Stock Review: Dr Reddy’s

Dr Reddy's (DRL's) domestic formulation business, which was subdued for quite some time, marked 25 per cent year-onyear (y-o-y) growth at `252 crore in the September quarter. The Russia/Commonwealth of Independent States (CIS) business also put up a good show, growing 17 per cent to `235 crore.

The two compensated for the muted growth seen in other geographies and helped Dr Reddy's post 25 per cent y-oygrowth in revenues at `1,870 crore. Higher other income component (up 75 per cent) and lower tax provisioning buoyed net profit by 32 per cent y-o-y to `287 crore.

The company also benefited from the restructuring of field operations and 13 new launches in the September quarter. Analysts reckon DRL's increasing rural penetration will be a key growth driver. Analysts at Emkay estimate the domestic business to grow to `1,570 crore by 2012-13. The Russian and CIS revenue growth is also likely to be strong, propelled by focus on launches of bio-similar products on over-thecounter segment.

DRL's tie-up with GlaxoSmithKline Consumer Healthcare for supplying branded products in the emerging markets imparts long-term visibility to the stock. It has already started its first shipment of four products to Mexico, Brazil and has filed over 100 dossiers in various markets under this alliance. The full impact on revenues from this deal will be visible only in the next two-three years, say analysts. Traction in the branded formulations, the US businesses and focus on improving profitability will be key growth drivers over the next two years, states a report from Motilal Oswal.

With the selling, general and administrative expenses in beta pharma down nearly 67 per cent to ¤1.5 million per month, margins are set to expand further. For 2010-11, analysts expect the company to report an adjusted net profit of `1,293 crore (up 53.3 per cent y-oy), while revenues should rise 23.8 per cent to `8,302 crore.

The stock, at `1,651.8, trades at 24x 2010-11E and 21.6x 2011-12E core earnings.

Traction in its branded formulations, the US businesses and focus on improving profitability will be key growth drivers