Dr Reddy's Laboratories Ltd. - PINC Result Review

DRL's Q1FY11 results were below our and street estimates on delays in key launches in US. Q1FY11 also underpins DRL's dependence on the unique product launches in US to maintain growth momentum. We note that 35% of our FY12E estimates are derived from the 4 unique product opportunities namely Arixtra, Lotrel, Prilosec OTC and Allegra D24. DRL should trade at a discount to the sector given the high concentration of profits. Our target is based on 18x (25% discount to sector) Sept'11 earnings.

Tepid growth in US; Russia and India drive growth

US growth has been tepid at 5% while India formulations and Russia grew 16% and 35% respectively. Germany and APIs continue to lag and declined by 16% and 8% respectively.

Margins under pressure

Reported EBIT margins declined 252bps YoY on the absence of high margin Sumtriptan revenues. Recurring EBIT margins (excluding Sumtriptan in Q1FY10) were flat at 13.5%.

Increased earnings concentration

We believe the risk in DRL's model has increased with high dependence on the unique products. These unique products together account for 19% and 35% of our FY11E and FY12E EPS estimates. A change in the legal and competitive environment of these products leaves our estimates vulnerable.

VALUATIONS AND RECOMMENDATION

Given the higher concentration of near term earnings on the unique products, we give a 20% discount to DRL's reported earnings (including the unique opportunities) and accordingly arrive at a target price of Rs1,437/share. We note that 35% of our FY12E EPS comes from the 4 unique products (Arixtra, Lotrel, Prilosec OTC and AllegraD24). Our estimates are vulnerable to a change in the competitive or legal environment. Given the limited upside (5%) we recommend at 'HOLD'.

Source : Equity Bulls

Keywords