Dr. Reddy's Laboratories Result Updated

4QFY2012 Result Update | Pharmaceutical
May 11, 2012
Dr. Reddys Laboratories

Performance Highlights
Y/E March (` cr) Net sales Gross profit Operating profit Adj. net profit 4QFY2012 2,658 1,397 501 431 3QFY2012 2,769 1,658 738 513 % chg (qoq) (4.0) (15.7) (32.1) (16.0) 4QFY2011 2,017 1,095 333 334 % chg (yoy) 31.8 27.6 50.6 28.9
ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 28,175 0.4 1818/1387 29,925 5 16,293 4,929 REDY.BO DRRD@IN
`1,662 `1,859
12 months
Source: Company, Angel Research
Dr. Reddys Laboratories (DRL) reported higher-than-expected 4QFY2012 top-line performance, while its bottom line came in below expectations. The companys net sales increased by 31.8% yoy, led by 29.9% yoy and 26.8% yoy growth across the global generics and proprietary products businesses, respectively. This led to OPM expansion and net profit growth during the period. Management has reinforced its FY2013 guidance of US$2.7bn, with RoCE expected to come in at 25%. We recommend Accumulate on the stock. Results much above expectations: DRL reported net sales of `2,658cr for 4QFY2012, registering 31.8% yoy growth, which was higher than our estimate of `2,272cr. The U.S. and ROW were the key growth drivers for the company, registering strong growth of 47.5% yoy and 32.3% yoy, respectively. The domestic market reported single-digit growth of 16.7% yoy. The companys EBIT margin expanded by 235bp yoy to 18.9%, resulting in adjusted net profit growing by 28.9% yoy to `431cr during the quarter. Outlook and valuation: DRL has reinforced its earlier revenue guidance of US$2.7bn by FY2013E with RoCE of 25%. We expect net sales to report a 9.8% CAGR to `11,662cr and adjusted EPS to record a 2.3% CAGR to `92.9 over FY2012-14E. We maintain our Accumulate recommendation on the stock with a target price of `1,859.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 25.6 20.3 45.7 8.4
Abs. (%) Sensex Dr Reddy
3m 2.6
1yr
3yr 39.5
(8.2) (12.3)
3.7 197.1
Key financials (IFRS Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg Adj net profit % chg Adj. EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
FY2011 7,469 6.3 1,104 933.6 1,076 16.8 63.8 21.0 26.1 24.2 17.7 6.1 4.0 19.0
FY2012 9,674 29.5 1,426 29.2 1,507 40.0 88.8 24.1 18.7 28.9 22.7 4.8 3.1 12.7
FY2013E 10,696 10.6 1,420 (0.4) 1,420 (5.8) 83.7 20.7 19.8 22.4 18.4 4.1 2.7 13.3
FY2014E 11,662 9.0 1,576 11.0 1,576 11.0 92.9 21.0 17.9 21.0 18.9 3.5 2.5 11.8
Sarabjit Kour Nangra

+91 2 39357600 Ext: 6806 sarabjit@angelbroking.com
Please refer to important disclosures at the end of this report
Dr. Reddys Laboratories | 4QFY2012 Result Update
Exhibit 1: 4QFY2012 performance (IFRS, consolidated)

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin (%) SG&A expenses R&D expenses PBIT PBIT (%) Interest PBT Tax Net Profit Share of profit/ (loss) in associates Reported net profit before excep. Exceptional items Reported PAT Adj. Net Profit EPS (`)
4QFY2012 2,658 21 2,679 1,397 52.6 722 174 501 18.9 (8) 531 84 447 447 104 343 431 25.4
3QFY2012 2,769 17 2,786 1,658 59.9 768 151 738 26.7 (17) 772 262 511 2.6 513 513 513 30.3
% chg (qoq) (4.0) 27 (3.8) (15.7) (12.2) (6.0) 15.0 (32.1) (31.3) (68.0) (12.5) (12.9) (33.2) (16.0)
4QFY2011 2,017 51 2,068 1,095 54.3 613 149 333 16.5 (7) 392 57 335 335 0 334 334 19.7
% chg (yoy) 31.8 29.5 27.6 (3.2) 17.8 16.8 50.6 10.2 35.5 47.7 33.4 33.4 2.5 28.9 -
FY2012 9,674 77 9,750 5,331 55.1 2,887 591 1,853 19.2 (16) 1,945 420 1,525 5.4 1,530 104 1,426 1,507 88.9
FY2011 7,469 75 7,544 4,026 53.9 2,369 506 1,151 15.4 18.8 1,207 140 1,067 0.3 1,067 (37) 1,104 1,076 63.5
% chg 29.5 29.2 32.4 2.2 21.9 16.8 60.9 199.6 42.9 43.4 29.2 40.1 -
Exhibit 2: Actual vs. Estimates

(` cr) Net sales Other income Operating profit Interest Tax Net profit
Actual 2,658 21 501 (8) 84 431
Estimates 2,272 51 607 132 526
Variation (%) 17.0 (59.0) (17.3) (36.3) (18.1)
Better-than-expected revenue growth: DRL reported net sales of `2,658cr for 4QFY2012, registering 31.8% yoy growth, which was higher than our estimate of `2,272cr. The global generics market registered growth of 29.9% yoy, led by growth across the U.S. and Russian markets. In terms of market performance, the U.S. market reported strong growth of 47.5% yoy, with sales of `873cr. Russia registered 32.3% yoy growth. The domestic market reported single-digit growth of 16.7% yoy. Sales from Europe dipped by 10.3% yoy during the quarter. During the quarter, the company filed 17 ANDAs. The company has 80 ANDAs pending for approval with the USFDA, of which 41 are Para IVs and seven are FTFs. During the quarter, DRL launched 23 products in the domestic market.
May 11, 2012
Exhibit 3: Global generic trend

2,500 2,000 227 1,500 288 301 212 500 592 0 4QFY2011 Others 1QFY2012 Russia & CIS 2QFY2012 India 3QFY2012 Europe 4QFY2012 North America 268 275 201 675 249 294 169 653 1,000 332 333 243 1,111 873 316 155
The PSAI segment registered 26.8% yoy growth, majorly led by 59.1% yoy and 33.3% yoy in the U.S. and Europe, respectively. India and other regions grew by 21.2% yoy and 9.9% yoy, respectively.
Exhibit 4: PSAI trend

800 700 600 500 221 201 71 208 75 4QFY2011 188 164 66 169 84 1QFY2012 Others
(` cr)
(` cr)
400 300 200 100 0
86
160 65 155 81 2QFY2012 Europe India
86 278 165 117 3QFY2012 North America 119 4QFY2012
May 11, 2012
EBIT margin expands on a yoy basis: DRL reported gross margin of 52.6% during the quarter. However, the companys EBIT margin came in at 18.9%. The key expenditure areas R&D grew by 15.0% yoy, while S&GA declined by 6.0% yoy during the quarter.
Exhibit 5: EBIT margin trend

32.0 28.0 24.0 20.0 18.9 16.5 15.6 26.7 26.7
(%)
16.0 12.0 8.0 4.0 0.0 4QFY2011 1QFY2012 2QFY2012 3QFY2012 4QFY2012
Adjusted net profit grew by 28.9% yoy during the quarter: DRL reported adjusted net profit of `431cr, registering an increase of 28.9% yoy, much lower than our estimate of `526cr on account of lower-than-expected EBIT margin in 4QFY2012.
Exhibit 6: Adjusted net profit trend

550 500 450 400 350 307 263 287 343 513
(` cr)
300 250 200 150 100 50 0 4QFY2011
1QFY2012
2QFY2012
3QFY2012
4QFY2012
May 11, 2012
Concall takeaways
Management reinforced its FY2013 revenue guidance of US$2.7bn, with RoCE of 25%. Management guided for higher R&D costs (7-8%, up from current 6.5% of total sales) on account of biosimilar trials for regulated and ROW markets and filings of complex molecules in U.S. Management indicates that growth from biosimilars will accelerate over the next 2 to 3 years to an estimated US$100mn. OTC portfolio in the U.S. contributed US$130mn in FY2012 vs. US$60mn in FY2011. Capex is guided to be around US$150mn for FY2013, of which the major portion is going towards the SEZ facility for formulations and biologics.
May 11, 2012
Investment arguments
Robust growth in the U.S. ahead: After attaining a critical mass (US$666mn in FY2012), DRL aims to scale up its business to the next orbit in the U.S. market on the back of a strong product pipeline (80 ANDAs are pending approval, of which 41 are Para IVs and seven are FTFs). Management has guided for robust growth in the U.S., driven by introduction of new products, some of which are also Para IV opportunities. Also, the company has developed its OTC product basket, which now contributes around US$130mn (FY2012), contributing almost 25% to its overall sales. Overall, we expect the ex-exclusivity U.S. sales to post a CAGR of ~18% during FY2012-14E. Domestic back in focus: After a below-industry average growth on the domestic formulation front since the last three years, DRL reported modest 11.0% growth in FY2012. Management expects the companys performance to rebound and targets to achieve 15% growth going ahead, driven by a) field force expansion and improvement in productivity, b) new product launches (including biosimilars) and c) focus on brand building. Strategic alliances to provide long-term growth: In order to tap the emerging market opportunities, DRL entered into an alliance with GSK in FY2011 to develop and market branded formulations across emerging markets. On the biogeneric front, the company has developed nine products (four products launched in India) on mammalian cell culture with global brand sales of US$30bn. The company has also entered into a marketing agreement with Valent Pharma to market Cloderm cream in the U.S. market. This deal is expected to provide an impetus to the proprietary products business going forward. Valuation: DRL has maintained its revenue guidance of US$2.7bn by FY2013E, with RoCE of 25%. Growth would be driven by the U.S. business, uptick in the domestic formulation and Russian markets and increased contribution from GSKs alliance. We expect the companys net sales to post a 9.8% CAGR to `11,662cr and adjusted EPS to record a 2.3% CAGR to `92.9 over FY2012-14E. At the CMP, the stock is trading at 19.8x FY2013E and 17.9x FY2014E earnings. We maintain our Accumulate view on the stock with a target price of `1,859.
May 11, 2012
Exhibit 7: Key assumptions

FY2013E PSAI segment growth (%) Generics segment growth (%) Operating margin (%) Capex (` cr)
FY2014E 2.0 9.0 21.0 600
1.8 12.0 20.7 600
Exhibit 8: One-year forward PE chart

2000 1800 1600 1400 1200 1000 800 600 400 200 0
Exhibit 9: Recommendation summary

Company Alembic Pharmaceuticals Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Buy Reduce Buy Buy Accumulate Buy Neutral Buy Buy Buy Buy Neutral Accumulate CMP Tgt. price Upside (`) 52 109 2,083 766 319 1,662 42 2,049 460 358 517 161 479 570 (`) 91 175 1,937 953 379 1,859 92 665 443 646 270 635 76.0 60.3 (7.0) 24.4 18.8 11.9 119.0 44.5 23.8 25.1 68.2 11.5 5.7 6.2 20.0 16.1 16.8 17.9 3.2 24.9 6.9 8.8 16.0 4.2 16.1 20.9 FY2014E 0.7 0.5 2.6 2.1 2.9 2.5 0.7 5.1 0.9 1.4 2.1 0.9 1.8 5.7 4.7 3.7 16.6 10.9 13.5 11.8 4.1 16.4 6.0 6.4 10.8 4.6 11.1 12.6 FY12-14E 14.6 4.7 5.6 22.3 13.5 2.3 38.9 8.7 25.1 23.5 29.1 50.0 44.8 8.3 FY2014E 29.4 10.1 16.1 23.0 15.2 18.9 8.9 38.9 13.8 27.3 28.0 10.7 15.6 24.0 29.2 14.0 17.0 27.5 16.8 21.0 10.1 29.0 16.9 27.7 25.2 18.0 28.1 20.8 % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)
Source: Company, Angel Research; Note: *December year ending
May 11, 2012
Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
Price 5x 10x 15x 20x
Profit & loss statement (IFRS Consolidated)

Y/E March (` cr) Net sales Other operating income Total operating income % chg Total expenditure Cost of revenues SG&A expenses R&D expenses EBITDA % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Share in profit of associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Exceptional items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2010 7,028 56.9 7,085 2.4 5,608 2,978 2,251 379.3 1,420 -6.9 20.2 416.0 1,004 (12.2) 14.3 37.2 36.9 3.5 4.8 1,066 6.3 860.3 205.3 98.5 48.0 106.8 815 106.8 921.4 4.1 1.5 54.6 54.6 3.8 FY2011 7,469 75.0 7,544 6.5 5,903 3,028 2,369 506.0 1,566 10.3 21.0 414.7 1,151 14.6 15.4 28.3 9.4 0.8 0.3 1,208 13.3 (37) 1,244.2 140.3 11.3 1,104 9 1,104 1,076 16.8 14.8 63.8 63.8 16.8 FY2012E 9,674 76.5 9,750 29.2 7,340 3,862 2,887 591.1 2,334 49.0 24.1 481.3 1,853 60.9 19.2 (16.0) 5.4 1,951 61.5 104.0 1,846.6 420.4 22.8 1,426.2 1,426.2 1,506.5 40.0 14.7 88.8 88.8 39.4 FY2013E 10,696 76.5 10,773 10.5 8,483 4,291 3,464 727.4 2,214 -5.2 20.7 522.0 1,692 -8.7 15.8 5.4 1,773 (9.1) 1,773.4 353.6 19.9 1,419.8 1,419.8 1,419.8 (5.8) 13.3 83.7 83.7 (5.8) FY2014E 11,662 76.5 11,739 9.0 9,210 4,685 3,732 793.0 2,452 10.8 21.0 562.7 1,889 11.7 16.2 5.4 1,971 11.2 1,971.2 393.1 19.9 1,578.0 1,576.0 1,576.0 11.0 13.5 92.9 92.9 11.0
May 11, 2012
Balance sheet (IFRS Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Net fixed assets Goodwill /other intangibles Capital Work-in-Progress Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,759 1,422 486.7 31.0 4,206 658.4 421.7 3,126 2,004 2,202 5,901 2,478 1,549 486.7 31.0 4,832 572.9 448.2 3,811 2,276 2,556 7,100 3,104 1,353 220.8 31.0 7,403 1,815.2 580.4 5,008 2,918 4,485 9,195 3,704 1,353 220.8 31.0 7,058 879.3 641.8 5,537 3,221 3,837 9,148 10,797 4,304 1,353 220.8 31.0 8,395 1,661.8 699.7 6,034 3,510 4,885 84.4 4,207 4,292 1,465.6 143.8 5,901 84.4 4,515 4,599 2,357.2 143.8 7,100 84.8 5,744 5,830 3,221.0 143.8 9,195 84.8 6,787 6,874 2,130.1 143.8 9,148 84.8 8,045 8,133 2,520.1 143.8 10,797 FY2010 FY2011 FY2012E FY2013E FY2014E
Cash flow statement (IFRS Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2010 1,065.6 416.0 (38.0) 36.9 98.5 1,308.2 (157.7) 4.8 36.9 (116.0) 0.2 (482.7) 123.3 (734.2) (1,093.4) 98.8 559.6 658.4 FY2011 1,207.7 414.7 439.0 9.4 140.3 1,911.8 (718.3) 9.4 (708.9) 891.6 221.1 (1,958.8) (1,288.3) (85.5) 658.4 572.9 FY2012E 1,950.6 481.3 687.1 420.4 2,698.7 (360.4) (360.4) 0.4 863.8 276.5 (1,683.3) (1,096.0) 1,242.3 572.9 1,815.2 FY2013E 1,773.4 522.0 287.8 353.6 2,229.6 (600.0) (600.0) (1,090.9) 276.5 (1,198.2) (2,565.5) (935.9) 1,815.2 879.3 FY2014E 1,971.2 562.7 265.6 393.1 2,406.3 (600.0) (600.0) 390.0 276.5 (1,137.3) (1,023.8) 782.5 879.3 1,661.8
May 11, 2012
Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) 0.2 0.6 27.0 0.4 1.1 40.7 0.2 0.6 (115.8) 0.2 0.6 0.1 0.4 4.1 69 68 50 81 3.6 71 72 55 85 3.5 69 76 49 87 3.2 74 81 50 95 2.9 75 82 51 96 16.2 30.4 21.7 17.7 29.4 24.2 22.7 36.0 28.9 18.4 27.1 22.4 18.9 26.5 21.0 14.3 52.0 1.3 9.4 1.1 0.3 11.6 15.4 88.7 1.3 17.5 1.3 0.3 22.2 19.2 77.2 1.4 20.7 -0.4 0.3 27.4 15.8 80.1 1.4 17.4 0.0 0.2 21.1 16.2 80.1 1.3 17.5 0.0 0.1 20.0 54.6 54.6 31.0 5.0 254.2 63.8 63.8 90.0 11.0 272.5 88.8 88.8 112.5 14.0 343.8 83.7 83.7 114.5 14.0 405.4 92.9 92.9 126.1 14.0 479.6 30.4 53.6 6.5 0.3 4.1 20.3 4.9 26.1 18.5 6.1 0.7 4.0 19.0 4.2 18.7 14.8 4.8 0.8 3.1 12.7 3.2 19.8 14.5 4.1 0.8 2.8 13.3 3.2 17.9 13.2 3.5 0.8 2.5 11.8 2.7 FY2010 FY2011 FY2012E FY2013E FY2014E
May 11, 2012
10
Research Team Tel: 022 - 39357800
E-mail: research@angelbroking.com
Website: www.angelbroking.com
DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.
Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Dr. Reddys Laboratories No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
Buy (> 15%) Reduce (-5% to 15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
May 11, 2012
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4QFY2012 Result Update | Pharmaceutical

May 11, 2012