BSE Sensex S&P CNX 25,842 7,843 19 November 2015 Update Sector: Healthcare Dr. Reddy s Lab CMP: INR3,287 TP: INR4,000 (+22%) Buy Stock Info Bloomberg DRRD IN Equity Shares (m) 170.4 M.Cap. (INR b)/(usd b) 560.1/8.5 52-Week Range (INR) 4383/3010 1, 6, 12 Rel. Per (%) -19/-2/1 AvgVal,(INR m) 1,391 Free float (%) 74.5 Financial Snapshot (INR Billion) Y/E Mar 2015 2016E 2017E Sales 148.2 162.4 183.1 EBITDA 33.5 41.9 45.4 Net Profit 22.2 27.3 30.7 Adj. EPS (INR) 130.2 160.0 180.0 EPS Gr. (%) 4.5 22.9 12.5 BV/Sh. (INR) 653.2 789.8 941.8 RoE (%) 19.9 20.3 19.1 RoCE (%) 16.9 19.7 18.6 P/E (x) 25.3 20.5 18.3 P/BV (x) 5.0 4.2 3.5 Shareholding pattern (%) As on Sep-15 Jun-15 Sep-14 Promoter 25.5 25.5 25.5 DII 5.2 5.9 5.4 FII 55.0 54.8 55.5 Others 14.4 13.8 13.7 Note: FII includes depository receipts Stock Performance (1-year) Financial integrity intact; FDA resolution the key US-based law firm Lundin Law PC has initiated investigation into alleged violation of federal securities laws by Dr. Reddy s Lab (DRRD). The investigation will focus on allegations that Dr. Reddy s made false and misleading statements relating to company s financial performance. No class has been certified in the above action. We do not expect any financial impact due to this. The company refutes allegations The company has refuted all the allegations and assured its investors that it has always adhered to all disclosure requirements both of the SECs and Indian stock exchanges including accounting practices as per the IFRS and IAS. Possible financial impact highly unlikely We believe this is just a legal investigation and no class action suit or legal filing has been initiated by the plaintiff. The company has also not received any notification from judiciary/lundin. We see very low probability of this investigation culminating into serious legal battle that could impact Dr. Reddy s Lab financially. Regulatory overhang to keep the stock range-bound in near term Though the legal issue is not a major concern for DRRD, recently issued US FDA warning letter on three plants (2 API plants and 1 formulations plant) remains a key pain point for the company (please refer to our recent note on this). Even though DRRD is expected to maintain the supply of existing products to US market (accounting for ~10-12% of existing sales), future approvals from these plants would be withheld till the plants get clearance from USFDA. DRRD plans to arrest the impact partially by initiating site transfers from its API plants (though this may lead to delay of 6-9 months at least). Most of the negatives already in the price We did a scenario analysis as below: Scenario 1: This is our base where we assume no import alert on these plants and resolution to start from 2HFY17. In this scenario, we value the company at 20x 1HFY18E EPS at ~INR4,000. Scenario 2: In this scenario we assume delay in resolution of warning letters and expect resolution to start from FY18E beginning (but no import alert). Impact due to this delay would be ~7% on FY17E EPS and 7% on target price. Kumar Saurabh (Kumar.Saurabh@MotilalOswal.com); +91 22 3982 5584 Amey Chalke (Amey.Chalke@MotilalOswal.com); +91 22 3982 5423 Investors are advised to refer through important disclosures made at the last page of the Research Report, Motilal Oswal research is available on www.motilaloswal.com/institutional-equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Scenario 3: In this scenario we assume an import alert on these plants, resulting in loss of sales of ~USD250m. Impact on FY17E EPS due to this would be 17% and the potential fair value of the stock would be ~INR2,950 (@18x Sep 17E). Scenario analysis (FY17 Estimates) (INR m) Scenario 1 Scenario 2 Scenario 3 US Sales (USD m) 1,296 1,178 1,046 Total Sales 183,112 175,013 165,982 EBITDA 45,412 42,791 39,421 EBITDA margin (%) 24.8 24.5 23.8 PAT 30,680 28,462 25,563 EPS (INR) 180.0 167.0 150.0 Near-term pain; long-term fundamentals still intact Though DRRD s near-term performance will be impacted due to regulatory issues, conscious effort to focus on complex fillings in the US will help the company show recovery in growth in medium term. We believe enhanced focus on complex OSDs coupled with presence in injectables, topicals and soft gels will help the company recover from the current weakness. The company expects the non-osd portfolio to account for ~50% of total US sales v/s almost zero contribution three years back. Derma- and Neuro-based 505 (b) (2) products (in areas of Psoriasis, Rosacea and Migraine) can generate revenue of ~USD 5m0-75m/ product in the medium term. 19 November 2015 2
Story in charts Exhibit 1: Formulation led sales growth (INR b) Formulations (INR b) API (INR b) 31 28 25 25 24 31 24 20 20 49 53 70 83 105 121 133 150 175 Exhibit 3: US Sales to grow at 13% CAGR over FY15-18E Core US sales (INR b) YoY Growth (%) Exhibit 2: India formulation business DF Revenue (INR b) YoY Growth (%) 19.8 15.1 18.0 16.5 16.0 13.7 12.6 10.6 7.9 10 12 13 15 16 18 21 24 28 Exhibit 4: PSAI business to see moderate growth ahead PSAI Sales (INR b) YoY Growth (%) 14 15 77 56 32 27 35 55 65 76 84 99 18 11 18 11 7 18 21 29 9 11 11 24 6-4 -1-22 20 20 24 31 25 25 28 31 FY10 FY11 FY12 FY13 FY14E FY15 FY16E FY17E FY18E Exhibit 5: EBITDA margins to bounce back in FY18E Gross Margin (%) EBITDA Margin (%) Exhibit 6: EBITDA growth to improve in FY18E EBITDA (INR b) Growth (%) 55.5 57.9 58.9 55.4 58.2 57.6 61.3 60.0 61.3 52 20.2 21.0 24.5 21.3 24.0 22.6 25.8 24.8 26.1 28 10 4 6 8-6 14 16 24 25 32 33 42 45 56 25 22 19 November 2015 3
Story in charts Exhibit 7: Earnings growth to recover in FY18E Core EPS (INR/ share) 0 0 0 Exhibit 8: Rich ANDA pipeline ANDA filed ANDA pending 209 220 227 187 193 158 170 138 66 73 81 125 130 160 180 220 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 68 73 75 80 65 62 73 76 FY09 FY10 FY11 FY12 FY13 FY14 FY15 YTD Exhibit 9: R&D expense higher due to NCE research R&D expense (INR b) % of sales Exhibit 10: OTC share growing in Russia sales Rx (USD m) OTC (USD m) OTC ( % of sales ) 5.4 6.8 6.1 6.7 9.4 11.8 11.5 11.5 11.5 27 18 51 26 67 29 88 105 34 39 36 88 4 5 6 8 12 17 19 21 24 Exhibit 11: Return ratios lower with lower margins 125 145 165 170 165 157 FY10 FY11 FY12 FY13 FY14 FY15 Exhibit 12: Fixed asset turnover (x) RoE (%) RoCE (%) Gross block (INR b) Fixed Asset turnover 24.1 21.6 3.1 16.8 19.7 18.7 17.2 23.3 18.7 19.9 20.3 19.1 19.5 19.7 18.6 20.1 16.9 2.4 1.9 2.2 2.2 2.1 2.1 1.9 1.9 2.0 FY10 FY11 2.5 FY12 FY13 FY14 FY15 FY16E FY17E FY18E 30 38 44 53 63 72 85 96 107 19 November 2015 4
Financials and valuations Key assumptions Segment growth (%) 2011 2012 2013 2014 2015 2016E 2017E 2018E USA 13.0 67.9 18.7 46.1 17.0 17.7 10.6 17.5 India 15.1 10.6 12.6 7.9 13.7 16.5 16.0 18.0 Europe (12.6) (2.0) (6.6) (9.7) 3.2 21.5 15.6 15.0 Russia 19.1 22.1 27.5 17.2 (10.6) (20.8) 15.6 15.0 Others 17.3 16.0 41.7 33.0 77.4 0.5 15.6 15.0 PSAI (3.7) 21.2 28.9 (21.9) 6.2 (1.3) 10.5 10.9 Innovative products 34.6 57.3 11.9 1.1 (28.2) 100.0 25.0 25.0 Total Sales 6.3 29.5 20.2 13.7 12.1 9.6 12.8 16.2 Expenses Cost of sales (%) 42.1 41.1 44.6 41.8 42.4 38.7 40.0 38.7 EBITDA Margin (%) 21.0 24.5 21.3 24.0 22.6 25.8 24.8 26.1 Income Statement (INR Million) Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 74,693 96,738 116,266 132,171 148,189 162,376 183,112 212,807 Change (%) 6.3 29.5 20.2 13.7 12.1 9.6 12.8 16.2 Other Income 1,118 1,669 3,634 2,411 2,871 1,756 2,860 3,020 EBITDA 15,660 23,742 24,763 31,699 33,472 41,893 45,412 55,543 Change (%) 10.3 51.6 4.3 28.0 5.6 25.2 8.4 22.3 Margin (%) 21.0 24.5 21.3 24.0 22.6 25.8 24.8 26.1 Depreciation & Amort. 4,147 6,254 6,237 7,085 8,103 9,418 9,705 11,492 EBIT 11,513 17,488 18,526 24,614 25,369 32,475 35,707 44,051 Net Interest Exp 189 118 79 77 362 217 202 Forex (Gains)/Losses 0 0 365 329 0-337 0 0 PBT & EO Expense 12,442 19,157 21,677 26,616 28,163 34,207 38,350 46,869 Change (%) 506.0 54.0 13.2 22.8 5.8 21.5 12.1 22.2 PBT after EO Expense 12,442 19,157 21,677 26,616 28,163 34,207 38,350 46,869 Tax 1,403 4,204 4,900 5,093 5,984 6,944 7,670 9,374 Tax Rate (%) 11.3 21.9 22.6 19.1 21.2 20.3 20.0 20.0 Adjusted Net Profit 11,099 12,428 13,682 21,188 22,179 27,263 30,680 37,495 Change (%) 939.2 12.0 10.1 54.9 4.7 22.9 12.5 22.2 Balance Sheet (INR Million) Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E Equity Share Capital 846 848 849 851 852 852 852 852 Reserves 45,144 56,596 72,256 89,950 110,450 133,733 159,628 191,739 Net Worth 45,990 57,444 73,105 90,801 111,302 134,585 160,480 192,591 Loans 23,503 32,210 36,678 44,742 43,126 36,164 36,164 31,164 Deferred Liabilities/Tax 87-833 -1,669-3,310-4,013-4,013-4,013-4,013 Capital Employed 69,580 88,821 108,114 132,233 150,414 166,736 192,631 219,742 Gross Block 38,359 44,064 52,958 63,444 72,011 85,071 96,130 107,190 Less: Accum. Deprn. 14,714 18,086 21,213 25,695 30,040 35,543 41,602 48,161 Net Fixed Assets 29,642 33,246 37,814 44,424 48,090 55,646 60,647 65,148 Investments 622 11,558 18,131 26,384 38,871 30,262 30,262 30,262 Goodwill/Intangibles 15,246 13,529 14,021 14,697 16,430 16,227 16,227 16,228 Curr. Assets 47,560 59,179 68,751 78,664 85,580 98,148 124,172 151,457 Inventory 16,059 19,352 21,600 23,992 25,529 29,220 34,059 38,296 Account Receivables 17,615 25,339 31,972 33,037 40,755 39,990 45,097 52,410 Cash and Bank Balance 5,729 7,379 5,136 8,451 5,394 12,701 26,705 37,343 Others 8,157 7,109 10,043 13,184 13,901 16,238 18,311 23,409 Curr. Liability & Prov. 23,490 28,691 30,603 31,936 38,556 33,548 38,677 43,353 Account Payables 8,480 9,502 11,862 10,503 10,660 12,007 13,995 15,736 Other Current Liabilities 15,010 19,189 18,741 21,433 27,896 21,541 24,682 27,617 Net Current Assets 24,070 30,488 38,148 46,728 47,024 64,600 85,495 108,104 Appl. of Funds 69,580 88,821 108,114 132,233 150,415 166,736 192,632 219,743 E: MOSL Estimates 19 November 2015 5
Financials and valuations Ratios 0.56302 0.5375 Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E Basic (INR) EPS 65.6 73.3 80.6 124.6 130.2 160.0 180.0 220.0 Cash EPS 90.1 110.2 117.3 166.2 177.7 215.3 237.0 287.5 BV/Share 271.8 338.7 430.5 533.8 653.2 789.8 941.8 1,130.2 DPS 11.2 13.7 13.8 18.0 20.0 24.0 27.0 33.0 Payout (%) 20.2 18.2 16.3 16.6 17.9 17.6 17.6 17.6 Valuation (x) P/E 26.4 25.3 20.5 18.3 14.9 PEG (x) 0.5 5.4 0.9 1.5 0.7 P/BV 6.2 5.0 4.2 3.5 2.9 EV/Sales 4.3 3.8 3.4 2.9 2.5 EV/EBITDA 18.0 16.7 13.2 11.9 9.4 Dividend Yield (%) 0.5 0.6 0.7 0.8 1.0 Return Ratios (%) RoE 24.1 21.6 18.7 23.3 19.9 20.3 19.1 19.5 RoCE 16.8 19.7 17.2 18.7 16.9 19.7 18.6 20.1 Working Capital Ratios Fixed Asset Turnover (x) 2.2 2.3 2.4 2.3 2.2 2.1 2.0 2.1 Debtor (Days) 86 96 100 91 100 90 90 90 Inventory (Days) 78 73 68 66 63 66 68 66 Working Capital (Days) 90 87 104 106 103 117 117 121 Leverage Ratio Current Ratio (x) 2.0 2.1 2.2 2.5 2.2 2.9 3.2 3.5 Debt/Equity (x) 0.5 0.6 0.5 0.5 0.4 0.3 0.2 0.2 Cash Flow Statement (INR Million) Y/E March 2011 2012 2013 2014 2015 2016E 2017E 2018E Op. Profit/(Loss) before Tax 15,660 23,742 24,763 31,699 33,472 41,893 45,412 55,543 Interest/Dividends Recd. 929 1,669 3,151 2,003 2,793 1,731 2,643 2,818 Direct Taxes Paid -1,403-4,204-4,900-5,093-5,984-6,944-7,670-9,374 (Inc)/Dec in WC -6,501-4,768-9,903-5,265-3,353-10,270-6,890-11,972 CF from Operations 8,685 16,439 13,111 23,344 26,929 26,410 33,495 37,015 (inc)/dec in FA -12,603-8,141-11,297-14,371-13,502-16,771-14,706-15,993 Free Cash Flow -3,918 8,298 1,814 8,973 13,427 9,639 18,789 21,022 (Pur)/Sale of Investments 3,531-10,936-6,573-8,253-12,487 8,609 0 0 CF from Investments -9,072-19,077-17,870-22,624-25,989-8,162-14,706-15,993 Change in net worth -5,740-780 1,620-247 2,302 805 600 1,196 (Inc)/Dec in Debt 8,847 8,707 4,468 8,064-1,617-6,962 0-5,000 Other Items -1,351-920 -836-1,640-704 0 0 0 Dividend Paid -2,224-2,719-2,736-3,581-3,979-4,785-5,384-6,580 CF from Fin. Activity -468 4,288 2,516 2,596-3,998-10,941-4,785-10,384 Inc/Dec of Cash -855 1,650-2,243 3,315-3,058 7,307 14,004 10,637 Add: Beginning Balance 6,584 5,729 7,379 5,136 8,451 5,394 12,701 26,705 Closing Balance 5,729 7,379 5,136 8,451 5,393 12,702 26,705 37,343 19 November 2015 6
LUPIN HEALTHCARE GALLERY OTHER COMPANIES SECTOR UPDATES
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