Technology

For 2QFY2016, Dr Reddys Laboratories (DRL) posted in line sales while the net
profit growth exceeded our estimates. The company posted an 11.2% yoy growth
in sales to Rs3,989cr V/s Rs4,000cr expected and V/s Rs3,588cr in 2QFY2015,
mainly driven by global generics. On the operating front, the EBIT margin came
in at 22.4% V/s 18.7% expected and V/s 17.3% in 2QFY2015, driven by the
expansion in gross margins (285bps) and SG&A and R&D expenditure growing
only moderaly, which is by 3.6% and 8.8% yoy, respectively. Thus, the net profit
came in at Rs722cr V/s Rs631cr expected and V/s Rs574cr in 2QFY2015, a yoy growth
of 25.7%. After the warning letters for its three facilities, the stock has corrected,
making valuations attractive. Thus we recommend a Buy rating on the stock.
Results better on operating front: The company posted an 11.2% growth in sales
to Rs3989cr V/s Rs4,000cr expected and V/s Rs3,588cr in 2QFY2015, mainly driven
by global generics. Global generics (Rs3,276.8cr) posted a growth of 15% yoy,
while PSAI (Rs591.8cr) posted a dip of 7% yoy. In global generics, the key markets-
USA, Europe, India and Emerging markets, posted a growth of 32%, 65%, 14%
and -22% yoy, respectively. On the operating front, the EBIT margin came in at
22.4% V/s 18.7% expected and V/s 17.3% in 2QFY2015, driven by expansion in
gross margins (285bps) and moderate growth in SG&A and R&D expenditure,
which rose by 3.6% and 8.8% yoy, respectively. Thus, the net profit came in at
Rs722cr V/s Rs631cr expected and V/s Rs574cr in 2QFY2015, a yoy growth of 25.7%.
Outlook and valuation: We expect net sales to grow at a CAGR of 14.9% to
Rs19,575cr and adjusted EPS to record a 17.2% CAGR to Rs178.8 over
FY2015-17E. On back of valuations, we recommend a Buy rating on the stock.

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