MOSL: DR REDDY’S LABS (Neutral)-Revenue/EBITDA in-line; other income, lower tax boost earnings

Dr Reddy’s Labs: Revenue/EBITDA in-line; other income, lower tax boost earnings

(DRRD IN, Mkt Cap USD5.4b, CMP INR2404, TP INR2300, 4% Downside, Neutral)

• In-line op. performance: DRRD’s revenue grew ~7% YoY to INR37.9b (our estimate: INR38.3b), led by strong growth in emerging markets (EMs). Gross margin improved ~170bp YoY (-70bp QoQ), led by better margins in Pharma Services and Active Ingredients (PSAI) and Proprietary Products segments. EBITDA margin expanded at a lower rate of ~70bp YoY to 19.5%, largely due to increased SG&A expense (+140bp YoY). EBITDA increased ~12% YoY to INR7.4b (our estimate: INR7b). PAT grew at a much higher rate of 77% YoY (INR5b v/s est. of INR3.2b), supported by other income and a lower tax rate. For 1HFY19, sales, EBITDA and PAT stood at INR33.6b (+3% YoY), INR14.9b (+55% YoY) and INR9.6b (+179% YoY), respectively.
• Growth primarily driven by EMs: EM business (20% of sales) grew at ~36% YoY, led by scale-up in new markets and increased off-take in existing markets. Russia (+18% YoY), CIS/Romania (+56% YoY) and ROW (+65% YoY) were the key drivers of growth, partly offset by the muted show in North America (sales flat at INR14.3b) and Europe (sales down 21% YoY to INR2b). Price erosion in the base portfolio continued impacting both US and EU businesses. India business (INR6.9b) grew at 8% YoY, led by new launches and better traction in the base business.