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Dr. Reddy's Labs (DRRD) - Qtr. Updfate - Dtd. - February 14, 2013




Axis Capital Limited


15 Feb 2013





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Dr. Reddy’s Lab (DRL) reported Q3FY13 PAT at Rs 3.8 bn (down 22% YoY), which was below our estimate of Rs 5 bn. This was primarily due to: (a) forex loss of Rs 550 mn on cash flow hedges and Rs 80 mn net MTM loss and (b) higher SG&A (increased by Rs 580 mn QoQ). Increase in SG&A was due to higher spending on product launches and ~Rs 70 mn one-time rationalization cost in Germany. YoY fall in PAT was also due to USD 99 mn of one-off Zyprexa revenue in Q3FY12. Maintain BUY with target price of Rs 2,100 (12% upside from CMP of Rs 1,878) We believe strong presence in US (65 pending ANDAs; ramp-up in recent launches), 20% CAGR in high margin Russia business, and recovery in India (13% CAGR vs. 10% in FY12) would help DRL post 18% CAGR in core earnings over next two years. Maintain BUY with TP of Rs 2,100 – base business at Rs 2,087 (18x FY15E base EPS of Rs 116) and pipeline at Rs 13/share. At CMP, the stock trades at 18x FY14E EPS of Rs 106 and 16x FY15E EPS of Rs 120. Revenue (Rs 29 bn; up 3% YoY) in line with estimate; expect Q4 to be better  Revenue growth adjusted for one-off Zyprexa revenue in Q3FY12 was up 24% YoY  Management indicated benefits of market share ramp-up in key products – Metoprolol and Atorva – would be visible from Q4 (market share in Metaprolol has increased to ~15% from Jan ’13).  Russia/ CIS grew 32% YoY (26% in local currency) to Rs 4.4 bn driven by: (a) low base in Q2FY13, (b) better seasonal off-take, and (c) product launches  Delay in dispatch of high-value products led to 10% sequential decline in Pharmaceuticals Services and Active Ingredients (PSAI) revenue. Management indicated strong growth in Q4. PSAI gross margin fell to 29%; expect recovery from Q4: Management indicated gross margin in PSAI segment reduced to 29% in Q3 (35% in Q2) on (a) delay in dispatch of high-value batches and (b) pricing pressure in few large products. However, gross margin shall improve to 32-33% with launch of new products. Regards, Deepak Khetan (Asst VP – Life Sciences) Institutional Equity Research Axis Capital Ltd. Tel: +91 22 4325 1132

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