Dr Reddy’s (Q2 FY13) – BUY

India Infoline News Service | Mumbai |

Revenue growth of 27% yoy to Rs28bn was largely in line with our estimates.

CMP Rs1,698, Target Rs1,903, Upside 12.1%
  • Revenue growth of 27% yoy to Rs28bn was largely in line with our estimates
  • Global Generic business advanced by +24.6% yoy; niche product launches in the US (+47% yoy) and ramping up RoW business (+49.6%) led the growth
  • PSAI segment too reported robust growth of  32.7% yoy to  Rs7.9bn
  • As estimated reported PAT grew by 32.4% yoy at Rs4bn; Adjusted PAT at Rs4.9bn
  • We revise our 9-month target price to Rs1,903 and maintain our BUY rating

Result table

(Rs mn) Q2 FY13 Q2 FY12 % yoy Q1 FY13 % qoq
Net sales 28,809 22,678 27.0 25,406 13.4
(Inc)/dec in stock (751) (658) 14.1 (1,234) (39.2)
Con of Materials (9,599) (7,666) 25.2 (9,028) 6.3
Other Expenditure (4,656) (3,465) 34.4 (4,072) 14.4
Gross Profit 15,305 12,205 25.4 13,541 13.0
SG&A Expenses (6,270) (5,947) 5.4 (6,982) (10.2)
R&D Expenses (1,758) (1,459) 20.5 (1,564) 12.4
Other (Inc)/Expen (396) (215) 84.2 (219) 81.4
Operating profit 7,673 5,014 53.0 5,213 47.2
OPM (%) 27 22 453 bps 21 611 bps
Dep & Amort (2,431) (1,269) 91.5 (1,296) 87.5
Net Interest income 371 (50) (849.5) (212) (275.3)
Other income 28 13 113.5 19 49.5
PBT 5,642 3,708 52.1 3,725 51.5
Tax (1,567) (630) 148.7 (365) 329.4
Effective tax rate (%) 28 17 1078 bps 10 1798 bps
PAT 4,074 3,078 32.4 3,360 21.3
PAT margin (%) 14 14 57 bps 13 92 bps
Adjustments 863 (286) - (9) -
Adj PAT 4,937 2,792 76.8 3,351 47.3
Adj Ann. EPS (Rs) 116 66 76.5 79 47.3
Source: Company, India Infoline Research

Revenue growth of 27% yoy to Rs28bn was largely in line with our estimates
Revenue growth of 27% yoy to Rs28bn was largely in line with our estimates. Revenues from Global Generics segment grew by 25% yoy to Rs20.1bn primarily on account of growth in North America (+47%), India (+12% on a higher base) and other emerging markets(+50%). Revenues from Russia and Other CIS markets at Rs3.8 billion recorded yoy growth of 14%, while revenues from Europe at Rs1.8 billion declined yoy by 16%. The growth was also largely supported by revenues from the PSAI segment, which recorded continued robust yoy growth of 33% on the back of patent expiry opportunity.

Global Generic business advanced by +24.6% yoy; niche product launches in the US (+47% yoy) led the performance
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 company launched 4 new products during the quarter viz atorvastatin, metoprolol, montelukast family and amoxicillin.  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 aid the growth. The company filed 4 ANDAs during the quarter. Cumulatively, 63 ANDAs are pending for approval with the USFDA of which 33 are Para IVs and 7 have ‘First To File’ status

Volume Growth– Generics Market
Product Aug-12 Mar-12 Rank
Tacrolimus 44% 22% 1
Lansoprazole 22% 19% 2
Ziprasidone 23% 27% 2
Omeprazole 16% 15% 4
Fondaparinux 28% 24% 2
Source: IMS Health Inc Aug 2012

PSAI segment too reported robust growth of 32.7% yoy to Rs7.9bn
The growth in Active Ingredients business was led by new launches to generic customers on account of the high expiries of branded products in the near term. And the growth in Pharmaceutical Services business was led by new customer orders. We expect the growth momentum to continue with higher contribution of Indian plant and lift of import ban from Mexico facility will shore up the growth in revenues. . Company’s focus in enhancing specialty revenue is again depicted by its Intention to acquire OctoPlus N.V.; a service based specialty pharmaceutical company.   During the quarter, 10 DMFs were filed globally. The cumulative DMF filings as on date are 560.

Adjusted EBIDTA margin at 26.6% and Adjusted PAT growth of 77% yoy is well above our estimates
The company reported adjusted EBITDA margin of 26% which is far better than our expectation. The improvement was led by lower SG&A expenses and higher operating leverage. Rupee depreciation also aided in margin improvement. (EBITDA and PAT adjusted for a non-recurring and non-cash impairment charge of Rs688mn pertaining to product intangibles in generics portfolio and a goodwill charge w.r.t Italian operations). The company reported net incremental forex gain of Rs187mn, primarily on account of reversal of the loss on time value of options recorded in Q1 FY13, due to the recent appreciation of the rupee.  Adjusting the impact of this charge, adjusted PAT grew 77% yoy to Rs4.9bn is well above our estimates. The growth in PAT was also backed by the offsetting impact in finance expenses which was led by higher interest income earned from FD & mutual fund.

Revenue Break-up
Rsmn.  Q2FY13 Q2FY12 % yoy Q1FY13 % qoq
Global Generics 20,103 16,136   24.6 19,066   5.4


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