Buy Dr Reddy's Laboratories With Target Of Rs 1572
DRL’s Q4FY11 results were ahead of estimates driven by generic Allegra D-24 and the PSAI segment. We expect generic Allegra D-24 to have contributed USD25mn (product now moved to OTC). DRL indicated that the lower growth in India was on back of price cuts in the market which provides an early signal to rising competition. Further the recurring EBIT margins were bit under pressure on back of higher SG&A and R&D cost. We continue to maintain HOLD rating with a revised TP of Rs1,572 valuing the base business at Rs1,501 (20x June’12 recurring earnings) and Rs71/share for P-IV/ limited competition opportunities.
Strong growth in US & PSAI segments, India disappoints
DRL reported net sales of Rs20.2bn, up 22.8% driven by US and PSAI segments. US geography was primarily driven by launch of generic Allegra-D24 during the quarter and is estimated to clock sales of USD25mn. Generic Allegra D-24 has now been shifted to OTC there by sales momentum would taper in the coming quarters. The growth on the PSAI front of 12.8% YoY was positive driven by API segment. However the Indian geography disappointed with mere 5% growth on back of price cuts.
Higher SG&A and R&D cost negates Gross margin mprovement
For the quarter the company reported EBIT margins of 19.0% which expanded by 619bps YoY. Excluding Allegra- D24 contribution, we expect the recurring margin to have contracted by 56bps YoY to
14.7%. Increase in SG&A expenses was on account of higher legal expenses, increase in field force and marketing expenses in Russia.