Dr. Reddy's Laboratories Ltd. share price target

DRRD expects more drug launches in the US in FY17 than in FY16 as it visualises few datespecificandlitigationbasedopportunities. 9 DRRDtradesatanattractivevaluationof19x/15xFY17/18EPS,andwebelievemajority...

We resume coverage on Dr Reddys with a NEUTRAL rating. Although valuations are attractive at 21x/16x of FY17E/FY18E EPS in our base case scenario, they are subject to a successful resolution of the warning letter against three of Dr Reddys facilities. We expect a resolution by 4QFY17 and refrain from taking a call, as the possibility of an import alert cannot be ignored. Our TP is Rs 3,600 (20x FY18E EPS, assuming resolution).

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...

USFDA issued a warning letter to three key manufacturing facilities of Dr Reddy's Lab. The sites located at Srikakulam and Duvvada in Andhra Pradesh and Miryalaguda in Telangana are important contributors to the companys US operations and supply disruptions may have adverse effect on growth prospects of the company.

and Miryalaguda in Telangana) and for its oncology formulation unit at Duvvada in Visakhapatnam.ThewarninglettersfollowedtheinspectionofthesesitesbytheUSFDAin November2014, January2015,and February2015 respectively. While the Srikakulamunit...

Global corrective action plan required; Growth delayed by 2 years DRL received 3 warning letters from the USFDA for API plants Srikakulam (Vizag), Miryalaguda, Telangana and an oncology plant at Duvvada (Vizag). The action follows the earlier inspection of these sites in Nov'14, Jan'15 and Feb'15 respectively. While Srikakulam F483 was a concern, the issuance of the warning letter for the other 2 facilities is a negative surprise. The USFDA has mandated for a global corrective action plan with third party verification across facilities, which can significantly delay resolution. While approved products are not currently impacted, we assess...

DRL's revenues rose 11.2% YoY to Rs 39.9 bn (in line with our estimates) due to better performance of US, Europe and India. Gross margins increased by 280bps YoY to 61.3% in Q2FY16 (higher than our estimates of 60%) due to strength of portfolio, business mix and yield improvement.

9 gNexium launch to sustain growth momentum, notwithstanding the recent price correctionintheISgenericsspace. 8 The OAI from the USFDA for its Sirkakulam facility makes the management cautious...

Background: Dr. Reddy's is a global generic pharmaceutical company with focus on the US, Europe, Russia and India. Finished dosage and API account for a bulk of the revenues, with up to 60% of sales derived from overseas operations. With a strong research pipeline, its R&D; is focused in the areas of cancer, diabetes, cardiovascular, inflammation and bacterial infections. Dr. Reddy's offers a portfolio of products and services including APIs, custom pharmaceutical services, generics, biosimilars, differentiated formulations and NCEs. It has one of the largest ANDA & a patent challenge pipeline has strengthened presence through the launch of several...