Hold Dr Reddys Labs; target of Rs 1700: Emkay

Emkay Global Financial Services has recommended hold rating on Dr Reddys Labs with a target of Rs 1700, in its July 19, 2012 research report.

 “Dr Reddys Labs, management has re-iterated its top-line guidance of USD2.7bn and US revenue guidance of USD900mn in FY13. However, in the current quarter top-line and US business stood at USD457mn and USD158mn respectively. This implies that in the coming quarters, the company will have to clock per quarter run-rate of USD750mn in top-line and USD250mn from US business. This we believe will be challenging task for the company to achieve.”

“Gross margins- In FY12, DRL reported 59% gross margins and 63% in Q3FY12 when revenues from Zyprexa were USD99mn. In the current quarter, gross margins stood at 57% (decrease of 200bps from FY12 levels). For FY13, we have assumed 59% gross margins. Note: Our gross margin calculation excludes depreciation from cost of revenues. EBITDA margins- In FY12, DRL reported 24.5% EBITDA margins and base margins w/o exclusivity was 21%. This quarter reported margins stood at 21% and base EBITDA margins at 20%. We have assumed reported EBITDA margins of 23% and base margins of 21% in FY13. Going forward, if launches in US business doesn’t pan out the way as expected and price pressure continue in US market then we may have to revise our margin estimates downwards by 100-200bps. For every 1% movement in gross margin, impact on EPS is to the tune of Rs4-5.”

“We expect Dr. Reddy to report 22% base revenue growth in FY13E and 13% growth in FY14E. We expect base EBIDTA margins to move from 21% in FY12 to 21.5% in FY14. Base earnings will grow by 14% CAGR over FY12-14E. Maintain Hold with a target price of Rs1700. At CMP, the stock is trading at 21x FY13E and 18x FY14E base earnings,” says Emkay Global Financial Services research report. 

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