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Research
Dr. Reddy's Labs - PSAI segment disappoints - Centrum
Posted On : 2013-08-18 02:03:48( TIMEZONE : IST )
Dr. Reddy's Labs' (DRL) revenues, EBIT margin and net profit for Q1FY14 were below our expectations. The company reported a growth of 12%YoY in revenues, 70bps decline in EBIT margin and 7%YoY growth in net profit. As per AIOCD data, DRL grew at10.5% against the industry growth of 9.8% in the domestic market. DRL's domestic revenues are likely to get impacted by ~4% due to the National Pharma Pricing Policy (NPPP). The company has a strong pipeline of 64 ANDAs pending with US FDA of which 38 are Para IV and 8 FTF. We have revised our EPS estimates for FY14 and FY15 downwards by 10% and 3% respectively. We have a Buy rating for the scrip and revised target price from Rs2,665 to Rs2,896 (based on 23x FY15 EPS of Rs125.9).
Moderate Revenue growth: DRL reported 12%YoY growth in revenues from Rs25.4bn to Rs28.5bn. The company's global generic business (77% of revenues) grew by 15% YoY from Rs19.1bn to Rs21.9bn. In global generics, N. America reported the highest growth of 37%YoY from Rs7.92bn to Rs10.87bn. European revenues declined by 28%YoY from Rs2.18bn to Rs1.57bn. DRL's PSAI segment (33% of revenues) reported 6%YoY growth from Rs5.53bn to Rs5.87bn. Among PSAI, India business reported the highest growth of 30%YoY from Rs611mn to Rs791mn. Revenues in Europe declined by 6%YoY from Rs2.23bn to Rs2.09bn.
EBIT margin declines: DRL's EBIT margin for Q1FY14 declined by 70bps from 15.4% to 14.7% due to the rise in cost of goods sold and R & D expenses. The cost of goods sold increased by 50bps from 46.7% to 47.2% of revenues due to the change in product mix. R & D expenses grew by 230bps from 6.2% to 8.5% due to added thrust on R & D.
Major brands performing well: As per AIOCD AWCS data-MAT June'13, DRL reported 10.5% growth against the industry growth of 9.8%. Eight of the company's brands appear in the list of top 300. DRL's four brands fared better than the market. These were, Omez-D 15.7%, Razo 16.6%, Econorm 26.8% and Reditux 16.1%. NPPP will have an adverse impact on the company's performance as domestic revenues are expected to decline by 4%. The expected hit is ~Rs550mn from this. Major price reduction is expected for Omez (omeprazole) capsules.
Strong product pipeline for US: DRL has cumulative filing of 64 ANDAs pending with US FDA of which 38 are Para IV and 8 FTF. We expect this strong pipeline to drive future growth in the US market.
Benefit from rupee depreciation: DRL benefited from the ~9% depreciation of rupee against the dollar during Q1FY14. The company derives ~42% of its revenues from N. America and this is likely to increase due to strong growth in the US market.
Valuations: We expect DRL to report good growth in the US market due to new product introductions and strong product pipeline. At the CMP of Rs2239, the stock trades at 23.8x FY14E EPS of Rs94.1 and 17.8x FY15E EPS of Rs125.9. We have revised our EPS estimates downwards for FY14 and FY15 by 10% and 3% respectively. We have a Buy rating for the scrip with a revised target price of Rs2,896 (based on 23x FY15 EPS of Rs125.9), an upside of 29.3% over the CMP.
