Notes Biocon Confluence: Pharma; Pre-conference note Emkay Research 17 November 2011 12
November 17, 2011 Reco Hold CMP Rs1,617 Previous Reco Hold Target Price Rs1,604 EPS change FY11E/12E (%) NA Target Price change (%) NA Nifty 5,069 Sensex 16,883 Price Performance (%) 1M 3M 6M 12M Absolute 6 9 (1) (8) Rel. to Nifty 7 9 6 11 Source: Bloomberg Relative Price Chart 1850 1760 1670 1580 1490 Rs 1400 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Source: Bloomberg <strong>Dr</strong>. <strong>Reddy's</strong> <strong>Lab</strong> (LHS) Rel to Nifty (RHS) Stock Details Sector Pharmaceuticals Bloomberg DRRD@IN Equity Capital (Rs mn) 847 Face Value(Rs) 5 No of shares o/s (mn) 169 52 Week H/L 1,855/1,387 Market Cap (Rs bn/USD mn) % 10 6 2 -2 -6 -10 274/5,407 Daily Avg Volume (No of sh) 327081 Daily Avg Turnover (US$mn) 9.8 Shareholding Pattern (%) Sep-11 Jun-11 Mar-11 Promoters 25.6 25.6 25.7 FII/NRI 45.6 45.4 46.3 Institutions 14.4 14.7 14.0 Private Corp 6.0 5.6 5.5 Public 8.4 8.6 8.6 Source: Capitaline Deepak Malik deepak.malik@emkayglobal.<strong>com</strong> +91 22 6612 1257 Ashish Thavkar ashish.thavkar@emkayglobal.<strong>com</strong> +91 22 6612 1254 Bhavita Nagrani bhavita.nagrani@emkayglobal.<strong>com</strong> +91 22 6624 2486 <strong>Dr</strong>. Reddy’s <strong>Lab</strong> Attractive Para-IV pipeline � New launches, gain in market share in existing products & limited <strong>com</strong>petition opportunities to drive the growth in US � Upside from Para IV in FY12 and FY13 is Rs 19.2 and Rs 14.3 respectively, mainly driven by launches like zyprexa, clopidogrel and ziprasidone � <strong>Dr</strong>. Reddy to witness modest growth of ~12% CAGR (FY11- FY13) in domestic market, due to issues in pain management and anti infective therapy � Upsides from Para-IVs largely factored-in. Maintain Hold rating with a price target of Rs1604 Domestic business to witness gradual recovery and Russian Business to Show Strong Growth � DRL has been witnessing slower growth in the Indian market due to controversy related to one of its key brand in pain management i.e Nise. Though there has been favorable ruling by DCGI, but it will take some time to regain lost market share. However if we exclude, this impact than the domestic business grew at a healthy rate of ~15% <strong>com</strong>pared to industry rate of 12-14% � Russia & CIS which contributes 15%, to grow by 18% on back of significant volume growth in key brands and acquisition of JB Chemicals Rx Russian business Revenue growth to be led by US Business � North American business, to witness growth of ~19% CAGR (FY11- FY13) due to new product launches and increase in MS of existing products o Already launched 9 new products including 4 SKU’s from its Bristols penicillin facility acquired from GSK in Sept’11 o Key Para – IV’s opportunities - – Olanzapine (20mg) – Market size of US$900 mn, launched on Oct 25 th , 2011, under 180-days unshared exclusivity – Olanzapine ODT – Market size of US$80mn, launch to be under 180-days exclusivity with 2 other players – Ziprasidone – Market Size US$800m, expected in Mar 12’ (Shared with two other <strong>com</strong>panies). But the launch can be delayed by 6months, if USFDA grants PED to innovator o Upsides may <strong>com</strong>e from the <strong>com</strong>pany’s Bristol facility in H2FY12 Valuation We expect <strong>Dr</strong>. Reddy to report 17%% revenue growth in FY12E and 7% growth in FY13E. We expect EBIDTA margins to move from 22.4% in FY11 to 22.8% in FY12 and 23.5%% in FY13. Earnings will grow by 12% CAGR over FY11-13E. We maintain our target price on the stock to Rs1604 (20x base business earnings of Rs77 + NPV of Rs64 from Para IVs) with a Hold rating. At CMP, the stock is trading at 20x FY12E and 18x FY13E earnings. Financials Rs mn YE- Net EBITDA EPS EPS RoE EV/ Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV FY10 70,310 15,762 22.4 8,435 50.0 101.9 9.6 32.4 17.8 7.2 FY11 76,558 17,121 22.4 12,314 72.8 10.8 30.6 22.2 16.9 6.4 FY12E 89,789 20,443 22.8 13,659 80.7 45.6 22.2 20.0 13.8 5.4 FY13E 96,268 22,621 23.5 15,431 91.2 10.9 23.2 17.7 12.1 4.5 Emkay Global Financial Services Ltd 13 <strong>Company</strong> <strong>Update</strong>
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