Accumulate Dr Reddys Labs; target of Rs 1938: Dolat Capital

Dolat Capital is bullish on Dr Reddys Labs and has recommended accumulate rating on the stock with a target of Rs 1938 in its May 15, 2012 research report.

“Dr. Reddy’s Labs’ (DRL) revenue grew 29.5% YoY to Rs 26.8bn driven by strong growth in key generic markets of US and Russia as well as in PSAI segment. Global generics sales grew 29.9% YoY to Rs 18.4bn. Revenues from North America stood at Rs 8.73bn (up 47.5% YoY), driven by new launches (Ziprasidone under shared exclusivity) and market share gains from existing products. Russia registered sales of Rs 3.55bn (up 32.5% YoY), while European generics sales de-grew 10.2% YoY to Rs 1.8bn. Notably, Indian formulations reported a strong performance growing 16.4% YoY to Rs 3.2bn. PSAI segment sales stood at Rs 7.49bn (up 34.8% YoY) on account of new customer orders. Gross margins for the quarter stood lower by 250bps YoY at 52.9% due to lower DEPB benefits and higher contribution from low margin PSAI segment.”

“The company reported a one-off impairment charge of Rs 1.04bn on product intangibles pertaining to German operations. Net carrying value of these intangibles still stands at Euro 60mn-75mn (approx. Rs 4.2bn-5bn). Tax rate stood at 19.7% against 14.5% in Q4FY11. Consequently, reported PAT stood at Rs 3.43bn (up 2.5% YoY). However, adjusted for exceptional items, PAT grew 34.2% YoY to Rs 4.12bn. DRL is on track to achieve USD 2.5bn-2.7bn of sales in FY13E, of which USD 900mn will be contributed by US, driven by new product launches. Surplus cash flow from operations shall be used towards debt repayment (no plans for inorganic expansion) while RoCE is guided at 25% for FY13E.”

“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% of sales), and is unlikely to be a further drag on overall financials. A string of product launches in US and other generic markets, coupled with healthy traction in the PSAI segment in the short-run, will catapult growth in FY13E which will taper off to normal levels from FY14E. At CMP, the stock trades at 17.1x FY13E & 17.2x FY14E earnings. We recommend Accumulate with a revised target price of Rs 1938 (20x to FY14E EPS),” says Dolat Capital research report.  

Non-Institutions holding more than 90% in Indian cos

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