Dr Reddy’ s Labs
BSE SENSEX
26,397
S&P CNX
8,111
13 June 2016
Update | Sector: Healthcare
CMP: INR3,086 TP: INR3,200 (+4%)
Announces acquisition of ANDA portfolio from Teva
Neutral
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, (INR m)
Free float (%)
DRRD IN
170.5
526.3 / 7.8
4,383/2,750
2/-1/-7
1,788
74.4
Financials & Valuations (INR b)
Y/E Mar
2016 2017E 2018E
Net Sales
154.7 172.2
198.3
EBITDA
39.1 40.5
49.2
PAT
22.6 25.2
30.2
EPS (INR)
132.3 147.8
177.5
Gr. (%)
1.7 11.7
20.1
BV/Sh (INR)
752.3 880.3 1,031.9
RoE (%)
18.8 18.1
18.6
RoCE (%)
13.9 14.2
15.3
P/E (x)
23.3 20.9
17.4
P/BV (x)
4.1
3.5
3.0
Shareholding pattern (%)
As on
Mar-16
Promoter
25.6
DII
FII
Others
6.0
36.0
32.4
Dec-15 Mar-15
25.6
25.5
5.7
37.8
30.9
5.4
55.8
13.3
Note: FII includes depository receipts
Dr. Reddy's announced that it has entered into a definitive agreement with
Teva to acquire a portfolio of 8 ANDAs in the US for USD350m. Teva is divesting
the portfolio as a pre-condition to close the Allergan deal (due to overlap). The
acquisition of these ANDAs is contingent upon the closing of the Teva/Allergan
deal and an approval by the US FTC.
Entering new categories:
The acquired products (1 approved and 7 pending
ANDAs), including sublingual film (Suboxane, market size of > USD1b), vaginal
ring (NuvaRing, market size of > USD500m), topicals and inhalation repsules,
face limited competition. Combined branded sales of these products stand at
USD350m. We believe DRRD would have been looking for annual sales of
>USD150m for at least five years to justify the cost they have paid. According
to management, 4 of these 8 ANDAs are expected to commercialize by FY18,
while the remaining 4 would come to the market over the following two years.
Focus on limited competition products more than ever:
This is in line with
DRRD's endeavor to enhance its focus toward proprietary/complex generic
products. However, USD44m/ANDA (USD350m for 8 ANDAs) is the company's
highest-ever investment on any set of generic products up till now. Apart from
this, the company would continue investing on its existing pipeline of generic
and proprietary products (~12% of sales or ~USD300m in FY17 as R&D
expense).
Leveraging on strong balance sheet:
DRRD is acquiring the portfolio on a cash-
free, debt-free basis, and plans to fund it via internal accruals and debt. At end-
FY16, DRRD had net cash of USD97m on its books. The company generated
~USD400m of FCF in FY16.
Early resolution of regulatory issues key for turnaround:
We believe the speed
at which DRRD is able to resolve regulatory issues with the FDA holds the key
(FY18, in our view). Although long-term fundamentals remain intact, the stock
should trade range-bound in the near term due to competition in key products
and regulatory concerns. We maintain our Neutral rating with a TP of INR3,200
@ 18x FY18E PER.
Exhibit 1:
Composition
of Revenues
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16
Revenue Mix (%)
USA
India
Europe
LatAm
RoW
CRAMs
Innovative product
38.2
12.3
5.5
15.8
5.2
20.6
2.4
39.4
12.5
5.2
16.4
5.4
19.1
1.9
45.9
11.1
5.3
15.0
5.9
14.3
2.5
43.0
11.8
5.1
13.0
5.6
19.1
2.4
46.8
11.4
4.1
13.8
6.3
15.7
1.8
39.8
13.4
4.0
13.4
9.9
17.8
1.7
42.8
11.3
4.4
12.4
10.6
15.9
2.6
44.3
12.3
6.0
8.5
9.0
19.2
0.8
49.3
12.7
5.1
8.2
7.2
14.9
2.7
46.5
13.7
5.3
9.8
6.8
14.8
3.0
48.9
14.6
4.9
9.2
7.0
12.8
2.6
50.4
14.0
4.7
6.1
6.7
15.3
2.7
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 3982 5584
Amey Chalke
(Amey.Chalke@MotilalOswal.com); +91 22 3982 5423
Investors are advised to refer through important disclosures made at the last page 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
Operating metrics
Exhibit 2: Key operating metrics
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16
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
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)
81.0
43.3
29.2
8.5
12.8
56.7
19.0
13.3
12.7
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)
74.8
42.0
23.8
9.0
10.3
58.0
25.2
20.0
20.6
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
71.0
39.5
23.1
8.4
29.0
60.5
29.0
24.0
16.1
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
78.2
42.8
24.0
11.4
20.6
57.2
21.8
16.2
13.9
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)
76.8
40.7
25.0
11.0
21.5
59.3
23.2
17.9
15.6
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)
77.3
41.5
24.3
11.5
17.2
58.5
22.7
17.3
16.0
42.8
11.3
4.4
12.4
10.6
15.9
2.6
8.8
1.5
10.6
(8.6)
(10.0)
94.0
20.7
11.8
76.8
41.8
23.7
11.2
30.7
58.2
23.2
17.9
16.3
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)
78.7
45.2
20.3
13.3
12.5
54.8
21.3
15.5
13.7
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
73.8
38.9
23.2
11.7
21.6
61.1
26.2
20.2
16.6
46.5
13.7
5.3
9.8
6.8
14.8
3.0
11.2
29.9
13.9
48.1
(18.4)
(23.8)
(7.4)
94.8
71.4
38.7
21.5
11.2
20.7
61.3
28.6
22.4
18.1
48.9
14.6
4.9
9.2
7.0
12.8
2.6
3.2
18.0
34.1
13.8
(23.8)
(32.1)
(16.9)
5.6
74.7
40.5
23.8
10.3
23.6
59.5
25.3
18.8
14.6
50.4
14.0
4.7
6.1
6.7
15.3
2.7
(3.0)
10.5
11.0
(24.9)
(30.7)
(27.3)
(22.3)
245.3
78.0
43.4
21.7
13.0
70.0
56.6
22.0
13.9
10.0
Source: Company; MOSL
13 June 2016
2

Dr Reddy’ s Labs
Story in charts
Exhibit 3: Formulation led sales growth (INR b)
Formulations (INR b)
API (INR b)
15.1
25
22
25
27
10.6
Exhibit 4: India formulation business
DF Revenue (INR b)
YoY Growth (%)
20.0
12.6
7.9
13.7
16.0
18.0
20
49
20
53
24
70
31
83
24
105
121
130
142
164
12
FY11
13
FY12
15
FY13
16
FY14
18
FY15
21
FY16
25
29
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Source: Company, MOSL
FY17E FY18E
Source: Company, MOSL
Exhibit 5: US Sales to grow at 7-8% CAGR over FY15-18E
Core US sales (INR b)
YoY Growth (%)
Exhibit 6: PSAI business to see moderate growth ahead
PSAI Sales (INR b)
29
25
-4
24
-22
20
FY11
24
FY12
31
FY13
FY14E
FY15
6
-13
22
FY16
25
27
YoY Growth (%)
21
77
32
13
7
FY11
FY12
FY13
FY14
18
FY15
17
FY16
4
FY17E FY18E
56
11
10
FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 7: EBITDA margins improving with product mix
Gross Margin (%)
55.5
57.9
58.9
55.4
58.2
EBITDA Margin (%)
57.6
59.6
59.0
60.0
Exhibit 8: Moderate earnings growth ahead
Core EPS (INR/ share)
20.2
21.0
24.5
21.3
24.0
22.6
25.3
23.5
24.8
66
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Source: Company, MOSL
FY11
73
FY12
81
FY13
125
FY14
130
FY15
132
FY16
148
177
FY17E FY18E
Source: Company, MOSL
13 June 2016
3

Dr Reddy’ s Labs
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
74,693
6.3
15,660
21.0
4,147
11,513
189
1,118
0
12,442
1,403
11.3
0
11,039
11,099
939.2
2011
846
45,144
45,990
23,503
87
69,580
38,359
14,714
23,645
5,997
622
47,560
16,059
17,615
5,729
8,157
23,490
23,490
0
24,070
69,580
2012
96,738
29.5
23,742
24.5
6,254
17,488
690
1,669
0
18,467
4,204
22.8
0
14,263
12,428
12.0
2012
848
56,596
57,444
32,210
-833
88,821
44,064
18,086
25,978
7,268
11,558
59,179
19,352
25,339
7,379
7,109
28,691
28,691
0
30,488
88,821
2013
116,266
20.2
24,763
21.3
6,237
18,526
118
2,904
365
21,677
4,900
22.6
0
16,777
13,682
10.1
2013
849
72,256
73,105
36,678
-1,669
108,114
52,958
21,213
31,745
6,069
18,131
68,751
21,600
31,972
5,136
10,043
30,603
30,603
0
38,148
108,114
2014
132,171
13.7
31,699
24.0
7,085
24,614
79
1,753
329
26,616
5,093
19.1
0
21,524
21,188
54.9
2014
851
89,950
90,801
44,742
-3,310
132,233
63,444
25,695
37,749
6,675
26,384
78,664
23,992
33,037
8,451
13,184
31,936
31,936
0
46,728
132,233
2015
148,189
12.1
33,472
22.6
8,103
25,369
77
2,871
0
28,163
5,984
21.2
0
22,179
22,179
4.7
2015
852
110,450
111,302
43,126
-4,013
150,414
72,011
30,040
41,971
6,119
38,871
85,580
25,529
40,755
5,394
13,901
38,556
38,556
0
47,024
150,415
2016
154,708
4.4
39,088
25.3
10,343
28,745
334
1,103
-2,374
27,140
7,127
26.3
0
20,013
22,577
1.8
2016
853
127,483
128,336
33,513
-4,230
157,619
83,198
35,356
47,842
6,119
39,394
84,654
25,578
41,306
4,921
12,849
45,034
45,034
0
39,620
157,618
2017E
172,237
11.3
40,476
23.5
9,818
30,658
334
2,260
0
32,584
7,397
22.7
0
25,188
25,188
11.6
2017E
852
149,158
150,010
33,403
-4,230
179,183
94,257
41,246
53,011
6,119
32,409
101,139
32,837
42,418
8,660
17,224
38,140
38,140
0
62,999
179,182
(INR Million)
2018E
198,258
15.1
49,168
24.8
11,301
37,867
309
2,360
0
39,918
9,680
24.3
0
30,238
30,238
20.1
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
E: MOSL Estimates
(INR Million)
2018E
852
174,976
175,828
28,403
-4,230
200,001
105,317
47,653
57,664
6,119
32,409
121,724
36,876
48,827
14,213
21,808
42,561
42,561
0
79,163
200,000
13 June 2016
4

Dr Reddy’ s Labs
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
2011
65.6
90.1
271.8
11.2
20.2
2012
73.3
110.2
338.7
13.7
19.1
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
23.7
5.1
4.7
3.5
15.7
0.6
25.0
16.1
20
1.2
86
78
0.4
24.0
17.7
23
1.2
96
73
0.4
21.0
14.7
20
1.2
100
68
0.4
25.9
16.6
23
1.1
91
66
0.4
21.9
14.2
21
1.0
100
63
0.3
2016
132.3
193.0
752.3
17.6
17.6
23.3
13
4.1
3.3
13.2
0.6
18.8
13.9
20
1.0
97
60
0.2
2017E
147.8
205.4
880.3
22.2
17.6
20.9
NA
3.5
3.0
12.8
0.7
18.1
14.2
20
1.0
90
70
0.2
2018E
177.5
243.8
1031.9
26.6
17.6
17.4
0.9
3.0
2.6
10.3
0.9
18.6
15.3
21
1.0
90
68
0.1
P/E
PEG (x)
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2011
15,660
0
-6,501
-1,403
929
8,685
-12,603
-3,918
3,531
0
-9,072
-5,740
8,847
-2,224
-1,351
-468
-855
6,584
5,729
2012
23,742
0
-4,768
-4,204
979
15,749
-8,141
7,608
-10,936
0
-19,077
-90
8,707
-2,719
-920
4,978
1,650
5,729
7,379
2013
24,763
0
-9,903
-4,900
3,151
13,111
-11,297
1,814
-6,573
0
-17,870
1,620
4,468
-2,736
-836
2,516
-2,243
7,379
5,136
2014
31,699
0
-5,265
-5,093
2,003
23,344
-14,371
8,973
-8,253
0
-22,624
-247
8,064
-3,581
-1,640
2,596
3,315
5,136
8,451
2015
33,472
0
-3,353
-5,984
2,793
26,929
-13,502
13,427
-12,487
0
-25,989
2,302
-1,617
-3,979
-704
-3,998
-3,058
8,451
5,393
2016
39,088
0
6,931
-7,127
-1,605
37,287
-24,428
12,859
-523
0
-24,950
534
-9,613
-3,512
-219
-12,810
-474
5,394
4,921
2017E
40,476
0
-19,640
-7,397
1,926
15,365
-14,987
378
6,985
0
-8,002
907
-110
-4,420
0
-3,623
3,740
4,921
8,661
(INR Million)
2018E
49,168
0
-10,611
-9,680
2,051
30,927
-15,954
14,973
0
0
-15,954
886
-5,000
-5,307
0
-9,420
5,553
8,660
14,213
13 June 2016
5

DR REDDY’S LAB GALLERY
DR REDDY’S LAB
OTHER COMPANIES
SECTOR UPDATES

Dr Reddy’ s Labs
NOTES
13 June 2016
7

Disclosures
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Dr Reddy’ s
by it and/or its
may be distributed
Labs
affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or
inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to
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13 June 2016
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