RESULTS REVIEW 3QFY16

10 FEB 2016

Dr Reddys
NEUTRAL
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
FIs & Local MFs

25.51
5.18

FIIs

36.73

Public & Others

32.58

Source : BSE

Vivek Agrawal
vivek.agrawal@hdfcsec.com
+91-22-6171-7331

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)
Net Sales
EBIT
APAT
Diluted adj. EPS (Rs)
P/E (x)
EV / EBITDA (x)
RoE (%)

3QFY16
39,679
10,382
6,141
36.2

3QFY15
38,431
9,461
5,502
32.4

YoY (%)
3.2
9.7
11.6
11.6

2QFY16
39,890
11,404
7,219
42.5

QoQ (%)
(0.5)
(9.0)
(14.9)
(14.9)

FY15
148,147
34,101
21,634
127.4
23.2
14.6
24.4

FY16E
157,698
42,186
26,324
155.0
19.0
11.8
24.0

FY17E
166,112
40,985
24,995
147.2
20.1
12.1
19.1

FY18E
184,171
47,856
30,567
180.0
16.4
10.4
19.8

Source: Company, HDFC sec Inst Research # Consolidated

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

DR REDDYS: RESULTS REVIEW 3QFY16

Quarterly Financials Snapshot (Consolidated)

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

Particulars
Net Sales
Material Expenses
SG&A Expenses
R&D Expenses
EBITDA
Depreciation
EBIT
Other Income
Interest Cost
FX Gains / (Loss)
PBT
Tax
RPAT
EO Items (Adj For Tax)
Loss (income) of Affiliates
APAT

3QFY16
39,679
16,089
9,113
4,095
10,382
2,577
7,805
122
(236)
(298)
7,865
1,788
5,792
349
(64)
6,141

3QFY15
38,431
16,079
8,575
4,316
9,461
2,041
7,420
341
(235)
7,996
2,541
5,746
(244)
(47)
5,502

YoY (%)
3
0
6
(5)
10

QoQ (%)
(0.5)
4
6
(8)
(9)

12

2QFY16
39,890
15,421
8,592
4,473
11,404
2,466
8,938
320
216
9,041
1,879
7,219
(56)
7,219

3QFY16
40.5
23.0
10.3
26.2
22.7
15.5

3QFY15
41.8
22.3
11.2
24.6
31.8
14.3

YoY (bps)
(129)
65
(91)
155
(905)
116

2QFY16
38.7
21.5
11.2
28.6
20.8
18.1

QoQ (bps)
189
143
(89)
(242)
195
(262)

(2)
0.81

(13)

(13)
(20)

(15)

Source: Company, HDFC sec Inst Research

Margin Analysis
YoY decline in R&D expenses
was because of the cash
received from Merck Serono
as development costs for a
biosimilar programme

Material Expenses % Net Sales

SG&A Expenses % Net Sales
R&D Expenses % Net Sales
EBITDA Margin (%)
Tax Rate (%)
APAT Margin (%)
Source: Company, HDFC sec Inst Research

Page | 2

DR REDDYS: RESULTS REVIEW 3QFY16

YoY (%)

0.0
-10.0
-20.0

Source: Company, HDFC sec Inst Research

Source: Company, HDFC sec Inst Research

EBITDA Margin Trajectory

APAT Growth Trajectory

8,000

20.0

6,000

15.0

4,000

5,000

3QFY16

2QFY16

1QFY16

0.0
4QFY15

0
3QFY15

1,000

2QFY15

10.0

3,000

5.0
1QFY15

15.0

4,000
2,000

4QFY14

20.0

6,000

2,000
3QFY14

25.0

7,000

10.0

Source: Company, HDFC sec Inst Research

5.0
0.0
3QFY16

25.0

Rs mn

4QFY15

30.0

10,000

8,000

3QFY15

35.0

2QFY15

(%)

APAT Margin (%)

1QFY15

Rs mn

4QFY14

12,000

APAT

EBITDA Margin (%)

3QFY14

EBITDA

3QFY16

-30.0

2QFY16

3QFY16

2QFY16

1QFY16

4QFY15

3QFY15

2QFY15

1QFY15

4QFY14

0.0
3QFY14

0
2QFY14

50

2QFY14

Currency devaluation
continued to impact EM sales

10.0

10.0

1QFY16

20.0

100

20.0

1QFY16

30.0
150

30.0

4QFY15

200

50.0
40.0

3QFY15

40.0

2QFY15

250

YoY (%)

Rs mn

1QFY15

50.0

10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

4QFY14

300

60.0

3QFY14

2QFY14

350

Row+Russia+CIS

2QFY14

Despite the lack of new

launches, the company
reported strong US sales as
the companys injectables and
niche portfolio remained
sticky

Emerging Markets Growth Trajectory

US Form (USD mn)

2QFY16

US Formulations Growth Trajectory

Source: Company, HDFC sec Inst Research

Page | 3

DR REDDYS: RESULTS REVIEW 3QFY16

Ex-UCB, domestic sales grew

19% YoY, driven by strong
execution

Russia grew by 5% in local

currency

Segmental Quarterly Performance

(Rs mn)
Segmental Revenues
Domestic formulations
US Generics
Russia +CIS
ROW
Europe
PSAI+Others
Total

3QFY16

3QFY15

YoY (%)

2QFY16

QoQ (%)

FY15

5,805
19,417
4,000
2,400
1,937
6,121
39,680

4,328
16,819
4,766
3,832
1,947
6,738
38,430

34.1
15.4
(16.1)
(37.4)
(0.5)
(9.2)
3.3

5,464
18,563
3,800
2,700
2,174
7,120
39,821

6.2
4.6
5.3
(11.1)
(10.9)
(14.0)
(0.4)

17,870
64,734
17,616
13,057
7,240
27,630
148,147

Source: HDFC sec Inst Research

PSAI sales declined because

of supply disruption caused
by the remediation
measures. It is back on track
now

Assumptions
FY15
17,870
13.7
64,734
17.1
17,616
(11.1)
13,057
77.4
7,240
11.8
27,630
4.2

Domestic formulations
Growth (%)
US Formulations
Growth (%)
Russia/CIS
Growth (%)
ROW (inc. Venezuela)
Growth (%)
Europe
Growth (%)
API and Others
Growth (%)

FY16E
21,856
22.3
75,310
16.3
14,204
(19.4)
9,776
(25.1)
8,598
18.8
27,838
0.8

FY17E
25,781
18.0
78,499
4.2
14,361
1.1
9,240
(5.5)
9,458
10.0
29,442
5.8

FY18E
29,905
16.0
87,688
11.7
15,997
11.4
10,164
10.0
10,404
10.0
31,148
5.8

Source: HDFC sec Inst Research

Peer Valuation
Relative
Valuation
Cipla
Dr Reddy's
Lupin
Cadila
Sun Pharma
Alembic
Average

MCap
(Rs bn)
447
505
858
336
2,055
111

CMP
(Rs)
556
2,960
1,904
328
854
590

Reco
BUY
NEU
NEU
NEU
BUY
NEU

TP
(Rs)
760
3,600
1,810
348
900
660

FY16E
24.2
155.0
47.7
13.8
18.4
40.2
49.9

EPS
FY17E
30.5
147.2
71.6
14.2
26.9
23.7
52.3

FY18E
38.6
180.0
82.3
17.4
36.6
29.1
64.0

FY16E
22.9
19.1
40.0
23.8
46.5
14.7
27.8

P/E (x)
FY17E
18.2
20.1
26.6
23.0
31.8
24.9
24.1

FY18E
14.4
16.4
23.1
18.9
23.3
20.3
19.4

EV/EBITDA (x)
FY16E FY17E FY18E
17.1
13.2
10.7
11.8
12.1
10.4
24.0
15.8
13.9
15.1
15.4
12.9
22.1
12.3
12.3
11.2
18.3
15.2
16.9
14.5
12.6

FY16E
16.7
24.0
22.1
29.1
16.9
62.2
28.5

RoE (%)
FY17E
18.0
19.1
27.1
24.4
29.1
25.8
23.9

FY18E
19.2
19.8
25.0
24.7
23.0
25.8
22.9

Source: HDFC sec Inst Research

Page | 4

DR REDDYS: RESULTS REVIEW 3QFY16

Income Statement (Consolidated)

Year ending March (Rs mn)
FY14
Net Revenues
133,183
Growth (%)
13.3
Material Expenses
56,369
SG&A Exps (including staff)
32,186
R&D Expenses
12,403
EBITDA
32,226
EBITDA Margin (%)
24.2
EBITDA Growth (%)
23.3
Depreciation
7,095
EBIT
25,131
Other Income (Incl EO Items)
2,184
Interest
1,267
PBT
26,048
Tax (Incl Deferred)
5,093
RPAT
20,955
EO (Loss) / Profit (Net Of Tax)
339
APAT
20,616
APAT Growth (%)
26.8
Adjusted EPS (Rs)
121.4
Source: Company, HDFC sec Inst Research

Balance Sheet (Consolidated)

FY15
148,147
11.2
62,744
33,854
17,449
34,101
23.0
5.8
8,102
25,999
3,247
1,082
28,163
5,984
22,179
545
21,634
4.9
127.4

FY16E
157,698
6.4
62,571
35,328
17,613
42,186
26.8
23.7
9,609
32,577
2,016
1,085
33,508
7,184
26,324
0
26,324
21.7
155.0

FY17E
FY18E
166,112 184,171
5.3
10.9
67,619 72,890
38,405 42,245
19,103 21,180
40,985 47,856
24.7
26.0
(2.8)
16.8
10,237 10,747
30,749 37,109
2,382
3,164
1,085
1,085
32,045 39,188
7,050
8,621
24,995 30,567
0
0
24,995 30,567
(5.0)
22.3
147.2
180.0

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 &
28,366 37,683 37,683 37,683 37,683
Provisions
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

Page | 5

DR REDDYS: RESULTS REVIEW 3QFY16

Cash Flow
Year ending March (Rs mn)
FY14
FY15
FY16E
Reported PBT
26,545
28,163
33,508
Non-operating & EO items
(1,942) (2,943) (1,782)
Interest expenses
1,267
1,082
1,085
Depreciation
7,095
6,259
6,792
Working Capital Change
(6,119)
(376)
1,872
Tax Paid
(5,097) (6,351) (7,184)
OPERATING CASH FLOW ( a )
21,750
25,835
34,290
Capex
(8,547) (7,523) (14,878)
Free cash flow (FCF)
13,203
18,312
19,412
Investments
(9,083) (5,321)
0
Non-operating Income
1,671
2,507
1,782
INVESTING CASH FLOW ( b )
(15,959) (10,337) (13,096)
Debt Issuance/(Repaid)
9,717 (5,190)
0
Interest Expenses
(1,267) (1,082) (1,085)
FCFE
21,653
12,040
18,327
Share Capital Issuance
2
2
0
Dividend
(2,980) (3,587) (4,371)
FINANCING CASH FLOW ( c )
5,472 (9,858) (5,456)
NET CASH FLOW (a+b+c)
11,262
5,640
15,739
EO Items, Others
271
436
0
Closing Cash & Equivalents
33,670
39,746
55,485
Source: Company, HDFC sec Inst Research

Key Ratios
FY17E
32,045
(2,215)
1,085
7,837
(2,997)
(7,050)
28,706
(6,559)
22,147
0
2,215
(4,345)
0
(1,085)
21,062
0
(4,109)
(5,194)
19,167
0
74,652

FY18E
39,188
(2,996)
1,085
8,347
(6,432)
(8,621)
30,570
(8,039)
22,531
0
2,996
(5,043)
0
(1,085)
21,446
0
(4,520)
(5,605)
19,922
0
94,574

FY14
PROFITABILITY (%)
GPM
57.7
EBITDA Margin
24.2
APAT Margin
15.5
RoE
29.0
RoIC (or Core RoCE)
25.2
RoCE
19.8
EFFICIENCY
Tax Rate (%)
19.6
Fixed Asset Turnover (x)
1.2
Inventory (days)
59.2
Debtors (days)
89.1
Other Current Assets (days)
3.0
Payables (days)
25.5
Other Current Liab & Provns (days)
77.2
Cash Conversion Cycle (days)
48.6
Debt/EBITDA (x)
1.3
Net D/E (x)
0.1
Interest Coverage (x)
19.8
PER SHARE DATA (Rs)
EPS
121.4
CEPS
163.2
Dividend
18.0
Book Value
463.2
VALUATION
P/E (x)
24.3
P/BV (x)
6.4
EV/EBITDA (x)
15.4
EV/Revenues (x)
3.7
OCF/EV (%)
4.4
FCF/EV (%)
2.7
FCFE/Mkt Cap (%)
4.3
Dividend Yield (%)
0.6
Source: Company, HDFC sec Inst Research

FY15

FY16E

FY17E

FY18E

57.6
23.0
14.6
24.4
22.4
17.3

60.3
26.8
16.7
24.0
26.5
18.2

59.3
24.7
15.0
19.1
23.7
15.2

60.4
26.0
16.6
19.8
27.5
16.2

21.2
1.2
51.4
91.5
3.4
21.7
81.4
43.2
1.1
(0.0)
24.0

21.4
1.1
55.0
95.0
3.6
20.0
87.2
46.4
0.9
(0.2)
30.0

22.0
1.1
55.0
95.0
3.4
20.0
82.8
50.6
0.9
(0.3)
28.3

22.0
1.2
55.0
95.0
3.1
20.0
74.7
58.4
0.8
(0.3)
34.2

127.4
175.1
20.0
580.3

155.0
211.6
22.0
709.6

147.2
207.5
24.2
832.6

180.0
243.3
26.6
986.0

23.2
5.1
14.6
3.4
5.2
3.7
2.4
0.7

19.0
4.2
11.8
3.2
6.9
3.9
3.7
0.7

20.1
3.5
12.1
3.0
5.8
4.5
4.2
0.8

16.4
3.0
10.4
2.7
6.1
4.5
4.3
0.9
Page | 6

DR REDDYS: RESULTS REVIEW 3QFY16

RECOMMENDATION HISTORY
Dr Reddy

4,500

Date
18-Jan-16
10-Feb-16

TP

CMP
2,936
2,960

Reco
NEU
NEU

Target
3,600
3,600

4,000
3,500
3,000

Feb-16

Jan-16

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

Jan-15

2,500

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

Page | 7

DR REDDYS: RESULTS REVIEW 3QFY16

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.
Any holding in stock No
Disclaimer:
This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or
arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of
warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for
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Report. HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475

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