Technology

For 4QFY2016, Dr Reddy’s Laboratories (DRL) posted results much lower than
our estimates. The company posted a 3.0% yoy de-growth in sales to Rs3,756cr
V/s Rs4,500cr expected and V/s Rs3,870cr in 4QFY2015. The sales dip mainly
happened on account of flat global generics and a 22% dip in the PSAI segment.
On the operating front, the EBIT margin came in at 12.7% V/s 22.2% expected
and V/s 11.4% in 4QFY2015, mainly owing to lower sales and a 15.4% yoy rise
in SG&A expenditure. Thus, the Adj. net profit came in at Rs376cr V/s Rs729cr
expected and V/s Rs519cr in 4QFY2015, a yoy de-growth of 27.5%. We recommend
a Buy rating on the stock.
Sales lower than expected: The company posted a 3.0% yoy de-growth in sales to
Rs3,756cr V/s Rs4,500cr expected and V/s Rs3,870cr in 4QFY2015. The sales dip
mainly happened owing to flat global generics and a 22% dip in the PSAI
segment. In generics, its key market USA posted a 12% yoy growth, Europe
posted an 18% yoy dip, while Emerging markets posted a dip of 31% during the
quarter. On the operating front, the EBIT margin came in at 12.7% V/s 22.2%
expected and V/s 11.4% in 4QFY2015, mainly owing to lower sales and a 15.4%
rise in SG&A expenditure. Thus, the Adj. net profit came in at Rs376cr V/s Rs729cr
expected and V/s Rs519cr in 4QFY2015, a yoy de-growth of 27.5%. However, on
back of the Venezuela related write offs of Rs430cr, the reported net profit came in at
Rs75cr v/s `519cr in 4QFY2015, a de-growth of 85.6% yoy.
Outlook and valuation: We expect net sales to grow at a CAGR of 13.8% to
Rs20,021cr and adjusted EPS to record a 12.2% CAGR to Rs173.8 over
FY2016-18E. On back of valuations, we recommend a Buy rating on the stock.

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