Sell Dr Reddys Labs; target of Rs 1519: PINC Research

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Sell Dr Reddys Labs; target of Rs 1519: PINC Research

PINC Research is bearish on Dr Reddys Labs and has recommended sell rating on the stock with a target of Rs 1519 in its February 3, 2012 research report.

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PINC Research is bearish on Dr Reddys Labs and has recommended sell rating on the stock with a target of Rs 1519 in its February 3, 2012 research report.

"DRL Q3FY12 results were ahead of our and street estimates primarily driven by the US segment. DRL reported USD99mn revenues from generic Zyprexa exclusivity. However, other segments recorded lower-than-expected growth with Russia registering flat YoY growth in constant currency terms. DRL recorded EBIT margins of 27.3%, however adjusting for generic Zyprexa, the recurring margins have contracted sequentially on back of lower growth in the high-margin Russia business and withdrawal of the DEPB scheme. On back of exclusivity, DRL reported 88% YoY growth in profits. We value DRL on a SOTP basis with a target price of Rs1,519, valuing the base business now at Rs1,452 (18x one year forward recurring earnings) and Rs67/share for P-IV/ limited competition opportunities. We maintain our SELL rating on the stock."

"DRL reported revenue of Rs27.6bn up 46% YoY which was ahead of our estimates majorly driven by the US and RoW formulation segments. US formulation segment grew by stellar 133% backed by the launch of Zyprexa which contributed USD99mn. The other markets had a modest contribution with disappointment from the Russia segment, which was flat YoY. However, going ahead DRL expects the traction to be back. The India formulation segment had a slow recovery registering growth of 11% YoY. On the other hand, the PSAI segment grew by 11.7% YoY. DRL reported EBIT margins of 27.3% which was boosted by the generic Zyprexa exclusivity. The SG&A and R&D expenses increased by 6.5% and 3.8% QoQ respectively. Adjusting for the exclusivity, we expect the EBIT margins to be at 14.5% for the quarter which are below expectations. On back of exclusivity, DRL reported tax rate of 33.8% during the quarter. Buoyed by strong sales, DRL reported net profit of Rs5.1bn up 67% YoY."

"We have revised our FY12 earnings estimates downward by 9%, factoring increase in SG&A costs and higher tax rate. We value DRL on a SOTP basis with a target price of Rs1,519, valuing the base business now at Rs1,452 (18x one year forward recurring earnings) and Rs67/share for P-IV/ limited competition opportunities. The stock is trading at 26.9x FY12E and 20.7x FY13E recurring earnings. We maintain our SELL rating on the stock," says PINC Research report.  

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To read the full report click on the attachment