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Feb 25, 2013, 12.22 PM IST | Source: Moneycontrol.com

Hold Dr Reddys Laboratories: Ventura Securities

Ventura Securities has recommended hold rating on Dr Reddy Laboratories (DRL), in its February 21, 2013 research report. The research firm, expects company's performance in FY14 to remain muted and restricted to single digit growth.

Ventura Securities has recommended hold rating on Dr Reddy Laboratories (DRL), in its February 21, 2013 research report. The research firm, expects company's performance in FY14 to remain muted and restricted to single digit growth.

"Dr Reddy Laboratories revenue grew 3.5% yoy to Rs 2865 crore. However, excl. olanzapine exclusivity in Q3FY13, revenue grew 23% yoy. The reported EBITDA margin came in at 20.5%, lower than the street expectation mainly on account of a decline in the PSAI (pharma services and active ingredients) gross margin and higher R&D spend of 7%, vs 5.5% yoy. Due to lower revenue growth and the decline in the EBITDA margin, adjusted PAT declined 29.2% yoy to Rs 363.3 crore.

Domestic formulations grew 11.7% yoy, led by strong growth in biosimilars and the launch of brands. Biosimilars portfolio witnessed a strong growth of 47% YoY albeit on a smaller base. However, the domestic formulations growth has been lower than the Industry, the direction is positive and the management would be implementing plans to drive performance.

Revenue (excl. Olanzapine exclusivity) growth of 23% yoy was largely driven by a 38% yoy increase in US generics, 35% growth in Russia and 28% growth in the PSAI segment. US growth was led by limitedcompetition products such as ziprasidone, tacrolimus and fondaparinux, and market-share gains in metoprolol, atorvastatin and montelukast. Higher growth in Russia stemmed from seasonal offtake across the product portfolio. At the same time, CIS business grew 18.5% to Rs 660 mn.

Backed by the favorable currency movements and launch of new APIs due to patent expiries during the year, growth in the PSAI segment was a healthy at 25.7% on a YoY basis. However, gross margins declined by 840 bps sequentially to 27.4% several high-value APIs did not receive approval during Q3FY13. We believe that 75% of the PSAI segment's revenues come from APIs, which is not a consistent business and there is lumpiness QoQ. Over the same period, SG&A spend escalated on account of US $1 mn led by GDUFA fee, spate of launches (especially from the bio-generics side) in emerging markets, and spend towards OTC portfolio in the US and Russia.

Despite current performance, rich product pipeline (63 ANDA's pending approval), 7 FTF opportunities and 33 Para IVs would drive Dr Reddy's revenue in the long term. However, considering the high base of FY13, we expect DRL performance in FY14 to remain muted and restricted to single digit growth. Currently, the stock is trading at 17.2x and 15.2x of its FY14E and FY15E consensus earnings. Factoring the weak outlook for FY14, slower pace of ANDA's filings, we recommend a HOLD on the stock," says Ventura Securities research report.

Institutional holding more than 40% in Indian cos

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