Buy Dr Reddys Labs; target of Rs 2250: Emkay

Emkay Gobal Financial Services is bullish on Dr Reddys Labs and has recommended buy rating on the stock with a target of Rs 2250 in its January 1, 2013 research report.

• US business which is 50% of its formulation biz will grow by 19% CAGR over FY12-15 on back of niche launches like Toprol, Vidaza and 30 other new launches
• Expect 15% CAGR in Russia business over FY12-15E led by strong OTC portfolio and 9% CAGR in India under DPCO impact , however impact will be minimum across industry
• Operating margins will improve going forward on back of better currency realization. Strong cash flow generation of USD 750 million is expected over the next 3 years
• Recent gain in market share in key products and expected niche launches in US will drive 27% CAGR in earnings over FY12-15. Upgrade the stock to buy with TP of Rs2,250

"US business, which contributes 50% of the formulation revenue is expected to grow by 19% over FY12-15 and will do more than USD 1 bn in revenue in FY15. Over the last three months the outlook on US business of Dr. Reddy has improved on back of a) increase in market share in some key products like Atorvastatin, Amoxcillin, Tecrolimus, Lansoprozole and Fondaparinux b) Metoprolol, which is a niche opportunity, is expected to give USD 50 mn in revenue annually and c) Launch of approx. 30 products in next two years which includes Propecia, Vidaza, Avandia, Avelox, Lunesta and Aciphex. Russia and India business which contributes rest 35% of the formulation business is expected to grow 12% CAGR over FY12-15. In Russia the growth will be led by strong OTC portfolio and new products launches. In India growth will be led by Bio similar portfolio & new product launches. However, DPCO will restrict the India growth in FY14.”
 
“We expect operating margins to improve on back of strong growth in US and better currency realization. Average USD realization currently is at less than Rs. 50 to a dollor, which is expected to be 56 next year i.e. 12% improvement. However we have not assumed any margins improvement because of Drug pricing control policy impact. Company today has a cash of USD 285 million which will reach to USD 1 billion in next 3 years on back of strong free cash flow generation. ROCE of the company will improve by 330 bps over FY12-15 to 28%. This will be on back of strong growth in US, India and Russia. Company has a very nominal capex of USD 125 mn per year against a yearly depreciation of USD 95 million. Company invests 7% of its revenue in R&D which is approx. USD 140mn.”
 
“We expect Dr. Reddy to report 21% base revenue growth over FY12-15. We expect base EBIDTA margins to remain stable at 20-21% over FY12-15. Base earnings will grow by 25% CAGR over FY12-15E. Upgrade to Buy with a TP of Rs. 2,250. At CMP, the stock is trading at 18x FY13E & 15x FY14E EPS of Rs. 116,” says Emkay Gobal Financial Services research report.

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