Dr Reddy’s reported marginally lower than estimated revenue growth at 23.6% yoy while PAT at +52.5% yoy beats our forecast for +43.4% yoy
Global generics sales at 32.4% yoy within which North America generics sales jump 51.5% yoy on sustained performance due to limited launches from competition on key drugs; 9 product filings in US in Q1 while cumulatively 70 ANDAs are pending for approval
Russia revenues at Rs4.2bn, up 18% in local currency driven by higher OTC volumes and key products in prescription market
India revenue growth at 15% yoy better than industry run rate driven by volume expansion in focus brands; company remains optimist on domestic growth prospects as base effect of last year’s price cuts tapers off in August
Near term lackluster growth and recent rally in stock leads us to assign Accumulate rating on stock with 9-12mth target of Rs3,000
|(Rs m)||Q1 FY15||Q4 FY14||% qoq||Q1 FY14||% yoy|
|RM & other costs||(12,483)||(13,248)||(5.8)||(11,300)||10.5|
|Purchase of traded goods||(1,849)||(1,639)||12.8||(2,130)||(13.2)|
|OPM (%)||23.2||16.2||703 bps||19.0||419 bps|
|Effective tax rate (%)||21.6||20.8||83 bps||12.9||877 bps|
|PAT margin (%)||15.6||13.8||181 bps||12.7||296 bps|
Dr Reddys’ Q1 PAT beats estimates; revs up 23.6% yoy
Dr Reddys’ Q1 revenues came marginally below our estimate at Rs35.2bn (estimated Rs35.9bn), or +23.6% yoy driven by 32.4% yoy growth in global generics while PAT beats our expectation with 52.5% yoy growth (vs est. 43.4% yoy). Within global generics, North America posted stellar jump in sales of 51.5% yoy driven by sustained performance from limited competition launches.
|Segment (Rs mn)||Q1 FY15||Q1 FY14||% yoy|
|Russia & other CIS||4,861||4,489||8.3|
|Pharma scvs & APIs (PSAI)||5,537||5,868||(5.6)|
|Proprietary products & others||634||679||(6.6)|
Russia drives emerging markets’ generics growth; PSAI declines 5.6% yoy
Company made 9 product filings in US in Q1 FY15 while cumulatively 70 ANDAs are pending for approval from FDA of which 42 are para IVs and company believes 8 have a ‘first to file’ (FTF) status. Revenues from emerging markets (Russia+CIS+ROW) grew 19% yoy to Rs7.1bn of which Russia accounted for 59% and grew at 18% in local currency terms, largely driven by higher volumes in OTC segment and certain key products in the prescription segment. India business grew 15% yoy, better than the industry run rate driven by healthy volume expansion in key focus brands and despite some of the brands under NLEM portfolio. PSAI declined 5.6% yoy as declines in North America (-50% yoy) and ROW (-19% yoy) adversely impacted the segment.
Conference call highlights
Key takeaways from post earnings conference call: 1) Global Generics business grew 32% yoy-growth remained well diversified while US generics continued to benefit from limited competition for last year launches. 2) Cost increase in absolute terms due to INR depreciation, annual increments, additional staff deployment and other cost items specific to this quarter.3) Increase in R&D in line with planned scale up in development activities. 4) Effective tax rate of 21.5% for full year while Q1 capex stood at US$36mn 5) PSAI business: challenges remain on macro front 6) India revenues at Rs4bn, +15% yoy and second quarter of above industry growth as a result of robust volumes and prescription growth. Remain optimist on India business and cannot comment on recent price cuts as matter is still debated 7) Emerging markets: Russia local currency growth at 18% yoy.
Accumulate on reasonable valuations, healthy growth outlook
Dr Reddys’ FY15 growth is likely to remain lackluster even as we believe the next key trigger could be potential launch of Nexium and Copaxone. At its earnings call, the company guided for FY15 US generics sales growth at mid teens. India business growth has been above industry for the past two quarters and we remain positive on the domestic growth outlook. The stock has rallied in the recent past as it played catch up with peers and valuation discount has accordingly narrowed; we assign accumulate rating with 9-12mth target of Rs3,000 based on 19x FY16E earnings.
|Y/e 31 Mar (Rs m)||FY13||FY14||FY15E||FY16E|
|yoy growth (%)||20.2||13.7||12.2||12.2|
|yoy growth (%)||17.5||28.2||9.4||13.1|