MOSL: DR REDDY’ S LABS (Neutral)-Weak quarter-margin disappoint

Dr Reddy’ s Labs: Weak quarter; margin disappoint

(DRRD IN, Mkt Cap USD5.1b, CMP INR2014, TP INR2000, 1% Downside, Neutral)

• Weak operating performance: Net sales remained flat (-0.5% YoY) to ~INR35.3b (vs est. of INR37.5). Muted performance was mainly due to decline in US business by ~6% YoY, Europe by ~17% YoY and emerging market by ~19% YoY, partially off-set by growth in domestic market by ~6% YoY and PSAI by ~16% YoY. Gross margin for the company came at 53.5% (+230bp YoY - 300bp QoQ). Sequential decline in gross margin is attributed to lower off-take in Russia market, lower Proprietary business income and price erosion in key products. EBITDA margins stood at 15.6% in 4QFY18 v/s 16.4% in 4QFY17 & 20% in 3QFY18. Sequential decline in margin is primarily due to decline in gross margin and increase in SG&A expense by ~170bp (as % of sales). EBITDA declined by ~6% YoY to INR535b (v/s est. of INR7.6b). PAT for the quarter stood at INR3b (v/s est. of INR3.7b). For FY18 sales, EBITDA and PAT stood at INR142 (+~1%), INR22.9b (-5%) and INR10.7 (-11%) respectively.
• US and Russia market dragged sequential growth: US business declined ~6% YoY and 10% QoQ to INR14.4b (~USD220m). Sequential decline is primarily attributed to higher sales of Selvelmar. India business grew ~8% YoY. Normalizing for GST transition related adjustment; domestic growth was ~16% YoY. Revenue from Emerging markets declined by 19 primarily due to decline in Russia market. ROW markets increased by ~25% YoY.