Dr. Reddy's Laboratories

Transcription

1 Result in line; Tepid guidance for Q4FY16 on weak EM, currency February 10, 2016 Surajit Pal Rating Accumulate Price Rs2,960 Target Price Rs3,083 Implied Upside 4.2% Sensex 24,021 Nifty 7,298 (Prices as on February 09, 2015) Trading data Market Cap. (Rs bn) Shares o/s (m) M Avg. Daily value (Rs m) Major shareholders Promoters 25.57% Foreign 35.54% Domestic Inst. 5.69% Public & Other 33.20% Stock Performance (%) 1M 6M 12M Absolute (1.7) (30.5) (4.5) Relative 2.0 (15.6) 10.4 How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: REDY.BO, BB: DRRD IN) (Rs) 4,500 3,500 2,500 1,500 Feb15 Apr15 Source: Bloomberg Jun15 Aug15 Oct15 Dec15 Feb16 Nexium, India formulations save the day: Dr Reddy s (DRL) sales, EBITDA and PAT were at Rs 39.7bn, Rs 10bn and Rs 5.8bn respectively with 3%, 6% and 1% growth, in. Overall results were in line our estimates of Rs 39.4bn sales, Rs 9.8bn EBITDA and Rs 5.7bn PAT. Management expects increasing consolidation among channel partners and growing competition among generic suppliers, leading to its limited competition drugs such as oncology injectables (Imitrex, Reclast, Dacogen, Vidaza), Valcyte and Sirolimus witness strong price competition and lower market share in near term. In absence of approvals of key generics, its US generic sale may face challenging scenario in Q4FY16E and FY17E. Better product mix drives US sales: DRL s core US sales were US$295m, increased by 3% (US$ growth) QoQ in due to partial benefits of Nexium launch, integration of Habitrol sales and stable revenues from limited competition drugs. While better quality of generic portfolio maintains growth in, management guided that current scenario could be changed with increase in number of approvals in its limited competition drugs in near term. DRL s relaunch of Nexium is expected to recover loss of sales in near term though it clarified that sizeable price rationalization occurred in recent months. Russia, Venezuela continue to pose currency risk: With currency devaluation and steep increases in prices in the secondary market, DRL consciously reduced supply in Venezuelan market. Their sales were US$18m in while they expect to reduce sales further in coming quarters. Russian market is also under pricing pressure due to fresh slide in currency in recent months Valuation Maintain Accumulate, retain TP at Rs 3,083: With tepid guidance of sales in Q4FY16 and challenging competitive landscape looming large for US generics, we expect India formulations is the strong visible driver for DRL s 7% revenue CAGR in FY17E18E. USFDA issues in three plants will also complicate approvals of key generics such Xeloda and Propofol in near term. We expect 14% CAGR in India formulations while PSAI and EM is expected to grow at 57% CAGR in FY17E18E. We however expect better turnout from launch of NDA products in US in long term. We maintain Accumulate and retain TP at Rs 3,083. Key financials (Y/e March) E 2017E 2018E Revenues (Rs m) 148, , , ,752 Growth (%) EBITDA (Rs m) 34,101 38,172 41,761 45,624 PAT (Rs m) 22,823 25,574 28,186 30,896 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2017E 2018E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Q3Y16 Result Overview (Rs m) Y/e March YoY gr. (%) 9MFY16 9MFY15 YoY gr. (%) Net Sales 39,679 38, , , , Raw Material 8,196 8,881 (7.7) 7,550 22,876 24,499 (6.6) % of Net Sales Personnel Cost 7,893 7, ,870 23,265 20, % of Net Sales Others 13,557 12, ,065 40,363 38, % of Net Sales Total Expenditure 29,646 28, ,486 86,503 83, EBITDA 10,033 9, ,404 30,642 25, Margin (%) Depreciation 2,577 2, ,466 6,662 5, EBIT 7,456 7, ,938 23,980 19, Other Income (64.2) (28.4) Interest 62 (1,013) NA (1,915) NA PBT 7,516 8,774 (14.3) 9,041 24,484 22, ExtraOrd. Inc./Exps. (64) 487 (56) (170) 383 Total Taxes 1,788 2,541 (29.6) 1,879 5,388 5, ETR (%) Reported PAT 5,792 5, ,219 19,267 16, February 10,

3 Exhibit 2: Major Sources of Revenues (Rs m) Y/e March YoY gr. (%) 9MFY16 9MFY15 YoY gr. (%) PSAI (CPS & API) 5,082 6,112 (16.9) 5,918 16,614 18,041 (7.9) % of Net Sales India (34.4) 724 1,933 3,743 (48.4) % of Net Sales International 4,460 5,164 (13.6) 5,194 14,681 14, % of Net Sales North America 1,037 1,360 (23.8) 692 2,393 3,205 (25.3) % of Net Sales Europe 1,951 2,055 (5.1) 2,426 6,729 6, % of Net Sales ROW 1,472 1,749 (15.8) 2,076 5,559 4, % of Net Sales Branded Formulation 33,558 31, ,768 97,285 89, India 5,805 4, ,464 16,025 13, % of Net Sales International 27,753 27, ,304 81,260 75, % of Net Sales Russia & CIS 4,766 (16.1) 3,900 11,000 14,425 (23.7) % of Net Sales Europe 1,937 1,947 (0.5) 2,124 5,973 4, % of Net Sales North America Generics 19,417 16, ,563 56,495 47, % of Net Sales Emerging Mkt Generics 2,399 3,832 (37.4) 2,717 7,792 9,717 (19.8) % of Net Sales Innovative Prod. (Proprietary Prod.) 1, ,204 3,246 2, % of Net Sales Net Sales 39,679 38, , , , February 10,

4 Key takeways from conference call Management highlighted that better product mix, launch of Nexium, full benefit from integration of UCB brands and India formulations growth were the reason for growth and 3% sales growth and 25.3% EBITDA margin in. PSAI sales growth remains uncertain on delay in dispatch of drugs due to remediation measures in Srikakulam plant in. Its 17% decline in PSAI sales was also caused by competition of a partner s products (with profit sharing) which was crowded with new entry of generics. The issues of supply related delay in revenues however been resolved and management expect normalised sales to be reflected in Q4FY16E Domestic formulations growth is driven by strong traction of core portfolio and benefits of full integration (first time) of UCB portfolio in. Though DRL s core portfolio of India formulations benefitted from spill over effect from, its growth of 19% implied strong momentum to continue in coming quarters. With expectation of lower number of approvals, DRL expects US launch of 34 para3 niche products in FY17E, which are not dependent on Srikakulam API plant. Management, however, maintains that visibility on number of approvals in US remain uncertain while certain that approval of key drugs such as Xeloda will not be possible due to USFDA issues in key plants in India. DRL s application of three NDA received approval in JanFeb 2016 though it is not expected for sizeable contribution in first year of launch. With current sales force of 150 reps, DRL does not require additional reps for derma products, while it requires new sales team for its CNS drugs. DRL submitted data and communicated with USFDA at regular intervals and completed its response on CAPA on all the three plants (for which Warning Letter issued) in January 2016, though there is no specific visibility on the resolution of Form483 observations. In, capex incurred was US$47m, working capital was US$87m and netcash was US$68m. February 10,

5 Exhibit 3: India Formulations: Sales and Growth Sales (Rs m) 7,000 1, Exhibit 4: US Generics (US$ m): sales and growth Sales (US$ mn) Exhibit 5: Russia and CIS Sales and growth Sales (Rs m) 1, February 10,

6 Exhibit 6: Emerging mkt: Sales and growth Sales (Rs m) 4,500 3,500 2,500 1,500 1, Exhibit 7: PSAI: Sales and growth (Rs m) Sales (Rs m) 1 10,000 8, Exhibit 8: Overall Sales and Growth Sales (Rs m) 4 40, , , , February 10,

7 Exhibit 9: Gross profit and Margin Gross Profit (Rs m) Margin (%) RHS 30, , , Exhibit 10: EBITDA and margin EBITDA (Rs m) Margin (%) RHS 1 10,000 8, Exhibit 11: R&D exps and % of sales R&D exps (Rs m) % of Sales (RHS) 1, February 10,

8 Exhibit 12: PAT and growth PAT (Rs m) 8,000 7,000 1, February 10,

9 Income Statement (Rs m) Y/e March E 2017E 2018E Net Revenue 148, , , ,752 Raw Material Expenses 33,819 37,408 39,489 41,681 Gross Profit 114, , , ,071 Employee Cost 28,967 28,463 29,355 31,542 Other Expenses 51,302 58,601 64,126 68,905 EBITDA 34,101 38,172 41,761 45,624 Depr. & Amortization 5,722 5,766 6,235 6,633 Net Interest (1,682) (1,716) (1,750) (1,785) Other Income 3,927 3,905 4,712 5,018 Profit before Tax 33,988 38,027 41,988 45,793 Total Tax 5,340 6,595 7,268 7,967 Profit after Tax 28,648 31,433 34,720 37,826 ExOd items / Min. Int. 195 Adj. PAT 22,823 25,574 28,186 30,896 Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract (Rs m) Y/e March E 2017E 2018E C/F from Operations 25,033 25,606 26,923 23,984 C/F from Investing (22,904) (12,835) (13,094) (15,302) C/F from Financing (4,118) (4,971) (8,237) (10,202) Inc. / Dec. in Cash (1,989) 7,799 5,592 (1,520) Opening Cash 8,451 5,394 13,193 18,785 Closing Cash 5,394 13,193 18,785 17,265 FCFF 18,290 20,786 18,654 18,632 FCFE 18,177 9,987 13,182 12,474 Key Financial Metrics Y/e March E 2017E 2018E Growth Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) FCFE / PAT Balance Sheet Abstract (Rs m) Y/e March E 2017E 2018E Shareholder's Funds 111, , , ,196 Total Debt 46,505 35,706 30,234 24,076 Other Liabilities (4,013) (4,052) (5,561) (6,457) Total Liabilities 153, , , ,815 Net Fixed Assets 65,282 70,885 75,695 80,804 Goodwill Investments 38,110 37,090 37,275 42,745 Net Current Assets 50,402 55,873 67,686 79,267 Cash & Equivalents 5,394 6,112 6,958 4,441 Other Current Assets 80,184 85,247 98, ,734 Current Liabilities 35,177 35,485 37,932 33,909 Other Assets Total Assets 153, , , ,815 Quarterly Financials (Rs m) Y/e March Net Revenue 38,704 37,578 39,890 39,679 EBITDA 8,227 9,206 11,404 10,033 % of revenue Depr. & Amortization 2,232 1,619 2,466 2,577 Net Interest 233 (216) Other Income Profit before Tax 5,887 7,928 9,041 7,516 Total Tax 742 1,721 1,879 1,788 Profit after Tax 5,189 6,257 7,219 5,792 Adj. PAT 5,189 6,257 7,219 5,792 Key Operating Metrics (Rs m) Y/e March E 2017E 2018E India Formulations 17,870 20,551 23,428 26,707 US Formulations 64,723 69,069 69,983 69,983 Russia 17,713 20,510 23,754 27,518 PSAI 25,456 27,124 28,786 30,557. February 10,

10 Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 46.7% 42.1% 11.2% % BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12months Accumulate : Outperformance to Sensex over 12months Reduce : Underperformance to Sensex over 12months Sell : Over 15% underperformance to Sensex over 12months Trading Buy : Over 10% absolute upside in 1month Trading Sell : Over 10% absolute decline in 1month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Surajit Pal (PGDBA, CFA, M.Com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or comanaged public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Surajit Pal (PGDBA, CFA, M.Com), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated brokerdealer and therefore the analyst(s) is/are not subject to supervision by a U.S. brokerdealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered brokerdealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. February 10,