Motilal Oswal has come with pre earning report on pharmaceutical companies for quarter ended March FY07. It expects Dr Reddy’s 4QFY07 sales (excl. Zofran) are expected to grow by 56% YoY to Rs 10.9 billion and PAT (excl. Zofran) to Rs 878 million (v/s losses of Rs 232 million).

Motilal Oswal report on Dr Reddy’s Labs

Dr Reddy’s 4QFY07 sales (excl. Zofran) are expected to grow by 56% YoY to Rs 10.9 billion, driven by consolidation of BetaPharm and Roche’s Mexico facility, and improvement in the base business. Zofran — a 180 exclusivity opportunity — is likely to contribute around Rs 1 billion to DRL’s sales and Rs 741 million to PAT for the quarter.

Overall gross margin (excl. Zofran) is expected to improve by 830bp (to 50.4%) due to improvement in the base business. Also, EBITDA margins are likely to improve to 16.2% due to the significantly lower base of 3QFY06.

However, higher depreciation (up 174%) and higher other expenditure (up 164%) would restrict PBT to Rs 1 billion (v/s losses of Rs 296 million) and PAT (excl. Zofran) to Rs 878 million (v/s losses of Rs 232 million).

Improvement in the US business coupled with large one-time opportunities like generic Allegra and Zofran will result in increased traction. The German operations are likely to contribute positively to margins despite the recent price cuts. DRL is currently valued at 28.7x FY07E and 19.9x FY08E EPS (excl. one-time opportunities). We maintain Buy.