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
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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.
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investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
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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.
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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
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responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
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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