Buy DRL as UCB buy incrementally positive

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Published: April 9, 2015 2:49:33 AM

Reiterate ‘buy’ on Dr Reddy's Laboratories and value the stock at 20x FY17 EPS forecast of Rs 177.5, which derives a target price of Rs 3,532.

Reiterate ‘buy’ on Dr Reddy’s Laboratories and value the stock at 20x FY17 EPS forecast of R177.5, which derives a target price of R3,532. Dr Reddy’s has announced an agreement to acquire select brands from UCB in India mainly in respiratory, derma and paediatrics segments. The acquired portfolio includes market-leading brands such as Atarax, Nootropil, Xyzal and Zyrtec. As part of the deal, Dr Reddy’s will also acquire 350 employees of UCB, largely comprising the field force. This deal is expected to close by Q1FY16.

The company has acquired the portfolio for R800 crore (118 million euros). The acquired brands’ sales were at R150 crore as of CY14, which implies EV/sales multiple of 5.3x. This multiple is in line with recent acquisitions in India’s pharma market (Torrent acquired the brand portfolio of Elder at EV/sales of 5x in December 2013). As per Dr Reddy’s, the acquired brands have recorded an annual growth rate of 15-17% over the past three years. The ebitda margins of the acquired business are higher than DRL’s current India operations.

We view this acquisition as incrementally positive as this acquisition demonstrates Dr Reddy’s increased focus on the domestic pharma market.

The company has put in place a new leadership team and attrition in the field force has come down. This we believe will help Dr Reddy’s grow ahead of the broader market consistently.

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