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Dr Reddy's Laboratories Ltd. | Q3FY13 Result Update




IndiaNivesh Securities Pvt Ltd


15 Feb 2013





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Dr Reddy's Laboratories Ltd. | Q3FY13 Result Update | Mixed bag of performance, Revise target price upward to Rs 2,123, Maintain BUY During the quarter, DRL revenue grew 3.5% y-o-y (almost flat sequentially) to Rs 28.65 billion in Q3 FY13 (inline with INSPL est= Rs 27.25 billion). However, adjusting for 180 days exclusivity of Zypraxa (Olanzapine) in Q3FY12, base business grew ~ 23% y-o-y. Adj base Global generics /PSAI business grew ~22% y-o-y & 28% y-o-y respectively. During the quarter Gross margins were down by ~790 bps y-o-y (116 bps q-o-q) to 52% level mainly due to change in product mix. Operating profit (EBIT) declined 42% y-o-y (23% q-o-q) to Rs 4.29 billion (below INSPL est= Rs 5.10 billion). EBIT margins declined 1168 bps y-o- y (423 bps q-o-q) to 15% level (V/s INSPL est= 18.1%) due to higher material cost linked with change in product mix & higher SG&A expenses. Adj net profit (adjusted for forex loss of ~Rs 200 million in Q3FY13 compared to forex gain of Rs 285 million in Q3FY12) declined 20% y-o-y to Rs 3.83 billion in Q3FY13 (below INSPL est= Rs 4.30 billion). Valuations: During the quarter company’s revenue was almost inline with our estimates; however operating performance was below estimates mainly due to higher R&D expenses & SG&A expenses. We believe that going forward company’s R&D expenses are likely to remain at higher level of 7-8% of total revenue due to inclusion of Octopus Pharma. But healthy growth across the markets & ramp up in key launches in US would bode well for the margins. Further, we are of the view that certain delays in approvals in US market would reap the fruit in FY14E. Anticipating sustainability in revenue growth & healthy margins going forward, we continue to have positive view on the stock & advise investor to add on dips. At CMP of Rs 1,878, the stock is trading at P/E multiple of 20.6x of FY13E & 16.8x of FY14E earnings estimates. We revise target price upward to Rs 2,123 (from Rs 1,983), valuing at 20x of FY14E earnings estimates & maintain BUY rating on the stock.

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