2QFY2015 Result Update | Pharmaceutical October 30, 2014 Dr Reddy’s Laboratories BUY Performance Highlights CMP Target Price Y/E March (` cr) 2QFY2015 1QFY2015 % chg (qoq) 2QFY2014 % chg (yoy) Net sales 3,588 3,518 2.0 3,357 6.9 Gross profit 2,294 2,272 1.0 2,120 8.2 Operating profit 816 816 (0.1) 846 (3.5) Adj. net profit 574 550 4.3 690 (16.8) Source: Company, Angel Research For 2QFY2015, Dr Reddy’s Laboratories (DRL) posted net sales of `3,587.9cr (V/s an expected `3,900cr), a yoy growth of 6.9% yoy. The growth was subdued as the US geography which is the company’s growth driver posted a growth of only 8%. Other key geographies, namely emerging and Indian markets, posted a yoy growth of 14%. The operating margin came in at 22.7% (V/s an expected 25.2%), dipping by 245bp yoy, as the R&D expenditure during the quarter rose by 36.7% yoy. This, along with higher taxation and dip in other income, lead the net profit to come in at `574cr (V/s an expected `715cr), a yoy dip of 16.8%. Given the stock’s valuation, we maintain our Buy recommendation on the stock with a price target of `3,723. Results lower than expectations: For the quarter, the company posted net sales of `3,587.9cr (V/s an expected `3,900cr), a yoy growth of 6.9% yoy. The growth was subdued as the US geography which is the company’s growth driver posted a growth of only 8%. Other key geographies, namely emerging and Indian markets, posted a yoy growth of 14%. On the operating front, the gross margin came in at 63.9% (V/s an expected 64.1%), a yoy expansion of 80bp. In spite of the same, the operating margin came in at 22.7% (V/s an expected 25.2%), dipping by 245bp yoy, as the R&D expenditure during the quarter rose by 36.7% yoy. This, along with higher taxation, which rose by 51.0% during the period (tax as % of PBT was 17.4% V/s 10.3% in 2QFY2014); and a 26.7% dip in other income; lead the net profit to come in at `574cr (V/s an expected `715cr), ie a yoy dip of 16.8%. `3,046 `3,723 Investment Period 12 months Stock Info Pharmaceutical Sector Market Cap (` cr) 51,899 Net Debt (` cr) 3,629 Beta 0.1 52 Week High / Low 3,354/2,250 Avg. Daily Volume 24,536 Face Value (`) 5 BSE Sensex 27,098 Nifty 8,090 Reuters Code REDY.BO DRRD@IN Bloomberg Code Shareholding Pattern (%) Promoters 25.5 MF / Banks / Indian Fls 9.9 FII / NRIs / OCBs 56.8 Indian Public / Others 7.8 Abs. (%) 3m 1yr 3yr Sensex 4.3 29.5 52.2 10.1 25.4 82.2 Dr Reddy Outlook and valuation: We expect net sales to grow at a CAGR of 18.2% to `18,477cr and adjusted EPS to record a 21.2% CAGR to `186.1 over FY2014-16E. We recommend a Buy rating on the stock. 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) FY2013 11,627 20.2 1,678 17.6 1,750 17.0 103.1 23.0 29.6 26.8 17.8 7.1 4.7 20.5 FY2014 13,217 13.7 2,151 28.2 2,151 22.9 126.7 23.6 24.0 26.3 20.2 5.7 4.2 17.7 FY2015E 15,747 19.1 2,515 16.9 2,515 16.9 148.1 23.3 20.6 24.8 20.3 4.6 3.5 14.8 Source: Company, Angel Research; Note: CMP as of October 29, 2014 Please refer to important disclosures at the end of this report FY2016E 18,477 17.3 3,161 25.7 3,161 25.7 186.1 24.2 16.4 25.0 21.8 3.7 2.9 11.9 Sarabjit Kour Nangra +91 2 39357600 Ext: 6806 [email protected] 1 Dr. Reddy’s Laboratories | 2QFY2015 Result Update Exhibit 1: 2QFY2015 performance (IFRS, consolidated) Y/E March (` cr) 2QFY2015 1QFY2015 % chg (qoq) 2QFY2014 3,588 3,518 2.0 69 67 3 Total income 3,657 3,584 Gross profit 2,294 2,272 63.9 64.6 Net sales Other income Gross margin (%) SG&A expenses % chg (yoy) 1HFY2015 1HFY2014 % chg 3,357 6.9 7,105 6,202 14.6 94 (26.7) 135 123 9.9 2.0 3,451 6.0 7,241 6,325 14.5 1.0 2,120 8.2 4,566 3,784 20.7 64.3 61.0 63.1 1,067 1,068 (0.1) 974 9.6 2,135 1,853 15.2 R&D expenses 411 388 6.1 301 36.7 799 544 46.8 EBDITA 816 816 (0.1) 846 (3.5) 1,632 1,387 17.7 EBDITA (%) 22.7 23.2 - 25.2 23.0 22.4 - Depreciation 196 187.2 4.5 173.3 12.9 382.9 334.6 14.4 Interest - - - - - - - PBT 689 696 (1.0) 766 (10.1) 1,384 1,175 17.8 Tax 120 151 (20.5) 79 51.0 270 132 104.6 Net Profit 569 545 4.4 687 (17.1) 1,114 1,043 6.8 Share of profit/ (loss) in associates 5.3 5.3 0.0 3.6 47.2 10.6 8.0 Reported net profit before exceptional 574 550 4.3 690 (16.8) 1,125 1,051 - - - - 574 550 4.3 4.3 Exceptional items (loss) /profit Reported PAT Adj.Net Profit 574 550 EPS (`) 33.6 32.2 - 7.0 690 (16.8) 1,125 1,051 7.0 690 (16.8) 1,125 1,051 7.0 66.2 61.9 40.5 Source: Company, Angel Research Exhibit 2: Actual vs Estimates (` cr) Actual Estimates Variation (%) Net sales 3,588 3,900 (8.0) 69 72 (4.7) Operating profit 816 794 2.8 Tax 120 151 (20.8) Adj. Net profit 574 715 (19.6) Other income Source: Company, Angel Research Revenue growth lower than expectation: For the quarter, the company posted net sales of `3,587.9cr (V/s an expected `3,900cr), a yoy growth of 6.9%. The growth was subdued as the US geography, which is the company’s growth driver, posted a growth of only 8% on back of old products and with the company launching only one new product during the quarter. Other key geographies, namely emerging and Indian markets, posted a yoy growth of 14%. Overall, the key generic market (80% of sales) posted a yoy growth of 9%, while the PSAI (18% of sales) remained flat and propriety products & others (2% of sales) de-grew by 1% yoy. The generic market growth was on back of ROW (`354.5cr) and India (`479.9cr) geographies, which grew by 95% yoy and 14% yoy respectively. The US market (`1,429.3cr) posted gains of 8% yoy only while Russia and CIS (`479.8cr) on the other hand de-grew by 13% yoy.. The PSAI segment declined mainly on back of Europe (-37%) and ROW (-22%) geographies. USA grew by 37% while India grew by 89% yoy. October 30, 2014 2 Dr. Reddy’s Laboratories | 2QFY2015 Result Update DRL filed 2 abbreviated new drug application (ANDA)s during the quarter. The company has 72 ANDAs pending for approval with the USFDA, of which, 45 are Para IVs and 11 are FTFs. Exhibit 3: Global generic trend 3,500 3,000 (` cr) 2,500 2,000 1,500 530 552 391 186 421 176 1,000 500 1,622 1,324 452 410 177 1,496 486 400 146 1,647 479 480 143 1,429 0 2QFY2014 Others 3QFY2014 Russia & CIS 4QFY2014 India 1QFY2015 2QFY2016 Europe North America Source: Company, Angel Research The PSAI segment remained flat, posting sales of `639.2cr, with only US and India growing at 37% yoy and 89% yoy respectively. Europe posted a decline of 37% while ROW degrew by 22%. Exhibit 4: PSAI trend 700 600 (` cr) 500 400 175 203 107 95 300 200 236 195 94 154 78 2QFY2014 3QFY2014 Others 78 202 268 149 237 100 0 153 98 139 158 India 4QFY2014 Europe 130 55 1QFY2015 2QFY2015 North America Source: Company, Angel Research October 30, 2014 3 Dr. Reddy’s Laboratories | 2QFY2015 Result Update EBITDA dips yoy: On the operating front, the gross margin came in at 63.9% (V/s an expected 64.1%), a yoy expansion of 80bp. In spite of the same, the operating margin came in at 22.7% (V/s an expected 25.2%), dipping by 245bp yoy, as the R&D expenditure during the quarter rose by 36.7% yoy. R&D expenditure during the quarter was 11.5% of sales in 2QFY2015 V/s 9.0% of sales in 2QFY2014. Exhibit 5: EBITDA margin trend (%) 28.0 27.6 26.0 (%) 25.2 24.0 23.2 22.7 21.8 22.0 20.0 2QFY2014 3QFY2014 4QFY2014 1QFY2015 2QFY2015 Source: Company, Angel Research Net profit lower than expected during the quarter: The tax expense for the quarter rose by 51.0% (tax as % of PBT was 17.4% in 2QFY2015 V/s 10.3% in 2QFY2014). Other income dipped by 26.7% (`69cr in 2QFY2015 V/s `94cr in 2QFY2014) for the quarter. The net profit came in at `574cr (V/s an expected `715cr), a yoy dip of 16.8%. (` cr) Exhibit 6: Adjusted net profit trend 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 690 584 550 574 482 2QFY2014 3QFY2014 4QFY2014 1QFY2015 2QFY2015 Source: Company, Angel Research October 30, 2014 4 Dr. Reddy’s Laboratories | 2QFY2015 Result Update Concall takeaways The company plans to file its first NDA (novel product) in the US by FY2015, which is expected to get an approval in the next 12 months. Habitrol acquisition (smoking cessation transdermal patch) has enriched the company’s US OTC portfolio. The brand has sales of US$60mn. The US business has been impacted owing to channel consolidation, which has lead to price erosion in the company’s US base business. The Management expects 6-8 launches in the US in 2HFY2015, which will drive growth, while Domestic and Russian businesses are likely to outpace industry growth going ahead on continued brand building efforts and new launches. Investment arguments Robust growth in the US going ahead: After attaining a critical mass (US$991mn in FY2014), DRL aims to scale up its business to the next orbit in the US market on the back of a strong product pipeline (72 ANDAs are pending approval, of which 45 are Para IVs and 11 are FTFs). The Management has guided for a robust growth in the US over the medium term, driven by introduction of new products, some of which are also Para IV opportunities. Overall, we expect the ex-exclusivity US sales to post a CAGR of ~18.7% during FY2014-16. Domestic back in focus: DRL reported a modest 8.0% yoy growth in FY2014. The Management expects the company’s performance to rebound and targets to achieve an above Industry growth rate going ahead, driven by a) field force expansion and improvement in productivity, b) new product launches (including biosimilars) and c) focus on brand building. Overall, we expect sales in India to post a CAGR of ~14.4% over FY2014-16. Valuation: We expect net sales to report an 18.2% CAGR to `18,477cr and adjusted EPS to record a 21.2% CAGR to `186.1 over FY2014-16E. We recommend a Buy rating on the stock. Exhibit 7: Key assumptions PSAI segment growth (%) Generics segment growth (%) FY2015E FY2016E 4.8 5.1 20.7 18.5 Operating margin (%) 23.3 24.2 Capex (` cr) 1000 1000 Source: Company, Angel Research October 30, 2014 5 Dr. Reddy’s Laboratories | 2QFY2015 Result Update Exhibit 8: One-year forward PE chart 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 10x 15x Aug-14 Mar-14 Oct-13 Dec-12 Jul-12 Feb-12 Sep-11 Apr-11 5x May-13 Price Nov-10 Jun-10 Jan-10 Aug-09 Mar-09 Oct-08 0 20x Source: Company, Angel Research Exhibit 9: Recommendation summary Company CMP Tgt. price Upside (`) (`) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%) Neutral 406 - - 22.1 3.0 15.6 21.2 31.7 32.6 Aurobindo Pharma Neutral 962 - - 22.4 2.5 14.8 (3.1) 15.5 23.8 1387 - - 22.4 2.9 16.8 24.3 19.9 26.5 Alembic Pharma Reco Cadila Healthcare Neutral Cipla Neutral Dr Reddy's Buy Dishman Pharma Buy GSK Pharma* Neutral Indoco Remedies Neutral Ipca labs Buy Lupin Neutral Ranbaxy Sanofi India* Sun Pharma FY2016E FY14-16E FY2016E 656 - - 26.0 3.8 19.3 20.6 15.8 16.3 3,046 3,723 22.2 16.4 2.9 11.9 21.2 21.8 25.0 160 221 38.5 7.2 1.0 4.2 27.7 12.9 12.7 2,685 - - 45.2 7.3 35.7 0.4 25.9 25.7 285 - - 20.0 2.5 13.6 50.0 19.8 21.8 733 986 34.5 12.8 2.2 9.4 20.9 25.4 26.2 1355 - - 23.2 3.8 14.2 19.3 33.0 25.4 Neutral 622 - - 46.8 2.6 30.0 6.5 5.4 13.9 Neutral 3,319 - - 27.1 3.1 18.1 6.6 19.0 20.6 Neutral 830 - - 25.9 4.3 14.5 5.3 25.5 26.1 Source: Company, Angel Research; Note: *December year ending Company Background Established in 1984, Dr Reddy's Laboratories is an integrated global pharmaceutical company, through its three businesses - Pharmaceutical Services and Active Ingredients, Global Generics and Proprietary Products. The key therapeutic focus is on gastro-intestinal, cardiovascular, diabetology, oncology, pain management, anti-infective and paediatrics. The key markets for DRL include India, USA, Russia & CIS, and Germany. October 30, 2014 6 Dr. Reddy’s Laboratories | 2QFY2015 Result Update Profit & loss statement (IFRS Consolidated) Y/E March (` cr) Net sales FY2013 FY2014 FY2015E FY2016E 9,674 11,627 13,217 15,747 18,477 Other operating income 76.5 247.9 141.6 141.6 141.6 Total operating income 9,750 11,875 13,359 15,888 18,619 % chg 29.2 21.8 12.5 18.9 17.2 Total expenditure 7,076 8,951 10,096 12,085 14,006 Cost of revenues 3,598 4,825 4,977 5,691 6,584 SG&A expenses 2,887 3,358 3,878 4,711 5,469 R&D expenses 591.1 767.3 1,240.2 1,682.6 1,953.3 EBITDA 2,598 2,676 3,121 3,662 4,471 65.9 3.0 16.6 17.3 22.1 % chg (% of Net Sales) 26.9 23.0 23.6 23.3 24.2 Depreciation & amortisation 745.4 743.7 659.8 734.1 785.8 EBIT 1,853 1,932 2,462 2,928 3,685 % chg 60.9 4.3 27.4 19.0 25.9 (% of Net Sales) 19.2 16.6 18.6 18.6 19.9 Interest & other charges (16.0) - - - - Other Income - 46.0 40.0 40.0 40.0 (% of PBT) - 2.1 1.5 1.3 1.0 Share in profit of associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) 5.4 10.4 17.4 17.4 17.4 1,951 2,237 2,661 3,127 3,884 61.5 14.7 19.0 17.5 24.2 104.0 68.8 - - - 1,846.6 2,167.7 2,660.6 3,127.1 3,884.5 420.4 490.0 509.4 611.7 723.8 22.8 22.6 19.1 19.6 18.6 1,426.2 1,677.7 2,151.2 2,515.4 3,160.7 Add: Share of earnings of asso. - - - - - Less: Minority interest (MI) - - - - - Exceptional items October 30, 2014 FY2012 - - - - - PAT after MI (reported) 1,426.2 1,677.7 2,151.2 2,515.4 3,160.7 ADJ. PAT 1,496.0 1,750.0 2,151.2 2,515.4 3,160.7 % chg 39.0 17.0 22.9 16.9 25.7 (% of Net Sales) 14.7 14.4 16.3 16.0 17.1 Basic EPS (`) 88.2 103.1 126.7 148.1 186.1 Fully Diluted EPS (`) 88.2 103.1 126.7 149.6 170.0 % chg 38.4 16.8 22.9 18.1 13.6 7 Dr. Reddy’s Laboratories | 2QFY2015 Result Update Balance sheet (IFRS Consolidated) Y/E March (` cr) FY2012 FY2013 FY2014 FY2015E FY2016E SOURCES OF FUNDS Equity share capital 84.8 84.9 84.9 84.9 84.9 Preference Capital - - - - - Reserves & surplus 5,660 7,224 8,995 11,153 13,956 Shareholders funds 5,744 7,309 9,080 11,238 14,041 - - - - - 4,831.2 3,676.0 4,474.2 4,474.2 4,474.2 83.3 83.3 (192.9) (192.9) (192.9) 10,659 11,068 13,361 15,519 18,322 Net fixed assets 3,325 3,781 3,945 4,945 5,945 Goodwill /other intangibles 1,353 1,402 1,470 1,470 1,470 Capital Work-in-Progress 520.8 495.2 495.2 495.2 495.2 Investments 1,077 1,764 2,589 2,589 2,589 Current Assets 6,995 6,875 7,866 10,370 12,922 Cash 737.9 513.6 845 1,848 2,934 Loans & Advances 580.4 697.6 793.0 944.8 1,108.6 Other 5,677 5,664 6,228 7,577 8,879 Current liabilities 2,613 3,252 3,006 4,353 5,102 Net Current Assets 4,382 3,623 4,860 6,017 7,820 - - 10,659 11,068 13,361 15,519 18,322 Minority Interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Mis. Exp. not written off Total Assets October 30, 2014 8 Dr. Reddy’s Laboratories | 2QFY2015 Result Update Cash flow statement (IFRS Consolidated) Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income FY2013 FY2014 FY2015E FY2016E 1,951 2,237 2,661 3,127 3,884 745 744 660 734 786 (1,661) 535 (906) (153) (718) - 46 40 40 40 Direct taxes paid 420 490 509 612 724 Cash Flow from Operations 614 2,980 1,865 3,056 3,189 (Inc.)/Dec.in Fixed Assets (881) (431) (164) (1,000) (1,000) (Inc.)/Dec. in Investments (1,046) 687 824 - - - 46 40 40 40 (1,928) 302 701 (960) (960) 0 0 - - - 2,474 (1,155) 798 - - 259 298 358 358 358 (1,255) (2,649) (3,390) (1,450) (1,501) Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing October 30, 2014 FY2012 1,478 (3,506) (2,234) (1,093) (1,143) Inc./(Dec.) in Cash 165 (224) 331 1,003 1,085 Opening Cash balances 573 738 514 845 1,848 Closing Cash balances 738 514 845 1,848 2,934 9 Dr. Reddy’s Laboratories | 2QFY2015 Result Update Key ratios Y/E March FY2012 FY2013 FY2014 FY2015E FY2016E P/E (on FDEPS) 34.5 29.6 24.0 20.6 16.4 P/CEPS 23.8 21.4 18.4 15.9 13.1 P/BV 9.0 7.1 5.7 4.6 3.7 Dividend yield (%) 0.5 0.5 0.5 0.5 0.5 EV/Sales 5.8 4.7 4.2 3.5 2.9 21.5 20.5 17.7 14.8 11.9 5.2 5.0 4.1 3.5 2.9 EPS (Basic) 88.2 103.1 126.7 148.1 186.1 EPS (fully diluted) 88.2 103.1 126.7 148.1 186.1 128.0 142.6 165.5 191.4 232.4 14.0 15.0 15.0 15.0 15.0 338.7 430.4 534.7 661.8 826.9 EBIT margin 19.2 16.6 18.6 18.6 19.9 Tax retention ratio 77.2 77.4 80.9 80.4 81.4 Asset turnover (x) 1.2 1.2 1.2 1.2 1.3 17.5 14.9 17.4 18.2 20.8 Cost of Debt (Post Tax) 0.0 0.0 0.0 0.0 0.0 Leverage (x) 0.6 0.6 0.4 0.3 0.2 27.2 23.5 24.7 23.9 24.4 ROCE (Pre-tax) 20.9 17.8 20.2 20.3 21.8 Angel ROIC (Pre-tax) 29.6 23.1 25.6 26.3 29.3 ROE 28.9 26.8 26.3 24.8 25.0 Asset Turnover (Gross Block) 3.4 3.3 3.5 3.6 3.4 Inventory / Sales (days) 66 63 62 69 73 Receivables (days) 80 88 89 100 106 Payables (days) 46 44 40 42 43 105 104 97 94 89 Net debt to equity 0.7 0.4 0.4 0.2 0.1 Net debt to EBITDA 1.6 1.2 1.2 0.7 0.3 - - - - 1.0 Valuation Ratio (x) EV/EBITDA EV / Total Assets Per Share Data (`) Cash EPS DPS Book Value Dupont Analysis ROIC (Post-tax) Operating ROE Returns (%) Turnover ratios (x) WC cycle (ex-cash) (days) Solvency ratios (x) Interest Coverage (EBIT / Int.) October 30, 2014 10 Dr. Reddy’s Laboratories | 2QFY2015 Result Update Research Team Tel: 022 - 39357800 E-mail: [email protected] 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. 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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 Dr. Reddy’s Laboratories No 2. Angel and its Group companies ownership of the stock No 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 ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): October 30, 2014 Buy (> 15%) Reduce (-5% to -15%) Accumulate (5% to 15%) Sell (< -15%) Neutral (-5 to 5%) 11
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