Dr Reddy's (DRL) 3QFY11 results were below estimates mainly on account of its sustained disappointing performance in EU generics and pharma services & active ingredients (PSAI). Gross margin improved 400bps yoy to 54.9%. However, EBIT margin remained flat at 14.4% due to increase in SG&A expenses.
n 3QFY11 results. DRL's adjusted net profit grew 20.3% yoy driven by 9.8% revenue growth, a 400bps improvement in gross margin and lower effective tax rate. However, results were below our estimates, with flat EBIT margin despite substantial improvement in gross profit margin.
n US and India - Key growth drivers. The 9.8% yoy revenue growth was primarily fuelled by 60.2% growth in US generics led by launch of key products, limited competition and 14.2% growth in Indian branded formulations. The PSAI segment continued to be a drag and declined 4.9% yoy.
n Change estimates. We lower our estimates to account for the lacklustre 9MFY11 performance and non-receipt of USFDA approval for Fondaparinux. We cut our FY11-13e revenue by 10-12% and PAT by 1-6%.
n Valuation and risks. The stock trades at 20.6x FY12e and 18.3x FY13e earnings. We reduce our price target to Rs1,612 from Rs1,636 earlier, due to earnings revision of 2.8% for FY12e. Our target price is based on 20x FY12e EPS and Rs75 for NPV of para IV pipeline. Downside/upside risks: Delay or failure/success in launching para IV products.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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