KRChoksey is bullish on Dr Reddys Labs and has recommended accumulate rating on the stock with a target of Rs 3485 in its October 30, 2014 research report.
"DRL's Q2FY15 revenues showed growth of 6.9% YoY to Rs. 3,588 crs in line with our estimates. North America & Russia business showed growth lower than our estimates while PSAI, ROW & domestic business showed performance better than expected. EBIDTA degrew by 4% YoY to Rs.816 crs mainly on account of lower gross margins, higher R&D & operating expenses. EBITDA margin stood at 22.7% contracted by 250bps YoY. R&D expenses were high at 11.5% of revenues due to scale up in development activities of complex generics like topicals, patches, injectables, biosimilar's early phase trials & late phase trials in prop products. The company has outstanding cashflow hedges of around USD 610mn at an average rate of Rs. 59-61/USD and balance sheet hedges of around USD 524mn. Reported PAT stood at Rs. 574 crs down by 17% YoY higher than our estimates on account of lower tax provisioning. After adjusting tax write back during corresponding quarter last year APAT was down by 8% YoY. EPS for the quarter stood at Rs 33.8."
"North America showed subdued revenue growth of 7% YoY in dollar terms to USD 235mn during the quarter on account of channel consolidation – price erosion in some of its base products & lack of new launches. Management highlighted that ANDA approvals were slower than anticipated during H1FY15. However company has seen market share expansion in its key launches namely Metoprolol succinate, Ziprasidone & Divalproex ER. Company has launched 1 product during the quarter. Company has done 2 ANDA filings during the quarter. Company has entered in to an asset purchase agreement with Novartis to acquire rights & market Habitrol franchise an OTC nicotine replacement therapy transdermal patch with modest market size in US. Company has launched Rapamune tablet 1mg & 2mg which is a low competition market. We believe US market will recover in H2FY15 with ramp up in new launches. Cumulatively 72 ANDAs are pending for approval of which 45 are Para IVs & 11 are FTFs. Europe has shown degrowth of 19% YoY during the quarter. We believe company will continue to face challenges in EU business due to tender business."
"Domestic business showed strong growth of 14% during the quarter driven by healthy volume expansion in its focus brands, some of which listed in NLEM portfolio. Total MRs stands at 4000. Management is focusing to improve its volume growth in high profile brands and also by launching new products in different therapies like CVS, Hypertension & other chronic therapies. Therefore we expect domestic revenue CAGR of 14% over FY14-16E. Russia degrew by 11% YoY on account of rouble devaluation. We believe sales in Russia will recover in H2FY15. Company has strong foothold in the market & has local MRs to cater to both prescription & OTC market in Russia. Currently DRL has 37% OTC exposure of sales and planning to increase its OTC exposure in order to stay away from price regulation. Emerging markets Ex- Russia grew by 57% YoY during the quarter due to strong performance in Venezuela. We believe company will have focused approach on emerging markets viz. South Africa & Venezuela through their sales force excellence. Cumulatively 72 ANDAs are pending out of which 45 are Para IVs & 11 FTFs. We believe US business growth to pick up in H2FY15. Company has strong focus on niche launches & building its pipeline in injectables, biosimilars & derma space. Also, strong domestic business will help the company to drive growth in future. At CMP of Rs. 3,053 DRL is trading at 22.9xFY15E & 19.3xFY16E EPS. We recommend 'ACCUMULATE' rating with the revised target price of Rs. 3,485 at 22xFY16E (earlier Rs. 3,515)," says KRChoksey research report.
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