1. 1QFY2011 Result Update | Pharmaceutical
July 23, 2010
Dr. Reddy’s Laboratories NEUTRAL
CMP Rs1,365
Performance Highlights Target Price -
Investment Period -
Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg (qoq) 1QFY2010 % chg (yoy)
Stock Info
Net Sales 1,683 1,642 2.5 1,819 (7.5)
Sector Pharmaceutical
Gross Profit 891 864 3.2 1,017 (12.4)
Market Cap (Rs cr) 23,086
Operating Profit 244 187 30.2 326 (25.2)
Beta 0.4
Net Profit 210 166 26.1 244 (14.1)
52 Week High / Low 1,515/696
Source: Company, Angel Research
Avg. Daily Volume 72,941
Face Value (Rs) 5
Dr. Reddy’s Laboratories’ (DRL) 1QFY2011 results were a mixed bag. While the
BSE Sensex 18,131
company disappointed on the US front in spite of approvals of low-competition
products during the quarter, net profit came in higher than our estimates on the Nifty 5,449
back of better OPM and lower tax charges. The company reiterated its FY2013 Reuters Code REDY.BO
guidance of US $3bn on the top-line front and RoCE of 25%. We maintain Bloomberg Code DRRD@IN
Neutral on the stock.
Mixed results: DRL reported net sales of Rs1,683cr (Rs1,819cr) which was Shareholding Pattern (%)
in line with our expectation wherein lower sales in the US was offset by higher Promoters 25.7
sales in the Russia region. The lower-than-expected sales in the US was primarily MF / Banks / Indian Fls 19.6
on account of the slow pick up in new product sales and sluggish recovery in the FII / NRIs / OCBs 46.0
base business post the recall in 3QFY2010. In Europe, sales de-grew by 8.2% yoy
Indian Public / Others 8.7
as the Betapharm business continues to reel under pricing pressure. However, on
a positive note, the company successful reduced the SG&A costs by 70% yoy to
Euro1.5mn along with increasing sourcing from India. The Russia region grew by
Abs. (%) 3m 1yr 3yr
a stellar 36.4% on the back of restocking after a sluggish FY2010. The new
Sensex 2.5 19.0 15.2
pricing policy introduced in the Russian market at the beginning of the fiscal did
DRL 12.5 73.6 104.6
not have a material impact on DRL’s product portfolio. India grew by 16.1% yoy
on volume growth. The company launched 11 new products during the quarter in
the domestic market.
Excluding the Sumatriptan impact in 1QFY2010, OPM at 14.5% in 1QFY2011
came in higher on lower SG&A expenses. DRL also improved its profitability at
Betapharm through reduction in workforce and increase of sourcing from India.
Overall, DRL reported net profit of Rs209.9cr (Rs244.5cr), down by 14.1% yoy.
The company had lower tax charges on higher R&D weighted deduction.
Outlook and Valuation: DRL has guided for revenue of US $3bn by FY2013E, Sarabjit Kour Nangra
which implies revenue CAGR of 24% over FY2010-13E with RoCE of 25% (c17%). Tel: 022 – 4040 3800 Ext: 343
Growth would be driven by the US business, up-tick on the domestic formulation sarabjit@angeltrade.com
and Russia, and increasing contribution from the GSK alliance. From 1QFY2011,
the company has stopped reporting consolidated results as per Indian GAAP; we Sushant Dalmia
are currently reviewing our estimates as per IFRS. We maintain a Neutral on the Tel: 022 – 4040 3800 Ext: 320
stock. sushant.dalmia@angeltrade.com
Please refer to important disclosures at the end of this report 1
2. Dr. Reddy’s Laboratories | 1QFY2011 Result Update
Exhibit 1: 1QFY2011 performance (IFRS, consolidated)
Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg (qoq) 1QFY2010 % chg (yoy) FY2010 FY2009 % chg
Net Sales 1,683 1,642 2.5 1,819 (7.5) 7,028 6,944 1.2
Other Income 19 24 (20.2) 3 444 57 (25) -
Total Income 1,702 1,666 2.2 1,822 (6.6) 7,085 6,919 2.4
Gross Profit 891 864 3.2 1,017 (12.4) 3,634 3,650 (0.4)
Gross Margin (%) 53.0 52.6 55.9 51.7 52.6
SG&A expenses 548 581 (5.7) 593 (7.5) 2,251 2,102 7.1
R&D expenses 99 95 4.2 99 0.8 379 404 (6.0)
PBIDT 244 187 30.2 326 (25.2) 144 (258) -
OPM (%) 14.5 11.4 17.9 2.0 -
Interest 18 3 582.3 14 31.1 0 119 -
PBT 245 209 17.6 316 (22.4) 201 (402) -
Tax 36 44 (19.0) 73 (50.8) 99 117 (16.0)
Reported Net Profit 209 164 27.4 243 (13.9) 102 (519) -
share of profit in associates 0 2 (76.5) 1 (56.9) 5 2 100.0
PAT after Exceptional Items 210 166 26.1 244 (14.1) 107 (517) -
EPS (Rs) 12.5 9.8 14.2 6.3 -
Source: Company, Angel Research
Revenues in line, but US disappoints: DRL reported net sales of Rs1,683cr
(Rs1,819cr) which was in line with our expectation as lower sales in the US was
offset by higher sales in the Russia region. On the global generic front, the
company disappointed on the US front with sales of Rs390cr, which was flat yoy
excluding the Sumatriptan sales in 1QFY2010. The lower-than-expected sales in
the US came primarily on account of the slow pick up of new product sales and
slow recovery in base business post the recall in 3QFY2010. On new launches of
generic version of Lotrel and Prograf, the company expects gradual increase in
market share. On the Omeprazole OTC drug, the company added two more
customers during the quarter taking the aggregate to four. On Allegra D-24, post
the US district court injunction blocking the company’s at-risk launch, DRL expects
a resolution of the issue by 2HFY2011. In FY2011, the company plans to launch
8-10 products of which 2-3 could be a limited competition opportunity.
In Europe, sales de-grew by 8.2% to Rs193.7cr (Rs210.9cr) as Betapharm business
continued to reel under pricing pressure. However on the positive front, the
company has been successful in bringing down the SG&A costs by 70% yoy to
Euro1.5mn currently and increase sourcing from India. As a result, Betapharm is
able to generate cash profits for the company.
Russia grew by a stellar 36.4% to Rs255.2cr (Rs187.1cr) on the back of restocking
after a sluggish FY2010. The new pricing policy introduced at the start of the fiscal
failed to have any material impact on DRL’s product portfolio. India registered
16.1% yoy growth to Rs277.8cr (Rs239.3cr) on the back of volume growth. The
company launched 11 new products during the quarter in the domestic market.
July 23, 2010 2
3. Dr. Reddy’s Laboratories | 1QFY2011 Result Update
Exhibit 2: Global generic trend
1,400
62 71
1,200
187 77 75
235 77
1,000 255
239 277 213
252
(Rs cr)
800
211 263 261 278
600 285
211 194
400 258
603
200 429 353 390
297
0
1QFY2010 2Q FY2010 3Q FY2010 4Q FY2010 1QFY2011
Others Russia & CIS India Europe North America
Source: Company, Angel Research
On the PSAI front, sales de-grew by 7.6% to Rs450cr (Rs487cr) on the back of
continuous pricing pressure and no launch of new API products. Volume growth in
existing products was offset by price declines.
Exhibit 3: PSAI trend
600
500
184 176
400 188 197 147
(Rs cr)
63 61
300
63 78 63
200 176
137 215 156
137
100
100 115 81 84
72
0
1QFY2010 2Q FY2010 3Q FY2011 4Q FY2010 1QFY2011
Others India Europe North America
Source: Company, Angel Research
OPM higher than expectation: The company reported OPM of 14.5% which
contracted by 343bp from 17.9% in 1QFY2010 but was higher than expectation.
Higher OPM during 1QFY2010 was due to exclusivity of Sumatriptan. After
excluding the Sumatriptan impact, OPM came in higher on the back of lower
SG&A expenses, which fell 7.5% yoy to Rs548.2cr (Rs592.7cr) mainly due to the
one-off expense in 1QFY2010. DRL has also been able to improve profitability at
Betapharm through reduction in workforce and increase of sourcing from India.
July 23, 2010 3
4. Dr. Reddy’s Laboratories | 1QFY2011 Result Update
Exhibit 4: OPM trend
20.0
17.9
16.0 14.4 14.5
13.2
11.4
12.0
(%)
8.0
4.0
0.0
1QFY2010 2Q FY2010 3Q FY2011 4Q FY2010 1QFY2011
Source: Company, Angel research
Net profit boosted by lower tax charges: DRL reported net profit of Rs209.9cr
(Rs244.5cr), down 14.1% yoy. The company had lower tax charges due to higher
R&D weighted deduction.
Exhibit 5: Net Profit trend
300
244
250 227
206 210
200
166
(Rs cr)
150
100
50
0
1QFY2010 2Q FY2010 3Q FY2011 4Q FY2010 1QFY2011
Source: Company, Angel Research
July 23, 2010 4
5. Dr. Reddy’s Laboratories | 1QFY2011 Result Update
Concall takeaways
DRL reiterated its FY2013 guidance of US$3bn in revenues with 25% RoCE.
The company has cumulative ANDA filings of 163. Around 71 ANDAs are
pending approvals of which 36 are Para IV and 12 are FTFs.
DRL plans to launch its third biosimilar product (darbepoetin)in India. The
product would be the first biosimilar version of the innovator product globally.
On the GSK alliance, the company has transferred few products in the Brazil
market to GSK and received US $4mn, which would be accrued over a period
of three years. Further, the company expects to receive US $9mn in the future
from transfer of additional products.
July 23, 2010 5
6. Dr. Reddy’s Laboratories | 1QFY2011 Result Update
Recommendation Rationale
Timely launches in US critical: After attaining US $365mn in FY2010, DRL aims to
scale up its business to the next orbit in the US market on the back of strong
product pipeline (71 ANDAs are pending approval of which 36 are Para IVs and
12 are FTFs). DRL has guided for one limited competition opportunity every year
over the next few years. In the next 12-18 months we expect DRL to have one of
the most interesting product pipelines with limited competition opportunity
comprising Prilosec OTC, Prograf, Lotrel, Allegra D-12, Allegra D-24, Arixtra,
which could contribute US $230mn to revenues. However post the recent setback
on Allegra D-24, timely launches of limited competitive product is critical for
achieving the US$3bn revenue target in FY2013.
Worst behind us in German market: Post the Betapharm acquisition, Germany has
become a tender-based market leading to significant price erosions. Thus, to
remain competitive, DRL has managed to reduce workforce by 200 to 80
personnel currently and 60% of its products at Betapharm are now vertically
integrated. The company expects to clock revenues to de-grow to Euro 75-100mn
for FY2011E, and to stabilise in FY2012E.
Domestic market back in focus: After a below-industry average growth in the
domestic formulations segment in the last three years, DRL contemplates to log
18-20% growth going ahead driven by: a) field force expansion (beefed up field
force to 3,000 from 2,400 in FY2009) and improve productivity, b) new product
launches including biosimilars, and c) focus on brand building.
Alliance with GSK and Biogenerics to provide long-term growth: To tap emerging
market opportunities, DRL has entered into an alliance with GSK to develop and
market branded formulations across emerging markets. DRL expects revenue flow
from this deal to commence from FY2011 by focusing on Mexico, Brazil and
Turkey initially. On the Biogeneric front, the company has developed 9 products
(2 products launched in India) on the mammalian cell culture with global branded
sales of US $30bn.
Valuation: DRL has guided for revenue of US $3bn by FY2013E, which implies
revenue CAGR of 24% over FY2010-13E with RoCE of 25% (c17%).The growth
would be driven by the US business, up-tick in domestic formulations and Russia,
and increasing contribution from the GSK alliance. From 1QFY2011, the company
has stopped reporting consolidated results as per Indian GAAP; we are currently
reviewing our estimates as per IFRS. We maintain Neutral on the stock.
July 23, 2010 6
8. Dr. Reddy’s Laboratories | 1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Dr Reddy’s Labs
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 23, 2010 8
