We build in core EPS growth of ~10% over FY14-FY16 for DRRD, largely due to a weak pipeline in US in the near term. Even though near-term earnings growth is muted, we believe the company deserves at least sector-average valuations, given its established R&D capabilities, lean balance sheet and well-balanced geographic presence. Hence, 21x FY15e and 19.0x FY16e are undemanding, in our view.
Delay in incremental competition for key limited competition products launched in FY14 may lead to a positive surprise. DRRD's Q1FY15 results were in line with estimates. Revenue grew 24% y-o-y to R3,520 crore (in line), Ebitda grew 51% to R820 crore (in line) and PAT grew 53% y-o-y to R550 crore (5% beat). Sales growth was driven by strong traction in US generics (up 51% y-o-y; vs estimates 33%). Performance of other markets was below estimate, PSAI (declined 6%) and Russia (up 15% vs estimates of 22%). India sales grew 15% vs estimates of 13%.