Dr. Reddy's Laboratories (DRRD IN; Mkt Cap USD4.9b, CMP Rs1,365, Under Review)
Dr. Reddy's Labs 1QFY11 results were below our estimates.
Key highlights:
- 1QFY11 sales declined 7.5% YoY to Rs16.8b and it posted PAT of Rs2.1b against our estimate of Rs2.6b. Excluding one-off/low-competition upsides, we estimate topline de-grew by 2.5% to Rs15.7b against our estimate of Rs17.5b and core PAT de-grew by 2% to Rs1.67b against our estimate of Rs2.06b.
- Revenue growth was below estimates mainly due to lower-than-expected core generic revenue in the US estimated at Rs2.75b against our forecast of Rs3.8b and a 7.6% de-growth in PSAI revenue at Rs4.5b against our estimate of Rs5.6b.
- We estimate core EBITDA of Rs2.1b, which was lower than our earlier estimate of Rs2.7b due to lower-than-expected topline growth. Core EBITDA margins of 13.5% were below our estimates of 15.5%.
- The management reiterated its FY11 RoCE guidance of 18-22%, in line with its long-term goal of achieving RoCE of 25% by FY13. It has guided for US$150m of capex and a tax rate of 15% for FY11.
Traction in the branded formulations and US businesses and focus on improving profitability will be key growth drivers for DRL over the next two years. We estimate core EPS of Rs48.7 in FY11 and of Rs59.3 in FY12, adjusting for the impact of proposed bonus debentures. We expect core EPS CAGR of 21% over FY08-12 (FY09 and FY10 EPS suffered due to Betapharm write-offs). Including upsides from Para-IV/low-competition opportunities, we expect EPS of Rs63 in FY11 and Rs72.6 in FY12. Our core estimates exclude the upsides from patent challenges/low-competition opportunities in the US (current DCF value of Rs26/share for visible opportunities). The stock trades at 27x FY11E and 22.1x FY12E core earnings. Our rating is Under Review.