IDirect_DrReddys_Q4FY15 4065R DRREDLAB 20150513
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Result Update May 13, 2015 Rating matrix Dr Reddy’s Laboratories (DRREDD) Rating : Buy Target : | 3949 Target Period : 12-15 months Potential Upside : 13% Higher R&D, adverse product mix hit margins What’s Changed? Target Changed from | 3332 to | 3949 EPS FY16E Changed from | 151 to 150.9 EPS FY17E Changing from | 185.1 to | 179.5 Rating Changed from Hold to Buy Quarterly Performance Revenue EBITDA EBITDA (%) Net Profit Q4FY15 3,870.4 825.6 21.3 518.8 Q4FY14 YoY (%) 3,480.9 11.2 781.3 5.7 22.4 -111 bps 481.7 7.7 Q3FY15 QoQ (%) 3,843.1 0.7 980.2 -15.8 25.5 -417 bps 574.6 -9.7 Key Financials (|crore) Revenues FY14 FY15 FY16E FY17E 13217.0 14818.9 17291.5 19438.4 EBITDA 3312.7 3482.7 4065.1 4667.0 Net Profit 2151.3 2099.0 2562.6 3048.2 126.7 123.6 150.9 179.5 EPS (|) Valuation summary FY14 FY15 FY16E FY17E PE (x) 27.5 28.2 23.1 19.4 Target PE (x) 31.2 31.9 26.2 22.0 EV to EBITDA (x) 14.8 13.9 11.7 9.8 Price to book (x) 5.3 4.4 3.7 3.0 RoNW (%) 23.7 19.3 19.6 19.4 RoCE (%) 19.2 18.1 20.2 21.3 Stock data Particular Amount Market Capitalisation | 59280 crore Debt (FY15) | 3635 crore Cash & cash equivalents (FY15) | 3114 crore EV | 59800 crore 52 week H/L 3808/2250 Equity capital | 85.0 crore Face value |5 Price performance (%) Dr Reddy's Labs Sun Pharma Lupin 1M -8.7 -15.2 -11.0 3M 4.1 2.8 8.1 | 3485 6M 0.8 4.8 22.9 1Y 27.4 54.8 82.3 Research Analyst Siddhant Khandekar siddhant.khandekar@icicisecurities.com Mitesh Shah mitesh.sha@icicisecurities.com Nandan Kamat nandan.kamat@icicisecurities.com ICICI Securities Ltd | Retail Equity Research • Revenues grew 11.2% YoY to | 3870.4 crore (I-direct estimate: | 3993 crore) mainly on account of 15% growth in US formulation sales to | 1715.4 crore • EBITDA margins declined 111 bps YoY to 21.3% vs. I-direct estimate of 26%. The delta was mainly due to higher R&D spend, change in product mix and currency fluctuation. EBITDA in absolute terms increased 5.7% to | 825.6 crore vs. I-direct estimate of | 1038.2 crore • Net profit increased 7.7% to | 518.8 crore vs. I-direct estimate of | 755.9 crore. The miss was on account of lower operational income and higher finance expenses Global generics to piggyback on strong, sustainable US traction The global generics (GG) segment is expected to grow at a CAGR of 17% in FY15-17E driven by strong US traction, which is likely to grow at a CAGR of ~19% during the same period. DRL has developed a knack for exclusivity/FTF launches on a fairly continuous basis in the US. We expect this trend to continue further. However, the focus has now shifted to more unique launches like OTC, complex generics, controlled releases, etc. The US traction is also likely to nullify European slowdown. The US pipeline includes 220 filed ANDAs including 68 pending approvals. Russia CIS becomes volatile; India to provide more stability Global generics (ex US, Europe) are likely to grow at a steady CAGR of ~17% in FY15-17E driven by growth in India as the Russian performance remains volatile. These two markets are more or less identical in nature (branded generics and OTC) with similar growth potential and similar kinds of risks. DRL is well versed with the dynamics in Russia by virtue of being an early mover. However, the recent currency volatility and political unrest have caused disturbances in an otherwise safe market for the company. For India, growth is expected to be largely from launches in the oncology and biosimilars space besides an improvement in productivity of the enhanced field force. Portfolio realignment eminent We envisage a fall in share of low margin/high risk segments such as PSAI and European generics (especially Betapharm), going ahead. Thus, growth in FY15-17E is likely to emanate from more productive and sustainable segments such as US and India. Similarly, in terms of product offering, we envisage more launches in the fields of injectables, OTC, complex/limited competition products & biosimilars, besides legacy generics. US franchisee looks promising; India growth likely to sustain US and India together hold the key for global generics growth as well as DRL’s overall growth. Among them, the US is the main catalyst with a pending product portfolio of 68 ANDAs, which includes 43 Para IVs and 13 FTFs. The company is investing heavily in R&D to bring more and complex generics and limited competition products, mainly from the nonoral category, which is likely to take care of sustained US growth for the next two or three years. India is showing promising growth as well with a recalibrated approach and the recent acquisition (UCB’s India business) bodes well for the future. Russia, Europe and PSAI segments, however, continue to pose challenges for being lumpy and volatile. We have ascribed a target of | 3949 based on 22x FY17E EPS of | 179.5. Variance analysis Revenue Q4FY15 Q4FY15E Q4FY14 Q3FY15 3,870.4 3,993.0 3,480.9 3,843.1 Raw Material 1,089.6 958.3 927.7 961.7 17.4 13.3 658.8 794.5 514.4 678.8 878.5 447.2 561.0 835.1 398.5 646.2 857.5 431.6 17.4 -4.9 29.1 1.9 -7.3 19.2 0.0 0.0 -12.5 1,296.4 825.6 21.3 0.0 0.0 -8.0 1,317.7 1,038.2 26 0.0 0.0 -22.6 1,211.0 781.3 22.4 213.7 23.3 4.4 74.2 518.8 195.9 -42.0 5.0 133.4 755.9 195.6 -16.4 4.8 125.2 481.7 257.4 -101.3 4.7 254.1 574.6 9.3 LP -9.7 -40.8 7.7 -17.0 LP -6.2 -70.8 -9.7 1715.4 1945.3 1496.4 1681.9 14.6 2.0 Europe formulations 234.1 147.2 177.4 194.7 32.0 20.2 India formulations 474.4 459.3 410.1 432.8 15.7 9.6 Russia & Other CIS formulations 328.9 341.6 451.9 476.6 -27.2 -31.0 RoW markets formulations 346.5 382.2 196 383.2 76.8 -9.6 741.5 29.6 Source: Company, ICICIdirect.com Research 630.5 86.8 664.1 85.1 611.2 89.76 11.7 -65.2 21.3 -67.0 Other manufacturing expenses SGNA R & D cost Write down of Intangible assets Write down of goodwill Other (income)/expenses Total Expenditure EBITDA EBITDA (%) Depreciation Finance (income)/ expenses Share of pr/(loss) to equity investee Tax Net Profit Key Metrics North America formulations PSAI segment Proprietary products & Others YoY (%) QoQ (%) 11.2 0.7 0.0 0.0 0.0 0.0 0.0 0.0 -34.1 NA NA 1,255.1 7.1 3.3 980.2 5.7 -15.8 25.5 -111 bps -417 bps Comments The growth was mainly driven by 14.6% growth in the US and 15.7% growth in India. Raw material cost increase was mainly due to adverse product mix, inventory write-off in the US and currency fluctuation R&D cost as percentage of sales increased 184 bps to 13.3% on account of planned scale up in overall R&D spend and filing of three NDAs Fall in margins was mainly on account of increase in R&D spend, change in product mix and currency volatility in the emerging markets Increase in profit was mainly in line with lower operational performance Growth was on account of acquiring of Habitrol brand and increased market shares in key products. Delta vis-à-vis estimates was on account of lower-thanexpected injectable sales Growth was mainly due to new CNS products launches in UK and Germany's non tender business The growth was mainly on the back of volume expansion in focused brands and new launches (three products) The decline was mainly on account of depreciation of Rouble and higher base. On a constant currency basis, Russia grew 3% YoY Growth was mainly due to robust growth in Venezuela on continuous volume uptick Strong growth on the back of lower base Change in estimates FY16E FY17E (| Crore) Old New % Change Old New % Change Revenue 17,036.9 17,291.5 1.5 19,538.3 19,438.4 -0.5 EBITDA 4,091.1 4,065.1 -0.6 4,789.3 4,667.0 -2.6 EBITDA Margin (%) 24.0 23.5 -50 bps 24.5 24.0 -50 bps PAT 2,582.8 2,562.6 -0.8 3,143.6 3,048.2 -3.0 EPS (|) 152.1 150.9 -0.8 185.1 179.5 -3.0 Source: Company, ICICIdirect.com Research Assumptions Growth (%) North America formulations FY14 73.4 Europe formulations -15.6 India formulations 21.5 Russia & Other CIS formulations 49.5 RoW markets formulations 88.5 PSAI segment 0.7 Proprietary products & Other 13.1 Source: Company, ICICIdirect.com Research FY15 17.1 3.0 13.7 -10.6 77.4 6.2 -19.4 Current FY16E FY17E 23.9 15.0 -0.7 21.3 0.9 35.3 1.7 2.0 ICICI Securities Ltd | Retail Equity Research -0.9 16.7 5.0 25.0 2.0 2.0 Earlier FY16E FY17E 20.0 22.0 -0.5 15.0 0.9 30.0 1.7 2.0 Comments We have reduced our US growth assumption due to higher base on account of Habitrol acqusition and slow product approvals -1.0 15.0 5.0 25.0 2.0 2.0 Page 2 Company Analysis Established in 1984, Dr Reddy’s Laboratories (DRL) is one of India’s pedigreed players with a firm footing in the US and other export markets. DRL has deep rooted product and market knowledge across therapies. Like Cipla, DRL also recognised the importance of having good manufacturing practices (GMP) accreditation in the eighties and eventually got USFDA approval (first of its kind approval for a formulation facility in India) in 1987. The company owns 22 manufacturing facilities and four developing centres across the globe. The facilities have been approved by various agencies like the USFDA, WHO-Geneva, UKMHRA, TGA-Australia, MCC-South Africa, DMA Denmark, Brail ANVISA, among others. Over the years, along with generics, the company also established itself in the field of discovery of new chemical entities (NCEs) but with little success. DRL’s business can be classified into three broad segments- 1) global generics (GG), 2) pharmaceutical services and active ingredients (PSAI) and 3) proprietary products (PP). GG (81% of revenues) includes branded and unbranded prescription and over-the-counter (OTC) products business. It also includes the operations of the biologics business. This segment comprises formulation sales to regulated markets of the US, Europe and emerging markets such as Russia/CIS, India and RoW. PSAI (17% of revenues) consists of the active pharmaceutical ingredients (API) business and custom pharmaceutical services (CPS) business. PP (2% of revenues) consists of NCEs, differentiated formulations and dermatology focused specialty business operated through Promius Pharma. DRL is one of the few Indian companies to foray into new drug discovery & development (NDDS) and new chemical entity (NCE) research. The company started research operations in 1992 through a non profit organisation, Dr Reddy’s Research Foundation, which was later merged into the company. Despite being an early entrant, the company is yet to taste success in it. DRL is also the first Indian company to out-license molecules to big pharma companies. DRL has spent around 8-9% of the turnover on R&D in the last four years but this figure is likely to touch 10-11%, going ahead. Beside ANDAs, it has also filed 10 new drug applications (NDAs) in the 505 b (2) route that are awaiting approval. We expect revenues to grow at 15% CAGR to | 19438 crore in FY15-17E, on the back of growth in the GG segment. This, in turn, will be driven by the US. The GG is likely to grow at a CAGR of 17% to | 16544 crore during the same period. On the other hand, the PSAI segment is likely to slow down, mainly on the back of 1) higher internal consumption and 2) pricing pressure/order uncertainty in the API and CPS segments, respectively. The PSAI segment is likely to register 2% CAGR to | 2640 crore in FY15-17E. ICICI Securities Ltd | Retail Equity Research Page 3 Exhibit 1: Revenues to grow at CAGR of 15% in FY15-17E 24000 19438.4 20000 17291.5 (| crore) 16000 11626.6 12000 8000 13217.0 14818.9 9673.7 7027.7 7469.3 FY10 FY11 4000 0 FY12 FY13 FY14 FY15 FY16E FY17E Revenues Source: Company, ICICIdirect.com Research Exhibit 2: Geography wise revenue break-up (| crore) North America Europe India Russia & Other CIS RoW Global Generics North America Europe India RoW PSAI Prop. Products & Others Total FY10 1681.7 963.8 1015.8 911.9 287.3 4860.5 367.3 665.2 264.6 743.3 2040.4 126.8 7027.7 FY11 1899.6 843.1 1169.0 1085.8 336.5 5334.0 317.0 702.0 261.9 683.8 1964.7 170.5 7469.2 FY12 FY13 FY14 FY15 FY16E FY17E 3188.9 3784.6 5530.3 6473.4 8018.7 9221.5 825.9 771.6 697.0 718.1 713.1 706.8 1293.1 1456.0 1571.3 1787.0 2167.6 2530.2 1326.0 1690.8 1981.9 1771.4 1787.5 1876.9 390.4 553.3 735.9 1305.7 1766.9 2208.6 7024.3 8256.3 10516.4 12055.7 14453.8 16544.0 427.2 574.4 435.4 460.5 469.7 479.1 842.4 1200.7 877.0 945.2 955.8 974.9 358.6 463.8 378.7 441.1 450.0 459.0 753.1 831.3 706.3 698.8 712.8 727.0 2381.3 3070.2 2397.4 2545.7 2588.3 2640.0 268.2 300.1 303.3 244.6 249.5 254.4 9673.8 11626.6 13217.1 14845.9 17291.5 19438.4 Source: Company, ICICIdirect.com Research US remains in sweet spot; banking on capabilities and capacity The US contributes more than 98% of North American sales while the remaining sales are from Canada. DRL has four USFDA approved formulations facilities including two in the US. The company operates in the prescriptions (Rx) and OTC segments in the US market. The sales are channelled through drug stores, drug wholesalers, health maintenance organisations and pharmacy chains. DRL is also an authorised supplier to the US government. After establishing itself in the US generics space, the focus was shifted to the first to file (FTFs) and AG space. From FY08 onwards, DRL started filing limited competition/niche products like injections, controlled releases and complex generics in the US market in order to reduce the dependence on plain generics. DRL also owns one of the largest over the counter (OTC) product portfolios in the US. DRL has a strong product pipeline of 220 ANDAs with 68 pending approvals. Of these, 43 are Para IVs while 13 have first to file (FTF) status. Beside ANDAs, DRL has also filed seven NDAs through the 505 b (2) route, which are awaiting approval. We expect the company to file 18-20 ANDAs every year, going ahead. Going by the future pipeline, (we expect DRL to launch eight to 10 products per annum, which includes at least two or three complex products every year besides plain vanilla generic and FTF opportunities. We expect sales from North America to grow at a CAGR of 19% in FY15-17E. ICICI Securities Ltd | Retail Equity Research Page 4 Exhibit 3: North America sales to be driven by robust pipeline 10000 9221.5 9000 8018.7 8000 6473.4 (| crore) 7000 5530.3 6000 5000 4000 3000 2000 3188.9 1681.7 1899.6 FY10 FY11 3784.6 1000 0 FY12 FY13 FY14 FY15 FY16E FY17E North America Source: Company, ICICIdirect.com Research India: Field force expansion, niche forays to drive growth DRL ranks seventeenth (in terms of market share, AIOCD, April, 2015) with a market share of 2.16%. The acute-chronic ratio currently stands at 70:30. Gastrointestinal (GI) is the largest therapeutic group and the company ranks fifth in this therapeutic group. In many other therapies, however, it remains a marginal player. The only therapeutic category, where it holds No. 1 position is anti-neoplastics (oncology), which as a therapy remains an important but untapped opportunity. To bolster the domestic franchise, DRL has almost doubled the MR strength from 2250 in FY09 to ~4300 as of today. In order to push domestic growth, DRL has forayed into the complex biosimilars space, which till date has not witnessed much crowding. At the same time, these products have not witnessed the expected traction either. It launched the first biosimilar oncology product Filgrastim under the brand name Grafeel in 2001. Again in 2007, it launched another oncology product Rituximab, a biosimilar of Roche’s blockbuster Mabthera under the brand name Reditux. Overall, it has launched four biosimilars till date including these two. Exhibit 4: New launches, improved MR productivity to drive domestic growth 2800 2530.2 2400 2167.6 (| crore) 2000 1787.0 1600 1200 1015.8 1169.0 1293.1 1456.0 1571.3 800 400 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E India Source: Company, ICICIdirect.com Research Another interesting high growth/low penetration space for DRL is oncology. It owns the branded portfolio of products such as Capibine (Capecitabine), Docetere (Docetaxel) and Cytogem (Gemcitabine).We expect Indian formulations to grow at a CAGR of 19% in 2015-17E. As per the management, the NLEM 2011 impact is confined to just ~3-5% of domestic sales. ICICI Securities Ltd | Retail Equity Research Page 5 Russia & CIS - banking on experience; region of late has become volatile DRL was the first Indian entrant in Russia and the CIS, dating back to 1992. Early entry into these markets has helped the company to get hold of the changing dynamics of these high potential but notoriously volatile territories. The CIS segment includes countries such as Ukraine, Belarus, Kazakhstan and Uzbekistan. Russia comprises ~83% of the overall Russia & CIS (RCIS) segment. DRL has consolidated its position in the Russian market by focusing on select therapies such as pain management, anti-infectives, gastrointestinal, respiratory, oncology and cardiovascular encompassing prescription, OTC and hospital sales. The top four brands: Nise, Omez, Ketorol and Cetrine constituted ~60% of overall Russian sales. DRL has also struck in-licensing deals with other Indian companies such as Cipla and Torrent. However, due to the political unrest and sanctions due to Ukrainian invasion, the region has lost its safe haven status for DRL besides Rouble volatility. We expect sales from Russia CIS to grow at a CAGR of 3% in FY15-17E. Exhibit 5: Russia & CIS to witness tempered growth due to regional issues 2500 1981.9 (| crore) 2000 1690.8 1787.5 FY15 FY16E 1876.9 1326.0 1500 1000 1771.4 911.9 1085.8 500 0 FY10 FY11 FY12 FY13 FY14 FY17E Russia & Other CIS Source: Company, ICICIdirect.com Research R&D cost to increase further Dr Reddy’s is one of the few Indian companies to foray into new drug discovery & development (NDDS) and new chemical entity (NCE) research with a focus on therapies like dermatology, anti-inflammatory and antiinfectives from CVS and diabetics. DRL is also the first Indian company to launch biosimilars in the domestic market. The R&D cost is expected to be ~12% of turnover in FY16 mainly due to higher spend in (i) complex generic including injectables and (ii) biosimilars and novel drug discovery. ICICI Securities Ltd | Retail Equity Research Page 6 Exhibit 6: R&D cost to go up due to complex generics and biosimilars 2075.0 12.0 11.8 1744.8 2000 12.0 12 10 9.4 1240.2 1600 (| crore) 14 2332.6 1200 6.8 5.4 800 400 591.1 506.0 379.3 6.1 8 6.6 767.4 6 (%) 2400 4 2 0 0 FY10 FY11 FY12 FY13 FY14 R & D cost FY15E FY16E FY17E R & D cost (% of revenues) Source: Company, ICICIdirect.com Research Exhibit 7: Higher R&D cost likely to restrict improvement in EBITDA margins 4667.0 5000 4500 4000 22.5 (| crore) 3500 3000 2346.5 2500 1000 22.9 3312.7 4065.1 23.5 3482.7 23.5 24.0 25 20 2666.1 15 1677.7 2000 1500 25.1 24.3 30 10 8.8 616.8 5 500 0 0 FY10 FY11 FY12 FY13 FY14 EBITDA FY15 FY16E FY17E EBIDTDA Margins(%) Source: Company, ICICIdirect.com Research Exhibit 8: Net profit to grow at CAGR of 21% in FY14-17E on high base 3500 16.3 3000 14.8 14.7 14.4 (| crore) 2500 2151.3 2000 1426.2 1500 18 3048.2 15.7 16 14.8 2562.6 14 14.2 2099.0 12 10 1677.6 8 1104.0 6 1000 500 4 106.8 2 1.5 0 0 FY10 FY11 FY12 Net Profit FY13 FY14 FY15 FY16E FY17E Net Profit Margins (%) Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 7 Exhibit 9: Trends in return ratios 30 24 24.0 18 18.2 24.8 23.0 20.4 20.2 23.7 19.2 21.3 19.4 19.6 19.3 18.1 19.2 12 3.5 6 2.5 0 FY10 FY11 FY12 FY13 FY14 RoNW (%) FY15 FY16E FY17E RoCE (%) Source: Company, ICICIdirect.com Research Exhibit 10: Trend in quarterly financials | Crore Revenues (inc)/dec in SIT & WIP Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 2658.4 2540.6 2880.9 2865.2 3340.0 2844.9 3357.5 3533.8 3480.9 3517.5 3587.8 3843.1 3870.4 264.5 YoY (%) QoQ (%) 11.2 0.7 13.7 -123.4 -75.1 -45.4 107.8 -118.8 -100.8 -33.6 -77.8 -69.3 -123.8 -127.0 Raw Material 844.0 902.8 959.9 943.7 1030.0 943.9 986.7 890.7 1005.5 853.6 968.8 1088.6 825.1 -17.9 -24.2 Other manufacturing exp. 403.6 407.2 465.6 478.1 517.6 517.8 524.7 537.5 561.0 648.8 644.2 646.2 658.8 17.4 1.9 1261.4 1186.5 1350.4 1376.3 1655.5 1343.0 1410.6 1394.7 1488.7 1433.2 1489.2 1607.9 1748.4 17.4 8.7 47.4 46.7 46.9 48.0 49.6 47.2 42.0 39.5 42.8 40.7 41.5 41.8 45.2 241 bps 333 bps 1397.0 1354.1 1530.5 1488.8 1684.6 1501.9 1946.9 2139.1 1992.2 2084.4 2098.6 2235.2 2122.1 6.5 -5.1 52.6 53.3 53.1 52.0 50.4 52.8 58.0 60.5 57.2 59.3 58.5 58.2 54.8 -241 bps -333 bps 581.1 698.0 663.7 718.9 722.9 718.1 800.4 815.3 835.1 880.7 871.6 857.5 794.5 -4.9 -7.3 21.9 27.5 23.0 25.1 21.6 25.2 23.8 23.1 24.0 25.0 24.3 22.3 20.5 -346 bps -179 bps 174.1 156.4 175.8 202.5 232.6 243.0 300.9 297.9 398.5 387.5 411.3 431.6 514.4 29.1 19.2 6.6 6.2 6.1 7.1 7.0 8.5 9.0 8.4 11.4 11.0 11.5 11.2 13.3 184 bps 206 bps -19.9 -21.8 -39.6 -23.3 -163.2 -37.6 -63.7 -17.7 -22.6 -18.5 -26.6 -34.1 -12.5 -44.6 -63.3 -0.7 -0.9 -1.4 -0.8 -4.9 -1.3 -1.9 -0.5 -0.7 -0.5 -0.7 -0.9 -0.3 33 bps 56 bps 2100.8 2019.1 2219.0 2274.5 2447.9 2266.5 2448.1 2490.1 2699.7 2682.9 2745.6 2862.9 3044.8 12.8 6.4 79.0 79.5 77.0 79.4 73.3 79.7 72.9 70.5 77.6 76.3 76.5 74.5 78.7 111 bps 417 bps 557.6 521.5 661.8 590.7 892.1 578.5 909.3 1043.7 781.3 834.7 842.2 980.2 825.7 5.7 -15.8 21.0 20.5 23.0 20.6 26.7 20.3 27.1 29.5 22.4 23.7 23.5 25.5 21.3 -111 bps -417 bps Depreciation 140.5 129.7 137.6 138.2 149.4 161.3 173.3 179.3 195.6 187.2 195.7 257.5 213.7 9.3 -17.0 EBITA 417.1 391.8 524.2 452.5 742.7 417.2 736.0 864.4 585.7 647.5 646.5 722.7 612.0 4.5 -15.3 -8.2 21.2 -37.1 9.7 -39.8 7.0 -29.1 -1.5 -16.4 -48.1 -42.1 -101.3 23.3 -242.2 -123.0 Cost of Revenues % of Revenues Gross Profit Gross Profit Margins (%) SGNA % of Revenues R & D cost % of Revenues Other (income)/expense % of Revenues Total Expenditure % of Revenues EBITDA EBITDA Margins (%) Finace (income)/exp. Share of pr./(loss) 1.1 1.9 2.8 3.1 2.5 3.6 4.4 4.7 4.8 5.3 5.1 4.7 4.4 -9.7 -6.2 426.4 372.5 564.2 446.0 785.0 413.7 769.5 870.6 606.9 700.9 693.7 828.6 593.0 -2.3 -28.4 Tax 83.7 36.5 156.7 82.7 214.1 52.8 79.3 252.1 125.2 150.5 119.6 254.1 74.2 -40.8 -70.8 Tax % 19.6 9.8 27.8 18.5 27.3 12.8 10.3 29.0 20.6 21.5 17.2 30.7 12.5 342.7 336.0 407.4 363.3 570.9 360.9 690.2 618.5 481.7 550.4 574.1 574.5 518.8 7.7 -9.7 12.9 13.2 14.1 12.7 17.1 12.7 20.6 17.5 13.8 15.6 16.0 14.9 13.4 EBT Net Profit % of Revenues Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 8 SWOT Analysis Strengths – A seasoned player in the US generic space with a proven track record. A strong US pipeline with many FTF/limited competition products. The largest Indian player in Russia/CIS. Weakness – The PSAI and European businesses remain a drag on margins and growth. Higher R&D spends in future are expected to put pressure on current margins. The Russian region has also become volatile and unpredictable due to political unrest. Opportunities - The US generics space has scope for complex/limited competition products. The biosimilars space across the globe. Indian franchise is still pretty small for a player of DRL’s calibre. Threats - Increased USFDA scrutiny across the globe regarding cGMP issues and consolidation in the US pharmacy space. Its Srikakulam API plant has recently received Form 483 from the USFDA with nine observations. Conference call highlights • • • • • • • • • • ICICI Securities Ltd | Retail Equity Research DRL expects four or five meaningful USFDA approvals in FY16 The company expects to complete the acquisition of UCB’s domestic portfolio by Q1FY16 The company has completed the site transfer and updated the USFDA for gNexium API from Srikakulam facility (that received Form 483 observations) to other API plant The company has registered balance sheet translation loss in Venezuela to the tune of US$14 million in FY15 due to the prevalence of three-tier currency system in Venezuela. DRL has applied SIMADI rate of VEF193/US$ to translate its net monetary assets, other than those which qualify for the CENCOEX rate of VEF6.3/US$. This has been included in the financial income (net) The company expects its R&D cost at ~12% in FY16E. DRL spends 60% of its R&D on generics & APIs and the remaining on proprietary and biosimilar products The company has hedged US$440 million of cash flow (40-60% of US forecasted cash flow) for the next 18 months and US$291 million of balance sheet in the range of | 60-64.5/US$. It has also hedged Russian cash flows of RUB 1760 million (~30% of forecasted cash flow) at the rate of | 1.16/RUB for FY16 In Q4FY15, it filed and launched one product each in the US. Till date, the company is awaiting 68 ANDA approvals, which includes 43 Para IV filings comprising 13 products with FTF status. Total ANDA filings stood at 220 The company filed eight DMFs in Europe in Q4FY15. Global cumulative DMF filings have reached 735 The injectable business contribution was ~US$280 million (~27% of total US sales) in FY15 The OTC business contributed 36% in FY15 in Russia’s total sales Page 9 Valuation The miss was on the back of slower US growth and negative Russian growth. With Russia now struggling, the US and India together hold the key for global generics growth as well as DRL’s overall growth. Among them, the US is the main catalyst with a pending product portfolio of 68 ANDAs, which include 43 Para IVs and 13 FTFs. The company is investing heavily in R&D to bring more and complex generics and limited competition products mainly from non-oral category, which is likely to take care of sustained US growth for the next two or three years. India is showing promising growth as well with a recalibrated approach. On the flip side, Russia has become a new matter of concern besides Europe and the PSAI segment. We have ascribed a target price of | 3949 based on 22x FY17E EPS of | 179.5. Exhibit 11: One year forward PE 4000 3500 3000 (|) 2500 2000 1500 1000 500 Price 21.0x 20.2x 17.7x 12.9x Mar-15 Sep-14 Mar-14 Sep-13 Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10 Mar-10 Sep-09 Mar-09 Sep-08 Mar-08 Sep-07 Mar-07 Sep-06 Mar-06 0 9.7x [ Source: Company, ICICIdirect.com Research Exhibit 12: One year forward PE of company vs. BSE Healthcare Index 35 30 21.5% Discount 25 (x) 20 15 10 5 Dr Reddy's Mar-15 Sep-14 Mar-14 Sep-13 Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10 Mar-10 Sep-09 Mar-09 Sep-08 Mar-08 Sep-07 Mar-07 Sep-06 Mar-06 0 CNX Pharma Source: Company, ICICIdirect.com Research Exhibit 13: Valuation FY14 FY15 FY16E FY17E Revenues (| crore) 13217 14819 17291 19438 Growth (%) 13.7 12.1 16.7 12.4 EPS (|) 126.7 123.6 150.9 179.5 Growth (%) 28.1 3.2 16.6 14.9 P/E EV/EBITDA (x) (X) 22.3 14.8 22.8 13.9 18.7 11.7 15.7 9.8 RoNW (%) 23.7 19.3 19.6 19.4 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 10 RoCE (%) 19.2 18.1 20.2 21.3 Company snapshot 4,500 Target Price:| 3949 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Apr-16 Jan-16 Oct-15 Jul-15 Apr-15 Jan-15 Oct-14 Jul-14 Apr-14 Jan-14 Oct-13 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 0 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Jun-09 Nov-10 Dec-10 Event Announces a partnership with GSK to develop and market select products across emerging markets outside India. Under the tie-up, GSK will have access to more than 100 branded products of DRL Acquires GSK’s US oral penicillin facility and product portfolio. Under the agreement, GSK will transfer rights for Augmentin and Amoxil brands in the US market Jun-12 Enters into licensing of technology transfer, manufacturing and marketing agreement with R-Pharm of Russia. The collaboration is in the area of high-technology and will work on a profit sharing model Dr Reddy’s and Merck Serono sign an agreement to co-develop and commercialise a portfolio of biosimilars compounds in oncology Jul-12 USFDA lifts import alert for chemical manufacturing facility at Cuernavaca, Mexico Oct-12 Acquires Netherland based specialty injectable company OctoPlus NV Jun-13 Dr Reddy’s and Fujifilm Corporation call off their joint venture. The JV was started in July 2011 for developing and launching generic drugs in the Japanese market Dec-14 Dr. Reddy's Labs closed the acquisition of Habitrol brand, an over-the-counter nicotine replacement therapy transdermal patch, from Novartis for a consideration of US$ 80 million Enters a €118 million (| 800 crore) definitive agreement to acquire a select portfolio of established products from UCB in India Apr-15 Source: Company, ICICIdirect.com Research Top 10 Shareholders Rank 1 2 3 4 5 6 7 8 9 10 Name Dr Reddys Holdings Pvt. Ltd. Commonwealth Bank of Australia First State Investment Management (UK) Limited OppenheimerFunds, Inc. BlackRock Institutional Trust Company, N.A. Abu Dhabi Investment Authority Capital World Investors Life Insurance Corporation of India Franklin Templeton Asset Management (India) Pvt. Ltd. Capital Research Global Investors Shareholding Pattern Latest Filing Date % O/S Position (m)n Change (m) 31-Mar-15 23.32 39.7 0.0 31-Dec-13 8.54 14.6 14.6 31-Mar-15 8.45 14.4 0.0 31-Mar-15 4.27 7.3 0.8 31-Mar-15 3.08 5.3 0.7 31-Mar-15 2.09 3.6 -0.1 31-Mar-15 1.68 2.9 2.9 31-Mar-15 1.65 2.8 -0.5 31-Mar-15 1.59 2.7 0.6 31-Dec-14 1.40 2.4 0.0 (in %) Promoter FII DII Others Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 25.5 25.5 25.5 25.5 25.5 34.3 35.3 38.4 38.5 38.9 6.3 5.4 5.4 5.7 5.4 33.9 33.8 30.7 30.3 30.2 Source: Reuters, ICICIdirect.com Research Recent Activity Buys Investor name Commonwealth Bank of Australia Capital World Investors OppenheimerFunds, Inc. BlackRock Institutional Trust Company, N.A. Franklin Templeton Asset Management (India) Pvt. Ltd. Value 596.68m 160.46m 46.83m 38.47m 34.91m Shares 14.55m 2.86m 0.84m 0.69m 0.62m Sells Investor name Investec Asset Management Ltd. Norges Bank Investment Management (NBIM) Life Insurance Corporation of India J.P. Morgan Asset Management (Hong Kong) Ltd. Schroder Investment Management (Hong Kong) Ltd. Value -56.00m -34.58m -28.24m -23.45m -16.08m Shares -1.28m -0.67m -0.50m -0.45m -0.30m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 11 Financial summary Profit and loss statement (Year-end March) Revenues Growth (%) Cost of Revenues Gross Profit Gross Profit Margins (%) SGNA R & D cost Intangible write down Goodwill write down Other (income)/expense Total Expenditure EBITDA Growth (%) EBITDA Margins (%) Depreciation PBIT Finance Income Finance Expenses Net Finace (income)/expenses Profit/(loss) of ERI* EBT Tax Net Profit Growth (%) EPS (|) | Crore FY14 13217.0 36.6 5636.9 7580.2 57.4 3168.8 1240.2 0.0 0.0 -141.6 9904.4 3312.7 41.2 25.1 709.5 2603.2 167.4 127.4 -40.0 17.4 2660.6 509.4 2151.3 50.8 126.7 FY15E 14818.9 12.1 6278.7 8540.2 57.6 3404.4 1744.8 0.0 0.0 -91.7 11336.2 3482.7 5.1 23.5 854.0 2628.7 79.6 30.4 -49.2 19.5 2697.4 598.4 2099.0 -2.4 123.6 FY16E 17291.5 16.7 7217.6 10073.9 58.3 3977.0 2075.0 0.0 0.0 -43.2 13226.4 4065.1 16.7 23.5 880.8 3184.3 163.0 82.0 -81.0 20.0 3285.4 722.8 2562.6 22.1 150.9 FY17E 19438.4 12.4 8016.6 11421.9 58.8 4470.8 2332.6 0.0 0.0 -48.6 14771.4 4667.0 14.8 24.0 908.9 3758.1 188.1 58.2 -129.9 20.0 3908.0 859.8 3048.2 19.0 179.5 Balance sheet | Crore FY14 85.1 8995.0 9080.1 4474.2 0.0 274.4 187.5 14016.2 10335.4 5433.6 4901.8 667.5 5569.3 80.6 0.0 2508.3 342.8 605.4 49.5 2399.2 3303.7 55.4 1263.0 845.1 7866.4 1050.3 30.5 0.0 281.9 1643.4 3006.1 4860.3 14016.2 (Year-end March) Net Profit/(Loss) Add: Depreciation (Inc)/Dec in current assets Inc/ (Dec) in Current Liailities CF from Operating activities (Inc)/Dec in Goodwill (Purchase)/Sale of Liq. Inves. Fixed Assets Deferred Tax Inc/(Dec) in MI (Inc)/Decin Other Investments Others CF from Investing activities Equity Shares Inc/(Dec) in Share Premium Dividend and Dividend Tax Debt Other components of equity Inc/(Dec) in Debenture Reserve Adjustment Retained earnings Others CF from Financial activities Net Cash flow Cash at the beginning Cash | Crore FY14 2151.3 709.5 -659.8 46.8 2247.7 -23.5 -812.0 -1414.6 -164.1 -2.0 20.9 52.3 -2343.0 0.2 33.9 -298.5 806.4 -124.7 -171.1 170.6 10.0 426.7 331.5 513.6 845.1 FY15E 2099.0 854.0 -1261.3 238.8 1930.4 0.0 0.0 -970.2 20.0 0.0 0.0 -66.6 -1016.8 0.0 0.0 -338.3 -839.5 25.2 0.0 0.0 0.0 -1152.7 -239.1 845.1 605.9 FY16E 2562.6 880.8 -1359.5 438.3 2522.3 0.0 0.0 -1200.0 20.0 0.0 0.0 11.1 -1168.9 0.0 0.0 -378.2 -901.1 0.0 0.0 0.0 0.0 -1279.3 74.1 605.9 680.1 FY17E 3048.2 908.9 -1181.7 446.2 3221.7 0.0 0.0 -1200.0 20.0 0.0 0.0 9.7 -1170.3 0.0 0.0 -378.2 -792.0 0.0 0.0 0.0 0.0 -1170.2 881.2 680.1 1561.3 FY14 FY15E FY16E 126.7 168.4 534.6 197.4 15.0 123.6 173.9 639.8 183.4 17.0 150.9 202.7 768.4 187.7 19.0 FY17E (|) 179.5 233.0 925.6 239.6 19.0 57.4 25.1 19.7 16.3 57.6 23.5 17.7 14.2 58.3 23.5 18.4 14.8 58.8 24.0 19.3 15.7 23.7 19.2 26.0 19.3 18.1 23.3 19.6 20.2 25.2 19.4 21.3 27.2 22.3 14.8 3.7 3.6 1.5 5.3 11.8 22.8 13.9 3.3 3.2 1.4 4.4 13.8 18.7 11.7 2.7 2.8 1.3 3.7 12.6 15.7 9.8 2.4 2.5 1.2 3.0 10.6 66 91 29 2.2 70 100 30 2.5 70 100 30 2.7 70 100 30 2.9 0.5 1.4 2.6 1.8 0.3 1.0 2.7 1.9 0.2 0.7 2.8 1.9 0.1 0.4 3.0 2.1 Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research (Year-end March) Equity Capital Net Networth Total share holder funds Total Debt Minority Interest Deferred tax liabilities Non current Liabilities & other Total Liabilities Gross Block Acc.Depreciation Net Bock CWIP Total Fixed Assets inves in eq. acc. investees Other investments-non current Liquid Investments Goodwill Deferred tax assets other non current assets Inventories Trade Receivables Derivative financial instruments Other current assets Cash & Cash Equivalents Total Current Assets Trade Payables Derivative financial instruments Bank overdraft provision other current liabilities Total Current Liabilities Net Current Assets Total Assets Cash flow statement FY15E 85.1 10780.8 10865.9 3634.7 0.0 314.4 138.1 14953.0 11335.4 6217.4 5118.0 567.5 5685.5 80.6 0.0 2508.3 342.8 625.4 66.7 2842.0 4060.0 55.4 1325.3 605.9 8888.6 1218.0 30.5 0.0 311.2 1685.2 3244.9 5643.7 14953.0 FY16E 85.1 12965.3 13050.3 2733.6 0.0 354.4 160.3 16298.6 12635.4 7098.2 5537.2 467.5 6004.7 80.6 0.0 2508.3 342.8 645.4 77.8 3316.2 4737.4 55.4 1533.1 680.1 10322.2 1421.2 30.5 0.0 363.1 1868.3 3683.2 6639.0 . 16298.6 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research FY17E 85.1 15635.3 15720.4 1941.6 0.0 394.4 179.6 18236.0 13935.4 8007.1 5928.3 367.5 6295.8 80.6 0.0 2508.3 342.8 665.4 87.5 3727.9 5325.6 55.4 1714.9 1561.3 12385.0 1597.7 30.5 0.0 408.2 2093.0 4129.4 8255.6 18236.0 Key ratios Per Share Data EPS Cash EPS BV Cash per Share DPS Operating Ratios Gross Profit Margins EBITDA margins PBT margins Net Profit margins Return Ratios RoE RoCE RoIC Valuation Ratios P/E EV / EBITDA EV / Revenues Market Cap / Revenues Revenues / Equity Price to Book Value Dividend yield Turnover Ratios Inventory Days Debtor days Creditor days Asset turnover ratio (x times) Solvency Ratios Debt / Equity Debt/EBITDA Current Ratio Quick Ratio Source: Company, ICICIdirect.com Research Page 12 ICICIdirect.com coverage universe (Healthcare) ICICIdirect Healthcare coverage Universe I-Direct CMP TP Company Code (|) (|) Rating M Cap (| Cr) FY14 EPS (|) FY15E FY16E FY14 PE(x) EV/EBITDA (x) RoCE (%) RoNW (%) FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E Ajanta Pharma AJAPHA 1247 1488 BUY 11001.3 26.5 38.3 45.6 47.1 32.6 27.4 29.9 21.6 18.2 44.9 40.6 38.1 39.4 32.8 28.9 Apollo Hospitals APOHOS 1239 1455 BUY 17274.6 22.8 26.8 36.8 54.4 46.3 33.7 27.1 24.0 17.0 11.6 12.0 15.5 10.6 11.5 14.2 Aurobindo Pharma AURPHA 1322 1303 BUY 38690.2 47.3 57.4 70.5 28.0 23.1 18.7 19.8 16.4 13.3 24.1 23.4 24.4 31.3 31.6 28.6 Biocon BIOCON 431.8 447 HOLD 8654.9 20.7 20.1 22.5 35.1 29.2 32.4 21.2 21.1 18.0 12.2 10.7 11.7 13.7 15.2 12.4 Cadila Healthcare CADHEA 1650 1634 HOLD 33850.1 39.2 51.1 66.2 42.0 32.3 24.9 29.9 22.4 17.4 15.9 19.0 21.7 23.4 24.6 25.4 53441.1 17.3 15.9 Cipla CIPLA 664.1 21.7 38.4 41.7 30.5 25.4 23.0 18.5 15.5 14.2 17.6 13.8 11.3 14.2 Dr Reddy's Labs DRREDD 3469 3949 BUY 59232.6 126.7 123.6 150.9 27.4 28.1 23.0 17.9 17.0 14.6 19.2 18.1 20.2 23.7 19.3 19.6 Glenmark Pharma GLEPHA 869.1 824 HOLD 23629.7 20.0 21.5 34.0 43.4 40.4 25.6 19.9 21.5 14.2 16.0 17.1 23.5 18.3 17.4 22.8 Indoco Remedies INDREM 325 375 BUY 2998.7 6.3 9.5 13.3 51.7 34.2 24.4 25.4 17.3 13.3 16.6 21.8 28.1 12.6 16.4 19.4 Ipca Laboratories IPCLAB 622 HOLD 8260.1 37.9 25.6 31.8 17.2 25.5 20.5 10.8 14.3 13.7 27.6 16.1 17.8 24.4 14.7 16.0 Jubilant Life Sciences VAMORG 8.5 6.6 11.9 5.8 10.1 4.5 7.6 4.2 -3.5 7.6 Lupin LUPIN 29.0 27.1 21.4 18.8 34.5 33.4 31.9 26.5 27.1 24.5 Natco Pharma NATPHA 2077 1354 HOLD Sun Pharma SUNPHA 949.7 1036 BUY Torrent Pharma TORPHA 1179 1165 HOLD Unichem Laboratories UNILAB 199.8 653.1 170 648 HOLD 138 SELL 2716.1 6.8 -6.5 20.0 24.9 -26.3 1748 1866 BUY 78804.8 41.0 53.6 60.4 42.7 6918.5 30.3 32.5 44.9 58.5 54.6 39.5 39.9 33.1 26.7 15.3 16.7 18.7 14.1 13.5 16.1 229025.2 29.0 34.8 39.9 32.7 27.3 23.8 23.6 22.9 19.6 32.4 31.2 28.8 27.0 25.3 23.1 20001.7 39.2 47.2 50.4 30.1 25.0 23.4 21.2 18.9 15.1 28.5 21.4 26.7 34.9 32.4 28.0 1817.9 18.7 7.2 14.1 10.7 27.6 14.1 10.1 17.2 10.3 15.7 7.2 13.5 20.7 7.5 13.9 214 HOLD 32.6 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 13 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 research@icicidirect.com ICICI Securities Ltd | Retail Equity Research Page 14 ANALYST CERTIFICATION We /I, Siddhant Khandekar, CA INTER and Mitesh Shah, MS (finance), Nandan Kamat MBA 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. 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ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. 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