15 February 2013
3QFY13 Results Update |
Sector: Healthcare
Dr Reddy's Laboratories
BSE Sensex
S&P CNX
19,497
5,897
Bloomberg
DRRD IN
Equity Shares (m)
169.2
M.Cap. (INR b)/(USD b) 319.8/5.9
52-Week Range (INR) 1,969/1,598
1,6,12 Rel. Perf. (%)
2/4/8
CMP: INR1,890
TP: INR2,270
Buy
Dr Reddy's Labs' 3QFY13 performance was below estimates. Sales (including
one-offs) grew 3.5% to INR28.65b, in line with our estimate. Excluding one-
offs, sales were up 23% to INR26.97b (v/s est of INR26.82b).
Reported EBITDA was down 35% to INR5.67b (v/s est INR6.47b), while core
EBITDA grew mere 6% to INR4.9b (v/s est INR5.63b). Core EBITDA margin was
down 300bp YoY to 18.2% (v/s est 21%) impacted by (1) adverse sales mix in
US generics and PSAI, (2) promotional expenses on OTC launches in Russia
and (3) higher R&D expenses. Management indicated it is witnessing a ramp-
up in key products in the US generics and the ensuing benefit will reflect in
4QFY13. We believe this will lead to an improvement in EBITDA margin.
Reported PAT declined 29% to INR3.63b (v/s est INR3.9b), while core PAT
(excl one-offs) was up 29% to INR3.1b (v/s est of INR3.42b). Core PAT was
below est due to subdued operational performance and INR200m forex loss.
FY13 top line guidance - Management indicated that it may miss the top line
guidance of USD2.5-2.7b for FY13 due to slower ramp-up in key products in
the US and delay in approvals for some niche opportunities. However, they
are confident of obtaining these approvals in FY14 instead, if not in FY13,
thus improving the outlook for next year. We view this purely as a timing
issue and believe that the fundamentals are in place to drive growth in future.
Financials & Valuation (INR b)
Y/E March
Sales
EBITDA
Net Profit
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div. Yield (%)
2013E 2014E 2015E
108.4
22.4
14.1
83.2
16.6
400.6
20.8
16.6
20.0
22.7
4.7
14.7
0.8
115.8
23.3
16.6
97.8
17.5
462.6
21.1
15.8
20.0
19.3
4.1
13.9
0.9
131.6
26.3
19.2
113.3
15.8
534.7
21.2
17.4
20.0
16.7
3.5
12.0
1.0
Post the lower-than-expected 3QFY13 performance, we lower FY13E/14E/15E EPS
by 7%/6%/6% to reflect (1) slowdown in EU generics and PSAI segment, (2) lower
gross margins, with increased price erosion of existing portfolio in US generics
and (3) increased cost pressure from higher R&D and other expenses. Our core
estimates exclude upsides from patent challenges/low competition opportunities
in the US (we estimate one-time PAT contribution of INR3.55b from such
opportunities for FY13). DRRD's stock trades at 19.3x FY14E and 16.7x FY15E core
earnings.
Buy
with a target price of INR2,270, 20% upside.
Hardick Bora
(Hardick.Bora@MotilalOswal.com)
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Dr. Reddy's Laboratories
3QFY13 revenues were in line driven by International branded formulations,
Core US sales
Sales (including one-offs) were up 3.5% to INR28.65b, in line with our est. Excluding
one-offs, sales were up 23% to INR26.97b v/s our est. of INR26.82b.
Core revenues were in line with estimates as lower than expected sales from EU
generics at INR1.93b (v/s est. INR2.41b) and PSAI segment at INR7.13b (v/s est.
INR7.32b) were compensated by strong growth in international branded formulations
market at INRINR9.65b (v/s est. INR9.17) and core US generics at INR9.24b (v/s est.
INR8.91b).
We estimate one-off sales in US at INR1.68b, which were lower than our estimate of
INR1.81b.
Sales mix & EBITDA trend (INR m)
PSAI
India
International
Branded Formulations
India
International
Generics
North America
Europe
Others
Total Revenues
3QFY13
7,127
1,268
5,859
9,654
3,718
5,936
11,174
9,243
1,931
696
28,651
3QFY12
5,563
862
4,701
7,747
3,333
4,414
13,540
11,114
2,426
842
27,692
% Change
28.1
47.1
24.6
24.6
11.6
34.5
-17.5
-16.8
-20.4
-17.3
3.5
2QFY13
% Change
7,876
-9.5
1,148
10.5
6,728
-12.9
9,056
6.6
3,879
-4.2
5,177
14.7
11,047
1.1
9,270
-0.3
1,777
8.7
830
-16.1
28,809
-0.5
Source: Company, MOSL
Core EBITDA below estimate impacted by adverse sales mix
Reported EBITDA was down 35% to INR5.67b v/s our est. of INR6.47b. Excluding
one-offs, EBITDA was up by mere 6% to INR4.9b (v/s est. of INR5.63b) and core
EBITDA margins were down 300bps YoY to 18.2% (v/s est. of 21%).
Core EBITDA was below our estimate due to (1) adverse sales mix in US generics
and PSAI segment, (2) higher SG&A expenses towards promotional activities on
OTC launches in Russia and (3) higher R&D expenses.
Delay in ANDA approvals and slow ramp-up in US has impacted profitability, as
this has resulted in higher share from older generic products which are witnessing
increasing price erosion. Management has indicated that it is witnessing ramp-up
in key products in the US generics and the ensuing benefit will be reflected in
4QFY13. We believe this will lead to improvement in EBITDA margin from next
quarter.
Reported PAT declined 29% to INR3.63b (v/s est. INR3.9b) while core PAT (excl
one-offs) was up 29% to INR3.1b v/s our est. of INR3.42b. Core PAT growth was
lower than estimates due to subdued operational performance and partly due to
forex loss of INR200m.
15 February 2013
2

Dr. Reddy's Laboratories
EBITDA margin trend
Source: Company, MOSL
Key takeaways from the concall
Timely approvals key to meeting topline guidance:
In the past, management had
guided for topline of USD2.5-2.7b for FY13 (9MFY13 topline was ~USD1.5b) with
USD800-900m coming from US business (~USD500m for 9MFY13). This guidance
was to be achieved through ramp-up in key products (like generic Toprol, Boniva
and Lipitor) as well as potential launch of some niche products. However, the
ramp-up has been slower than expected and there have been delays in obtaining
approvals from the FDA for some niche opportunities. The management has
indicated that it may miss the topline guidance if these approvals do not come in
FY13. However, they are confident of getting these approvals in FY14 instead, if
not in FY13, improving the outlook for next year. We view this purely as a timing
issue and believe that the fundamentals are in place to drive growth in future.
Delay in ANDA approvals and slow ramp-up in US has impacted profitability,
as
this has resulted in higher share from older generic products which are witnessing
increasing price erosion. This was partly responsible for the QoQ drop in gross
margins. The subdued operational performance was also attributed to (1) adverse
product mix in PSAI segment (expected to normalize going forward), (2)
promotional expenses on OTC launches in Russia, (4) higher R&D expenses and
(3) EUR1m of cost incurred on rationalization measures undertaken in Germany.
Other guidance parameters:
Management guided FY13 tax rate of 20%-22% with
R&D expenses guided to be over 7% of sales going forward.
Emerging market formulations likely to report strong growth in coming quarters
led by Russia and other emerging markets. While the growth in Russia & CIS
markets at 32% may not be sustainable, the management is confident of
outperforming the overall industry growth in these markets.
India formulations business is expected to show better performance from FY13
(FY12 growth was just 11%). Management had earlier guided that it expects to
record ~14-15% growth for this business in FY13. DRDD is targeting annual revenue
of USD100m from the launch of biosimilars in emerging markets (incl India) over
the next 2-3 years v/s existing revenue of USD30m.
Future hedges to realize better rates
- Forex hedges were constant at ~USD600m
(at average of INR55-57). While the company hedges ~60% of its net exposure
(and hence is reasonably hedged), we note that incremental hedges are coming-
in at better rates.
3
15 February 2013

Dr. Reddy's Laboratories
Balance sheet hedges stand at USD408m and outstanding net debt on book is
USD247m (net debt/equity at 0.2x).
US generics, PSAI and emerging markets to be key growth contributors for
FY13
The US market will be a key contributor
to the company's goal of achieving USD2.5-
2.7b revenue in FY13, with a contribution of ~USD800-900m. The management
indicated that it will be able to meet this target for US in case it receives ANDA
approvals for some of its key launches in the pipeline. Else, it will monetize these
opportunities in FY14.
Unlike the consensus belief, the management is confident of achieving 10-15%
CAGR in US revenue from FY14 onwards (despite the patent cliff), led by the
commercialization of its pipeline of 65 ANDAs (pending approval) and the
contribution from FTF/low-competition opportunities. Going forward, DRRD plans
to maintain 30% of its total product filings in niche/complex molecules.
We estimate core US revenue CAGR at 20% for FY12-15 (ex- one offs) mainly led by
a strong 32% growth in FY13E. Our growth estimates for FY14E/FY15E at 15%/13%
factors in the potential adverse impact of patent cliff.
Dr. Reddy's - Core US Sales (INR M)
Source: Company/MOSL
We expect DRRD to earn one-time PAT of INR3.55b in FY13
from the low
competition/Para-IV product opportunities. Management has indicated that it
has a few more potential opportunities in its US pipeline for FY13 (besides that
indicated in the table below), which it has not yet disclosed due to competitive
reasons.
Launch Status
Launched in Jul-2011
Launched
Launched on 15-Oct-2010
Launched on 22-Sep-2011
Expected in FY13
Launched in Mar 2012
Launched in Jul-2012
Launched in Sep-2012
Expected in Jan 2013
FY13E
695
443
515
53
153
685
204
258
545
3,551
Source: Company, MOSL
4
DRL US Portfolio - One -time PAT contribution (INR m)
Product
Generic
Generic
Generic
Generic
Generic
Generic
Generic
Generic
Generic
TOTAL
15 February 2013
Arixtra
Accolate
Prevacid
Exelon
Clarinex
Geodon
Lipitor
Toprol
Propecia

Dr. Reddy's Laboratories
PSAI business to record healthy growth for FY13 - Growth will normalize in
FY14 due to patent cliff
DRRD's PSAI business has recorded strong growth of 25.7% for 9MFY13 led mainly
by higher API supplies linked to patent expiries in the US and incremental ramp-
up in the company's CRAMS business.
We believe that the strong growth traction of 9MFY13 is likely to come-off going
forward due to the reduced number of patent expiries.
Dr. Reddy's - PSAI Sales (INR M)
Source: Company/MOSL
Branded formulations exports to sustain double-digit growth; potential
change in regulations a key long-term risk
We expect DRRD to sustain ~20% revenue CAGR
for this business led by:
a) Expanding presence in Russian OTC market coupled with additional growth
drivers like in-licensed products
b) Ramp-up in the biogeneric portfolio in emerging markets - management
expects revenues of USD100m in the next 2-3 years v/s the current USD30m
c) Gradual ramp-up in revenues from the company's partnership arrangement in
emerging markets.
However, the Russian market (a key contributor for DRRD's emerging markets
business) is gradually transitioning
from an out-of-pocket market to the model of
centralized reimbursement with the Russian government expected to play a key
role in regulating both, access and price of essential medicines. This is a key long-
term risk for DRRD given that this is one of the most profitable markets.
Dr. Reddy's - Branded Formulation Exports (INR m)
Source: Company/MOSL
15 February 2013
5

Dr. Reddy's Laboratories
India formulations business - growth recovery
DRRD's India formulations business faced multiple growth challenges
in the past
few years mainly due to execution shortfalls:
a) The company redeployed its experienced urban sales force in rural areas,
which resulted in a decline in urban doctor coverage and loss of business in
the metros. The management claims it has taken corrective action and the
results should be visible in the next few quarters.
b) Further, during the last few years, DRRD's focus was on US and Europe, post
the Betapharm acquisition. India was ignored, which resulted in fewer product
launches here. However, the company has now resumed a healthy rate of
product introductions (22 in 9MFY13 against 23 in FY12).
c) The management believes it will be able to match the industry growth rate
from FY13 (14-15%) while 9MFY13 growth was at 14%.
We expect this business to record 14% CAGR for FY12-15,
slightly lower than the
average market growth.
Dr. Reddy's - Domestic Formulations growth recovering (INR m)
Source: Company/MOSL
Valuation and view
The management has indicated that it may miss the topline guidance for FY13 due to
slower than expected ramp-up in key products in the US and delay in receive product
approvals. However, they are confident of getting these approvals in FY14, if not in
FY13, improving the outlook for next year. We view this as a timing issue and believe
that the fundamentals are in place to drive growth in future.
Traction in the US generics and sustained growth momentum in international branded
formulations segment will be the key growth drivers for DRRD going forward.
Significant gap between guidance and consensus implies some product opportunities
in US not visible to investors as of now. Management indicated that it is on-track to
launch these products in the near-future, subject to regulatory approvals. We believe
that the strong growth visibility over the coming quarters is poised to give reasonable
returns for investors. While investors are rightly concerned about the likely muted
growth for FY14 (given the adverse impact of patent cliff for DRRD's US and PSAI
businesses), we believe that these concerns are already discounted in current
valuations.
15 February 2013
6

Dr. Reddy's Laboratories
Post the lower-than-expected 3QFY13 performance, we lower FY13E/14E/15E EPS by
7%/6%/6% to reflect (1) slowdown in EU generics and PSAI segment, (2) lower gross
margins, with increased price erosion of existing portfolio in US generics and (3)
increased cost pressure from higher R&D and other expenses. Our core estimates
exclude upsides from patent challenges/low competition opportunities in the US
(we estimate one-time PAT contribution of INR3.55b from such opportunities for FY13).
DRRD's stock trades at 19.3x FY14E and 16.7x FY15E core earnings.
Buy
with a target
price of INR2,270, 20% upside.
15 February 2013
7

Dr. Reddy's Laboratories
Dr. Reddy's Laboratories: an investment profile
Company description
Dr. Reddy's is a vertically integrated company with
presence across the pharmaceutical value chain through
its core businesses of Global Generics, Pharmaceutical
Services & Active Ingredients (PSAI), and Proprietary
Products. The company is currently developing bio-
generics and NCEs. Key focus markets include India, US,
Europe and Russia.
Recent developments
Launched exclusive generic version of generic
Propecia as expected.
Valuation and view
We estimate core EPS of INR97.8 for FY14E and
INR113.3 for FY15E.
Trades at 19.3x FY14E and 16.7x FY15E core earnings
adjusted for DCF value of FTFs.
Key investment arguments
Reiterates strong growth traction over the coming
quarters: Management expects to achieve strong
growth led by the US, PSAI and emerging market and
without any major inorganic growth initiatives.
Company continues to focus on its five key markets
- US, India, Russia, Germany and the UK.
The US market will be a key contributor led by the
commercialization of its pipeline of 65 ANDAs
(pending approval) and the contribution from FTF/
low-competition opportunities.
Sector view
Emerging markets coupled with low competition/
Para-IV upsides in the US would remain the key sales
and profit drivers in the medium term.
We are Overweight on companies that have a
differentiated business model for the US market.
Key investment risks
Government mandated price controls could impact
the profitability of the India formulations business.
Higher-than-expected currency appreciation could
adversely impact future earnings.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
DRL
19.3
16.7
4.1
3.5
2.8
2.4
13.9
12.0
Cipla
19.6
17.9
2.9
2.8
3.2
3.2
14.1
12.7
Ranbaxy
16.9
13.8
2.7
2.3
1.9
1.7
13.7
11.5
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
83.2
97.8
Consensus
Forecast
95.7
106.9
Variation
(%)
-13.1
-8.5
FY13
FY14
Target price and recommendation
Current
Price (INR)
1,890
Target
Price (INR)
2,270
Upside
(%)
20.1
Reco.
Buy
Stock performance (1 year)
Shareholding pattern (%)
Dec-12
Promoter
Domestic Inst
Foreign
Others
15 February 2013
25.6
14.0
44.3
16.2
Sep-12
25.6
15.2
42.9
16.3
Dec-11
25.6
13.8
46.1
14.5
8

Dr. Reddy's Laboratories
Financials and Valuation
15 February 2013
9

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Dr Reddy's Laboratories
No
No
No
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