Dr Reddys Lab 4Q FY 2013

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Please refer to important disclosures at the end of this report 1

Y/E March (` cr) 4QFY2013 3QFY2013 % chg (qoq) 4QFY2012 % chg (yoy)Net sales 3,340 2,865 16.6 2,658 25.6Gross profit 1,685 1,967 (14.4) 1,397 20.6

Operating profit 580 429 35.1 501 15.7

Adj. net profit 571 363 57.2 431 32.5Source: Company, Angel Research

Dr Reddys Laboratories (DRL) reported better than expected numbers for

4QFY2013 on the top-line and bottom-line fronts. The EBIT margin came in at

17.4% vs 18.9%.Consequently, the Adj. net profit came in at`571cr, a growth of32.5%, much higher than our expectation of`313cr. Along with the , higher than

expected EBIT margins, the other income, which came in at`163cr, aided higher

than expected net profit during the quarter. We recommend a buy on the stockwith a price target of `2,535.Results better than expectations: DRL posted numbers better than expected. Thesales came in at`3,340cr is V/s`2,409cr, registering a growth of 26%yoy. The

growth was mainly driven by PSAI segment, which grew by 44.6% yoy, while the

generic segment grew by 18.2% yoy. While, all the regions grew at robust growth

in PSAI, the generic segment growth was driven by the USA market, which grew

by 30.7%. The company posted an EBIT margins of 17.4% V/s 18.9% in the lastcorresponding period. Higher than expected EBIT Margins during the period

aided the net profit to come in at`571cr, V/s expectation of`313cr. Also the net

profit was aided by higher income during the quarter, which came in`163cr.

Outlook and valuation: ForDRL, we expect net sales to report a 14.9% CAGR to`15,350cr and adjusted EPS to record a 10.8% CAGR to `126.8 over FY2013-15.

We recommend a buy on the stock with a price target of `2,535.Key financials (IFRS Consolidated)

Y/E March (` cr) FY2012 FY2013 FY2014E FY2015ENet sales 9,674 11,627 13,377 15,350% chg 29.5 20.2 15.1 14.7

Net profit 1,426 1,678 1,903 2,149% chg 29.2 17.6 13.5 12.9

Adj net profit 1,496 1,750 1,903 2,149% chg 39.0 17.0 8.8 12.9

Adj. EPS (`) 88.2 103.2 112.3 126.8EBITDA margin (%) 26.9 23.0 20.4 20.1

P/E (x) 23.0 19.6 18.0 16.0

RoE (%) 28.9 26.8 23.5 21.8

RoCE (%) 20.9 17.8 18.3 18.3

P/BV (x) 6.0 4.7 3.9 3.2

EV/Sales (x) 4.0 3.2 2.8 2.4

EV/EBITDA (x) 14.8 14.0 13.6 11.9

Source: Company, Angel Research

BUYCMP `2,026

Target Price `2,535

Investment Period 12 months

Stock Info

Sector

3,162

Bloomberg Code

Shareholding Pattern (%)

Promoters 25.6

MF / Banks / Indian Fls 18.3

FII / NRIs / OCBs 47.9

Indian Public / Others 8.2

Abs. (%) 3m 1yr 3yr

Sensex 1.2 21.6 16.1

Dr Reddy 7.9 21.2 56.7

Pharmaceutical

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

34,400

0.3

2,151/1,528

25,295

Net Debt (`cr)

5

19,722

DRRD@IN

Nifty

Reuters Code

5,995

REDY.BO

Face Value (`)

BSE Sensex

Sarabjit Kour Nangra+91 2 39357600 Ext: 6806

[email protected]

Dr Reddys LaboratoriesPerformance Highlights

4QFY2013 Result Update | Pharmaceutical

May 14, 2013


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Dr. Reddys Laboratories | 4QFY2013 Result Update

May 14, 2013 2

Exhibit 1:4QFY2013 performance (IFRS, consolidated)Y/E March (` cr) 4QFY2013 3QFY2013 % chg (qoq) 4QFY2012 % chg (yoy) FY2013 FY2012 % chgNet sales 3,340 2,865 16.6 2,658 25.6 11,627 9,674 20.2Other income 163 26 517 20 720 248 77 224.1Total income 3,503 2,892 21.1 2,678 30.8 11,875 9,750 21.8Gross profit 1,685 1,967 (14.4) 1,397 20.6 6,058 5,331 13.6

Gross margin (%) 50.4 68.7 (26.5) 52.6 (4.0) 52.1 55.1 (5.4)

SG&A expenses 872 1,335 (34.7) 722 20.9 3,358 2,887 16.3

R&D expenses 233 203 14.8 174 33.6 767 591 29.8

EBIT 580 429 35.1 501 15.7 1,932 1,853 4.3EBIT (%) 17.4 15.0 - 18.9 16.6 19.2 -

Interest (40) 10 - (8) (46) (16.0) -

PBT 783 446 75.5 529 47.9 2,226 1,945 (72.8)

Tax 214 83 159.0 84 155.5 490 420 16.6

Net Profit 569 363 56.5 446 27.6 1,736 1,525 13.9Share of profit/ (loss) in asso. 2.6 - - 1.1 - 10.4 5.4 (79.6)

Reported net profit before excep. 571 363 57.2 447 27.9 1,747 1,530 14.1Exceptional items - - 104 69 104 (33.8)Reported PAT 571 363 57.2 343 66.7 1,678 1,426 17.6Adj. Net Profit 571 363 57.2 431 32.5 1,750 1,496 17.0EPS (`) 33.7 21.4 25.4 - 103.2 88.2 -


Exhibit 2:Actual vs Estimates(` cr) Actual Estimates Variation (%)Net sales 3,340 2,409 38.6Other income 163 3 5,336.7

Operating profit 580 388 49.3

Interest (40) - -

Tax 214 78 173.6

Net profit 571 313 82.4Source: Company, Angel Research

Revenue growth higher than expected: DRL posted numbers better thanexpected. The sales came in at `3,340cr is V/s `2,409cr, registering agrowth of 26%yoy. The growth was mainly driven by PSAI segment, which

grew by 44.6% yoy, while the generic segment grew by 18.2% yoy. While,

all the regions grew at robust growth in PSAI, the generic segment growth

was driven by the USA market, which grew by 30.7%.

Formulations in the ROW also registered a robust growth of 18.8% yoy to

end the quarter at `133cr. Russia grew only by 4.5% yoy growth. The

domestic market reported a single-digit growth of 8.6% yoy. Sales from

Europe grew only by 1.7% yoy during the quarter.

DRL filed 19 ANDAs during the quarter. The company has 65 ANDAs

pending for approval with the USFDA, of which 38 are Para IVs and 8 are

FTFs. During the quarter, the company launched 24 products in the

domestic market.


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Exhibit 3:Global generic trend

873 792 927 9241,141

180 218178 193

183320 349388 372

348355 417384 438

370

0

500

1,000

1,500

2,000

2,500

4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013

(`cr)

Others Russ ia & CIS India Europe North America Source: Company, Angel Research

The PSAI segment registered a 44.6% yoy growth. Europe and India grew by

58.3% yoy and 58.3% yoy growth in the Europe and India, respectively. The US

and ROW (PSAI segment) grew by 72.9% yoy and (4.6) % yoy, respectively.

Exhibit 4:PSAI trend

119 106 135 127206.1

278223

291 247

439.68661

115127

161.1

221

162

247212

210.4

0

200

400

600

800

1,000

1,200


Others India Europe North America

(`

cr)



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EBIT expands on yoy basis: DRL reported a gross margin of 50.4% during thequarter V/s 52.6% during the last corresponding period. However, the companys

EBIT margin came in at 17.4% V/s 18.9%. The key expenditure areas were R&D,

which grew by 33.6% yoy, and S&GA expenses, which grew by 20.9% yoy duringthe quarter.

Exhibit 5:EBIT margin trend18.9

14.6

19.2

15.0

17.4

12

14

16

18

20


(%)


Adjusted net profit grew by 32.5% yoy during the quarter: Higher than expectedOPMs during the period aided the net profit to come in at `571cr, V/s

expectation of `313cr. Also the net profit was aided by higher income

during the quarter, which came in `163cr, aided by the US $ 22.5mn asone time settlement done with Nordion Inc., towards the damages

sustained by the Company due to the breach by Nordion of the then

existing Laboratory services agreement for bioequivalence studies.

Exhibit 6:Adjusted net profit trend

343 336

494

363

571

0

50

100

150

200

250

300

350

400

450

500

550

600


(`

cr)



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May 14, 2013 5

Concall takeaways To file 15-20 ANDAs in the US market in FY2014. Management sees higher pace of growth over FY15 17E based on its strategy

to focus on complex generics.

R&D spend is expected to be around 7.1% of sales. FY2014 capex to be around US $100-115mn. Tax as a % of PBT is guided towards 22-23%.


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May 14, 2013 6

Investment arguments

Robust growth in the US ahead: After attaining a critical mass (US$693mn inFY2013), DRL aims to scale up its business to the next orbit in the US market on

the back of a strong product pipeline (65 ANDAs are pending approval, of which

38 are Para IVs and 8 are FTFs). The Management has guided for a robust growth

in the US, 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% during FY2013-15.

Domestic back in focus: After a below-industry average growth on the domesticformulation front since the last three years, DRL reported a modest 13.0% growth

in FY2013. The 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 emergingmarket 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 US market. This deal is expected to provide an impetus to the

proprietary products business going forward.

Valuation: We expect the companys net sales to post a 14.9% CAGR to`15,350crand adjusted EPS to record a 10.8% CAGR to`126.8 over FY2013-15. Growth

would be driven by the US business, uptick in domestic formulations, and Russian

markets. At the current market price, the stock is trading at 18.0x FY2014E and16.0x FY2015E earnings. We recommend a buy on the stock with a price target ofExhibit 7:Key assumptions

FY2014E FY2015EPSAI segment growth (%) 4.5 4.8

Generics segment growth (%) 17.0 17.3

Operating margin (%) 20.4 20.1Capex (`cr) 900 900



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Exhibit 8:One-year forward PE chart

0

500

1,000

1,500

2,000

2,500

3,000

Feb-08

May-08

Aug-08

Nov-08

Feb-09

May-09

Aug-09

Nov-09

Feb-10

May-10

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

May-13

Price 5x 10x 15x 20x


Exhibit 9:Recommendation summaryCompany Reco CMP Tgt. price Upside FY2015E FY12-15E FY2015E

(`) (`) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)Alembic Pharma. Accumulate 123 139 13.2 8.8 1.2 6.0 26.1 34.0 34.7

Aurobindo Pharma Buy 190 264 38.9 9.9 1.2 7.4 58.2 12.0 18.0

Cadila Healthcare Buy 832 962 15.6 17.3 2.1 11.8 14.8 18.5 24.7

Cipla Buy 399 463 16.2 17.2 2.7 11.6 17.6 17.4 16..2

Dr Reddy's Buy 2,026 2,535 25.1 16.0 2.4 11.9 10.8 18.3 21.8Dishman Pharma Buy 75 206 175.2 3.6 0.8 4.0 47.9 12.0 13.7

GSK Pharma* Neutral 2,324 - - 27.9 5.4 18.9 4.8 36.1 31.0

Indoco Remedies Buy 64 90 40.6 7.1 0.8 5.4 21.5 14.6 15.8

Ipca labs Buy 545 676 24.1 12.1 1.8 8.4 30.6 26.0 25.3

Lupin Buy 752 877 16.6 18.0 2.4 11.2 29.1 28.5 24.8

Ranbaxy* Neutral 456 - - 20.2 1.5 14.2 (6.8) 13.1 19.1Sanofi India* Neutral 2,500 - - 25.2 2.5 15.0 13.4 15.9 16.7

Sun Pharma Neutral 946 - - 27.1 6.1 14.0 0.2 27.0 19.3

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.


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Profit & loss statement (IFRS Consolidated)

Y/E March FY2011 FY2012 FY2013 FY2014E FY2015ENet sales 7,469 9,674 11,627 13,377 15,350Other operating income 75.0 76.5 247.9 247.9 247.9Total operating income 7,544 9,750 11,875 13,625 15,598% chg 6.5 29.2 21.8 14.7 14.5

Total expenditure 5,903 7,076 8,951 10,647 12,260

Cost of revenues 3,028 3,598 4,825 5,457 6,304

SG&A expenses 2,369 2,887 3,358 4,281 4,912

R&D expenses 506.0 591.1 767.3 909.7 1,043.8

EBITDA 1,566 2,598 2,676 2,730 3,090% chg 10.3 65.9 3.0 2.0 13.2

(% of Net Sales) 21.0 26.9 23.0 20.4 20.1

Depreciation & amortisation 414.7 745.4 743.7 562.7 603.4

EBIT 1,151 1,853 1,932 2,167 2,487% chg 14.6 60.9 4.3 12.2 14.7

(% of Net Sales) 15.4 19.2 16.6 16.2 16.2

Interest & other charges 28.3 (16.0) - - -

Other Income 9.4 - 46.0 46.0 46.0

(% of PBT) 0.8 - 2.1 1.9 1.6

Share in profit of associates 0.3 5.4 10.4 10.4 10.4

Recurring PBT 1,208 1,951 2,237 2,471 2,791% chg 13.3 61.5 14.7 10.5 12.9

Extraordinary expense/(Inc.) (37) 104.0 68.8 - -

PBT (reported) 1,244.2 1,846.6 2,167.7 2,471.4 2,791.0Tax 140.3 420.4 490.0 566.0 639.5

(% of PBT) 11.3 22.8 22.6 22.9 22.9

PAT (reported) 1,104 1,426.2 1,677.7 1,905.4 2,151.5Exceptional items 9 - - - -

PAT after MI (reported) 1,104 1,426.2 1,677.7 1,903.4 2,149.5ADJ. PAT 1,076 1,496.0 1,750.0 1,903.4 2,149.5% chg 16.8 39.0 17.0 8.8 12.9

(% of Net Sales) 14.8 14.7 14.4 14.2 14.0

Basic EPS (`) 63.8 88.2 103.2 112.3 126.8Fully Diluted EPS (`) 63.8 88.2 103.2 112.3 126.8% chg 16.8 38.4 17.0 8.8 12.9


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Balance sheet (IFRS Consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015ESOURCES OF FUNDSEquity share capital 84.4 84.8 84.8 84.8 84.8Reserves & surplus 4,515 5,660 7,224 8,830 10,681

Shareholders funds 4,599 5,744 7,309 8,917 10,770Total loans 2,357.2 4,831.2 3,676.0 3,676.0 3,676.0

Deferred tax liability 143.8 83.3 83.3 83.3 83.3

Total liabilities 7,100 10,659 11,068 12,677 14,530APPLICATION OF FUNDSNet fixed assets 2,478 3,325 3,781 4,681 5,581

Goodwill /other intangibles 1,549 1,353 1,402 1,402 1,402

Capital Work-in-Progress 486.7 520.8 495.2 495.2 495.2

Investments 31.0 1,077 1,764 1,764 1,764Current Assets 4,832 6,995 6,875 8,064 9,557

Cash 572.9 737.9 513.6 763 1,197

Loans & Advances 448.2 580.4 697.6 802.6 921.0

Other 3,811 5,677 5,664 6,498 7,439

Current liabilities 2,276 2,613 3,252 3,733 4,274

Net Current Assets 2,556 4,382 3,623 4,330 5,283Mis. Exp. not written off - - -

Total Assets 7,100 10,659 11,068 12,677 14,530

Cash flow statement (IFRS Consolidated)Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015EProfit before tax 1,208 1,951 2,237 2,471 2,791

Depreciation 415 745 744 563 603

(Inc)/Dec in Working Capital (439) (1,661) 535 (458) (519)

Less: Other income 9 - 46 46 46

Direct taxes paid 140 420 490 566 640

Cash Flow from Operations 1,034 614 2,980 1,964 2,190(Inc.)/Dec.in Fixed Assets (718) (881) (431) (900) (900)

(Inc.)/Dec. in Investments - (1,046) 687 - -

Other income 9 - 46 46 46Cash Flow from Investing (709) (1,928) 302 (854) (854)Issue of Equity - 0 - - -

Inc./(Dec.) in loans 892 2,474 (1,155) - -

Dividend Paid (Incl. Tax) 221 259 298 298 298

Others (1,081) (736) (2,053) (563) (604)

Cash Flow from Financing (410) 1,478 (3,506) (860) (902)Inc./(Dec.) in Cash (86) 165 (224) 250 434

Opening Cash balances 658 573 738 514 763Closing Cash balances 573 738 514 763 1,197


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Key ratios

Y/E March FY2011 FY2012 FY2013 FY2014E FY2015EValuation Ratio (x)P/E (on FDEPS) 31.8 23.0 19.6 18.0 16.0P/CEPS 22.9 15.8 14.2 13.9 12.5

P/BV 7.4 6.0 4.7 3.9 3.2

Dividend yield (%) 0.5 0.7 0.7 0.7 0.7

EV/Sales 4.8 4.0 3.2 2.8 2.4

EV/EBITDA 23.0 14.8 14.0 13.6 11.9

EV / Total Assets 5.1 3.6 3.4 2.9 2.5

Per Share Data (`)EPS (Basic) 63.8 88.2 103.2 112.3 126.8

EPS (fully diluted) 63.8 88.2 103.2 112.3 126.8

Cash EPS 90.0 128.1 142.8 145.4 162.4

DPS 11.0 14.0 15.0 15.0 15.0

Book Value 272.5 338.8 431.0 525.9 635.2

Dupont AnalysisEBIT margin 15.4 19.2 16.6 16.2 16.2

Tax retention ratio 88.7 77.2 77.4 77.1 77.1

Asset turnover (x) 1.3 1.2 1.2 1.2 1.2

ROIC (Post-tax) 17.5 17.5 14.9 15.1 15.4

Cost of Debt (Post Tax) 1.3 -0.3 0.0 0.0 0.0

Leverage (x) 0.3 0.6 0.6 0.4 0.3

Operating ROE 22.2 27.4 23.5 20.9 19.7

Returns (%)ROCE (Pre-tax) 17.7 20.9 17.8 18.3 18.3

Angel ROIC (Pre-tax) 29.4 29.6 23.1 23.2 23.2

ROE 24.2 28.9 26.8 23.5 21.8

Turnover ratios (x)Asset Turnover (Gross Block) 3.6 3.4 3.3 3.2 3.0

Inventory / Sales (days) 71 66 63 63 65

Receivables (days) 72 80 88 91 94

Payables (days) 55 46 44 41 41

WC cycle (ex-cash) (days) 85 105 104 89 90

Solvency ratios (x)Net debt to equity 0.4 0.7 0.4 0.3 0.2

Net debt to EBITDA 1.1 1.6 1.2 1.1 0.8

Interest Coverage (EBIT / Int.) 40.7 - - - -


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Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Dr. Reddys Laboratories

1. Analyst ownership of the stock 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

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Documents

Dr Reddys Lab 4Q FY 2013