Accumulate Dr Reddys; target of Rs 1944: Dolat Capital

Dolat Capital is bullish on Dr Reddys Laboratories (DRL) and has recommended accumulate rating on the stock with a target of Rs 1944 in its October 31, 2012 research report.

“Dr. Reddy’s Labs’ gross revenue grew 27% YoY to Rs 28.81bn driven by healthy growth in US and RoW markets in the Global Generics segment. Growth was also aided by better than expected performance in PSAI segment; particularly from India and RoW markets. Global generics sales grew 24.6% YoY to Rs 20.1bn, largely driven by US. Revenues from North America stood at Rs 9.27bn (up 47.4% YoY) driven by limited competition opportunities, ramp-up in antibiotics portfolio and contribution from Shreveport facility.”

“Gross margins declined 50bps YoY to 53.8% owing to higher than expected contribution from PSAI segment. SG&A and R&D expenses declined 410bps and 40bps YoY, respectively. EBITDA margin stood at 25% (up 310bps YoY). Exceptional items for the quarter include impairment charges of Rs 688mn pertaining to product intangibles and goodwill in Italian operations. Tax rate stood higher at 27.9% against 17.1% in Q2FY12. Consequently, reported PAT grew to Rs 4.07bn (up 32.4% YoY). PAT adjusted for exceptional items stood even higher at Rs 4.94bn, up 76.8%. We anticipate traction in the PSAI segment to sustain and add momentum to revenue growth for this fiscal. The management maintains its revenue guidance of USD 2.5 - 2.7bn for FY13E, with US contributing USD 800-900mn.”

“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 18.4x FY13E & 18.1x FY14E earnings. We recommend accumulate with a revised target price of ` 1944 (20x to FY14E EPS),” says Dolat Capital research report.

Non-Institutions holding more than 90% in Indian cos

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