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MOSL: DR REDDY'S (BUY) - highest ever gross margins in Global Generics driven by superior product mix in US




Motilal Oswal Securities Ltd.


12 Feb 2014





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Dr Reddy's Laboratories (DRRD IN, Mkt Cap USD7.2b, CMP INR2,659, Buy) Alok Dalal (Alok.Dalal@MotilalOswal.com) / Hardick Bora (Hardick.Bora@MotilalOswal.com) Dr Reddys Labs (DRRD) 3QFY14 results were above estimates. Sales grew 23% YoY to INR35.3b (2% miss), EBITDA grew 72% to INR9.8b (26% beat), while PAT rose 70% YoY to INR6.2b (37% beat). Adj PAT grew 56% to INR5.7b (26% beat). Sales growth was driven by strong traction in US generics (up 76% YoY v/s est. 41%) and RoW formulations (up 35% YoY v/s est. 15%). Russia formulations (delayed onset of winter) and PSAI sales (subdued demand) missed estimates during the quarter. India formulations revenue was in line. EBITDA margin improved 780bp YoY to 27.6% led by (1) better sales mix, with higher contribution from the US and (2) better realization of recent low competition launches. Reported PAT beat was even higher due to INR497m of impairment reversal. Key concall takeaways: US sales may decline sequentially as seasonal impact on some products may normalize in 4QFY14. Russia continues to grow faster than the market, a trend which is expected to continue. Growth in PSAI segment will pick up on the back of a healthy order book. However, current high margins may not sustain if the competitive intensity increases in key products in the US. Valuation and view: We expect US to be the key growth driver in the medium term for DRRD. While FY15 may not see blockbuster launches, recently introduced products like gDacogen, gReclast, gVidaza injections are expected to continue to witness limited competition in the medium term. We expect Russia to return to mid teens growth as winter picks up, while India growth is expected to return to early teens in FY15 led by volume pick-up. PSAI is expected to demonstrate muted growth over the next few quarters and a strong performance there would be a positive surprise. While we expect operating leverage to continue for the company, we also build a 50bp increase in R&D spend annually. On the back of 3Q beat, we raise FY14E/FY15E/FY16E EPS by 12%/8%/6%. We value DRRD at 20x FY16E earnings to reflect the CAGR of 21% in core earnings over FY13-16E. Maintain Buy with a revised target price of INR3,180, 20% upside.

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