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RESULTS REVIEW 3QFY16 10 FEB 2016
Dr Reddys NEUTRAL
HDFC securities Institutional Research is also available on Bloomberg HSLB & Thomson Reuters
Tough times ahead Dr Reddys reported flat QoQ sales in 3QFY16. EBITDA margins saw a sequential decline of 242bps because of the ongoing remediation measures. Settlement charges of US$ 5.5mn related to Reclast and forex loss of Rs 637mn in Venezuela hit reported net profit (down 20% QoQ, flat YoY).
Weakness in EMs and competition in products (Valcyte, Vidaza) will take a toll on FY17E earnings. However, upcoming launches such as Propofol can partly offset the decline. Products like Copaxone and Xeloda are critical earnings drivers in FY18E, but are dependent on the impending regulatory resolution.
Our estimates are largely unchanged; we remain NEUTRAL on the stock due to (1) Weak FY17E outlook, (2) FY18E growth being dependent on regulatory resolution and (3) Venezuela not having bottomed out. Our TP is Rs 3,600 (20x FY18E EPS, assuming resolution). In case the WL resolution is delayed (or escalated), our FY18E EPS and fair value fall to Rs 158 and Rs 2,842 (18x FY18E EPS).
Highlights of the quarter
US generics: FY17E will be better for launches, as the site transfer of a few critical products is complete. Propofol can be launched soon, while Gleevec will be out on a scheduled date (likely in FY18). There is better visibility on Copaxone 20mg (launch likely in FY18).
Warning letter: Remediation measures are on track but management didnt provide any timeline. We model a resolution in 4QFY17.
Cautious outlook on 4Q: DRLs management cautioned investors on 4QFY16 owing to further currency devaluation in Russia, falling realisations in Venezuela and lower generic sales (hospital supply of injectables) in the US. In 3Q, Dr Reddys booked US$ 18mn in Venezuela (at VEF 6.3/US$), which may come down as the company wasnt been able to repatriate anything. It also booked a translation loss of Rs 637mn at the SIMADI rate of VEF 198.5/US$.
Financial Summary (Rsmn) 3QFY16 3QFY15 YoY (%) 2QFY16 QoQ (%) FY15 FY16E FY17E FY18E Net Sales 39,679 38,431 3.2 39,890 (0.5) 148,147 157,698 166,112 184,171 EBIT 10,382 9,461 9.7 11,404 (9.0) 34,101 42,186 40,985 47,856 APAT 6,141 5,502 11.6 7,219 (14.9) 21,634 26,324 24,995 30,567 Diluted adj. EPS (Rs) 36.2 32.4 11.6 42.5 (14.9) 127.4 155.0 147.2 180.0 P/E (x) 23.2 19.0 20.1 16.4 EV / EBITDA (x) 14.6 11.8 12.1 10.4 RoE (%) 24.4 24.0 19.1 19.8 Source: Company, HDFC sec Inst Research # Consolidated
INDUSTRY PHARMA
CMP (as on 9 Feb 2016) Rs 2,960
Target Price Rs 3,600
Nifty 7,298
Sensex 24,021
KEY STOCK DATA
Bloomberg DRRD IN
No. of Shares (mn) 171
MCap (Rs bn) / ($ mn) 505/7,425
6m avg traded value (Rs mn) 2,275
STOCK PERFORMANCE (%)
52 Week high / low Rs 4,387/2,750
3M 6M 12M
Absolute (%) (15.5) (30.5) (4.5)
Relative (%) (7.4) (15.6) 10.4
SHAREHOLDING PATTERN (%)
Promoters 25.51
FIs & Local MFs 5.18
FIIs 36.73
Public & Others 32.58
Source : BSE
Vivek Agrawal [email protected] +91-22-6171-7331
DR REDDYS: RESULTS REVIEW 3QFY16
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Quarterly Financials Snapshot (Consolidated) Particulars 3QFY16 3QFY15 YoY (%) 2QFY16 QoQ (%) Net Sales 39,679 38,431 3 39,890 (0.5) Material Expenses 16,089 16,079 0 15,421 4 SG&A Expenses 9,113 8,575 6 8,592 6 R&D Expenses 4,095 4,316 (5) 4,473 (8) EBITDA 10,382 9,461 10 11,404 (9) Depreciation 2,577 2,041 2,466 EBIT 7,805 7,420 5 8,938 (13) Other Income 122 341 320 Interest Cost (236) (235) 216 FX Gains / (Loss) (298) - -PBT 7,865 7,996 (2) 9,041 (13) Tax 1,788 2,541 1,879 RPAT 5,792 5,746 0.81 7,219 (20) EO Items (Adj For Tax) 349 (244) -Loss (income) of Affiliates (64) (47) (56) APAT 6,141 5,502 12 7,219 (15) Source: Company, HDFC sec Inst Research
Margin Analysis 3QFY16 3QFY15 YoY (bps) 2QFY16 QoQ (bps)
Material Expenses % Net Sales 40.5 41.8 (129) 38.7 189 SG&A Expenses % Net Sales 23.0 22.3 65 21.5 143 R&D Expenses % Net Sales 10.3 11.2 (91) 11.2 (89) EBITDA Margin (%) 26.2 24.6 155 28.6 (242) Tax Rate (%) 22.7 31.8 (905) 20.8 195 APAT Margin (%) 15.5 14.3 116 18.1 (262) Source: Company, HDFC sec Inst Research
Despite strong domestic (up 34% YoY) and US (up 15% YoY), decline in emerging markets and PSAI resulted in muted (up 3% YoY) revenue growth Margins impacted by remediation measures YoY decline in R&D expenses was because of the cash received from Merck Serono as development costs for a biosimilar programme
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US Formulations Growth Trajectory Emerging Markets Growth Trajectory
Source: Company, HDFC sec Inst Research
Source: Company, HDFC sec Inst Research
EBITDA Margin Trajectory APAT Growth Trajectory
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
Despite the lack of new launches, the company reported strong US sales as the companys injectables and niche portfolio remained sticky Currency devaluation continued to impact EM sales
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DR REDDYS: RESULTS REVIEW 3QFY16
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Segmental Quarterly Performance (Rs mn) 3QFY16 3QFY15 YoY (%) 2QFY16 QoQ (%) FY15 Segmental Revenues Domestic formulations 5,805 4,328 34.1 5,464 6.2 17,870 US Generics 19,417 16,819 15.4 18,563 4.6 64,734 Russia +CIS 4,000 4,766 (16.1) 3,800 5.3 17,616 ROW 2,400 3,832 (37.4) 2,700 (11.1) 13,057 Europe 1,937 1,947 (0.5) 2,174 (10.9) 7,240 PSAI+Others 6,121 6,738 (9.2) 7,120 (14.0) 27,630 Total 39,680 38,430 3.3 39,821 (0.4) 148,147 Source: HDFC sec Inst Research
Assumptions FY15 FY16E FY17E FY18E
Domestic formulations 17,870 21,856 25,781 29,905 Growth (%) 13.7 22.3 18.0 16.0 US Formulations 64,734 75,310 78,499 87,688 Growth (%) 17.1 16.3 4.2 11.7 Russia/CIS 17,616 14,204 14,361 15,997 Growth (%) (11.1) (19.4) 1.1 11.4 ROW (inc. Venezuela) 13,057 9,776 9,240 10,164 Growth (%) 77.4 (25.1) (5.5) 10.0 Europe 7,240 8,598 9,458 10,404 Growth (%) 11.8 18.8 10.0 10.0 API and Others 27,630 27,838 29,442 31,148 Growth (%) 4.2 0.8 5.8 5.8 Source: HDFC sec Inst Research
Peer Valuation Relative Valuation
MCap (Rs bn)
CMP (Rs)
Reco TP
(Rs) EPS P/E (x) EV/EBITDA (x) RoE (%)
FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E Cipla 447 556 BUY 760 24.2 30.5 38.6 22.9 18.2 14.4 17.1 13.2 10.7 16.7 18.0 19.2 Dr Reddy's 505 2,960 NEU 3,600 155.0 147.2 180.0 19.1 20.1 16.4 11.8 12.1 10.4 24.0 19.1 19.8 Lupin 858 1,904 NEU 1,810 47.7 71.6 82.3 40.0 26.6 23.1 24.0 15.8 13.9 22.1 27.1 25.0 Cadila 336 328 NEU 348 13.8 14.2 17.4 23.8 23.0 18.9 15.1 15.4 12.9 29.1 24.4 24.7 Sun Pharma 2,055 854 BUY 900 18.4 26.9 36.6 46.5 31.8 23.3 22.1 12.3 12.3 16.9 29.1 23.0 Alembic 111 590 NEU 660 40.2 23.7 29.1 14.7 24.9 20.3 11.2 18.3 15.2 62.2 25.8 25.8 Average 49.9 52.3 64.0 27.8 24.1 19.4 16.9 14.5 12.6 28.5 23.9 22.9 Source: HDFC sec Inst Research
Ex-UCB, domestic sales grew 19% YoY, driven by strong execution Russia grew by 5% in local currency PSAI sales declined because of supply disruption caused by the remediation measures. It is back on track now
DR REDDYS: RESULTS REVIEW 3QFY16
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Income Statement (Consolidated) Year ending March (Rs mn) FY14 FY15 FY16E FY17E FY18E
Net Revenues 133,183 148,147 157,698 166,112 184,171Growth (%) 13.3 11.2 6.4 5.3 10.9 Material Expenses 56,369 62,744 62,571 67,619 72,890SG&A Exps (including staff) 32,186 33,854 35,328 38,405 42,245R&D Expenses 12,403 17,449 17,613 19,103 21,180EBITDA 32,226 34,101 42,186 40,985 47,856EBITDA Margin (%) 24.2 23.0 26.8 24.7 26.0 EBITDA Growth (%) 23.3 5.8 23.7 (2.8) 16.8 Depreciation 7,095 8,102 9,609 10,237 10,747EBIT 25,131 25,999 32,577 30,749 37,109Other Income (Incl EO Items) 2,184 3,247 2,016 2,382 3,164 Interest 1,267 1,082 1,085 1,085 1,085PBT 26,048 28,163 33,508 32,045 39,188Tax (Incl Deferred) 5,093 5,984 7,184 7,050 8,621RPAT 20,955 22,179 26,324 24,995 30,567EO (Loss) / Profit (Net Of Tax) 339 545 0 0 0 APAT 20,616 21,634 26,324 24,995 30,567APAT Growth (%) 26.8 4.9 21.7 (5.0) 22.3 Adjusted EPS (Rs) 121.4 127.4 155.0 147.2 180.0 Source: Company, HDFC sec Inst Research
Balance Sheet (Consolidated) Year ending March (Rs mn) FY14 FY15 FY16E FY17E FY18E
SOURCES OF FUNDS Share Capital - Equity 851 852 852 852 852 Reserves 77,801 97,679 119,633 140,519 166,565 Total Shareholders Funds 78,652 98,531 120,485 141,371 167,417 Minority Interest Long-term Debt 20,755 14,315 14,315 14,315 14,315 Short-term Debt 20,607 21,857 21,857 21,857 21,857 Total Debt 41,362 36,172 36,172 36,172 36,172 Long-term Provisions & Others 1,744 3,512 3,512 3,512 3,512 TOTAL SOURCES OF FUNDS 121,758 138,215 160,169 181,055 207,102 APPLICATION OF FUNDS Net Block 37,496 41,837 52,045 52,209 52,862 CWIP 6,388 5,290 5,555 5,832 6,124 Intangible assets 8,912 11,933 9,546 7,828 6,576 Investments 4 1,456 1,456 1,456 1,456 LT Loans & Advances 2,322 4,245 4,245 4,245 4,245 Net Deferred Taxes 676 1,043 1,043 1,043 1,043 Total Non-current Assets 55,798 65,804 73,890 72,613 72,305 Inventories 24,189 25,699 23,763 25,031 27,752 Debtors 33,253 41,012 41,045 43,235 47,935 Other Current Assets 12,146 12,310 12,310 12,310 12,310 Cash & Equivalents 33,670 39,746 55,485 74,652 94,574 Total Current Assets 103,258 118,767 132,602 155,227 182,571 Creditors 8,932 8,673 8,641 9,102 10,092 Other Current Liabilities &Provisions
28,366 37,683 37,683 37,683 37,683
Total Current Liabilities 37,298 46,356 46,324 46,785 47,775 Net Current Assets 65,960 72,411 86,278 108,442 134,796 TOTAL APPLICATION OF FUNDS 121,758 138,215 160,169 181,055 207,102 Source: Company, HDFC sec Inst Research
DR REDDYS: RESULTS REVIEW 3QFY16
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Cash Flow Year ending March (Rs mn) FY14 FY15 FY16E FY17E FY18EReported PBT 26,545 28,163 33,508 32,045 39,188 Non-operating & EO items (1,942) (2,943) (1,782) (2,215) (2,996)Interest expenses 1,267 1,082 1,085 1,085 1,085 Depreciation 7,095 6,259 6,792 7,837 8,347 Working Capital Change (6,119) (376) 1,872 (2,997) (6,432)Tax Paid (5,097) (6,351) (7,184) (7,050) (8,621)OPERATING CASH FLOW ( a ) 21,750 25,835 34,290 28,706 30,570 Capex (8,547) (7,523) (14,878) (6,559) (8,039)Free cash flow (FCF) 13,203 18,312 19,412 22,147 22,531 Investments (9,083) (5,321) 0 0 0 Non-operating Income 1,671 2,507 1,782 2,215 2,996 INVESTING CASH FLOW ( b ) (15,959) (10,337) (13,096) (4,345) (5,043)Debt Issuance/(Repaid) 9,717 (5,190) 0 0 0 Interest Expenses (1,267) (1,082) (1,085) (1,085) (1,085)FCFE 21,653 12,040 18,327 21,062 21,446 Share Capital Issuance 2 2 0 0 0 Dividend (2,980) (3,587) (4,371) (4,109) (4,520)FINANCING CASH FLOW ( c ) 5,472 (9,858) (5,456) (5,194) (5,605)NET CASH FLOW (a+b+c) 11,262 5,640 15,739 19,167 19,922 EO Items, Others 271 436 0 0 0 Closing Cash & Equivalents 33,670 39,746 55,485 74,652 94,574 Source: Company, HDFC sec Inst Research
Key Ratios FY14 FY15 FY16E FY17E FY18E PROFITABILITY (%) GPM 57.7 57.6 60.3 59.3 60.4 EBITDA Margin 24.2 23.0 26.8 24.7 26.0 APAT Margin 15.5 14.6 16.7 15.0 16.6 RoE 29.0 24.4 24.0 19.1 19.8 RoIC (or Core RoCE) 25.2 22.4 26.5 23.7 27.5 RoCE 19.8 17.3 18.2 15.2 16.2 EFFICIENCY Tax Rate (%) 19.6 21.2 21.4 22.0 22.0 Fixed Asset Turnover (x) 1.2 1.2 1.1 1.1 1.2 Inventory (days) 59.2 51.4 55.0 55.0 55.0 Debtors (days) 89.1 91.5 95.0 95.0 95.0 Other Current Assets (days) 3.0 3.4 3.6 3.4 3.1 Payables (days) 25.5 21.7 20.0 20.0 20.0 Other Current Liab & Provns (days) 77.2 81.4 87.2 82.8 74.7 Cash Conversion Cycle (days) 48.6 43.2 46.4 50.6 58.4 Debt/EBITDA (x) 1.3 1.1 0.9 0.9 0.8 Net D/E (x) 0.1 (0.0) (0.2) (0.3) (0.3) Interest Coverage (x) 19.8 24.0 30.0 28.3 34.2 PER SHARE DATA (Rs) EPS 121.4 127.4 155.0 147.2 180.0 CEPS 163.2 175.1 211.6 207.5 243.3 Dividend 18.0 20.0 22.0 24.2 26.6 Book Value 463.2 580.3 709.6 832.6 986.0 VALUATION P/E (x) 24.3 23.2 19.0 20.1 16.4 P/BV (x) 6.4 5.1 4.2 3.5 3.0 EV/EBITDA (x) 15.4 14.6 11.8 12.1 10.4 EV/Revenues (x) 3.7 3.4 3.2 3.0 2.7 OCF/EV (%) 4.4 5.2 6.9 5.8 6.1 FCF/EV (%) 2.7 3.7 3.9 4.5 4.5 FCFE/Mkt Cap (%) 4.3 2.4 3.7 4.2 4.3 Dividend Yield (%) 0.6 0.7 0.7 0.8 0.9 Source: Company, HDFC sec Inst Research
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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
Date CMP Reco Target18-Jan-16 2,936 NEU 3,60010-Feb-16 2,960 NEU 3,600
RECOMMENDATION HISTORY
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Disclosure: I, Vivek Agrawal, MBA, author and the name 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. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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