guidance. At the CMP of INR2025, the stock trades at 17x FY15e which is at a discount to the large cap Pharma peers like Sun Pharma, Ranbaxy and Cipla. We believe that the discount is unwarranted and reiterate our BUY rating on the stock. We roll forward our estimates to FY15 and arrive at a target price of INR2395, implying 18% upside from the current level.

Source : Equity Bulls

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