Dr Reddys Labs Growth Underestimated – Goldman Sachs

Based on better-than-expected 9m-FY09 sales, Goldman Sachs [GS] now expect 33% FY09E sales growth. For FY2010E, while acknowledging that DRL faces a challenging task to improve upon its FY09 numbers, we believe that its growth momentum will continue and we expect it to post at least double-digit (10.1%) sales growth (core business growth of 16.9%). Market view of decline in growth in FY10E (owing to base comparison) is overly pessimistic; US to continue to drive revenue growth.

Additionally, we continue to believe that the AOK tender wins have equipped DRL better to face the changing business model in Germany and to be a long-term competitor of significance.

Reason For Under performance w.r.t SENSEX:
These have been primarily two-fold: (1) Concerns on reported growth numbers for FY10E owing to a base comparison effect with FY09, coupled with concerns in the Russian and German markets (2) Concerns on reported EBIT margin and net earnings decline on any potential write-offs on Betapharm products.

Dr Reddy’s is the least expensive stock in Pharma group (apart from the exception of Glenmark) and trades at a significant discount of 33% on one-year forward PE of 8.5X and 38% on one-year forward EV/EBITDA 4.9X to its peers.

Low 3-year PEG of 0.4 indicates the higher earnings potential of the company (compared to the peer average of 1.0) and maintain DR Reddy’s Lans on Conviction Buy list. GS has set a Target Price of Rs 805 implies a FY10E P/E of 17.3X, which implies a 20% premium over sector.