Buy Dr. Reddy's Laboratories - Higher traction from FY12 onwards - Emkay Global

• Muted performance in US and decline in PSAI segment impacted top line performance in Q2FY11; significant rampup in niche products to drive sales from H2FY11 onwards
• Branded formulation markets of India and CIS reported strong traction
• 361 bps YoY expansion in EBITDA margins at 18.6% and 33% growth in recurring PAT led by 592bps expansion in gross margins and lower tax provisioning
• Revise base business earnings for FY11E, FY12E and introduce NPV for limited competition opportunities; Upgrade to Buy with a price target of Rs1769

Revenue growth is impacted by US performance despite good show in CIS and Indian markets

Despite 17% and 25% growth in the branded CIS and Indian markets, 5% growth in recurring revenue was largely impacted because of a) Muted performance in the US (up 3% YoY), b) 14% decline in PSAI segment and c) 17% decline in European markets on the back of 14% reduction in Betapharm sales. The higher growth in CIS market is mainly aided by re-stocking, volume expansion and minimum impact (~5%) of reference pricing on its product portfolio. Going ahead, higher focus on OTC products and potential launch of the bio-similar portfolio will drive CIS business. In domestic market, Dr Reddy has outpaced the industry growth by 800bps and grew by 25% on back of 13 new launches during the quarter. In the US, excluding imitrex, revenue growth of 5% was on account of new product such as Lotrel (MS 8%) & Tacrolimus (MS 16%).

However going forward, company expect its US business to ramp-up on the back of a) Gradual improvement in the revenue of Omeprazole-OTC (commenced shipments to 2 more customers) and generic Prograf (currently there is only one more generic company, b) Recovery in the lost market share of generic Allegra over the next few quarters and c) 3-4 new limited competition launches (less than 3 players) in 2HFY11E.

Source : Equity Bulls

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