We retain our ‘buy’ rating on Dr Reddy’s Laboratories (DRRD) with a target price of R2,888. We continue to value DRRD at 18x one-year forward EPS of R160.4 (blended FY15/FY16f EPS). We prefer Lupin to DRRD.
DRRD’s Q4 results came in lower than our expectation. Sales, Ebitda and net earnings were 1%, 10% and 9% lower than our estimates, respectively. Net earnings were 22% lower than consensus.
Lower-than-estimated gross margin and higher R&D spend led to the earning miss. Lack of earnings upgrades by consensus may limit the stock’s performance in the near term.
The US revenues declined q-o-q (from R1,620 crore to R1,490 crore). The decline in US sales was guided by the management given channel fill in injectable products in the previous year. Injectables sales in the US exceeded $225 million in FY14, which is >24% of US revenues. The company has 62 pending approvals with nine FTFs.
Domestic formulation growth was robust at 18% y-o-y. This is despite the implementation of price cuts under the new pricing policy. The company reported strong volume expansion of products under NLEM. DRRD launched 11 products in the market in FY14, significantly lower than the previous year.