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Buy Dr Reddys Laboratories; target Rs 1931: Dolat Capital
21 Jul 2012 04:34 PM
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Dolat Capital is bullish on Dr Reddys Laboratories (DRL) and has recommended buy rating on the stock with a target price of Rs 1931 in its July 20, 2012 research report.

"Dr Reddys Laboratories (DRL) revenue for the quarter grew 28.3% YoY to Rs 25.63bn led by 32.2% YoY growth in Global Generics, while PSAI segment grew 14.4% YoY. Growth in generic sales in North America was restricted at USD 159mn (up 27% YoY in constant currency) due to higher price erosion witnessed in new launches and selectively in its existing product basket. Russia registered sales of Rs 4.17bn (up 38.1% YoY), while European generics grew 13.6% YoY to Rs 2.18bn. Notably, Indian formulations reported a strong performance, growing 18.6% YoY to Rs 3.48bn."

"Gross margins for the quarter stood lower by mere 10bps YoY at 53.7% due to a) lower than expected contribution from US generics affected by price erosion b) decline in DEPB benefits and c) Rs 700mn loss on cash flow hedges. Tax for the quarter stood lower at 10% due to unrealized inventory relating to the US segment. Consequently, PAT stood at Rs 3.36bn (up 27.9% YoY). The management remains confident of achieving USD 2.5bn - 2.7bn of sales in FY13E, while US generics revenue guidance is lowered marginally from USD 900mn given earlier. We have reduced our FY13E/14E EPS estimates by 2.7%/0.3% respectively to reflect lower operating margins and higher depreciation cost."

"For the quarter, gross margin in Global Generics segment were 59% (58% in Q4FY12) and that in PSAI were 31% (38% - Q4FY12). The management appears confident of ramp-up in US generics business going forward on the back of new launches gLipitor, gBoniva and niche launches such as Metoprolol XL (probable), gPropecia, gClarinex and gAllegra D-12, among others. Revenues for the quarter in US booked at exchange rate of Rs 50.2. OTC segment contributed 21%of US sales at USD 33mn and is expected to trail in that range for FY13E. Outstanding cash flow hedges stood at USD 620mn (18 months rate Rs 51.3-53.4/USD) and balance sheet hedges stood at USD 225mn. MTM liability in balance sheet hedges is USD 51mn. Average realization of net exports pegged at Rs 52-53/USD over next 9 months."

"DRL leverages on its chemistry skills to identify and capitalize on niche opportunities with limited competition. The company has built significant API capabilities that support its fast growing generic formulations business. Notably, dependence on Betapharm has reduced significantly (5% of sales), and is unlikely to be a further drag on overall financials. A string of product launches in US and other generic markets, coupled with healthy traction in the PSAI segment in the short-run, will catapult growth in FY13E which will taper off to normal levels from FY14E. At CMP, the stock trades at 17.0x FY13E & 16.7x FY14E earnings. We recommend Buy with a revised target price of Rs 1931 (20x to FY14E EPS)," says Dolat Capital research report.

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