We maintain our ‘buy’ rating on Dr Reddys Laboratories with a price target of Rs 2,750 based on a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of 11%.
Margins expand sharply on strong US launches. While sales at Rs 3,360 crore were below our estimates due to a Rs 65 crore hedging loss and a 19% y-o-y decline in PSAI business, Ebitda was inline. Ebitda margins expanded 620 bps q-o-q to 25.2% driven by 10% q-o-q US growth on the back of Dacogen, Aricept 23mg, Vidaza, Depakote ER and Lamictal XR launch during the quarter.
EM businesses grew strongly with Russia (+43% y-o-y), CIS (+45% y-o-y) and ROW markets (+36% y-o-y). India was up 8% y-o-y despite on-going impact of DPCO2013 and trade issues. PAT at R690 crore (UBS-e: R540 crore) was significantly ahead of estimates helped by other income and lower tax rate. However, management maintained the full year tax rate at 20%.
The management expects to maintain the current revenue run rate in the US. This quarter has seen only a limited benefit of the Vidaza and Depakote ER launch.
After a strong string of approvals in H1FY14, the focus will be on execution and maximising the profit opportunity for these products. Dr Reddy’s is moving up the complexity curve.
Copaxone remains key trigger. The drug demonstrates Dr Reddy’s strong capabilities in the injectables space.
We build in Copaxone approval in FY16 but any newsflow around the drug will be a key trigger for the stock.