For Q2’09, Dr Reddy’s Laboratories (DRL)’s top line surged 26.4% y-o-y to Rs16.1 billion, driven by a strong growth in the global generics and pharmaceutical services and active ingredients (PSAI) businesses.
However, the EBITDA margin declined by 82 bps y-o-y to 14.3% due to increases in the material and personal costs and SG&A expenses, even though R&D expenses fell.
The company continues to focus on new product launches during the quarter, which accounts for around 25% of its overall revenues. It is gaining from the investments made in R&D in the past; it launched around 60 new products in H1’09 despite the fall in R&D expenses (as a percentage of sales).
Besides, the speciality business was launched in November 2008 and is expected to add around $100 million in the next 3 years to the overall revenues.
Moreover, the Company has 66 Abbreviated New Drug Applications (ANDAs) pending with the US FDA at the end of Q2’09, aggregating to total market of around $48 billion and will provide significant upside in revenues, if exclusivity is granted to DRL.
At the current market price of Rs460.05, the stock is trading at a forward P/E of 19.3x and 13.5x for FY09E and FY10E, respectively, and it trades at a discount of around 10% to the average industry multiple.
Based on DCF valuation, we have arrived at a target price of Rs550, assuming an 8% Rf, a 5% terminal growth rate, and an 11.4% WACC. Our target price provides an upside of 19.4% from the current levels; thus, we maintain our BUY rating.