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Dr. Reddy's Labs (DRRD) - Qtr. Update - Dated - february 11, 2014




Axis Capital Limited


12 Feb 2014





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Dr. Reddy’s Lab's (Bloomberg: DRRD IN) Q3 revenue of Rs 35 bn (up 23% YoY) was in line with our estimate. Operating margin, at 23%, was 90 bps higher than estimate led by improving product-mix (higher contribution from complex generics) pushing up gross margin (61% vs. 58% estimated). However, adjusted PAT of Rs 5.7 bn (up 50% YoY) was 9% below our estimate due to higher tax (maintained FY14 tax guidance at 20-22%). Increase estimates; maintain BUY with TP of Rs 3,000 (13% upside from CMP) We believe DRRD’s US business would continue to benefit from increasing contribution of niche products, while Russia/ India would deliver healthy double digit growth. We increase our FY14E/ FY15E EPS by 9%/7% to Rs 130/ Rs 150 to factor in improving margin. Maintain BUY with revised TP of Rs 3,000 (20x FY15E EPS) vs. Rs 2,811 earlier. At CMP of Rs 2,659, the stock trades at 21x FY14E EPS and 18x FY15E EPS. Q3 highlights  Reasons for strong performance: - ~50% growth (USD terms) in US led by gVidaza, gDacogen, gAricept 23 mg, gDepakote ER, market share gain in Fondaparinux, Tacrolimus, Omeprazole, and bunching up of order from new clients, - 21% growth in Russia/ CIS (constant currency growth was only 6%; Q4 expected to be better as winter picks-up), and - Generic gross margin expanded 830 bps/ 220 bps YoY/ QoQ to 68% led by higher contribution from US niche products and currency benefits. Though this level of gross margin is not sustainable, we believe improving product-mix would keep gross margin buoyant (550 bps improvement over FY15E-13)  PSAI# segment continues to struggle – margin dips again as revenue continues to shrink: PSAI revenue declined 29% led by lower molecule launch by customers, price erosion and inventory rationalization. Gross margin declined 1330 bps/ 890 bps YoY/ QoQ. Management highlighted gradual recovery ahead # Pharmaceuticals Services and Active Ingredients Regards, Deepak Khetan (VP – Life Sciences) Institutional Equity Research Axis Capital Ltd. Tel: +91 22 4325 1132

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