Dr Reddy's (Q3 FY13)

India Infoline News Service | Mumbai |

We revise our 9-month target price to Rs2,080 and maintain our BUY rating

CMP Rs1,870, Target Rs2,080, Upside 11.3% 
  • Revenue growth of 3.5% yoy to Rs28.7bn was  in line with our estimates
  • Global Generic business advanced by 3.6% qoq and declined 2.2% yoy to20.8bn; Adjusting for the olanzapine(one-off) the growth was at 24%
  • Domestic growth decline in 4.2%qoq and grew 11.6% yoy to Rs3.7bn
  • Europe grew by 8.7% qoq whereas the US business remained flattish qoq though on a higher base of last year
  • Russia-CIS (+32% yoy) and RoW (41.8% yoy) largely led the growth in the global generic business.
  • PSAI reported robust 28.1% yoy  growth to  Rs7.1bn
  • EBITDA margin at 20.6% was lower than estimate on the back of higher R&D and SG&A expenses
  • Reported PAT was down 29% yoy to Rs3.6bn; Adjusting PAT at Rs3.7bn 
  • We revise our 9-month target price to Rs2,080 and maintain our BUY rating
Result table
(Rs mn) Q3 FY13 Q3 FY12 % yoy Q2 FY13 % qoq
Net sales 28,652 27,692 3.5 28,809 (0.5)
(Inc)/dec in stock (454) (361) 25.8 (751) (39.5)
Con of Materials (9,437) (7,863) 20.0 (9,599) (1.7)
Other Expenditure (4,781) (3,615) 32.3 (4,656) 2.7
Gross Profit 14,888 16,575 (10.2) 15,305 (2.7)
SG&A Expenses (7,189) (6,371) 12.8 (6,270) 14.7
R&D Expenses (2,025) (1,514) 33.8 (1,758) 15.2
Other (Inc)/Expen (233) (165) 41.4 (396) (41.2)
Operating profit 5,907 8,854 (33.3) 7,673 (23.0)
OPM (%) 20.6 32.0 (1136) bps 26.6 (602) bps
Dep & Amort (1,382) (1,307) 5.7 (2,431) (43.1)
Net Interest income (97) 174 (155.7) 371 (126.1)
Other income 31 25 25.2 28 10.2
PBT 4,460 7,746 (42.4) 5,642 (21.0)
Tax (827) (2,617) (68.4) (1,567) (47.3)
Effective tax rate (%) 18.5 33.8 (1525) bps 27.8 (925) bps
PAT 3,633 5,129 (29.2) 4,074 (10.8)
PAT margin (%) 12.7 18.5 (584) bps 14.1 (146) bps
Adjustments 100 26 277.5 863 -
Adj PAT 3,733 5,156 (27.6) 4,937 (24.4)
Adj Ann. EPS (Rs) 87.8 121.7 (27.8) 116.3 (24.5)
Source: Company, India Infoline Research

Revenue growth of 3.5% yoy to Rs28.7bn was  in line with our estimates
Revenue growth of 3.5% yoy to Rs28.7bn was in line with our estimates. Revenues from Global Generics segment de-grew by 2.2% yoy to Rs20.8bn primarily on account of lower growth in North America (-16.8% on higher base of last year) and Europe(-20.4%). Revenues from Russia and Other CIS markets at Rs4.4 billion recorded yoy growth of 32%, while revenues from ROW at Rs1.6bn grew by 41.8% yoy.

Global Generic business advanced by 3.6% qoq and declined 2.2% yoy to20.8bn; Adjusting for  the olanzapine(one-off) the growth was at 24%
Growth in North America was largely driven by key limited competition products of ziprasidone, tacrolimus, fondaparinux, clopidogrel, ramp-up in antibiotics portfolio and products from Shreveport facility. The growth was also aided by the  continued focus on gaining market shares of new products such as atorvastatin, metoprolol, ibandronate and montelukast granules. We believe North Americas’ business to inch up with new product launches like Propecia and other two limited competition product in next two quarters. Also, continuous gain in market share of launched niche product will support growth in future. The company filed 4 ANDAs during the quarter. Cumulatively, 65 ANDAs are pending for approval with the USFDA of which 35are Para IVs and 8 have ‘First To File’ status. Russia-CIS(+32% yoy) and RoW (41.8% yoy) largely led the growth in the global generic business. The revenues from India for Q3 FY13 stood at Rs3.7bn (+12% yoy) whereas the revenues from Europe declined yoy by 20% to Rs1.9bn.

Revenue Break-up
Rsmn.  Q3FY13 Q3FY12 % yoy Q2FY13 % qoq
Global Generics 20,828 21,287 (2.2) 20,103 3.6
Nort America 9,243 11,114 (16.8) 9,270 (0.3)
Europe 1,931 2,426 (20.4) 1,777 8.7
India 3,718 3,333 11.6 3,879 (4.2)
Russia & Other CIS 4,380 3,317 32.0 3,841 14.0
RoW 1,556 1,097 41.8 1,336 16.5
PSAI 7,127 5,563 28.1 7,876 (9.5)
North America 1,266 1,170 8.2 1,353 (6.4)
Europe 2,472 1,651 49.7 2,906 (14.9)
India 1,268 862 47.1 1,148 10.5
RoW 2,121 1,880 12.8 2,469 (14.1)
Proprietary Products 696 842 (17.3) 830 (16.1)
Total 28,651 27,692 3.5 28,809 (0.5)

PSAI segment reported robust growth of 28% yoy to Rs7.1bn
The robust growth in Active Ingredients business was continued even in this quarter led by new launches by the generic customers and new customer orders. We expect the growth momentum to continue with higher contribution from Indian plants. Company also announced the successful open offer the OctoPlus, a service based specialty pharmaceutical company. During the quarter, the company filed 13 DMFs globally. The cumulative DMF filings as on date are 566.

EBITDA margin at 20.6% was lower than estimate on the back of higher R&D and SG&A expenses
The company managed to maintain the gross margin at 53% but higher SG&A expenses (Rs8.6bn) and R&D expenses (Rs2bn) weighed on the operating margin. EBITDA margin at 20.6% was lower than our estimate by 200bps. The margins are not comparable yoy due to Olanzapine exclusivity in Q3 FY12.

Reported PAT was down 29% yoy to Rs3.6bn
The company reported forex loss of Rs100mn, primarily on account of loss on time value of options and depreciation in rupee.  The company earned Incremental Interest income of Rs168 million on account of higher interest income from FDs and mutual funds. But along with the forex loss it resulted in net finance cost of Rs97mn v/s gain of Rs174 in Q3 FY12. Adjusting the impact of forex PAT was at Rs3.7bn. 

Outlook & Valuation
Superior revenue mix coupled with competent R&D makes Dr Reddy’s(DRDY) as one of the best bet in pharma space. The company in the US has significant presence in generic business along with the good traction in OTC business. In next two years, we believe the company will gain maximum from the patent cliff. Robust Domestic and International generic market growth along with improving outlook of PSAI provides us comfort. We expect DRDY’s revenue and PAT to witness a CAGR of 17% and 22% over FY12-15E, respectively. We maintain BUY on DRDY with a revised 9-month price target of Rs2,080.

Financial Summary
 

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