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MOSL: DR REDDY’ S LABS (Neutral)-Weak quarter-US FDA resolution is key

Dr Reddy’ s Labs: Weak quarter; US FDA resolution is key

(DRRD IN, Mkt Cap USD6.7b, CMP INR2585, TP INR2600, 0.5% Upside, Neutral)

• Operating performance in-line: Net sales fell 5% YoY to ~INR35.5b (est. of ~INR37.5). EBITDA margin shrunk ~550bp YoY (-650bp QoQ) to 16.4%, primarily led by lower gross margin of 51% due to pricing pressure in the US and certain one-off charges. R&D expense for 4Q stood at 12.9% v/s 13.9% for the full year. 4QFY17 PAT was INR3.1b v/s our estimate of INR4.6b.
  
• US sales muted in 4Q; expect pick-up in 1Q: US sales were USD228m in 4Q (v/s ~USD246m in 3Q). Limited meaningful launches in FY17, coupled with pricing pressure in key products, led to muted growth in the US business. We expect revenue pick-up from 1Q as DDRD has launched Vitorin (could be >USD125m product annually). DDRD expects 10-15 ANDA launches in FY18.
  
• India delivered single-digit growth; EM performance impressive: India business grew at a muted pace of ~8% YoY due to impact from price control and demonetization. EM sales grew ~25% YoY in INR terms. Russia (>50% of EM) grew ~26% YoY in CC (tender business contributed USD15-20m in FY17).