2QFY2017 Result Update | Pharmaceutical
November 7, 2016
Dr. Reddy’s Laboratories
NEUTRAL
CMP
`3,077
Performance Highlights
Target Price
-
Y/E March (` cr)
2QFY2017 1QFY2017
% chg (qoq) 2QFY2016
% chg (yoy)
Investment Period
-
Net sales
3,586
3,235
10.9
3,989
(10.1)
Gross profit
2,294
2,121
8.2
2,694
(14.8)
Stock Info
Operating profit
596
477
24.9bp
1,140
(47.8)bp
Sector
Pharmaceutical
Adj. net profit
295
126
134.1
722
(59.2)
Market Cap (` cr)
51,310
Source: Company, Angel Research
Net Debt (` cr)
(663)
Dr. Reddy’s Laboratories (DRL) posted results lower than expected on net profit front.
Beta
0.8
While the sales were marginally higher than expected, operating profit was much
52 Week High / Low
4,326/2,750
lower than expected. In INR terms, the consolidated revenues came in at `3,586cr (vs.
Avg. Daily Volume
45,624
`3,500cr expected vs. `3,989cr in 2QFY2016), down by 10.1% yoy, mainly driven by
Face Value (`)
5
pressure on the generic market. The global generic market with sales (`2,899.5cr,
BSE Sensex
27,274
down by 12.0% yoy), mainly lead by the Europe (`177.6cr, 16% dip yoy) and
Nifty
8,434
Emerging market (`483.4cr, a yoy dip of 27%). The PSAI segment posted sales of
Reuters Code
REDY.BO
`578.4cr, down by 2.0%. On the operating front, the EBIT margin came in at 8.7%
Bloomberg Code
[email protected]
(vs. 12.1% expected vs. 22.4% in 2QFY2016). Consequently, the PAT came in at
`295cr (vs. `325cr expected vs. `722cr in 2QFY2016), a yoy de-growth of 59.2%. We
maintain our Neutral rating on the stock.
Shareholding Pattern (%)
Promoters
26.7
A subdued quarter: DRL posted results lower than expected on net profit front. While
MF / Banks / Indian Fls
9.2
the sales were marginally higher than expected, operating profit was much lower than
FII / NRIs / OCBs
55.4
expected. In INR terms, the consolidated revenues came in at `3,586cr (vs. `3,500cr
Indian Public / Others
8.7
expected vs. `3,989cr in 2QFY2016), down by 10.1% yoy, mainly driven by pressure
on the generic market. The global generic market with sales (`2,899.5cr, down by
12.0% yoy), mainly lead by the Europe (`177.6cr, 16% dip yoy) and Emerging market
Abs. (%)
3m 1yr
3yr
(`483.4cr, a yoy dip of 27%). The PSAI segment posted sales of `578.4cr, down by
Sensex
(1.0)
3.2
29.1
2.0%. On the operating front, the EBIT margin came in at 8.7% (vs. 12.1% expected
Dr Reddy
10.9
(24.6)
31.5
vs. 22.4% in 2QFY2016). Consequently, the PAT came in at `295cr (vs. `325cr
expected vs. `722cr in 2QFY2016), a yoy de-growth of 59.2%.
3-year Daily Price Chart
Outlook and valuation: We expect net sales to grow at a CAGR of 8.2% to
5,000
`18,119cr and adjusted EPS to record a CAGR of 1.7% to `142.9 over
4,500
FY2016-18E. We recommend a Neutral rating on the stock given the valuations.
4,000
3,500
Key financials (IFRS Consolidated)
3,000
Y/E March (` cr)
FY2015
FY2016
FY2017E
FY2018E
2,500
2,000
Net sales
14,819
15,471
16,043
18,119
1,500
% chg
12.1
4.4
3.7
12.9
1,000
Net profit
2,218
2,001
1,918
2,437
% chg
3.1
(9.8)
(4.2)
27.1
Adj net profit
2,218
2,357
1,918
2,437
% chg
3.1
6.3
(18.6)
27.1
Source: Company, Angel Research
Adj. EPS (`)
130.2
138.2
112.4
142.9
EBITDA margin (%)
22.2
24.6
20.8
22.4
P/E (x)
25.1
22.3
27.4
21.5
RoE (%)
21.9
19.7
14.1
15.9
RoCE (%)
18.1
18.7
13.9
16.2
P/BV (x)
5.0
4.3
3.9
3.4
Sarabjit Kour Nangra
EV/Sales (x)
3.7
3.6
3.4
3.0
+91 2 39357600 Ext: 6806
EV/EBITDA (x)
16.8
14.5
16.5
13.5
[email protected]
Source: Company, Angel Research; Note: CMP as of November 4, 2016
Please refer to important disclosures at the end of this report
1
Dr. Reddy’s Laboratories | 2QFY2017 Result Update
Exhibit 1: 2QFY2017 performance (IFRS, consolidated)
Y/E March (` cr)
2QFY2017
1QFY2017
% chg (qoq) 2QFY2016
% chg (yoy) 1HFY2017 1HFY2016
% chg
Net sales
3,586
3,235
10.9
3,989
(10.1)
6,714
7,642
(12.1)
Other income/(loss)
64
61
-
10
-
246
243
-
Total income
3,650
3,296
10.7
3,999
(8.7)
6,960
7,885
(11.8)
Gross profit
2,294
2,121
8.2
2,694
(14.8)
5,091
5,829
(12.7)
Gross margin (%)
64.0
65.6
67.5
75.8
76.3
SG&A expenses
1,177
1,228
(4.2)
1,106
6.5
2,303
2,150
7.1
R&D expenses
521
480
8.6
447
16.6
1,917
1,711
12.1
EBDITA
596
477
24.9
1,140
(47.8)
871
1,969
(55.8)
EBDITA (%)
16.6
14.7
-
28.6
13.0
26.1
-
Depreciation
285
303
(6.1)
246.6
15.5
505.8
426.8
18.5
Interest
-
-
-
-
-
PBT
375
235
59.6
904
(58.5)
611
1,784
(65.8)
Tax
89
44
99.3
188
(52.9)
148
380
(61.0)
Net Profit
287
191
50.3
716
(60.0)
462
1,405
(67.1)
Share of profit/ (loss) in associates
(8.4)
-
(6.0)
-
-
Reported net profit before exceptional
295
126
134.1
722
(59.2)
462
1,405
(67.1)
Exceptional items (loss) /profit
-
-
-
-
-
Reported PAT
295
126
134.1
722
(59.2)
462
1,405
(67.1)
Adj. Net Profit
295
126
134.1
722
(59.2)
575
1,405
(59.1)
EPS (`)
17.4
7.4
42.5
35.0
82.7
Source: Company, Angel Research
Exhibit 2: Actual Vs Estimates
(` cr)
Actual
Estimates
Variation (%)
Net sales
3,586
3,500
2.4
Other income
64
10
542.0
Operating profit
596
708
(15.8)
Tax
89
108
(18.2)
Adj. Net profit
295
325
(9.1)
Source: Company, Angel Research
Revenue just in line with expectation: In INR terms, the consolidated revenues came
in at `3,586cr (vs. `3,500cr expected vs. `3,989cr in 2QFY2016), down by 10.1%
yoy, mainly driven by pressure on the generic market.
The global generic market with sales (`2,899.5cr, down by 12.0% yoy), mainly
lead by the Europe (`177.6cr, 16% dip yoy) and Emerging market (`483.4cr, a yoy
dip of 27%). Other key markets like US dipped by 13% yoy to `1613.4cr and
India grew by 14% yoy to `625.1cr.
The PSAI segment posted sales of `578.4cr, down by 2.0%. The growth came in
on back of US (`113.5cr, a yoy growth of 64%), Europe (`209.5cr, a yoy dip of
14.0%), India (`57.5cr, a yoy dip of 21%) and ROW (`197.9cr, a yoy dip of 5%).
As of September 30, 2016, 85 generic filings are pending approval with the
USFDA, including 56 Para IVs (of which 19 are FTFs).
November 7, 2016
2
Dr. Reddy’s Laboratories | 2QFY2017 Result Update
Exhibit 3: Trend in Global generics
4000
3500
3000
401
480
270
2500
428
123
546
581
527
194
625
2000
212
176
522
162
177
1500
1000
1,856
1,942
1,895
1,552
1,613
500
0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Others
Russia & CIS
India
Europe
North America
Source: Company, Angel Research
In the PSAI segment (16% of sales), the US grew by 64% yoy; while ROW, Europe,
and India de-grew by 5%, 14% and 21% yoy, respectively, during the quarter.
Proprietary Products & Others (`578.4cr) posted a yoy de-growth of 2%.
Exhibit 4: PSAI trend
700
600
500
208
184
198
147
400
173
72
60
58
62
300
64
200
195
259
210
243
195
100
104
114
69
74
37
0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Others
India
Europe
North America
Source: Company, Angel Research
November 7, 2016
3
Dr. Reddy’s Laboratories | 2QFY2017 Result Update
EBITDA margin dips yoy: On the operating front, lower sales led the EBIT of come
in soft at 8.7% (vs. 12.1% expected vs. 22.4% in 2QFY2016). The EBITDA margin
came in at 16.6% (vs. 17.2% expected vs. 28.6% in 2QFY2016), hurt by lower
sales and 6.5% yoy growth in SG&A expenses. R&D expenditure for the quarter
amounted to 16.6% of sales (vs. 28.6% in 2QFY2016).
Exhibit 5: EBITDA margin trend (%)
32.0
28.6
28.0
25.3
24.0
22.0
20.0
16.6
14.7
16.0
12.0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Source: Company, Angel Research
Net profit lower than expected: Other income for the quarter came in at ~`64cr
(vs. `10cr in 2QFY2016). The net profit stood at `295cr (vs. `325cr expected vs.
`722cr in 2QFY2016), a yoy de-growth of 59.2%.
Exhibit 6: Adjusted net profit trend
800
722
700
579
600
500
376
400
295
300
200
126
100
0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Source: Company, Angel Research
November 7, 2016
4
Dr. Reddy’s Laboratories | 2QFY2017 Result Update
Concall takeaways
Remediation plan largely over; DRRD is planning to set a face-to-face meeting
with USFDA.
Effective Tax rate to be 20-22% of PBT in FY2017.
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 (85 ANDAs are pending approval, of which,
56 are Para IVs and 19 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 grow at a CAGR of 8.2% to `18,119cr and
adjusted EPS to record a CAGR of
1.7% to
`142.9 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 rating 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 (%)
20.8
22.4
Capex (` cr)
1200
1200
Source: Company, Angel Research
November 7, 2016
5
Dr. Reddy’s Laboratories | 2QFY2017 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
656
-
-
21.6
2.9
13.4
(10.8)
27.5
25.3
Aurobindo Pharma Accumulate
727
877
20.7
15.4
2.5
10.7
18.1
22.5
26.1
Cadila Healthcare Neutral
390
-
-
18.4
3.1
14.3
13.4
22.7
25.7
Cipla
Neutral
545
-
-
20.0
2.5
13.8
20.4
13.5
15.2
Dr Reddy's
Neutral
3,077
-
-
21.5
2.8
12.4
1.7
16.2
15.9
Dishman Pharma Neutral
227
-
-
20.1
2.3
9.9
3.1
10.3
10.9
GSK Pharma
Neutral
2,775
-
-
46.7
6.0
42.1
15.9
33.7
30.6
Indoco Remedies
Neutral
276
-
-
17.7
2.1
11.3
31.5
19.1
19.2
Ipca labs
Accumulate
583
613
5.1
29.6
2.0
13.4
36.5
8.8
9.4
Lupin
Buy
1,421
1,809
27.3
20.5
3.9
12.6
17.2
24.4
20.9
Sanofi India*
Neutral
4,276
-
-
25.3
3.4
18.2
21.2
24.9
28.4
Sun Pharma
Buy
653
944
44.6
19.9
3.9
12.6
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.
November 7, 2016
6
Dr. Reddy’s Laboratories | 2QFY2017 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
12,710
14,059
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
4,492
5,073
R&D expenses
767.3
1,240.2
1,744.9
1,783.4
2,406.4
2,717.9
EBITDA
2,676
3,121
3,284
3,802
3,332
4,061
% chg
3.0
16.6
5.2
15.8
(12.4)
21.9
(% of Net Sales)
23.0
23.6
22.2
24.6
20.8
22.4
Depreciation & amortisation
743.7
659.8
747.4
927.4
990.1
1,052.8
EBIT
1,932
2,462
2,537
2,875
2,342
3,008
% chg
4.3
27.4
3.1
13.3
-18.5
28.4
(% of Net Sales)
16.6
18.6
17.1
18.6
14.6
16.6
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
2,453
3,118
% chg
14.7
19.0
5.9
-3.6
-9.6
27.1
Extraordinary expense/(Inc.)
68.8
-
-
508.5
-
-
PBT (reported)
2,167.7
2,660.6
2,816.3
2,714.0
2,452.5
3,118.1
Tax
490.0
509.4
598.4
712.7
534.5
680.9
(% of PBT)
22.6
19.1
21.2
26.3
21.8
21.8
PAT (reported)
1,677.7
2,151.2
2,217.9
2,001.3
1,918.0
2,437.2
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
1,918.0
2,437.2
ADJ. PAT
1,750.0
2,151.2
2,217.9
2,357.0
1,918.0
2,437.2
% chg
17.0
22.9
3.1
6.3
(18.6)
27.1
(% of Net Sales)
14.4
16.3
15.0
12.9
12.0
13.5
Basic EPS (`)
103.1
126.7
130.2
138.2
112.4
142.9
Fully Diluted EPS (`)
103.1
126.7
130.2
138.2
112.4
142.9
% chg
16.8
22.9
2.7
6.1
(18.6)
27.1
November 7, 2016
7
Dr. Reddy’s Laboratories | 2QFY2017 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
14,267
16,305
Shareholders funds
7,309
9,080
11,130
12,834
14,352
16,390
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
17,591
19,629
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
9,011
10,418
Cash
513.6
845
539
492
356
648
Loans & Advances
697.6
793.0
889.1
928.2
962.6
1,087.2
Other
5,664
6,228
7,129
7,045
7,692
8,683
Current liabilities
3,252
3,006
4,214
4,193
4,420
4,989
Net Current Assets
3,623
4,860
4,344
4,273
4,591
5,429
Other Assets
-
76
106
106
106
Total Assets
11,068
13,361
14,683
16,073
17,591
19,629
November 7, 2016
8
Dr. Reddy’s Laboratories | 2QFY2017 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
2,453
3,118
Depreciation
744
660
747
927
990
1,053
(Inc)/Dec in Working Capital
535
(906)
211
24
(455)
(546)
Less: Other income
46
40
168
(271)
-
-
Direct taxes paid
490
509
598
713
535
681
Cash Flow from Operations
2,980
1,865
3,008
3,224
2,453
2,944
(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)
(136)
292
Opening Cash balances
738
514
845
539
492
356
Closing Cash balances
514
845
539
492
356
648
November 7, 2016
9
Dr. Reddy’s Laboratories | 2QFY2017 Result Update
Key ratios
Y/E March
FY2013
FY2014
FY2015
FY2016
FY2017E
FY2018E
Valuation Ratio (x)
P/E (on FDEPS)
29.9
24.3
23.6
22.3
27.4
21.5
P/CEPS
21.6
18.6
17.7
17.9
18.1
15.0
P/BV
7.6
6.1
5.0
4.3
3.9
3.4
Dividend yield (%)
0.5
0.5
0.5
0.5
0.5
0.5
EV/Sales
4.9
4.3
3.7
3.6
3.4
3.0
EV/EBITDA
20.0
17.1
15.8
13.6
15.6
12.7
EV / Total Assets
4.8
4.0
3.5
3.2
3.0
2.6
Per Share Data (`)
EPS (Basic)
103.1
126.7
130.2
138.2
112.4
142.9
EPS (fully diluted)
103.1
126.7
130.2
138.2
112.4
142.9
Cash EPS
142.6
165.5
174.0
171.7
170.5
204.6
DPS
15.0
15.0
15.0
15.0
15.0
15.0
Book Value
430.4
534.7
653.3
752.3
841.3
960.8
Dupont Analysis
EBIT margin
16.6
18.6
17.1
18.6
14.6
16.6
Tax retention ratio
77.4
80.9
78.8
73.7
78.2
78.2
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
11.2
13.0
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
13.9
15.7
Returns (%)
ROCE (Pre-tax)
17.8
20.2
18.1
18.7
13.9
16.2
Angel ROIC (Pre-tax)
23.1
25.6
22.5
22.9
16.8
19.2
ROE
26.8
26.3
21.9
19.7
14.1
15.9
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
59
61
Receivables (days)
88
89
90
96
86
88
Payables (days)
44
40
43
59
41
41
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
0.2
Net debt to EBITDA
1.2
1.2
1.0
0.8
1.0
0.7
Interest Coverage (EBIT / Int.)
-
-
-
-
-
-
November 7, 2016
10
Dr. Reddy’s Laboratories | 2QFY2017 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)
November 7, 2016
11