31 July 2015
1QFY16 Results Update | Sector: Healthcare
Dr Reddy’ s Labs
BSE SENSEX
27,705
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val,INRm/Vol ‘000
Free float (%)
Financials & Valuation (INR b)
Y/E MAR
Sales
EBITDA
Net Profit
Adj. EPS
(INR)
EPS Gr. (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2015 2016E 2017E
148.2 169.2
33.5
22.2
4.5
19.9
16.9
30.0
6.0
41.4
27.1
22.3
20.2
19.5
24.5
5.0
192.8
48.2
32.4
190.2
19.5
951.3
20.0
19.9
20.5
4.1
S&P CNX
8,422
DRRD IN
170.4
666/10.4
3960/2712
11/28/32
1141/345
74.5
CMP: INR3,908
TP: INR4,515 (+16%)
Buy
Earnings ahead of estimates, profitability improvement positive
Dr Reddy’s (DRRD) 1QFY15 PAT at INR 6.3b (+14% YoY) was 7% ahead of estimates, led
by improved profitability in this quarter (26% EBITDA margins). However, flat PSAI
sales (15% of sales) and 37% decline in Russia biz (8% of sales) dragged overall sales
growth to 7% YoY (at INR 37.6b). We expect Russia/CIS business to recover from 3Q.
US, India and EU led overall sales growth in 1Q:
US business reported 12% YoY
growth on the back of increased market share in key products like – gValcyte,
gDacogen, and other injectables. Scale up in recently launched Habitrol (OTC
product) also contributed in 1Q US sales. India sales grew 19% YoY to INR 4.8b, led
by better traction in top branded products. Europe business grew 31% YoY on the
back of two big product launches in the market. While RoW business was down
22% QoQ with lower Venezuela sales in 1Q. Russia/CIS business, accounted for 8%
of sales, also declined 37% YoY on the back of sharp currency depreciation and
weak demand for the drugs due to high prices.
EBITDA margin at its peak:
1Q EBITDA margin at 26.2% were 250bp ahead of
expectations (23.7%) as gross margin improved 180bp YoY and SG&A expenses
(Excl. Depreciation and Amortization) declined 2% YoY due to ongoing cost
controlled efforts across the segments. Going ahead, we expect margin to improve
on the back (forecast 240bp expansion over FY15-17E) niche US launches
(gNexium, complex injectables) & improved operating leverage.
Valuation and view:
We project 21% CAGR growth in EPS over FY15-17E, led by (1)
Low competition product launches in the US, (2) Improved India business, (3)
Stabilized Russian currency and (3) Improved profitability (240bps over FY15-17E)
Valuation discount to large peers (12-15%) would narrow on improving growth
visibility (niche US pipeline) & uptick from launches like gNexium (filed under site
transfer). We reiterate
Buy
rating on the stock with TP of INR 4,515 (24x FY17E,
12% discount to large peers target P/E). Key risks: Escalation of regulatory issues
(API plant) & delay in US approvals.
130.2 159.2
BV/Sh. (INR) 653.2 789.0
Estimate change
TP change
Rating change
Amey Chalke
(Amey.Chalke@MotilalOswal.com); +91 22 3982 5423
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Dr Reddy’ s Labs
Result snapshot
Exhibit 1: Quarterly Snapshot (Revenue mix)
(INR m)
Global Generics
North America
Europe
India
Russia/CIS
RoW
PSAI
North America
Europe
India
Others
Proprietary products
Total revenues
1QFY15
29002
16468
1459
3999
4861
2215
5537
547
2681
775
1534
634
35173
4QFY15
30993
17154
2341
4744
3289
3465
7415
1400
3223
668
2124
296
38704
1QFY16
30961
18515
1912
4756
3078
2700
5614
664
2352
587
2011
1003
37578
%YoY
6.8
12.4
31.0
18.9
(36.7)
21.9
1.4
21.4
(12.3)
(24.3)
31.1
58.2
6.8
%QoQ
(0.1)
7.9
(18.3)
0.3
(6.4)
(22.1)
(24.3)
(52.6)
(27.0)
(12.1)
(5.3)
238.9
(2.9)
FY15
120,556
64,723
7,193
17,870
17,713
13,057
25,456
4,605
10,507
3,288
7,056
2,177
148,189
FY16E
138,765
79,502
8,579
21,801
14,234
14,649
27,565
5,494
10,824
3,617
7,630
2,830
%YoY
15.1
22.8
19.3
22.0
(19.6)
12.2
8.3
19.3
3.0
10.0
8.1
30.0
169,161
14.2
Source: Company, MOSL
Exhibit 2: Quarterly Profit and Loss statement
(INR m)
Total revenues
Cost of revenues
Gross profit
Gross margin (%)
SG&A expenses
% of Total Revenues
R&D Expenditure
% of Total Revenues
EBITDA
EBITDA margin (%)
Amortization expenses
% of Total Revenues
Other operating income
Operating profit
OPM (%)
Forex loss/(gain)
Finance expenses
Equity in loss of affiliates
PBT
Income tax
Effective tax rate (%)
Net income - reported
Exceptionals
Adjusted Net Profit
1QFY15
35173
14331
20844
59.3
8807
25.0
3875
11.0
8162
23.2
1872
5.3
(185)
6475
18.4
(475)
(6)
(53)
7009
1505
21.5
5504
5504
4QFY15
38704
17484
21221
54.8
7850
20.3
5144
13.3
8226
21.3
2232
5.8
(125)
6120
15.8
843
(610)
(44)
5930
742
12.5
5188
95
5283
1QFY16
37578
14631
22947
61.1
8705
23.2
4387
11.7
9855
26.2
2268
6.0
(125)
7712
20.5
(12)
(204)
(49)
7977
1721
21.6
6256
0
6256
%YoY
6.8
2.1
10.1
181 bp
(1.2)
(187)bp
13.2
66 bp
20.7
302 bp
21.2
71 bp
(32.5)
19.1
211 bp
na
na
(7.2)
13.8
14.3
10 bp
13.7
na
13.7
%QoQ
(2.9)
(16.3)
8.1
624 bp
10.9
288 bp
(14.7)
(162)bp
19.8
497 bp
1.6
27 bp
(0.3)
26.0
471 bp
(101.4)
(66.6)
12.6
34.5
132.0
906 bp
20.6
na
18.4
FY15
148,189
62,786
85,403
57.6
34,482
23.3
17,449
11.8
33,472
22.6
8,103
5.5
(917)
26,286
17.7
(1,759)
77
(195)
28,163
5,984
21.2
22,179
629
22,179
FY16E
169,161
69,356
99,805
59.0
38,907
23.0
19,453
11.5
41,444
24.5
9,304
5.5
(1,900)
34,041
20.1
0
362
(230)
33,909
6,782
20.0
27,127
0
%YoY
14.2
10.5
16.9
137 bp
12.8
(27)bp
11.5
(27)bp
23.8
191 bp
14.8
3 bp
107.3
29.5
239 bp
(100.0)
368.4
18.1
20.4
13.3
(125)bp
22.3
27,127
22.3
Source: Company, MOSL
31 July 2015
2

Dr Reddy’ s Labs
Business highlights
1Q Revenues grew 7% YoY to INR 37.6b (USD 592, flat YoY), primarily affected by flat
PSAI sales and Russia business performance. Global Generics business growth was in
line at 7% YoY, led by strong growth in US, India, Europe and RoW. North America
growth sustained at healthy levels despite no new approvals in 1Q.
North America (49% of sales):
For 1QFY16, on constant currency basis, DRRD
grew 6% YoY (5% QoQ) to USD 292m, aided by acquired Habitrol OTC brand
launched in December 2014 and ramp up in key products like gValcyte,
gDacogen and a few other injectables.
Habitrol Brand
:
DRRD had acquired this OTC brand from Novartis in Dec’14 for
a sum of USD80m. Habitrol brand had registered USD58m sales in 2013. It is a
transdermal patch used in Nicotine replacement therapy. Management had
highlighted that though the gross margins for the product is lower than overall
Global Generics, the product is lucrative from EBITDA perspective. Going ahead,
we expect slow and steady ramp up in this product.
Exhibit 4: ANDA filings - quarterly trend
ANDA approval
9
5
5
2 2
3
2
2
ANDA filed
6
4
2
1 1
0
Exhibit 3: Resilient US biz grew sequentially
US sales (USD m)
One-off sales (USD m)
213
262
242
275
236
271
279
292
3
4
2
Source: Company, MOSL
Source: Company, MOSL
In 1Q, company had filed for six new products in the US, taking cumulative
ANDA filings to 225. Pending ANDAs stands at 73 including 47 Para IVs of which
16 are FTFs (3 added in 1Q). DRRD has maintained its high market share in key
drugs like gReclast (86%), gDacogen (85%), gVidaza (52%) and Fondaparinux
(54%).
Exhibit 5: Market share in key products (%)
Product
Decitabine
Azacitidine (Dacogen)
Zoledronic Acid (Reclast)
Aug’14
94
54
65
Jan’15
76
66
61
Mar'15
85
50
80
May'15
82
52
86
Source: Company, MOSL
India (13% of sales):
India business delivered double digit growth for 6
th
consecutive quarter, on account of sustained improvement in the performance
of the top brands. The company has also introduced six new products in the
domestic market during this quarter. According to AIOCD, Dr Reddys growth in
domestic market was at 22% (secondary market data) for the Apr-Jul’15 quarter,
much ahead of industry growth of 14.8%.
31 July 2015
3

Dr Reddy’ s Labs
UCB Acquisition to increase domestic growth from 2Q
:
In 4Q, DRRD had
acquired UCB’s India portfolio for a sum of INR8b. DRRD has completed the
integration process of these brands in 1Q. It also contributed 1.5% of India sales
in 1Q (with 10 days of sales). Going ahead, we expect UCB portfolio to boost
DRRD’s India sales by 7-8% in every quarter, resulting better numbers for FY16E.
UCB’s India business had registered INR 1.5b sales for the CY14 and has branded
portfolio of 21 products focusing on Allergy, Respiratory, Dermatology and
Pediatric space. Its top 10 product list includes – Atarax (INR 395m), Nootropil
(INR 340m), Xyzal (INR 196m). DRRD has acquired all brands except for CNS
drugs - Keppra and Seizgard (in CNS therapies) which are retained by UCB due to
their global focus on CNS segment.
With expanded reach of Dr Reddys and access to a reputed MNC company’s
brands, DRRD can expand its reach in therapy segments where it has weaker
presence, like respiratory, dermatology and pediatrics (and allergy where it is
strong).
Large part of the acquired business is outside the purview of price control
(except Zyrtec) and hence is fairly profitable. Further scope for synergies exist in
the portfolio, given UCB had not been promoting some of its fast growing
brands efficiently. With DRRD’s management and reach, the portfolio with
established brands in respiratory, dermatology and pediatric space can grow at
much faster rate
Exhibit 6: India formulation sales improving …
India form. (INR m)
17.8
14.5
YoY growth (%)
14.1
10.6
5.2
4207
3913
4101
3999
4799
4328
4744
4756
15.7
18.9
8.5
Source: Company, MOSL
RoW sales including Russia/CIS (15% of sales):
Sharp depreciation in Russian
ruble as well as ongoing macro-economic issues (in CIS region) led to 37% YoY
decline in Russia/CIS sales. (Constant currency growth – 20% decline). Increase in
drug prices from the DRRD and retailers led to significant volume decline for DRRD
in 1Q. However, these price hikes have been taken back, resulting in healthy
constant currency growth going ahead.
31 July 2015
4

Dr Reddy’ s Labs
Exhibit 7: Russian sales impacted by Rouble weakness
Russia form. (INR m)
Exhibit 8: Constant currency growth in Russia remains robust
Constant currency growth (%)
43
17
30
7
4
5
18
15
0
-11
-8
Absolute growth (%)
27
17
-46
-30
-20
Source: Company, MOSL
Source: Company, MOSL
Assuming, RUB/INR rate stays at same level (1.1RUB/INR), we could see better
numbers in Russian market for DRRD from 4Q. However, Improvement in
Russian business could be visible much earlier than 4Q if RUB/INR starts
appreciating going ahead.
Exhibit 9: RUB/INR has depreciated significantly over the last few quarters
RUB/INR
1
10
9
-1
-3
% YoY
11
-12
-31
1.8
1.9
1.9
1.8
1.7
1.7
1.3
-44
1.0
-37
1.1
-34
1.1
1.1
-16
1.1
Source: Company, MOSL
Venezuela sales contribution weakens in 1Q:
Venezuela sales grew 42%YoY
in 1Q (decline on QoQ). The company has been remitting funds from its
Venezuelan subsidiary at official exchange rate of 6.3 bolivar/USD (CENCOEX
rate). However, certain monetary assets and liabilities may not qualify for this
rate have been translated at the rate of VED 197 per USD, resulting in INR 100m
loss in 1Q. Current receivables from Venezuela market stand at USD 50m v/s
USD 35m in 4Q). Going ahead, The Company would calibrate its growth in this
market, depending on its ability to get funds repatriated.
Europe (5% of sales):
DRRD registered 31%YoY growth in Europe sales at INR
1.9b, driven by two product launches in 1Q (Aripiprazole and Pregabalin).
Management sees improving traction in this business to sustain in coming
quarters, led by healthy product pipeline.
Improved business mix and operating leverage offset higher R&D in 1Q:
1Q EBITDA margins at 26.2% were 250bp ahead of expectations (23.7%) as gross
margins improved 180bp YoY and SG&A expenses (Excl. Dep. and Amort.)
declined 2% YoY due to ongoing cost controlled efforts across the segments. We
expect margin to improve going ahead (forecast 240bp expansion over FY15-
31 July 2015
5

Dr Reddy’ s Labs
17E) led by niche US launches (gNexium, complex injectables) & operating
leverage
.
Exhibit 10: Gross Margin (%)
Gross profit (INR b)
60.5
58.0
57.2
59.3
58.5
Gross margin (%)
61.1
58.2
54.8
19
21
20
21
21
22
21
23
8
10
8
8
8
9
8
10
25.2
29.0
21.8
Exhibit 11: EBITDA Margin (%)
EBITDA (INR b)
23.2
EBITDA margin (%)
22.7
23.2
21.3
26.2
Source: Company, MOSL
Source: Company, MOSL
Gross margins at peak levels:
Overall gross margins at 61% (Up 200bp YoY)
were driven by better business/product mix and cost control activities at plant
level. Gross margins for Global generics and PSAI segment stood at 68% and
24%, respectively. PSAI gross margins improvement was led by product mix in
1Q.
Exhibit 12: Gross margin quarterly trend (Segment wise)
Global generics (%)
62
66
68
66
67
PSAI (%)
66
66
63
68
19
25
16
16
22
27
17
23
24
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Source: Company, MOSL
R&D spends remain high:
R&D expense was at 11.7% of sales at INR 4.4b v/s
11% of sales in 1QFY15. Scale in R&D is according to plan and expected to
remain at higher level due to strong product pipeline of complex generics,
Biosimilars and Proprietary products. Going forward, management expects R&D
spend to remain closer to 12% of revenues (11.8% for FY15).
31 July 2015
6

Dr Reddy’ s Labs
Exhibit 13: R&D expense on increasing trend
R&D cost (INR b)
11.4
9.0
8.4
11.0
R&D / sales (%)
11.5
11.2
13.3
11.7
3.0
3.0
4.0
3.9
4.1
4.3
5.1
4.4
Source: Company, MOSL
Net working capital
marginally increased by USD 7m in 1Q.
Balance sheet hedges
stand at USD256m, while outstanding cash flow hedges
are at USD 353m (at average rate of INR60-65/USD). Russian exposure could see
partial benefit from Ruble hedges worth RUB 1440m (for 9 months).
Srikakulam facility:
DRRD facility was inspected in Dec’14 and had received
few 483 observations from US FDA. Since the inspection the company has not
received any approval from this facility including Nexium. The management
clarified that they have completed all remedial measures for this facility and
expects one more US FDA inspection in the near future. It could take few more
months to get the clearance from the US FDA. Meanwhile it has already
transferred gNexium product to another plant. However, approval time line
remains uncertain. Site transfer has also been in processed for other key
products as de-risking strategy.
31 July 2015
7

Dr Reddy’ s Labs
Operating metrics
Exhibit 14: Key operating metrics
2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16
Revenue Mix (%)
USA
India
Europe
LatAm
RoW
CRAMs
Innovative products
Revenue Gr. (%)
USA
India
Europe
LatAm
RoW
CRAMs
Innovative products
As % of sales
Raw material
SG&A
R&D cost
Tax Rate
Margins (%)
Gross Margins
EBITDA Margins
EBIT Margins
PAT margins
56.4
24.0
16.8
11.6
55.4
19.8
15.0
10.8
53.6
21.5
17.0
13.7
56.7
19.0
13.3
12.7
58.0
25.2
20.0
20.6
60.5
29.0
24.0
16.1
57.2
21.8
16.2
13.8
59.3
23.2
17.9
15.6
58.5
22.7
17.3
16.0
58.2
23.2
17.9
16.3
54.8
21.3
15.5
13.7
61.1
26.2
20.2
16.6
43.6
26.3
6.1
27.8
44.6
28.5
7.1
18.5
46.4
24.8
7.3
27.3
43.3
29.2
8.5
12.8
42.0
23.8
9.0
10.3
39.5
23.1
8.4
29.0
42.8
24.0
11.4
20.6
40.7
25.0
11.0
21.5
41.5
24.3
11.5
17.2
41.8
23.7
11.2
30.7
45.2
20.3
13.3
20.0
38.9
23.2
11.7
21.6
32.2
13.5
6.2
13.3
4.6
27.3
2.9
27.0
47.4
12.1
(16.1)
13.6
49.6
32.7
36.1
32.3
13.0
6.7
15.3
5.4
24.9
2.4
3.5
(16.8)
11.6
(20.4)
32.0
41.8
28.1
(17.3)
34.2
10.4
5.5
13.5
4.0
30.5
2.0
25.6
30.7
8.7
1.7
27.5
18.4
35.9
(5.7)
38.2
12.3
5.5
15.8
5.2
20.6
2.4
12.0
37.3
0.3
(27.8)
7.7
12.0
6.2
(16.5)
39.4
12.5
5.2
16.4
5.4
19.1
1.9
16.5
42.9
8.5
(0.9)
43.6
36.2
(18.7)
(24.8)
45.9
11.1
5.3
15.0
5.9
14.3
2.5
23.3
75.5
5.2
(3.6)
20.9
35.1
(29.0)
26.4
43.0
11.8
5.1
13.0
5.6
19.1
2.4
4.2
31.1
17.8
(3.1)
(0.0)
48.3
(34.7)
28.5
46.8
11.4
4.1
13.8
6.3
15.7
1.8
23.6
51.5
14.5
(7.2)
8.3
50.0
(5.6)
(6.6)
39.8
13.4
4.0
13.4
9.9
17.8
1.7
6.9
7.9
14.1
(18.6)
(13.0)
94.8
(0.2)
(1.0)
43.8
11.3
5.1
12.4
10.0
15.9
1.6
8.7
3.7
10.6
4.6
(10.0)
82.3
20.7
(28.9)
44.3
12.3
6.0
8.5
9.0
19.2
0.8
11.2
14.6
15.7
32.0
(27.2)
76.8
11.7
(65.2)
49.3
12.7
5.1
8.2
7.2
14.9
2.7
6.8
12.4
18.9
31.0
(36.7)
21.9
1.4
58.2
Source: Company; MOSL
31 July 2015
8

Dr Reddy’ s Labs
Valuation and view
Successful monetization of several niche products (gValcyte, gDacogen) has helped
DRRD achieve a formidable base in the US. With fewer new launches in the US and
concerns on Russian market, FY16 would be a year of consolidation for DRRD.
However, we expect upside from US portfolio and healthy domestic growth to result
in 21% EPS CAGR over FY15-17E to be driven by 14% revenue growth and
cumulative 240bp operating margin expansion.
Our TP of INR 4515 implies 17% upside from current levels. We value DRRD at 24x
FY17E EPS, at 8% premium to sector average (one-year forward P/E) and at 12%
discount to large peers due to:
With stronger earnings growth of 21% CAGR (23% for larger peers)
Healthy Balance Sheet (D/E: 0.3x) and return ratios (RoE at 20%)
Strong product pipeline (16 FTFs, proprietary products and Biosimilars )
Key catalysts to drive stock’s performance over the medium term are:
Stabilisation of emerging market economies/currency, mainly Russia/CIS (12% of
sales)
Clearance of Form 483 issues at Srikakulam API facility
Launch of key products like gCopaxone, gNexium, etc
Key risks to our investment thesis:
Regulatory delays affecting key US launches,
Adverse outcome of pending FDA issues (API facility)
Further depreciation of Russian currency. Every 10% depreciation of Ruble
hereon (vs USD) leads to 2% downgrade in EPS estimate (annualized).
Exhibit 16: DRRD trades at 44% premium to Sensex PE
300
200
20.4
20.2
24.3
100
0
-100
Dr Reddy’ s Labs PE Relative to Sensex PE (%)
LPA (%)
Negative
Earnings
Cycle
27.8
44.9
Exhibit 15: DRRD trades at 17% premium to 10 year avg. PE
60
40
20
0
PE (x)
Median(x)
Negative
Earnings
Cycle
11.2
Peak(x)
Min(x)
Avg(x)
48.2
Source: Company, MOSL
Source: Company, MOSL
31 July 2015
9

Dr Reddy’ s Labs
Story in charts
Exhibit 17: Formulation led sales growth (INR b)
Formulations (INR b)
API (INR b)
28
29
Exhibit 18: India formulation business
DF Revenue (INR b)
19.8
15.1
10.6
12.6
7.9
13.7
22.0
16.0
YoY Growth (%)
19
50
20
49
20
53
24
70
31
83
24
25
105
121
139
160
10
FY10
12
FY11
13
FY12
15
FY13
16
FY14
18
FY15
22
25
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Source: Company, MOSL
FY16E FY17E
Source: Company, MOSL
Exhibit 19: US Sales to grow at 18-19% CAGR over FY15-17E
Core US sales (INR b)
77
56
32
14
11
FY10
15
7
FY11
27
FY12
35
FY13
55
FY14
18
FY15 FY16E FY17E
Source: Company, MOSL
65
80
23
92
15
YoY Growth (%)
Exhibit 20: PSAI business to see moderate growth ahead
PSAI Sales (INR b)
21
9
-4
-22
20
FY10
20
FY11
24
FY12
31
FY13
FY14E
25
FY15
28
29
29
24
6
8
7
YoY Growth (%)
FY16E FY17E
Source: Company, MOSL
Exhibit 21: EBITDA margins improving with product mix
Gross Margin (%)
EBITDA Margin (%)
Exhibit 22: EBITDA growth to improve in FY16-17E
127
EBITDA (INR b)
Growth (%)
55.7 55.5 57.9 58.9 55.4 58.2 57.6 59.0 59.2
52
21.8 20.2 21.0 24.5 21.3 24.0 22.6 24.5 25.0
15
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Source: Company, MOSL
FY09
-6
14
FY10
10
16
FY11
24
FY12
28
4
25
FY13
32
FY14
6
33
24
16
41
48
FY15 FY16E FY17E
Source: Company, MOSL
31 July 2015
10

Dr Reddy’ s Labs
Exhibit 23: Strong earnings growth expected ahead
Core EPS (INR/ share)
Exhibit 24: Rich ANDA pipeline
ANDA filed
170
187
ANDA pending
193
209
225
2
15
23
-31
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Source: Company, MOSL
6
66
73
18
81
125
130
159
190
138
158
68
FY09
73
FY10
75
FY11
80
FY12
65
FY13
62
FY14
73
FY15
Source: Company, MOSL
Exhibit 25: R&D expense higher due to NCE research
R&D expense (INR b)
% of sales
11.8
9.4
5.8
5.4
6.8
6.1
6.7
11.5
11.5
Exhibit 26: OTC share growing in Russia sales
Rx (USD m)
OTC (USD m)
67
88
OTC ( % of sales )
105
39
27
18
51
26
145
FY11
29
165
FY12
34
170
FY13
4
FY09
4
FY10
5
FY11
6
FY12
8
FY13
12
FY14
17
19
22
125
FY10
165
FY14
FY15 FY16E FY17E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 27: Return ratios lower with lower margins
RoE (%)
24.1
21.6
19.7
18.7
17.2
RoCE (%)
23.3
18.7
19.9
16.9
20.2
19.5
20.0
19.9
Exhibit 28: Fixed asset turnover decreasing
2.6
2.4
2.2
1.9
2.2
2.1
2.1
2.0
2.0
Gross block (INR b)
Fixed Asset turnover
-2.4 2.5
3.1
16.8
26
-12.3
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Source: Company, MOSL
FY09
30
FY10
38
FY11
44
FY12
53
FY13
63
FY14
72
85
96
FY15 FY16E FY17E
Source: Company, MOSL
31 July 2015
11

Dr Reddy’ s Labs
Financials and valuations
Key assumptions
Segment growth (%)
USA
India
Europe
Russia
Others
PSAI
Innovative products
Total Sales
Expenses
Cost of sales (%)
EBITDA Margin (%)
2010
(15.2)
19.8
(18.9)
19.6
46.4
8.8
41.9
1.2
44.5
20.2
2010
70,277
1.2
1,058
56,075
14,202
-6.0
20.2
12,763
1,439
372
72
2,053
985
48.0
1,068
1,068
-120.7
1.5
2011
13.0
15.1
(12.6)
19.1
17.3
(3.7)
34.6
6.3
42.1
21.0
2011
74,693
6.3
1,118
59,033
15,660
10.3
21.0
4,147
11,513
189
0
12,442
1,403
11.3
11,039
11,099
939.2
14.9
2012
67.9
10.6
(2.0)
22.1
16.0
21.2
57.3
29.5
41.1
24.5
2012
96,738
29.5
1,669
72,996
23,742
51.6
24.5
6,254
17,488
0
19,157
4,204
21.9
14,953
12,428
12.0
12.8
2013
18.7
12.6
(6.6)
27.5
41.7
28.9
11.9
20.2
44.6
21.3
2013
116,266
20.2
3,634
91,503
24,763
4.3
21.3
6,237
18,526
118
365
21,677
4,900
22.6
16,777
13,682
10.1
11.8
2014
46.1
7.9
(9.7)
17.2
33.0
(21.9)
1.1
13.7
41.8
24.0
2014
132,171
13.7
2,411
100,472
31,699
28.0
24.0
7,085
24,614
79
329
26,616
5,093
19.1
21,524
21,188
54.9
16.0
2015
17.0
13.7
3.2
(10.6)
77.4
6.2
(28.2)
12.1
42.4
22.6
2015
148,189
12.1
2,871
114,717
33,472
5.6
22.6
8,103
25,369
77
0
28,163
5,984
21.2
22,179
22,179
4.7
15.0
2016E
22.8
18.0
19.3
(19.6)
12.2
8.3
30.0
14.2
41.0
24.5
2016E
169,161
14.2
2,130
127,716
41,444
23.8
24.5
9,304
32,141
362
0
33,909
6,782
20.0
27,127
27,127
22.3
16.0
2017E
15.3
18.0
12.3
19.8
12.3
6.6
18.0
14.0
40.8
25.0
2017E
192,811
14.0
2,510
144,609
48,203
16.3
25.0
9,833
38,369
362
0
40,518
8,104
20.0
32,414
32,414
19.5
16.8
Income Statement
Y/E March
Net Sales
Change (%)
Other Income
Total Expenditure
EBITDA
Change (%)
Margin (%)
Depreciation & Amort.
EBIT
Net Interest Exp
Forex (Gains)/Losses
PBT after EO Expense
Tax
Tax Rate (%)
Reported PAT
Adjusted Net Profit
Change (%)
Margin (%)
(INR Million)
Balance Sheet
Y/E March
Equity Share Capital
Reserves
Net Worth
Loans
Deferred Liabilities/Tax
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Investments
Goodwill/Intangibles
Curr. Assets
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liability & Prov.
Account Payables
Other Current Liabilities
Net Current Assets
Appl. of Funds
E: MOSL Estimates
(INR Million)
2010
840
42,075
42,915
14,656
1,438
59,009
29,679
12,087
22,459
4,153
13,973
38,463
13,371
11,960
6,584
6,548
20,039
9,322
10,717
18,424
59,009
2011
846
45,144
45,990
23,503
87
69,580
38,359
14,714
29,642
622
15,246
47,560
16,059
17,615
5,729
8,157
23,490
8,480
15,010
24,070
69,580
2012
848
56,596
57,444
32,210
-833
88,821
44,064
18,086
33,246
11,558
13,529
59,179
19,352
25,339
7,379
7,109
28,691
9,502
19,189
30,488
88,821
2013
849
72,256
73,105
36,678
-1,669
108,114
52,958
21,213
37,814
18,131
14,021
68,751
21,600
31,972
5,136
10,043
30,603
11,862
18,741
38,148
108,114
2014
851
89,950
90,801
44,742
-3,310
132,233
63,444
25,695
44,424
26,384
14,697
78,664
23,992
33,037
8,451
13,184
31,936
10,503
21,433
46,728
132,233
2015
852
110,450
111,302
43,126
-4,013
150,414
72,011
30,040
48,090
38,871
16,430
85,580
25,529
40,755
5,394
13,901
38,556
10,660
27,896
47,024
150,415
2016E
852
133,597
134,449
36,164
-4,013
166,601
85,071
35,543
55,646
30,262
16,227
101,126
32,250
41,661
10,299
16,916
36,661
13,252
23,409
64,465
166,601
2017E
852
161,251
162,103
36,164
-4,013
194,254
96,130
41,602
60,647
30,262
16,227
128,449
36,580
47,485
25,103
19,281
41,332
15,031
26,301
87,117
194,254
31 July 2015
12

Dr Reddy’ s Labs
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Fixed Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Working Capital (Days)
Leverage Ratio
Current Ratio (x)
Debt/Equity (x)
2010
6.4
82.4
255.6
11.3
207.4
2011
65.6
90.1
271.8
11.2
20.2
0.56302
2012
73.3
110.2
338.7
13.7
18.2
0.5375
2013
80.6
117.3
430.5
13.8
16.3
2014
124.6
166.2
533.8
18.0
16.6
2015
130.2
177.7
653.2
20.0
17.9
2016E
159.2
213.8
789.0
23.9
17.6
2017E
190.2
247.9
951.3
28.5
17.6
53.3
35.5
11.5
7.0
28.6
0.4
48.5
33.3
9.1
5.8
27.4
0.4
31.4
23.5
7.3
5.1
21.3
0.5
30.0
22.0
6.0
4.5
19.9
0.5
24.5
18.3
5.0
3.9
16.0
0.6
20.5
15.8
4.1
3.4
13.4
0.7
2.5
3.1
24.1
16.8
21.6
19.7
18.7
17.2
23.3
18.7
19.9
16.9
20.2
19.5
20.0
19.9
2.5
62
69
61
2.2
86
78
90
2.3
96
73
87
2.4
100
68
104
2.3
91
66
106
2.2
100
63
103
2.2
90
70
117
2.1
90
69
117
1.9
0.3
2.0
0.5
2.1
0.6
2.2
0.5
2.5
0.5
2.2
0.4
2.8
0.3
3.1
0.2
Cash Flow Statement
Y/E March
Op. Profit/(Loss) before Tax
Interest/Dividends Recd.
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
(inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Investments
Change in net worth
(Inc)/Dec in Debt
Other Items
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
2010
14,202
614
-985
3,450
17,281
-6,134
11,147
-3,161
-9,295
2,019
-4,827
-1,974
-2,216
-6,998
988
5,596
6,584
2011
15,660
929
-1,403
-6,501
8,685
-12,603
-3,918
3,531
-9,072
-5,740
8,847
-1,351
-2,224
-468
-855
6,584
5,729
2012
23,742
1,669
-4,204
-4,768
16,439
-8,141
8,298
-10,936
-19,077
-780
8,707
-920
-2,719
4,288
1,650
5,729
7,379
2013
24,763
3,151
-4,900
-9,903
13,111
-11,297
1,814
-6,573
-17,870
1,620
4,468
-836
-2,736
2,516
-2,243
7,379
5,136
2014
31,699
2,003
-5,093
-5,265
23,344
-14,371
8,973
-8,253
-22,624
-247
8,064
-1,640
-3,581
2,596
3,315
5,136
8,451
2015
33,472
2,793
-5,984
-3,353
26,929
-13,502
13,427
-12,487
-25,989
2,302
-1,617
-704
-3,979
-3,998
-3,058
8,451
5,393
(INR Million)
2016E
41,444
1,768
-6,782
-12,537
23,894
-16,657
7,237
8,609
-8,048
781
-6,962
0
-4,761
-10,941
4,905
5,394
10,299
2017E
48,203
2,148
-8,104
-7,848
34,399
-14,834
19,565
0
-14,834
928
0
0
-5,689
-4,761
14,804
10,299
25,103
31 July 2015
13

Dr Reddy’ s Labs
Corporate profile: Dr. Reddy's Laboratories
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 and Active Ingredients
(PSAI) and Proprietary Products. Company is
currently developing bio-generics and NCEs. Key
focus markets include India, the US, Europe and
Russia.
Exhibit 34: Sensex rebased
4,250
3,900
3,550
3,200
2,850
2,500
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Dr Reddy's Labs
Sensex - Rebased
Exhibit 29: Shareholding pattern (%)
Jun-15
Promoter
DII
FII
Others
25.5
5.9
54.8
13.8
Mar-15
25.5
5.4
55.8
13.3
Jun-14
25.5
5.4
53.8
15.3
Exhibit 30: Top holders
Holder Name
First State Investments Management (UK) Ltd.First
Oppenheimer Developing Markets Fund
Blackrock Institutional Trust Company & their
Abu Dhabi Investment Authority
Life Insurance Corporation of India & their Associates
% Holding
8.2
4.2
3.1
1.9
1.7
Note: FII Includes depository receipts
Exhibit 31: Top management
Name
Satish Reddy
G V Prasad
Designation
Chairman
Vice Chairman & MD & CEO
Exhibit 32: Directors
Name
Satish Reddy
G V Prasad
J P Moreau*
Anupam Puri*
Omkar Goswami*
Name
Sridar Iyengar*
Bruce L A Carter*
Kalpana Morparia*
Ravi Bhoothalingam*
Ashok Sekhar Ganguly*
*Independent
Exhibit 33: Auditors
Name
BSR & Co LLP
Sagar & Associates
Type
Statutory
Cost Auditor
Exhibit 34: MOSL forecast v/s consensus
EPS (INR)
FY16
FY17
MOSL
forecast
159.2
190.2
Consensus
forecast
149.3
177.6
Variation (%)
6.6
7.1
31 July 2015
14

Dr Reddy’ s Labs
NOTES
31 July 2015
15

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Analyst ownership of the stock
Served as an officer, director or employee
DR REDDY’ S LABS
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31 July 2015
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