Dr. Reddy's Laboratories Limited - Not extrapolating a bad quarter, Retain Buy - 1QFY14 Results Review - Antique

Revenues at 28.4bn (up +12% yoy & -5 % qoq) were below consensus by 10 % and our estimates by 6% .EBITDA at 5.4 bn (up +8% yoy & -25% qoq) was below our estimates by 20% PAT at 3.6 bn (up +7 % yoy &-37 % qoq) was below our estimates by 16% and consensus by 17%. Adjusted PAT on account of normalized Tax rate is @3.2bn (13% vs.21% effective Tax-rate). The big miss in the quarter has been driven by weakness in the PSAI segment & Pricing action in the domestic market ,while North American geography grew at an impressive pace recording ~38% growth. Margins have been adversely impacted by a sequential increase in R&D expenditure(230bps yoy increase @ 8.5% of sales.)While higher R&D expenditure is likely to be a permanent feature of the company's growth we believe other drivers of the sub-par performance will normalize in the next 3 quarters.

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 subar-par financial performance in1QFY14 is transitional on account of PSAI & domestic segment volatility. The R&D expenditure will however stay at higher than industry levels of 8-9%.

The stock performance in our view no longer remains hostage to an ambitious guidance and past history indicates that volatile quarterly performance have provided good entry opportunities. At the CMP of INR2177, the stock trades at 17x FY15e which is at a discount to the large cap Pharma peers like Sun Pharma and Cipla. We believe that the discount is unwarranted and reiterate our BUY rating on the stock. Our FY15 based price target INR2660 (21 x FY15EPS).

Source : Equity Bulls

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