1QFY19 Result Update Institutional Equities Dr. Reddy s Laboratories 27 July 2018 Reuters: REDY.BO; Bloomberg: DRRD IN Drug Pipeline In Place, But Regulatory Hurdles Testing Patience Dr. Reddy s Laboratories or DRL reported a strong performance in 1QFY19 as its revenues (Rs37,207mn) grew 5.3% QoQ and 12.2% YoY, which were driven by growth across businesses and geographies. Revenues were above our/consensus estimates by 4.6%/ 6.2%, respectively. Net earnings at Rs4,561mn were above our/ consensus estimates by 67.3/57.3%, respectively. Strong growth in net earnings was a result of gross margin expansion of 230bps QoQ, aided by higher sales, US dollar or USD appreciation and launch of high value Suboxone generic for a limited period. We believe that Suboxone generic s contribution was around Rs1000mn to net profit for the quarter. Strong growth in emerging markets (16% YoY), India (30% YoY) and PSAI (16% YoY) also aided DRL s earnings. While Suboxone generic re-launch is contingent on the court's verdict in respect of preliminary injunction, growth in other business is expected to remain robust for the rest of the year. For the US market, the company maintains its guidance of 15-20 launches, and we expect the same to at least offset any price erosion in the base business. Nuvaring generic has received a complete response and the approval is expected in 4QFY19. We have retained our estimates for FY19/FY20 and continue to value DRL at 18x FY20E EPS of Rs161 to arrive at a target price of Rs2,898, up 37% from the CMP. We continue to have Buy rating on the stock. Earning highlights Revenues: They stood at Rs 37,207mn, up 5.3%/12.2% QoQ/YoY, respectively. Revenues were above our/consensus estimates by 4.6%/6.2%, respectively. QoQ growth was driven by global generics with North America (up 9.8%), Europe (up 17.8%) and EMs (up 20.8%). North America revenues included revenues from Suboxone generic. India, PSAI and EMs reported strong YoY growth of 30%/16%/16%, respectively. EBITDA: At Rs8,071mn, EBITDA was up 39.7%/140.2% QoQ/YoY, respectively. EBITDA margin at 21.7% was up 535bps/1156bps QoQ/YoY, respectively. EBITDA was above our/consensus estimates by 42.5%/31.6%, respectively. Gross margin expansion (226bps/415bps QoQ/YoY, respectively) and the fall in R&D expenses aided EBITDA growth. PAT: It stood at Rs4,561mn, up 50.9%/671.7% QoQ/YoY, respectively. PAT margin was at 12.3%, up371bps/1,048bps QoQ/YoY, respectively. PAT was above our/consensus estimates by 57.5%/67.3%, respectively.eps For the quarter was Rs27.5. NBIE Values your patronage- Vote for The Team in the Asia Money poll 2018. Click Here BUY Sector: Pharmaceuticals CMP: Rs2,110 Target Price: Rs2,898 Upside: 37% Vishal Manchanda Research Analyst vishal.manchanda@nirmalbang.com +919737437148 Madhurima Kane Research Associate madhurima.kane@nirmalbang.com +91 6273 8168 Key Data Current Shares O/S (mn) 165.9 Mkt. Cap (Rsbn/US$bn) 353.9/5.2 52 Wk H / L (Rs) 2,725/1,887 Daily Vol. (3M NSE Avg.) 877,285 Price Performance (%) 1 M 6 M 1 Yr Dr Reddy s Labs. (5.9) (15.0) (21.2) Nifty Index 3.7 0.9 11.4 Source: Bloomberg *Y/E March (Rsmn) 1QFY18 4QFY18 1QFY19 YoY (%) QoQ (%) Revenues 33,159 35,349 37,207 12.2 5.3 Cost of revenues 16,062 16,454 16,479 2.6 0.2 % of revenues 48.4 46.5 44.3 (415bps) (226bps) SG&A expenses 11,763 12,067 12,106 2.9 0.3 % of revenues 35.5 34.1 32.5 (294bps) (160bps) R&D expenses 5,075 4,348 4,157 (18.1) (4.4) % of revenues 15.3 12.3 11.2 (413bps) (113bps) Other operating (income)/expenses (194) (167) (303) 56.2 81.4 Results from operating activities 453 2,647 4,768 952.5 80.1 Net finance expenses (221) (1,032) (156) (29.4) (84.9) Share of (profit)/loss of equity accounted investee (98) (69) (83) (15.3) 20.3 Profit before income-tax 772 3,748 5,007 548.6 33.6 Income tax expenses 181 726 446 146.4 (38.6) Profit for the period 591 3,022 4,561 671.7 50.9 EBITDA computation PBT 772 3,748 5,007 548.6 33.6 Net interest (income)/expenses (211) (1,001) (46) (78.2) (95.4) Depreciation 2,008 2,109 2,214 10.3 5.0 Amortisation & impairment 791 921 896 13.3 (2.7) EBITDA 3,360 5,777 8,071 140.2 39.7 Margin (%) 10.1 16.3 21.7 1,156bps 535bps *Results are in the IFRS format. Please refer to the disclaimer towards the end of the document.
Earnings conference-call commentary Appeal against preliminary injunction on Suboxone generic: DRL expects to get a verdict on its appeal against Suboxone generic at the earliest by September/October 2018. ANDA filings and approvals: DRL did around four ANDA filings during the quarter and maintains guidance for 15to 20 approvals during the year. The company has already received approval for 4 out of the expected 20. Nuvaring generic: Complete response letter has been received which will be addressed in the next two months. Approval can be expected in 4QFY19. Copaxone generic: Complete response letter will be addressed in the next few weeks and the approval is expected in 2HCY19. Duvvada re-inspection: DRL has invited the USFDA for a re-inspection and is awaiting its response. Srikakulam facility warning letter: The USFDA has asked for data investigation and analysis which will be submitted by September 2018 and clarity will emerge thereafter in respect of facility clearance. Cost control: DRL is rationalising costs on all fronts including manufacturing facility rationalisation. The company recently divested an antibiotic manufacturing facility. The annual revision, which was due during the quarter, has been deferred to 2QFY19. The growth in staff costs is expected to be in single digit after accounting for cost-savings initiative. Growth in FY19: As regards North America, DRL did not give guidance on the growth number as the extent of price erosion in base portfolio is not predictable. It is expected that the new approvals should at least offset the price erosion in base business. India and emerging markets should grow in double digits. Proprietary products: Zembrace Symtouch: The growth in this product continues and is about 10% on QoQ basis. Sernivo: DRL is facing reimbursement problem and is working around the same. Zenavod launch by Galderma: Zenavod, which has been outlicensed to Galderma, may be launched in 1HCY19. DFN-02: The PDUFA date is January 2019 and DRL expects to launch it in 1QFY20. The company is evaluating various options as to whether to promote on its own or seek a commercial partner. R&D spending: Expect R&D spending to be at the same level as in FY18. Effective tax rate: The quarter witnessed a lower tax rate of 9% because of favourable resolution of previous litigations and a favourable business mix. For the full year, the tax rate is expected to be between 21%-22%. Exhibit 1: Key financials Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Net sales 1,54,708 1,40,809 1,42,028 1,53,618 1,81,798 EBITDA 36,170 36,252 25,495 24,081 34,542 Net profit 20,013 12,039 9,806 16,929 26,641 EPS (Rs) 120.6 72.5 59.1 102.0 160.5 EPS growth (%) (9.8) (39.8) (18.5) 72.6 57.4 EBITDA margin (%) 23.4 25.7 18.0 15.7 19.0 P/E (x) 17.5 29.1 35.7 20.7 13.1 P/BV (x) 2.7 2.8 2.8 2.5 2.2 EV/EBITDA (x) 9.5 14.9 15.8 10.8 7.5 RoCE (%) 18.8 9.9 8.5 12.8 19.7 RoE (%) 16.7 9.5 7.8 12.8 17.8 2 Dr. Reddy s Laboratories
Exhibit 2: Actual performance versus our estimate (Rsmn) Actual Our estimate Var. (%) Cons. est. Var. (%) Sales 37,207 35,578 4.6 35,042 6.2 EBITDA 8,071 5,664 42.5 6,131 31.6 EBITDA margin (%) 21.7 15.9 577bps 17.5 420bps Profit after tax 4,561 2,726 67.3 2,896 57.5 Exhibit 3: Quarterly revenue trend Revenue (Rsmn) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Global generics 26,638 28,995 30,638 29,138 27,455 28,618 30,105 27,836 30,636 North America 15,523 16,134 16,595 15,349 14,946 14,318 16,073 14,487 15,903 Europe 1,615 1,776 2,148 2,066 2,075 2,424 2,006 1,711 2,016 India 5,223 6,251 5,947 5,711 4,687 6,370 6,126 6,138 6,074 RoW 4,277 4,834 5,948 6,012 5,747 5,506 5,900 5,500 6,643 PSAI 4,692 5,784 5,400 5,391 4,651 5,654 5,436 6,251 5,409 Proprietary products 620 588 603 552 512 748 2,137 848 726 Others 395 490 424 451 541 440 382 414 436 Total revenues 32,345 35,857 37,065 35,532 33,159 35,460 38,060 35,349 37,207 Revenue mix (%) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Global generics 82.4 80.9 82.7 82.0 82.8 80.7 79.1 78.7 82.3 North America 48.0 45.0 44.8 43.2 45.1 40.4 42.2 41.0 42.7 Europe 5.0 5.0 5.8 5.8 6.3 6.8 5.3 4.8 5.4 India 16.1 17.4 16.0 16.1 14.1 18.0 16.1 17.4 16.3 RoW 13.2 13.5 16.0 16.9 17.3 15.5 15.5 15.6 17.9 PSAI 14.5 16.1 14.6 15.2 14.0 15.9 14.3 17.7 14.5 Proprietary products 1.9 1.6 1.6 1.6 1.5 2.1 5.6 2.4 2.0 Others 1.2 1.4 1.1 1.3 1.6 1.2 1.0 1.2 1.2 QoQ growth (%) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Global generics (13.5) 8.8 5.7 (4.9) (5.8) 4.2 5.2 (7.5) 10.1 North America (18.1) 3.9 2.9 (7.5) (2.6) (4.2) 12.3 (9.9) 9.8 Europe (8.2) 10.0 20.9 (3.8) 0.4 16.8 (17.2) (14.7) 17.8 India (1.0) 19.7 (4.9) (4.0) (17.9) 35.9 (3.8) 0.2 (1.0) RoW (10.9) 13.0 23.0 1.1 (4.4) (4.2) 7.2 (6.8) 20.8 PSAI (18.6) 23.3 (6.6) (0.2) (13.7) 21.6 (3.9) 15.0 (13.5) Proprietary products (3.9) (5.2) 2.6 (8.5) (7.2) 46.1 185.7 (60.3) (14.4) Others 4.8 24.1 (13.5) 6.4 20.0 (18.7) (13.2) 8.4 5.3 Total (13.9) 10.9 3.4 (4.1) (6.7) 6.9 7.3 (7.1) 5.3 YoY growth (%) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Global generics (14.0) (11.5) (8.7) (5.3) 3.1 (1.3) (1.7) (4.5) 11.6 North America (16.2) (13.1) (14.5) (19.0) (3.7) (11.3) (3.1) (5.6) 6.4 Europe (15.4) (16.2) 10.7 17.5 28.5 36.5 (6.6) (17.2) (2.8) India 9.7 14.5 2.4 8.2 (10.3) 1.9 3.0 7.5 29.6 RoW (26.0) (27.0) (7.1) 25.3 34.4 13.9 (0.8) (8.5) 15.6 PSAI (16.4) (2.3) 6.3 (6.5) (0.9) (2.2) 0.7 16.0 16.3 Proprietary products (11.0) (11.4) (7.8) (14.4) (17.4) 27.2 254.4 53.6 41.8 Others 29.0 (9.2) 10.1 19.6 37.0 (10.2) (9.9) (8.2) (19.4) Total (13.9) (10.1) (6.6) (5.4) 2.5 (1.1) 2.7 (0.5) 12.2 3 Dr. Reddy s Laboratories
Exhibit 4: Quarterly snapshot (Rsmn) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Revenues 32,345 35,857 37,065 35,542 33,159 35,460 38,060 35,349 37,207 Cost of revenues 14,167 15,760 15,166 17,360 16,062 16,559 16,649 16,454 16,479 Gross profit 18,178 20,097 21,899 18,182 17,097 18,901 21,411 18,895 20,728 SG&A expenses 12,284 11,774 11,341 10,973 11,763 11,032 12,048 12,067 12,106 R&D expenses 4,802 5,214 4,956 4,579 5,075 4,175 4,667 4,348 4,157 Other operating (income)/expense (96) (277) (187) (505) (194) (114) (313) (167) (303) Results from operating activities 1,188 3,386 5,789 3,135 453 3,808 5,009 2,647 4,768 Net finance expense/(income) (445) (365) (44) 48 (221) 24 (851) (1,032) (156) Share of (profit) / loss of equity accounted invested (74) (84) (89) (102) (98) (92) (85) (69) (83) Profit before income tax 1,707 3,835 5,922 3,189 772 3,876 5,945 3,748 5,007 Income tax expense 444 885 1,221 64 181 1,027 2,601 726 446 Profit for the period 1,263 2,950 4,701 3,125 591 2,849 3,344 3,022 4,561 EPS (Rs) 7.6 17.8 28.4 18.9 3.6 17.2 20.2 18.2 27.5 Margins (%) Gross margin 56.2 56.0 59.1 51.2 51.6 53.3 56.3 53.5 55.7 EBITDA 12.3 17.9 23.7 16.2 10.1 19.4 21.2 16.3 21.7 EBIT 4.0 10.0 15.8 8.2 1.7 11.1 13.4 7.8 13.3 PAT 3.9 8.2 12.7 8.8 1.8 8.0 8.8 8.5 12.3 EBITDA computation PBT 1,707 3,835 5,922 3,189 772 3,876 5,945 3,748 5,007 Interest (income)/expense net (409) (329) (53) (329) (211) 72 (881) (1,001) (46) Depreciation 1,760 1,897 1,936 1,897 2,008 2,078 2,089 2,109 2,214 Amortisation 921 950 988 950 791 862 882 921 896 Impairment - 67-67 - - 20 - - EBITDA 3,979 6,420 8,793 5,774 3,360 6,888 8,055 5,777 8,071 4 Dr. Reddy s Laboratories
Financial statements Exhibit 5: Income statement* Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Net sales 1,54,708 1,40,809 1,42,028 1,53,618 1,81,798 % growth 4.4 (9.0) 0.9 8.2 18.3 Cost of sales 62,427 62,453 65,724 68,462 73,430 R&D expenditure 17,834 19,551 18,265 18,434 21,816 SG&A expenditure 45,702 46,372 46,910 47,621 54,539 Other (income)/ expense (874) (1,065) (788) (788) (788) Total expenditure 1,25,089 1,27,311 1,30,111 1,33,730 1,48,998 Operating profit 29,619 13,498 11,917 19,888 32,800 % growth 12.7 (54.4) (11.7) 66.9 64.9 Operating profit margin (%) 19.1 9.6 8.4 12.9 18.0 Finance (expense) / income (2,708) 806 2,080 2,288 2,746 Share of profit in equity investments 229 349 344 396 455 Gross profit 92,281 78,356 76,304 85,156 1,08,368 % growth 8.1 (15.1) (2.6) 11.6 27.3 Profit before tax 27,140 14,653 14,341 22,572 36,001 % growth (3.6) (46.0) (2.1) 57.4 59.5 Tax 7,127 2,614 4,535 5,643 9,360 Effective tax rate (%) 26.3 17.8 31.6 25.0 26.0 Net profit 20,013 12,039 9,806 16,929 26,641 % growth (9.8) (39.8) (18.5) 72.6 57.4 EPS (Rs) 120.6 72.5 59.1 102.0 160.5 %growth (9.8) (39.8) (18.5) 72.6 57.4 *In IFRS format Exhibit 7: Balance sheet Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E Equity 853 829 830 830 830 Reserves 1,27,483 1,23,215 1,25,630 1,38,165 1,59,972 Net worth 1,28,336 1,24,044 1,26,460 1,38,995 1,60,802 Net deferred tax liabilities 767 1,204 730 730 730 Short-term loans 22,718 43,539 25,466 27,544 32,597 Long-term loans 10,685 5,449 25,089 17,562 12,294 Other non-current liabilities 3,216 4,124 3,633 3,633 3,633 Liabilities 2,07,650 2,19,821 2,25,604 2,43,506 2,72,211 Intangible assets and goodwill 25,953 50,280 50,714 46,662 42,890 Net block 53,961 57,160 57,869 62,350 65,738 Other non-current assets 8,048 12,006 7,376 7,376 7,376 Inventories 25,578 28,529 29,089 31,463 37,234 Debtors 41,306 38,065 40,617 43,931 51,990 Cash 4,921 3,866 2,638 12,140 20,817 Loans and advances 11,010 11,970 14,301 15,468 18,306 Other current assets 36,873 17,945 23,000 24,116 27,859 Total current assets 1,19,688 1,00,375 1,09,645 1,27,118 1,56,207 Creditors 12,300 13,417 16,052 17,362 20,547 Other current liabilities 52,346 71,583 53,640 65,225 74,206 Total current liabilities 64,646 85,000 69,692 82,586 94,753 Net current assets 55,042 15,375 39,953 44,532 61,454 Total assets 2,07,650 2,19,821 2,25,604 2,43,506 2,72,211 Exhibit 6: Cash flow Y/E March (Rsmn) FY16 FY17 FY18 FY19E FY20E PAT 20,013 12,039 9,806 16,929 26,641 (Inc.)/dec. in working capital (188) (5,302) (8,964) (4,618) (11,040) Cash flow from operations 19,825 6,737 842 12,311 15,600 Other income (1,081) (1,305) (2,614) (396) (455) Other expenses 19,267 10,574 10,852 5,643 9,360 Depreciation 10,250 11,277 11,710 14,258 15,194 Tax paid (7,014) (5,770) (2,761) (5,643) (9,360) Net cash from operations 41,247 21,513 18,029 26,173 30,339 Capital expenditure (11,933) (12,234) (9,152) (14,292) (14,355) Net cash after capex 29,314 9,279 8,877 11,882 15,984 Other investing activities (8,490) (6,237) (5,731) - - Cash from financial activities (21,297) (4,097) (4,374) (2,379) (7,307) Opening cash balance 5,394 4,921 3,866 2,638 12,140 Closing cash balance 4,921 3,866 2,638 12,140 20,817 Change in cash balance (473) (1,055) (1,228) 9,502 8,677 Exhibit 8: Key ratios Y/E March FY16 FY17 FY18 FY19E FY20E Profitability & return ratios EBITDA margin (%) 19.1 9.6 8.4 12.9 18.0 EBIT margin (%) 16.6 9.8 8.7 13.2 18.3 Net profit margin (%) 12.9 8.5 6.9 11.0 14.7 RoE (%) 16.7 9.5 7.8 12.8 17.8 RoCE (%) 18.8 9.9 8.5 12.8 19.7 Working capital & liquidity ratios Receivables (days) 96.8 102.9 101.1 100.4 96.3 Inventory (days) 149.4 158.1 160.0 161.4 170.7 Payables (days) 67.1 75.2 81.8 89.1 94.2 Current ratio (x) 1.9 1.2 1.6 1.5 1.6 Quick ratio (x) 1.5 0.8 1.2 1.2 1.3 Valuation ratios EV/sales (x) 2.2 2.7 2.7 2.4 2.0 EV/EBITDA (x) 9.5 14.9 15.8 10.8 7.5 P/E (x) 17.5 29.1 35.7 20.7 13.1 P/BV (x) 2.7 2.8 2.8 2.5 2.2 5 Dr. Reddy s Laboratories
Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Institutional Equities Rating track Date Rating Market price Target price (Rs) 10 June 2016 Buy 3,160 3,950 27July 2016 Buy 3,300 3,950 6 February 2017 Buy 3,142 3,950 15 May 2017 Buy 2,584 3,366 28 July 2017 Buy 2,620 3,020 1 November 2017 Buy 2,428 3,216 29 January 2018 Buy 2,508 3,077 23 May 2018 Buy 2,004 2,898 23 July 2018 Buy 2,059 2,898 27 July 2018 Buy 2,110 2,898 Rating track graph 3,800 3,300 2,800 2,300 1,800 Not Covered Covered 6 Dr. Reddy s Laboratories
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