Dr. Reddy’s Laboratories’ (DRRD) Q1FY11 results were below estimates, with operating profit of INR 2.6 bn vs. our estimate of INR 3.1 bn. While operating margins were flat Q-o-Q (ex-restructuring costs in Q4FY10) and fixed costs of INR 6.3 bn broadly in line with estimates, a lower-than-expected sales of INR 16.8 bn led to operating margins of 15.6% (below our estimate of 17.2%). Adjusted net profit of INR 2.3 bn (excluding INR 225 mn forex loss primarily from rouble depreciation) was 8% lower than our estimate of INR 2.5 bn. Thiswas largely led by weak topline at Rs16.8bn, down 7% YoY (5% below est) due to weak US, EU sales.
Business Growth is Flat – 1Q revenues disappointed due to lower than expected growth of 5% in US generics (base) including slow pick up in Omeprazole OTC market share, while PSAI (29% of total sales, down 8%) was marred by low visibility. Russia growth surprised on the upside partly due to channel restocking, subsequent to which we expect normalized ~15% growth. We forecast 12% revenue CAGR over FY10- 12E, with gradual pickup of lost market share in US generics.
The Management a) Guidance (FY13 & FY11) maintained but still no additional color on FY11 revenue expectation; b) Remains confident on US pipeline though timeline for key launches (fonda, Allegra D-24 & D-12) remains uncertain – Lotrel & Prograf market shares have been slow in scaling up; c) Germany remains a challenge but leaner cost structure & India sourcing to aid profitability.
Dr Reddy’s Labs EPS Estimates FY 11 FY 12
Goldman Sachs – 58 and 72
Citi – 59 and 76
BOFA Merrill – 50 and 70