Dr Reddy’s Labs – In need of Vitamins

Dr. Reddy’s Laboratories’ (DRRD) Q1FY11 results were below estimates, with operating profit of INR 2.6 bn vs. our estimate of INR 3.1 bn. While operating margins were flat Q-o-Q (ex-restructuring costs in Q4FY10) and fixed costs of INR 6.3 bn broadly in line with estimates, a lower-than-expected sales of INR 16.8 bn led to operating margins of 15.6% (below our estimate of 17.2%). Adjusted net profit of INR 2.3 bn (excluding INR 225 mn forex loss primarily from rouble depreciation) was 8% lower than our estimate of INR 2.5 bn. Thiswas largely led by weak topline at Rs16.8bn, down 7% YoY (5% below est) due to weak US, EU sales.

Business Growth is Flat – 1Q revenues disappointed due to lower than expected growth of 5% in US generics (base) including slow pick up in Omeprazole OTC market share, while PSAI (29% of total sales, down 8%) was marred by low visibility. Russia growth surprised on the upside partly due to channel restocking, subsequent to which we expect normalized ~15% growth. We forecast 12% revenue CAGR over FY10- 12E, with gradual pickup of lost market share in US generics.

The Management a) Guidance (FY13 & FY11) maintained but still no additional color on FY11 revenue expectation; b) Remains confident on US pipeline though timeline for key launches (fonda, Allegra D-24 & D-12) remains uncertain – Lotrel & Prograf market shares have been slow in scaling up; c) Germany remains a challenge but leaner cost structure & India sourcing to aid profitability.

Dr Reddy’s Labs EPS Estimates FY 11 FY 12
Goldman Sachs – 58 and 72
Citi – 59 and 76
BOFA Merrill – 50 and 70