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MOSL: DR REDDY’S LABS (Neutral)-On track for potential launches in US-regulatory overhang remains

Dr Reddy’s Labs: On track for potential launches in US; regulatory overhang remains

(DRRD IN, Mkt Cap USD6.5b, CMP INR2787, TP INR2540, 9% Downside, Neutral)

 

• Lower R&D and higher other income drive earnings: DRRD’s revenue grew ~1% YoY to INR38.5b (our estimate: INR38.7b), led by strong growth in the emerging markets. Gross margin shrank ~240bp YoY (-110bp QoQ) due to price erosion in key products in the US market. However, EBITDA margin expanded by ~100bp YoY to 21.2%, mainly due to lower R&D expense (-270bp as % of sales). EBITDA increased ~6% YoY to INR8.2b (our estimate: INR7.6b). PAT grew at a higher rate of ~14% YoY to INR4.9b (our estimate: INR3.5b) due to higher other income and a lower tax rate (16.4% v/s 43.8% YoY). The lower tax rate can be attributed to (i) a reduction in the US tax rate to 21% from 35% and (ii) deduction claim (which was previously disallowed). For 9MFY19, sales, EBITDA, PAT stood at INR51.3b (+4% YoY), INR23.1b (+33% YoY) and INR14.5b (+87% YoY), respectively.
• Revenue growth led by emerging market: Emerging markets (20% of sales; INR7.7b) grew ~31% YoY on the back of the entry into new geographies and increased base business. Particularly, Russia grew by 21% YoY, CIS/Romania by 40% YoY and ROW by 50% YoY. This growth was offset by de-growth in North America (~39% of sales; INR14.3b) and muted growth of 1% YoY in Europe sales (~5% of sales; INR2b). Price erosion in the base portfolio continues impacting the US business. India business (18% of sales; INR6.9b) grew 10% YoY, led by new launches and increased traction in the base business.