Dr Reddy’s Laboratories’ (DRL) reported weak numbers for Q408, as revenues were down 16.9% y-o-y to Rs12.9 billion, due to supply constraints leading to stock outs, rebates paid to the insurance companies and increasing price pressure.
EBITDA margin declined sharply by 13.3% y-o-y to 18.2% in Q408, led by an increase in personnel cost, SG&A, and pricing pressure.
The company faced supply constraints in Germany during FY08 resulting in significant stock outs. However, we believe the constraints to ease out as the DRL fully moves the product to its own supply chain network.
Further, the company is aggressively undertaking product development in order to expand its product portfolio, as reflected from the rising R&D cost, which has increased by more than 40% for FY08.
Consequently, we expect revenues to grow at around 18% for FY09E as DRL sorts out its supply issues and improve its product mix. Besides, EBITDA margin is expected to improve marginally to around 19% in next 2-3 years as Betapharm’s production is transferred to India.
At the current market price of Rs645, the stock is trading at a forward P/E of 21.8x and 19.2x for FY09E and FY10E. Based on DCF valuations, we have arrived at a target price of Rs608. We downgrade our rating to HOLD.