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HDFC BANK INVESTMENT ADVISORY GROUP
AAG
Market Impact
Company
Rating
Dr. Reddy's
Laboratories Ltd.
(Rs.3228)
MP*
Impact on
Company
Neutral
Brief:
 For
Q3FY15,
Dr.
Reddy’s
Laboratories Ltd. reported marginally
better than consensus earnings
expectations.
 It reported 8.8% YoY increase in its
consolidated net sales to Rs.38.43
bn.
 EBITDA declined 8.6% YoY to
Rs.8.93 bn.
 The EBITDA margin dipped by 440
bps YoY to 23.2%
 Adjusted PAT grew by a modest
1.0% YoY to Rs.5.75 bn led by high
other income.
 We recommend a HOLD
recommendation on the stock
with a price target to Rs.3479
(22x FY16E EPS of Rs.158.1).
Equities Desk
January 30, 2015
Our Comments
Dr. Reddy’s Laboratories Ltd. reported Q3FY15 earnings which
were marginally better than consensus expectations. It reported
8.8% YoY increase in its consolidated net sales to Rs.38.43 bn.
EBITDA declined 8.6% YoY to Rs.8.93 bn. The EBITDA margin
dipped by 440 bps YoY to 23.2% due to 237 bps YoY and 280
bps YoY increase in raw material cost and R&D expenditure as a
percentage of net sales, respectively. However, Adjusted PAT
grew by a modest 1.0% YoY to Rs.5.75 bn led by high other
income. The EPS for the quarter stood at Rs.33.7.
In terms of segmental performance, the Global Generics
business grew by 7.8% YoY led by revenue from India and Rest
of the World (RoW). US revenues grew by 3.7% YoY to Rs.16.8
bn led by sustained growth in limited competition products.
Revenues from Russia & CIS declined by 10.0% YoY to Rs.4.8
bn mainly due to currency devaluation. RoW revenue grew by
82.3% YoY to Rs.3.8 bn and Domestic Generics grew by 10.6%
YoY to Rs.4.3bn. Pharmaceutical Services and Active
Ingredients (PSAI) segment revenue grew at healthy rate of
20.7% YoY to Rs.6.1 bn. Globally, the Company launched 13
new generic products and filed 18 new product registrations
during the quarter. In the North America market, cumulative 68
ANDAs are pending for approval of which 43 are Para IVs and
13 are expected to have “First to File” status. Other Income was
high due to forex gain of Rs.604 mn, net interest income of
Rs.221 mn and profit on sale of investment of Rs.174 mn.
Management highlighted that the Russia business has done well
with 27% YoY growth in constant currency basis mainly coming
from volume growth. Similarly Venezuela market has also done
extremely well in terms of volume growth. Management expects
these markets to continue to do well. However, currency
devaluation is posing the real threat. On Srikakulam facility,
Management mentioned that a detailed clarification and
corrective and preventative action plan is submitted to USFDA.
Management confirmed that this facility was expected to supply
API for Nexium drug. Management is currently in process of site
shifting for Naxium API to get quicker approval on the drug. The
management maintained its stance on higher R&D spends.
Dr Reddy’s Laboratories continued its focus on R&D
activities targeting development of niche proprietary and
bio-similar products. The company is also strengthening its
US ANDA pipeline by filing two new ANDAs. The Company’s
margins are expected to remain muted in near term due to
increased focus on R&D expenses. However, over the long
term, we expect a strong revenue growth driven by value
unlocking from new product development in branded
generics and complex products to drive earnings growth for
the company. We remain positive on the stock considering
its strong R&D capability, quality ANDA pipeline and well
diversified geographical diversification. We recommend a
HOLD on the stock with the target price of Rs.3479 (22x
FY16E EPS of Rs.158.1). Any earning/target price revision
would depend on the new product launches, clearance on
Srikakulam facility from USFDA and changes in general
business momentum.
*MP: Market Performer, Please refer to Disclaimer on the next page
Source: Bloomberg
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