Feb 19, 2013 11:46 AM IST | Source:

Accumulate Dr Reddys Labs; target of Rs 2055: Dolat Capital

Dolat Capital is bullish on Dr Reddys Labs and has recommended accumulate rating on the stock with a target of Rs 2055 in its February 15, 2013 research report.

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Dolat Capital is bullish on Dr Reddys Labs and has recommended accumulate rating on the stock with a target of Rs 2055 in its February 15, 2013 research report.
“Dr. Reddy’s Labs’ (DRL) gross revenue grew 3.5 percent YoY to Rs 28.65bn driven by healthy growth in Emerging markets – India & Russia in the Global Generics segment. Notably, excluding impact of Olanzapine in Q3FY12, like to like revenue growth is 23 percent YoY. US generics at USD178mn (USD187mn in Q2FY13) grew by 32 percent YoY (ex Olanzapine sales). US business saw a slowdown on QoQ basis mainly due to lack of new launches and price erosion in base business. Russia registered better-than-estimated sales at Rs 4.38bn, up 32 percent YoY largely aided by seasonal off take across branded products. Indian formulations grew 12 percent YoY to Rs 3.72bn, driven by 47 percent growth in Biosimilars portfolio (7 percent of India sales). European generics sales stood at Rs 1.93bn (lower by 20 percent YoY). Betapharm recorded sales of Euro19mn during the quarter (4.8 percent of total sales) Revenue contribution from PSAI segment grew 28 percent YoY to Rs 7.13bn.”
“Growth was driven by Europe & India markets. Gross margins declined 770bps YoY to 52.4 percent due to shift in product mix (no material launch in US) and fuel surcharge adjustment of Rs 204mn. SG&A and R&D expenses increased by 210bps and 160bps YoY at 29.7 percent & 7 percent of sales respectively. EBITDA margin stood at 20.5 percent. R&D spend is expected to be in the 7 percent range on the back of clinical development of Biosimilars, complex injectables & focus on niche products.”
“Tax rate stood much lower than expected at 19 percent against 34 percent in Q3FY12. Consequently, reported PAT degrew by 29 percent YoY to Rs 3.63bn. We anticipate traction in the PSAI segment to sustain in the near term. The earlier revenue guidance of USD 2.3bn for FY13 was subject to approval of 2 ANDA approvals (undisclosed). There is lack of certainty over timeline of these launches. Timely approvals in US acts as a key catalyst to earnings growth.”
“DRL leverages on its chemistry skills to identify and capitalize on niche opportunities with limited competition. The company has built significant API capabilities that support its fast growing generic formulations business. Notably, dependence on Betapharm has reduced significantly (5 percent of sales), and is unlikely to be a further drag on overall financials. We have lowered our FY13E/FY14E estimates by 16.5 percent/6 percent to factor in a) lower sales in US generics b) lower gross margins & higher R&D spend, while we have increased revenue contribution from India & Russia biz. New product launches in US remains key to earnings growth momentum. Sustained traction in the PSAI segment will drive growth in the near term. At CMP, the stock trades at 18.5x FY14E & 15.9x FY15E earnings. We recommend Accumulate with a revised target price of Rs 2055 (18x to FY15E EPS),” says Dolat Capital research report.

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