Dr Reddys’ Laboratories (Q1 FY15)

India Infoline News Service | Mumbai |

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.

CMP Rs2,822, Target Rs3,000, Upside 6.3% 
  • 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

Result table
(Rs m) Q1 FY15 Q4 FY14 % qoq Q1 FY14 % yoy
Net sales 35,175 34,809 1.1 28,449 23.6
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)
R&D (3,875) (3,985) (2.7) (2,430) 59.5
SG&A (8,807) (10,307) (14.6) (7,181) 22.6
Operating profit 8,162 5,630 45.0 5,409 50.9
OPM (%) 23.2 16.2 703 bps 19.0 419 bps
Depreciation (1,872) #DIV/0! (1,613) 16.1
Interest 481 163 194.3 (70) -
Other income 185 226 (18.3) 376 (50.8)
PBT 6,955 6,020 15.5 4,102 69.6
Tax (1,505) (1,252) 20.2 (528) 185.1
Effective tax rate (%) 21.6 20.8 83 bps 12.9 877 bps
Associate share 53 48 10.3 36 50.4
PAT 5,504 4,816 14.3 3,610 52.5
PAT margin (%) 15.6 13.8 181 bps 12.7 296 bps
Source: Company, India Infoline Research

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.


Revenue mix
Segment (Rs mn) Q1 FY15 Q1 FY14 % yoy
Global Generics 29,002 21,903 32.4
 North America 16,468 10,871 51.5
 Europe 1,459 1,573 (7.2)
 India 3,999 3,493 14.5
 Russia & other CIS 4,861 4,489 8.3
 ROW 2,215 1,477 50.0
Pharma scvs & APIs (PSAI) 5,537 5,868 (5.6)
 North America 547 1,093 (50.0)
 Europe 2,681 2,093 28.1
 India 775 791 (2.0)
 ROW 1,534 1,891 (18.9)
 Proprietary products & others 634 679 (6.6)
Total 35,175 28,449 23.6
Source: Company, India Infoline Research

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.  


Financial summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Revenues 116,266 132,170 148,335 166,476
yoy growth (%) 20.2 13.7 12.2 12.2
Operating profit 24,870 31,214 34,859 39,122
OPM (%) 21.4 23.6 23.5 23.5
Reported PAT 16,777 21,515 23,545 26,634
yoy growth (%) 17.5 28.2 9.4 13.1
EPS (Rs) 98.8 126.5 138.4 156.6
P/E (x) 28.6 22.3 20.4 18.0
P/BV (x) 6.6 5.3 4.3 3.6
EV/EBITDA (x) 20.7 16.7 14.7 12.9
Debt/Equity (x) 0.5 0.5 0.4 0.4
ROE (%) 22.9 26.1 23.2 21.6
ROCE (%) 18.8 18.6 18.3 18.1
Source: Company, India Infoline Research

 

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