>DR REDDY'S LABORATORIES (ICICI SECURITIES)

STANDING TALL

Dr. Reddy’s Laboratories’ (DRL) consolidated recurring net profit soared 160% YoY to Rs2.39bn, as per Indian GAAP. This was ahead of Street & our estimates, mainly on the back of higher-than-expected EBITDA margin, cost savings and lower depreciation. Consolidated operating revenues grew 20% YoY to Rs17.9bn, powered by authorised generics (AG) Imitrex ~Rs2bn) and the US & RoW markets. EBITDA margin expanded 756bps to 22% owing to high-margin AG
Imitrex, favourable currency rate, benefit of operating leverage and cost savings. The management reiterated its FY10 guidance of 10% YoY revenue growth, in rupee terms. Launch of generic Prilosec OTC within a month followed by potential launch of generic Arixtra over the next 2-4 quarters would drive earnings growth. The stock is currently trading at FY10E P/E of 20x.

■ Strong growth in Q1FY10 powered by AG Imitrex. Boosted by continued healthy revenues from AG Imitrex (~Rs2.1bn or 12% of total), DRL’s consolidated revenues rose 20% to Rs17.9bn, as per the Indian GAAP. Depreciation decreased 13% YoY and 23% QoQ to Rs1bn. Interest costs crashed 46% YoY to Rs122mn due to lower rates and borrowings. Consequently, consolidated recurring net profit spiked-up 160% to Rs2.39bn, significantly ahead of our estimates.

■ FY10 revenue growth guidance of 10% YoY maintained. Management reiterated its FY10 revenue growth guidance of 10% in rupee terms. The revenue growth is likely to be mainly on the back of a strong Q1FY10 and launch of generic Prilosec OTC next month. This would be followed by potential launch of generic Arixtra over the next 2-4 quarters. Combined potential first-year-revenue upside from these two products is likely to be US$50-85mn. Further, we believe the upside would continue beyond the first year, given the favourable competitive landscape.

■ Reiterate BUY. Buoyed by multi-year upside from two key products – generic Prilosec OTC (to be launched in mid-August ’09) and generic Arixtra (April ’10 launch) – and healthy growth in base business, we expect DRL to see strong performance in the next two years. Better-than-expected Q1FY10, potential of earnings upgrade (8-10% for FY10E) as well as superiority over peers on the US FDA compliance front, we raise our target price to Rs920/share from Rs854/share.

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