Dr Reddy’s (Q1 FY13)

CMP Rs1,655, Target Rs1,888, Upside 13.4%

• Q1 FY13 Revenues at Rs25.4bn reporting a growth of 28.4% yoy

• Generic business led the growth (+32% yoy) while PSAI segment (+14% yoy) reported lackluster performance

• Strong and encouraging domestic market growth of 18.6% yoy; led by volume increase across the key brands.

• Reported PAT grew by 28% yoy at Rs3.4bn; adjusted PAT at Rs3.7bn (adjusted for forex)

• We raise our 9-month target price to Rs1,888 as we rollover our multiple to the next period and rate Dr Reddy’s “BUY” from Market Performer

Result table

(Rs mn)	Q1FY13	Q1FY12	% yoy	Q4FY12	% qoq
Net sales	25,406.1	19,783.0	28.4	26,584.5	(4.4)
Inc/(dec) in stock	(1,234.2)	(520.3)	137.2	137.3	(998.9)
Con of Materials	(9,027.8)	(6,349.9)	42.2	(8,440.4)	7.0
Other Expenditure	(4,072)	(3,397.9)	19.8	(4,036.2)	0.9
Gross Profit	13,540.9	10,555.5	28.3	13,970.6	(3.1)
SG&A Expenses	(6,982)	(5,524)	26.4	(5,813)	20.1
R&D Expenses	(1,564)	(1,197)	30.6	(1,740)	(10.2)
Other (Income)/Exp	(219)	(187)	16.8	(198)	10.4
Operating profit	5,213	4,022	29.6	6,616	(21.2)
OPM (%)	20.5	20.3	19 bps	24.9	(436) bps
Dep & Amort	(1,296.0)	(1,233.0)	5.1	(2,444.0)	(47.0)
Net Interest income	(212)	(47)	355.1	82	(357.4)
Other income	19	4	375.0	12	65.2
PBT	3,725	2,747	35.6	4,265	(12.7)
Tax	(365)	(567)	(35.7)	(838)	(56.4)
Eff tax rate (%)	9.8	20.7	(1086 ) bps	19.6	(985) bps
PAT	3,359.8	2,626.6	27.9	3,427.4	(2.0)
PAT margin (%)	13.2	13.3	(5) bps	12.9	33 bps
Adjustments	297	158	88.0	836	-
Adj PAT	3,657	2,785	31.3	4,263	(14.2)
Adj Ann. EPS (Rs)	86.1	65.7	31.1	100.6	(14.3)

Source: Company, India Infoline Research

Generic business led the growth (+32% yoy) while PSAI segment (+14% yoy) reported lackluster performance
Generic business led the overall growth. North America grew by 38% yoy and 27% on a constant currency ($). The sequential growth in the US business was restricted due to delay in key product approvals. The launch of Atorvastatin got delayed to Q2FY13 (recently launched). Russia & CIS was up 38% yoy, and Europe grew by 13.6% yoy. India recorded revenue growth 18.6% yoy surpassing market growth by ~300bps. While PSAI segment disappointed; revenues reported yoy growth of 14.4% at Rs5.5bn. We expect sequential improvement in the PSAI segment as the current quarters’ weaker performance was attributable to lower uptake by the customers.  

Strong and encouraging domestic market growth of 18.6% yoy; led by volume increase across the key brands
India recorded revenue growth 18.6% yoy surpassing market growth by ~300bps. This is the fifth consecutive quarter in which DRDY has reported progressive yoy growth. Growth is driven by new product launches and volume increase in products including Stamlo, Reditux, OmezD and Razo. DRDY launched 10 new products in market. Biosimilars portfolio contributed the most in the revenue growth aided by recent biologic launches; Cresp and Peg-Grafeel grew by 36%.

Sales Breakup

(Rs mn)	Q1FY13	Q1FY12	% yoy	Q4FY12	% qoq
Global Generics	19,066	14,424	32.2	18,396	3.6
Nort America	7920	5756	37.6	8731	(9.3)
Europe	2,178	1917	13.6	1799	21.1
India	3482	2936	18.6	3203	8.7
Russia & Other CIS	4167	3018	38.1	3545	17.5
RoW	1319	797	65.5	1117	18.1
PSAI	5,527	4,832	14.4	7,484	(26.1)
North America	1064	842	26.4	1192	(10.7)
Europe	2233	1693	31.9	2777	(19.6)
India	611	662	(7.7)	1310	(53.4)
RoW	1619	1635	(1.0)	2206	(26.6)
Proprietary Products	813	528	54.0	702	15.8
Total	25,406	19,784	28.4	26,582	(4.4)

Source: Company, India Infoline Research

North Americas’ business to inch up with new product launches; buoyancy expected even in next two years
Growth was largely driven by new product launches of clopidogrel, OTC lansoprazole and was further supported by key products of ziprasidone, fondaparinux, quetiapine, etc, marginally offset by regular yoy price declines in existing product basket. 5 new products were launched during the quarter including clopidogrel 300 Mg which was launched under 180-day exclusivity. During the quarter, 4 ANDAs were filed. Cumulatively 73 ANDAs are pending for approval with the USFDA of which 36 are Para IVs and 6 are with FTF status.

PSAI segment lackluster; revenues reported yoy growth of 14.4% at Rs5.5bn
The growth in Active Ingredients business was far below our estimates led by weaker uptake by the customers. We expect the growth momentum to rebound with higher contribution of Indian plant. Early approval of its Mexico plant which received import alert will flourish the business further. During the quarter, 7 DMFs were filed globally, 1 each in the US and Europe. The cumulative DMF filings as of June 30, 2012 were 550.
 
Reported EBIDTA margin at 20%; adjusted PAT grew by 28% yoy
The company reported EBITDA margin of 20% which is below our expectation. The drag was led by higher SG&A expenses including amortization of Rs8.3bn which increased by 23% yoy on account of yoy salary increments, higher sales & marketing costs and the effect of rupee depreciation against multiple currencies (~Rs100mn impact due to provision for ANDA approval process with USFDA). PAT margin impacted by net finance expense of Rs212mn v/s Rs46mn in Q1FY12. Q1 FY13 includes a charge of Rs297mn due to time value of options. Adjusting the impact of this charge, net forex gain on P&L is at Rs88mn. The increase in finance expenses was partially offset by higher interest income earned from FD & mutual fund.

We raise our 9-month target price to Rs1,888 as we rollover our multiple to the next period and rate Dr Reddy’s “BUY” from Market Performer
We expect DRDY’s core revenue and core PAT to witness a CAGR of 14% and CAGR of 16% over FY12-14E, respectively. We rate DRDY “BUY” with 9-month price target of Rs1,888, which values the base business at Rs1,855 per share and 180 exclusivity opportunities/complex generics/limited competition products at Rs33 per share. We value the exclusivity, settlement and complex generics/limited competition opportunities in US on an NPV basis.

Other Key Highlights:
±  Dr Reddy’s entered into collaboration with Merck Serono for co-development, manufacturing and commercialization of biosimilars.
±  Company launched new Products; 10 (India), 5 (US) , 4 (Russia and CIS), 5 (Europe), 9 (RoW)
±  Launch of generic versions of Atorvastatin (July 2012), Clopidogrel and Ibandronate sodium in US
±  DRDY has 73 ANDAs pending for approval, of which 36 are Para IVs and 6 have FTF status
±  PSAI Pipeline; DMF (US: 188, Europe:153 ; RoW:209)

Financial summary

Y/e 31 Mar (Rs m)	FY11	FY12	FY13E	FY14E
Revenues	74,969	98,145	101,789	118,987
Rev yoy growth (%)	10.6	30.9	3.7	16.9
Operating profit	15,532	24,311	24,172	24,268
OPM (%)	22.7	28.0	26.6	21.4
Core PAT	9,989	9,224	11,898	14,327
Reported PAT	9,989	13,009	16,034	16,357
yoy growth (%)	30.1	30.2	29.0	20.4
EPS (Rs)	59.0	76.7	94.5	96.4
Core EPS	59.0	54.4	70.2	84.5
P/E (x)	28.2	21.7	17.6	17.3
Price/Book (x)	7.0	5.7	4.5	3.7
EV/EBITDA (x)	18.2	11.7	11.2	10.7
Debt/Equity (x)	0.2	0.3	0.3	0.2
RoE (%)	25.6	28.8	28.5	23.7
RoCE (%)	14.7	20.2	16.3	13.9

Source: Company, India Infoline Research