DRL’s Q3FY11 results were a mixed bag. The sales growth and adjusted margins were tad below expectation but adjusted PAT was above our estimates on back of lower tax rate. Near term trigger for the stock would be launches of Fondaparinux and generic Allegra D-24 products in US.

We recommend HOLD rating on the stock with a TP of Rs1,594 valuing the base business at Rs1,535 (20x March 2012 recurring earnings) and Rs59 per share for P-IV/limited competition opportunities. Our estimates do not factor in NPV of Rs22 per share for launch of generic Allegra D-24 given the litigation uncertainty.

Strong growth in US but India and Russia lag behind

Higher SG&A tamper Gross margin improvement

VALUATIONS AND RECOMMENDATION

We have valued DRL on a SOTP basis with a target price of Rs1,594, valuing the base business at Rs1,535 (20x March 2012 recurring earnings) and Rs59/share for P-IV/ limited competition opportunities. The stock is trading at 25.2x FY2011E and 20.6x FY2012E recurring earnings. We recommend ‘HOLD’ on the stock.