>DR. REDDY'S LABORATORIES (FIRST GLOBAL)

What Happened Last Quarter…

Dr. Reddy’s Laboratories Ltd.’s (DRRD.IN/REDY.BO) performance in Q4 FY09 and the full year FY09 was impacted by an exceptional charge related to impairment of goodwill and intangibles. However, excluding the exceptional charge, DRL’s overall results for Q4 FY09 as well as FY09
were ahead of our expectations, driven by strong sales recorded by generic Imitrex. DRL recorded a net loss of Rs.12.6 bn and Rs.9.2 bn for Q4 FY09 and FY09 respectively, primarily on account of the exceptional charge of Rs.14.6 bn related to the Betapharm acquisition. Excluding the exceptional charge, the company’s net profit for FY09 was up 24% Y-o-Y to Rs.5.5 bn, which was higher than our estimate of Rs.4.8 bn. The company’s topline was up 49% Y-o-Y to Rs.19.3 bn in Q4 FY09 and grew 38% Y-o-Y to Rs.69.0 bn in FY09, which was well ahead of our estimate of Rs.65.0 bn for the full year FY09, driven mainly by the successful launch of the authorized generic version of Imitrex in late November 2008, which recorded sales of Rs.6.8 bn. Excluding generic Imitrex sales, DRL’s topline was still up a healthy 24% Y-o-Y. The company’s EBIDTA margin for FY09 improved by 210 basis points to 19.2%.

Management has guided for a topline growth of 10% in FY10, which is exactly in line with our
earlier expectation. In view of the company’s performance in FY09 and management’s guidance for FY10, we have raised our revenue and EPS estimates for FY10 from Rs.70.7 bn and Rs.35.4 to Rs.74.8 bn and Rs.37.0 respectively. Since we upgraded DRL to ‘Moderate Outperform’ in April 2008, the stock has outperformed the NIFTY by 9 percentage points. Also, the recent approvals received by DRL for its FTF applications, Prilosec OTC and Arixtra, have resulted in improved visibility of its near term big product opportunities. Moreover, management’s recent decision to trim DRL’s global operations clearly indicates that the company is focusing on sustaining its base business growth and improving its margins & RoCE. The realignment of Betapharm (i.e. shifting of most of its manufacturing activities to India), trimming of global operations, reduction in fixed overheads, and improvement in R&D productivity will help bring down DRL’s operating costs. Plus, DRL’s future revenue growth will be driven by at least one ‘FTF opportunity’ that the company expects to enjoy each year for the next 3-4 years. At 15.5x, the stock trades almost in line with the industry average of 15-16x. We reiterate our ‘Moderate Outperform’ rating on DRL.

Key Quarterly Highlights

The company’s topline growth
was driven by the successful
launch of the authorized generic
version of Imitrex in late
November 2008, as well as on
account of a strong performance
from Russia/CIS and favourable
currency movements.

■ DRL recorded a net loss of Rs.12.6 bn and Rs.9.2 bn for Q4 FY09 and FY09 respectively, primarily on account of an exceptional charge of Rs.14.6 bn related to the impairment of goodwill and intangibles in Q4 FY09 arising from the Betapharm acquisition.

With the market now moving to a tender supply model and due to the change in the market drivers, the goodwill had to be evaluated for impairment. As a result, the company took a non-cash charge of $213 mn. Post these charges, the carrying value of Betapharm intangibles and goodwill in DRL’s books stands at approximately €50 mn and €160 mn respectively.

■ Excluding the exceptional charge, the company’s net profit for FY09 came in at Rs.5.5 bn, up
24% Y-o-Y and higher than our estimate of Rs.4.8 bn.

■ In Q4 FY09, the adjusted net profit was up 60% Y-o-Y to Rs.2 bn (excluding write down charges of Rs.14 bn and Sumatriptan exclusive sales).

■ The topline was up 49% Y-o-Y to Rs.19.3 bn in Q4 FY09 and grew 38% Y-o-Y to Rs.69.0 bn in FY09, which was well ahead of our estimate of Rs.65.0 bn.

■ The company’s topline growth was driven by the successful launch of the authorized generic version of Imitrex in late November 2008, as well as on account of a strong performance from Russia/CIS and favourable currency movements. Excluding generic Imitrex sales, the topline was still up by a healthy 24% Y-o-Y. Sumatriptan recorded sales of around Rs.3.5 bn in Q4 FY09.

■ On the back of strong revenues from Sumatriptan, DRL’s US sales were up 192% Y-o-Y in Q4 FY09. Excluding Sumatriptan sales, the company’s US sales grew 44% Y-o-Y (organic growth of 35% Y-o-Y).

■ The EBIDTA margin for the full year FY09 was up 210 basis points to 19.2%, partly due to a decline in SG&A expenses.

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