1QFY2017 Result Update | Pharmaceutical
July 29, 2016
Dr Reddy’s Laboratories
NEUTRAL
CMP
`2,988
Performance Highlights
Target Price
-
Y/E March (` cr)
1QFY2017 4QFY2016
% chg (qoq) 1QFY2016
% chg (yoy)
Investment Period
-
Net sales
3,235
3,756
(13.9)
3,758
(13.9)
Gross profit
2,121
2,431
(12.7)
2,482
(14.5)
Stock Info
Operating profit
477
844
(43.5)
946
(49.6)
Sector
Pharmaceutical
Adj. net profit
126
376
(66.5)
625
(79.8)
Market Cap (` cr)
51,011
Source: Company, Angel Research
Net Debt (` cr)
(396)
For 1QFY2017, Dr Reddy’s Laboratories (DRL) posted a poor set of numbers. It
Beta
0.7
posted sales of `3,235cr V/s `3,900cr expected and V/s `3,758cr in 1QFY2016,
52 Week High / Low
4,383/2,750
a yoy de-growth of 14.0%. The company’s sales will continue to be under
Avg. Daily Volume
44,327
pressure owing to the likelihood of all its major markets posting a muted growth.
Face Value (`)
5
Lower sales led to a soft EBIT margin of 3.4% V/s 15.6% expected and V/s 20.2%
BSE Sensex
28,024
in 1QFY2016. Other income came in at ~`61cr V/s `34cr in 1QFY2016. The net
Nifty
8,616
profit for the quarter stood at `126cr V/s `520cr expected and V/s `626cr in
Reuters Code
REDY.BO
1QFY2016, posting a yoy de-growth of 79.8%. We maintain our Neutral rating
Bloomberg Code
[email protected]
on the stock.
A subdued quarter: DRL posted a poor set of numbers for the quarter. It posted
Shareholding Pattern (%)
sales of `3,235cr V/s `3,900cr expected and V/s `3,758cr in 1QFY2016, a yoy
Promoters
26.4
de-growth of 14.0%. The generic business (`2,663.8cr) posted a yoy de-growth of
MF / Banks / Indian Fls
8.7
14.0% owing to USA, Europe and Emerging Markets posting a de-growth of 16%,
FII / NRIs / OCBs
56.5
16% and 26% yoy respectively. The Indian market on the other hand posted a yoy
Indian Public / Others
8.4
growth of 10.0% yoy. The PSAI segment (`469.2cr) posted a de-growth of 16%
yoy while proprietary products and others posted a flat yoy growth of 1.0% to
`101.5cr. Lower sales led to a soft EBIT margin of 3.4% V/s 15.6% expected and
Abs. (%)
3m 1yr
3yr
20.2% in 1QFY2016. Other income came in at ~`61cr V/s `34cr in 1QFY2016.
Sensex
7.5
1.7
41.9
The net profit for the quarter stood at `126cr V/s `520cr expected and V/s `626cr
Dr Reddy
(4.5)
(22.5)
30.0
in 1QFY2016, posting a yoy de-growth of 79.8%.
Outlook and valuation: We expect net sales to grow at a CAGR of 8.2% to
3-year Daily Price Chart
`18,119cr and adjusted EPS to record a
6.9% CAGR to
`157.8 over
FY2016-18E. We recommend a Neutral rating on the stock given the valuations.
Key financials (IFRS Consolidated)
Y/E March (` cr)
FY2015
FY2016
FY2017E
FY2018E
Net sales
14,819
15,471
16,043
18,119
% chg
12.1
4.4
3.7
12.9
Net profit
2,218
2,001
2,150
2,692
% chg
3.1
(9.8)
7.4
25.2
Adj net profit
2,218
2,357
2,150
2,692
% chg
3.1
6.3
(8.8)
25.2
Source: Company, Angel Research
Adj. EPS (`)
130.2
138.2
126.0
157.8
EBITDA margin (%)
22.2
24.6
23.1
24.7
P/E (x)
23.0
21.6
23.7
18.9
RoE (%)
21.9
19.7
15.7
17.1
RoCE (%)
18.1
18.7
16.0
18.1
P/BV (x)
4.6
4.0
3.5
3.0
Sarabjit Kour Nangra
EV/Sales (x)
3.4
3.3
3.1
2.7
+91 2 39357600 Ext: 6806
EV/EBITDA (x)
15.4
13.2
13.6
11.1
[email protected]
Source: Company, Angel Research; Note: CMP as of July 27, 2016
Please refer to important disclosures at the end of this report
1
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Exhibit 1: 1QFY2017 performance (IFRS, consolidated)
Y/E March (` cr)
1QFY2017
4QFY2016
% chg (qoq) 1QFY2016
% chg (yoy)
FY2016
FY2015
% chg
Net sales
3,235
3,756
(13.9)
3,758
(13.9)
15,471
14,819
4.4
Other income/(loss)
61
(234)
-
34
-
(183)
260
-
Total income
3,296
3,522
(6.4)
3,792
(13.1)
15,287
15,079
1.4
Gross profit
2,121
2,431
(12.7)
2,482
(14.5)
10,262
9,288
10.5
Gross margin (%)
65.6
64.7
66.0
66.3
62.7
SG&A expenses
1,228
1,163
5.6
1,097
11.9
4,570
4,259
7.3
R&D expenses
480
488
(1.6)
439
9.5
1,783
1,745
2.2
EBDITA
477
844
(43.5)
946
(49.6)
3,909
3,284
19.0
EBDITA (%)
14.7
22.5
-
25.2
25.3
22.2
-
Depreciation
303
303
0.0
187.2
62.0
1,034.3
747.4
(75.0)
Interest
-
-
-
-
-
PBT
235
307
(23.5)
793
(70.3)
2,691
2,797
(71.7)
Tax
44
174
(74.5)
172
(74.2)
713
598
19.2
Net Profit
191
133
43.0
621
(69.3)
1,978
2,199
(10.0)
Share of profit/ (loss) in associates
-
5.9
(100.0)
4.3
22.9
19.5
Reported net profit before exceptional
126
75
69.0
625
(79.8)
2,001
2,218
(9.8)
Exceptional items (loss) /profit
-
(431)
-
(509)
-
Reported PAT
126
75
69.0
625
(79.8)
2,001
2,218
(9.8)
Adj. Net Profit
126
376
(66.5)
625
(79.8)
2,357
2,218
6.3
EPS (`)
7.4
22.2
36.8
138.8
130.6
Source: Company, Angel Research
Exhibit 2: Actual Vs Estimates
(` cr)
Actual
Estimates
Variation (%)
Net sales
3,235
3,900
(17.1)
Other income
61
34
79.6
Operating profit
477
611
(21.9)
Tax
44
129
(65.6)
Adj. Net profit
126
520
(75.8)
Source: Company, Angel Research
Revenue lower than expected: For 1QFY2017, Dr Reddy’s Laboratories (DRL)
posted a poor set of numbers. It posted sales of `3,235cr V/s `3,900cr expected
and V/s `3,758cr in 1QFY2016, a yoy de-growth of 14.0%. The company’s sales
will continue to be under pressure owing to the likelihood of all its major markets
posting a muted growth.
The generic business (`2,663.8cr) posted a yoy de-growth of 14.0% owing to USA,
Europe and Emerging Markets posting a de-growth of 16%, 16% and 26% yoy
respectively. The company expects recovery in sales in 2HFY2017 driven by key
approvals including Gleevec. The Indian market on the other hand posted a yoy
growth of 10.0% yoy. Revenue from India was impacted on account of NPPA
pricing notifications and WPI based annual price decline. The company has
successfully integrated UCB brands.
PSAI (`469.2cr) posted a de-growth of 16% yoy while proprietary products and
others posted a flat yoy growth of 1.0% to `101.5cr.
As of June 30, 2016, 78 generic filings are pending approval with the USFDA,
including 50 Para IVs (of which 18 are FTFs).
July 29, 2016
2
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Exhibit 3: Trend in Global generics
4,000
3,500
3,000
401
480
270
310
2,500
581
428
476
546
527
2,000
191
212
194
176
522
162
1,500
1,000
1,942
1,852
1,856
1,895
1,552
500
0
1QFY2016
2QFY2016
3QFY2016
4QFY2016
1QFY2017
Others
Russia & CIS
India
Europe
North America
Source: Company, Angel Research
In the PSAI segment (15% of sales), the US grew by 11% yoy while ROW, Europe,
and India de-grew by 14%, 17% and 44% yoy respectively during the quarter.
Proprietary Products & Others (`102cr) posted a yoy growth of 1%.
Exhibit 4: PSAI trend
700
600
500
208
184
201
147
400
173
60
72
59
62
300
64
200
195
259
235
243
195
100
104
66
69
74
37
0
1QFY2016
2QFY2016
3QFY2016
4QFY2016
1QFY2017
Others
India
Europe
North America
Source: Company, Angel Research
July 29, 2016
3
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
EBITDA margin dips yoy: On the operating front, lower sales led the EBIT of come
in soft at 3.4% V/s 15.6% expected and V/s 20.2% in 1QFY2016. The EBITDA
margin came in at 14.7% V/s 21.3% expected V/s 25.2% in 1QFY2016, hurt by
lower sales and 11.9% yoy growth in SG&A expenses. R&D expenditure for the
quarter amounted to 14.8% of sales V/s 11.7% in 1QFY2016.
Exhibit 5: EBITDA margin trend (%)
32.0
28.6
28.0
25.3
25.2
24.0
22.0
20.0
16.0
14.7
12.0
1QFY2016
2QFY2016
3QFY2016
4QFY2016
1QFY2017
Source: Company, Angel Research
Net profit lower than expected: Other income for the quarter came in at ~`61cr
V/s `34cr in 1QFY2016. The net profit stood at `126cr V/s `520cr expected and
V/s `626cr in 1QFY2016, a yoy de-growth of 79.8%.
Exhibit 6: Adjusted net profit trend
800
722
700
626
579
600
500
376
400
300
200
126
100
0
1QFY2016
2QFY2016
3QFY2016
4QFY2016
1QFY2017
Source: Company, Angel Research
July 29, 2016
4
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Concall takeaways
DRL expects a recovery in sales in 2HFY2017, driven by key approvals,
including Gleevec.
The Management expects the Russia business to deliver strong growth going
forward as key tenders are due in 2HFY2017.
The remediation process is almost over; the company plans to invite the
USFDA in 2QFY2017 for a re-inspection.
The company incurred a remediation cost of US$16mn in 1QFY2017, which
should substantially come down from 2QFY2017.
The company incurs 12-15% of its total R&D spends on bio-similar research.
Investment arguments
Robust growth in the US going ahead: After attaining a critical mass (US$1,139mn
in FY2016), DRL aims to scale up its business to the next orbit in the US market on
the back of a strong product pipeline (78 ANDAs are pending approval, of which,
50 are Para IVs and 18 are FTFs). The Management has guided for a robust
growth in the US over the medium term, driven by introduction of new products,
some of which are also Para IV opportunities. Owing to the import alert on the
three facilities of the company, in a worst case scenario, we expect the ex-
exclusivity US sales to post a CAGR of ~7.0% during FY2016-18E.
Domestic back in focus: DRL reported a 19.0% yoy growth in FY2016. The
Management expects the company’s performance to rebound and targets to
achieve an above industry growth rate going ahead, driven by a) field force
expansion and improvement in productivity, b) new product launches (including
biosimilars) and c) focus on brand building. In 4QFY2015, DRL had acquired
UCB’s India portfolio and has completed the integration process of these brands in
1QFY2016. UCB’s India business had registered ~`150cr sales in CY2014 and
has a branded portfolio of
21 products focusing on Allergy, Respiratory,
Dermatology and Pediatric space. The acquisition has been successfully integrated
by 2QFY2016. Thus, we expect sales in India to post a CAGR of ~12.0% over
FY2016-18E.
Valuation: We expect net sales to post a CAGR of 8.2% to `18,119cr and
adjusted EPS to record an 6.9% CAGR to `157.8 over FY2016-18E. The stock has
been severely beaten down post the import alert from the USFDA. Still, considering
the valuations, we recommend a Neutral on the stock.
Exhibit 7: Key assumptions
FY2017E
FY2018E
PSAI segment growth (%)
(0.9)
(0.1)
Generics segment growth (%)
3.9
14.8
Operating margin (%)
23.1
24.7
Capex (` cr)
1200
1200
Source: Company, Angel Research
July 29, 2016
5
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Exhibit 8: PE chart
6,000
5,000
4,000
3,000
2,000
1,000
0
Price
20x
25x
30x
35x
Source: Company, Angel Research
Exhibit 9: Recommendation summary
Company
Reco.
CMP Tgt Price Upside
FY2018E
FY16-18E
FY2018E
(`)
(`)
(%)
PE
EV/Sales
EV/EBITDA
CAGR in EPS
RoCE
RoE
(x)
(x)
(x)
(%)
(%)
(%)
Alembic Pharma
Neutral
601
-
-
24.8
2.6
15.0
(21.2)
23.5
21.3
Aurobindo Pharma Accumulate
794
877
10.5
16.9
2.8
11.7
18.1
22.5
26.1
Cadila Healthcare Accumulate
358
399
11.4
18.6
2.8
12.5
15.8
24.3
26.6
Cipla
Neutral
524
-
-
19.3
2.5
13.3
20.4
13.5
15.2
Dr Reddy's
Neutral
2,988
-
-
24.7
3.0
11.1
6.9
18.1
17.1
Dishman Pharma Sell
147
83
(43.5)
13.8
1.5
7.0
(1.1)
9.6
10.2
GSK Pharma*
Neutral
3,404
-
-
52.1
7.2
37.5
21.6
35.8
31.8
Indoco Remedies
Sell
315
225
(28.6)
20.2
2.3
12.5
31.5
19.1
19.2
Ipca labs
Buy
495
613
23.8
17.4
1.8
9.7
17.9
11.8
14.9
Lupin
Buy
1,717
1,809
5.4
24.8
4.0
15.0
17.2
24.4
20.9
Sanofi India
Neutral
4,582
-
-
29.9
3.4
19.5
21.2
24.9
28.4
Sun Pharma
Buy
803
944
17.6
24.5
5.0
16.0
22.0
33.1
18.9
Source: Company, Angel Research; Note: *December year ending
Company Background
Established in
1984, Dr Reddy's Laboratories is an integrated global
pharmaceutical company, through its three businesses - Pharmaceutical Services
and Active Ingredients, Global Generics and Proprietary Products. The company’s
key therapeutic focus is on gastro-intestinal, cardiovascular, diabetology,
oncology, pain management, anti-infective and paediatrics. The company’s key
markets include India, USA, Russia & CIS, and Germany.
July 29, 2016
6
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Profit & loss statement (IFRS Consolidated)
Y/E March
FY2013
FY2014
FY2015
FY2016
FY2017E
FY2018E
Net sales
11,627
13,217
14,819
15,471
16,043
18,119
Other operating income
247.9
141.6
91.7
87.4
87.4
87.4
Total operating income
11,875
13,359
14,911
15,558
16,130
18,207
% chg
21.8
12.5
11.6
4.3
3.7
12.9
Total expenditure
8,951
10,096
11,535
11,669
12,341
13,642
Cost of revenues
4,825
4,977
5,531
5,315
5,812.02
6,267.44
SG&A expenses
3,358
3,878
4,259
4,570
4,604
5,200
R&D expenses
767.3
1,240.2
1,744.9
1,783.4
1,925.1
2,174.3
EBITDA
2,676
3,121
3,284
3,802
3,701
4,477
% chg
3.0
16.6
5.2
15.8
-2.6
21.0
(% of Net Sales)
23.0
23.6
22.2
24.6
23.1
24.7
Depreciation & amortisation
743.7
659.8
747.4
927.4
990.1
1,052.8
EBIT
1,932
2,462
2,537
2,875
2,711
3,425
% chg
4.3
27.4
3.1
13.3
-5.7
26.3
(% of Net Sales)
16.6
18.6
17.1
18.6
16.9
18.9
Interest & other charges
-
-
-
-
-
-
Other Income
46.0
40.0
168.2
(270.8)
-
-
(% of PBT)
2.1
1.5
6.0
(10.0)
-
-
Share in profit of associates
10.4
17.4
19.5
22.9
22.9
22.9
Recurring PBT
2,237
2,661
2,816
2,714
2,822
3,535
% chg
14.7
19.0
5.9
-3.6
4.0
25.3
Extraordinary expense/(Inc.)
68.8
-
-
508.5
-
-
PBT (reported)
2,167.7
2,660.6
2,816.3
2,714.0
2,821.5
3,534.9
Tax
490.0
509.4
598.4
712.7
671.7
842.9
(% of PBT)
22.6
19.1
21.2
26.3
23.8
23.8
PAT (reported)
1,677.7
2,151.2
2,217.9
2,001.3
2,149.9
2,692.0
Add: Share of earnings of asso.
-
-
-
-
-
-
Less: Minority interest (MI)
-
-
-
-
-
-
Exceptional items
-
-
-
-
-
-
PAT after MI (reported)
1,677.7
2,151.2
2,217.9
2,001.3
2,149.9
2,692.0
ADJ. PAT
1,750.0
2,151.2
2,217.9
2,357.0
2,149.9
2,692.0
% chg
17.0
22.9
3.1
6.3
(8.8)
25.2
(% of Net Sales)
14.4
16.3
15.0
12.9
13.4
14.9
Basic EPS (`)
103.1
126.7
130.2
138.2
126.0
157.8
Fully Diluted EPS (`)
103.1
126.7
130.2
138.2
126.0
157.8
% chg
16.8
22.9
2.7
6.1
(8.8)
25.2
July 29, 2016
7
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Balance sheet (IFRS Consolidated)
Y/E March (` cr)
FY2013
FY2014
FY2015
FY2016
FY2017E FY2018E
SOURCES OF FUNDS
Equity share capital
84.9
84.9
85.2
85.3
85.3
85.3
Preference Capital
-
-
-
-
-
-
Reserves & surplus
7,224
8,995
11,045
12,748
14,949
17,515
Shareholders funds
7,309
9,080
11,130
12,834
15,034
17,600
Minority Interest
Total loans
3,676.0
4,474.2
3,954.3
3,661.9
3,661.9
3,661.9
Deferred tax liability
83.3
(192.9)
(401.3)
(423.0)
(423.0)
(423.0)
Total liabilities
11,068
13,361
14,683
16,073
18,273
20,839
APPLICATION OF FUNDS
Net fixed assets
3,781
3,945
4,314
5,396
6,596
7,796
Goodwill /other intangibles
1,402
1,470
1,643
1,969
1,969
1,969
Capital Work-in-Progress
495.2
495.2
495.2
495.2
495.2
495.2
Investments
1,764
2,589
3,811
3,833
3,833
3,833
Current Assets
6,875
7,866
8,558
8,465
10,087
12,149
Cash
513.6
845
539
492
660
1,358
Loans & Advances
697.6
793.0
889.1
928.2
1,048.8
1,201.3
Other
5,664
6,228
7,129
7,045
8,378
9,590
Current liabilities
3,252
3,006
4,214
4,193
4,813
5,510
Net Current Assets
3,623
4,860
4,344
4,273
5,273
6,639
Other Assets
-
76
106
106
106
Total Assets
11,068
13,361
14,683
16,073
18,273
20,839
July 29, 2016
8
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Cash flow statement (IFRS Consolidated)
Y/E March (` cr)
FY2013
FY2014
FY2015
FY2016
FY2017E FY2018E
Profit before tax
2,237
2,661
2,816
2,714
3,414
3,894
Depreciation
744
660
747
927
990
1,053
(Inc)/Dec in Working Capital
535
(906)
211
24
(833)
(668)
Less: Other income
46
40
168
(271)
-
-
Direct taxes paid
490
509
598
713
814
929
Cash Flow from Operations
2,980
1,865
3,008
3,224
2,758
3,350
(Inc.)/Dec.in Fixed Assets
(431)
(164)
(369)
(1,082)
(1,200)
(1,200)
(Inc.)/Dec. in Investments
687
824
1,222
22
-
-
Other income
46
40
168
(271)
-
-
Cash Flow from Investing
302
701
1,021
(1,331)
(1,200)
(1,200)
Issue of Equity
0
-
0
0
-
-
Inc./(Dec.) in loans
(1,155)
798
(520)
(292)
-
-
Dividend Paid (Incl. Tax)
298
358
399
399
399
399
Others
(2,649)
(3,390)
(4,214)
(2,047)
(1,789)
(1,851)
Cash Flow from Financing
(3,506)
(2,234)
(4,335)
(1,940)
(1,389)
(1,452)
Inc./(Dec.) in Cash
(224)
331
(306)
(47)
168
698
Opening Cash balances
738
514
845
539
492
660
Closing Cash balances
514
845
539
492
660
1,358
July 29, 2016
9
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Key ratios
Y/E March
FY2013
FY2014
FY2015
FY2016
FY2017E
FY2018E
Valuation Ratio (x)
P/E (on FDEPS)
29.0
23.6
23.0
21.6
23.7
18.9
P/CEPS
21.0
18.0
17.2
17.4
16.2
13.6
P/BV
6.9
5.6
4.6
4.0
3.5
3.0
Dividend yield (%)
0.5
0.5
0.5
0.5
0.5
0.5
EV/Sales
4.5
3.9
3.4
3.3
3.1
2.7
EV/EBITDA
19.5
16.6
15.4
13.2
13.6
11.1
EV / Total Assets
4.7
3.9
3.4
3.1
2.8
2.5
Per Share Data (`)
EPS (Basic)
103.1
126.7
130.2
138.2
126.0
157.8
EPS (fully diluted)
103.1
126.7
130.2
138.2
126.0
157.8
Cash EPS
142.6
165.5
174.0
171.7
184.1
219.5
DPS
15.0
15.0
15.0
15.0
15.0
15.0
Book Value
430.4
534.7
653.3
752.3
854.9
989.3
Dupont Analysis
EBIT margin
16.6
18.6
17.1
18.6
16.9
18.9
Tax retention ratio
77.4
80.9
78.8
73.7
76.2
76.2
Asset turnover (x)
1.2
1.2
1.1
1.0
1.0
1.0
ROIC (Post-tax)
14.9
17.4
15.1
14.3
12.7
14.5
Cost of Debt (Post Tax)
0.0
0.0
0.0
0.0
0.0
0.0
Leverage (x)
0.6
0.4
0.4
0.3
0.2
0.2
Operating ROE
23.5
24.7
20.4
18.3
15.6
17.1
Returns (%)
ROCE (Pre-tax)
17.8
20.2
18.1
18.7
16.0
18.1
Angel ROIC (Pre-tax)
23.1
25.6
22.5
22.9
19.4
21.9
ROE
26.8
26.3
21.9
19.7
15.7
17.1
Turnover ratios (x)
Asset Turnover (Gross Block)
3.3
3.5
3.6
3.2
2.7
2.5
Inventory / Sales (days)
63
62
61
60
61
63
Receivables (days)
88
89
90
96
88
92
Payables (days)
44
40
43
59
42
43
WC cycle (ex-cash) (days)
104
97
96
89
91
90
Solvency ratios (x)
Net debt to equity
0.4
0.4
0.3
0.2
0.2
0.1
Net debt to EBITDA
1.2
1.2
1.0
0.8
0.8
0.6
Interest Coverage (EBIT / Int.)
-
-
-
-
-
-
July 29, 2016
10
Dr. Reddy’s Laboratories | 1QFY2017 Result Update
Research Team Tel: 022 - 39357800
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Dr. Reddy’s Laboratories
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Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
July 29, 2016
11