2013-01-08 500124 in (Ambit Capital) DR Reddy's Labs (BUY, 18% Upside) - The Strong Gets Stronger - Initiation.61911183

Pharmaceuticals
January 08, 2013
Dr Reddys Labs
Bloomberg: DRRD IN EQUITY Reuters: REDY.BO
BUY
Accounting: AMBER Predictability: AMBER Earnings Momentum: GREEN

INITIATING COVERAGE
Jatin Kotian
Tel: +91 22 3043 3261 jatinkotian@ambitcapital.com
The strong gets stronger

Opportunities in Dr Reddys (DRLs) US pipeline combined with a recovery in the hitherto slow growing Indian business leaves DRL well positioned over the next two years. With free cash flow to remain strong between FY12-15 inspite of heavy capex, DRL looks likely to be a debt free business by the end of FY14. Inspite of diminishing debt, DRL is likely to maintain premium RoEs vis a vis peers (25% vs 23%). We initiate coverage with a BUY stance and a valuation of `2,230, 18% upside. Competitive position: STRONG Changes to this position: POSITIVE FY14 - a transitional year for the US generics business: Fewer patent expiries and high revenue base seem likely to lead to muted revenue growth for DRL in FY14 (6% vs. 14% in FY13). We draw comfort from the fact that DRLs filing profile indicates potential opportunities (with clarity to emerge only in FY14). A few ambiguities around key assets, including complex generics and Biosimilars, could be clarified in FY14. Emerging markets - a mixed bag: Whilst the CIS market would slow down (12% revenue growth in FY14 vs 18% in FY13) given the regulatory changes and the base effect, revenue growth would remain healthy. The Indian business should see a steady recovery (~13% revenue growth), with the proportion of slow-moving categories further declining, although DRLs overall growth would lag industry growth (running at around 14 %). Strong FCF and return ratios despite high capex: FCF to remain strong through FY12-15 (between ` 12-15 bn p.a.) despite a high yearly capex run rate of ~`7bn. In the absence of any large acquisitions, we expect DRL to be largely debt-free by FY14-end. DRLs return ratios have remained higher than its peers (25% RoE vs 23% for peers) despite a sub-par Indian business and inspite of greater dependence on the highly competitive US generics space. The firms premium RoEs are driven by higher focus on limited competition products and strong presence in the high margin CIS region. Valuation: Our DCF valuation for DRL has explicit forecasts until FY24 and then estimates the residual value by applying a terminal growth rate of 4%. Using a risk-free rate of 8%, market risk premium of 7% and three-year adjusted beta of 0.7x, we arrive at a cost of equity of 12.9%. A target longterm debt-to-capital-employed of 10% and post-tax cost of debt of 4% gives an overall WACC of 12%. Using this discount rate, our DCF model values DRL at `2,230, implying an FY14 P/E of 21.4x (a premium of 5% to peers), EV/EBITDA of 14.1x (a premium of 3% to peers) and 18% upside. We initiate coverage with a BUY stance. Key risks: The key risks for DRL stems from: (a) changes in regulations governing foreign players in the CIS region, (b) delays in progress in the biosimilar pipeline, and (c) a growth slowdown in the Indian pharma market.
Key financials
Year to March Operating Income (` mn) EBITDA (` mn) EBITDA margin (%) EPS (`) BPS (`) RoE (%) P/E (x) Source: Company, Ambit Capital research FY11 75,289 16,258 21.6 65.3 271.9 25.0 28.9 FY12 97,139 24,143 24.9 85.9 338.8 28.3 22.0 FY13E 113,443 26,039 23.0 97.9 414.7 26.1 19.3 FY14E 124,046 27,428 22.1 104.0 498.3 22.9 18.1 FY15E 141,027 31,147 22.1 122.0 593.8 22.4 15.5
Ritu Modi
Tel: +91 22 3043 3292 ritumodi@ambitcapital.com
Recommendation
CMP: Target Price (12-month): Upside (%) EPS (FY14): Variance from consensus (%)
BUY
`1,888 `2,230 18 `104 (2)
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `320bn/US$5,818mn `1,916/1,526 `603mn/US$11mn 0.7 19,691 5,988
Stock Performance (%)

1M Absolute Rel. to Sensex 2.6 1.2 3M 11.2 7.2 12M 17.6 (6.5) YTD 3.2 1.8
Performance
20,000 19,000 18,000 17,000 16,000 15,000 May-12 Apr-12 Jun-12 Aug-12 Nov-12 Dec-12 Feb-12 Jan-12 Sep-12 2000 1900 1800 1700 1600 1500
Sensex
Dr. Reddy's
1-yr fwd EV/EBITDA

18 17 16 15 14 13 12 11 Dec-09 Mar-10 Jun-10 Dec-10 Mar-11 Jun-11 Dec-11 Mar-12 Jun-12 Dec-12 Sep-10 Sep-11 Sep-12
Source: Bloomberg, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
Dr Reddys Labs
CONTENTS
Snapshot of Company Financials...3 Company overview 4 SWOT Analysis5 Investment summary.6 Strong traction in emerging markets.9 Biosimilars offer further growth opportunities.. 15 US Time for a breather. 16 Key assumptions and estimates18 Ambit vs consensus.19 Key risks.20 Catalysts 21 Valuation and recommendation.. 22 Cross-cycle valuation. 23 Relative valuation of Indian pharma companies. 23 Accounting analysis 24
Ambit Capital Pvt Ltd
Dr Reddys Labs
Snapshot of Company Financials

Profit and Loss
Year to March (` mn) Net revenues EBITDA Depreciation Interest expense Adjusted PBT Tax Adjusted net profit Reported net profit Profit and Loss Ratios EBITDA Margin (%) Net profit margin (%) EV/ EBITDA (x) P/E on adjusted basis (x) EV/Sales (x) FY12 97,139 24,143 5,214 1,067 18,763 4,204 14,613 14,262 24.9 15.0 13.8 22.0 3.4 FY13E 113,443 26,039 5,721 304 20,887 4,201 16,657 16,100 23.0 14.7 12.6 19.3 2.9 FY14E 124,046 27,428 6,222 618 22,071 4,427 17,706 17,706 22.1 14.3 11.9 18.1 2.7
Company Background Dr Reddys Laboratories (DRL) is Indias second-largest pharmaceutical company in terms of revenues. The company began its business as a bulk drugs player and rapidly moved up the value chain to become a major generic-formulations company with global operations. The companys product portfolio comprises a number of therapeutic categories and it markets products in more than 100 countries; DRLs focus markets include the US, Europe, India and Russia. The company has set itself an internal revenue target of US$2.52.7bn. The vertical integration through its Pharmaceuticals Services and Active Ingredients (PSAI) business has also helped DRL.
Balance Sheet (consolidated)

Year to March (` mn) Total Assets Fixed Assets Current Assets Investments Total Liabilities Total networth Total Debt Current Liabilities Deferred Tax Liability Balance Sheet ratios RoCE RoE Gross Debt/Equity (x) Net debt (cash)/ Equity (x) P/B (x) FY12 117,505 46,775 59,589 11,141 117,505 57,444 34,033 26,861 (833) 19.2 28.3 0.6 0.2 5.6 FY13E 133,469 50,574 71,652 11,243 133,469 70,324 34,033 29,945 (833) 17.3 26.1 0.5 0.1 4.6 FY14E 145,155 50,852 82,997 11,305 145,155 84,489 28,939 32,560 (833) 16.8 22.9 0.3 (0.1) 3.8
Cash Flow (consolidated)

Year to March (` mn) PAT Depreciation Tax Net Working Capital CFO Capital Expenditure Investment CFI Issuance of Equity Inc/Dec in Borrowings Net Dividends Interest paid CFF Net change in cash FCF FY12 14,262 5,214 (345) (8,960) 16,150 (8,421) (10,576) (18,665) 6 7,054 (2,216) (1,109) 3,735 1,220 7,729 FY13E 16,100 5,721 (183) 20,967 (9,520) (8,648) (0) (3,220) (304) (3,524) 8,795 11,447 FY14E 17,706 6,222 (2,571) 20,431 (6,500) (5,017) (0) (5,094) (3,541) (618) (9,253) 6,161 13,931
Strong FCF despite high capex

25,000 20,000 15,000 10,000 5,000 (5,000) FY09 FY10 FY11 FY12 FY13E FY14E FY15E Rs mn
DRL has witnessed significant de-rating in the past year

31 29 27 25 23 21 19 17 15 Dec-09 Dec-10 Jun-10 Sep-10 Dec-11 Jun-11 Sep-11 Mar-10 Mar-11 Mar-12 Dec-12
3
Jun-12
CFO
FCF
DRRD 1-yr fwd P/E
Avg 1-yr fwd P/E
Source: Bloomberg, Company, Ambit Capital research
Sep-12
Dr Reddys Labs
Company overview
Exhibit 1: Revenue breakup for DRL
Revenues (` mn) Business Segment Generics North America Europe India Russia CIS Others PSAI* North America Europe India Others Proprietary Products Total FY10 48,606 16,817 9,638 10,158 7,232 1,887 2,874 20,404 3,673 6,652 2,646 7,433 1,267 70,277 FY11 53,340 18,996 8,431 11,690 8,942 1,916 3,365 19,648 3,170 7,020 2,619 6,839 1,705 74,693 FY12 70,243 31,889 8,259 12,931 11,024 2,236 3,904 23,813 4,272 8,424 3,586 7,531 2,682 96,738 % contribution to revenues FY10 69.2 23.9 13.7 14.5 10.3 2.7 4.1 29.0 5.2 9.5 3.8 10.6 1.8 100.0 FY11 71.4 25.4 11.3 15.7 12.0 2.6 4.5 26.3 4.2 9.4 3.5 9.2 2.3 100.0 CAGR (%) FY12 growth 31.7 67.9 (2.0) 10.6 23.3 16.7 16.0 21.2 34.8 20.0 36.9 10.1 57.3 29.5 4-yr 3-yr FY12 (FY08-12) (FY09-12) 72.6 33.0 8.5 13.4 11.4 2.3 4.0 24.6 4.4 8.7 3.7 7.8 2.8 100.0 20.9 41.9 (5.2) 12.5 28.3 11.2 34.4 9.4 6.3 10.5 11.1 9.3 51.3 17.9 12.2 17.1 (11.4) 15.1 23.8 7.1 25.8 8.3 3.3 11.0 14.6 5.9 44.3 11.7
Source: Company, Ambit Capital research. * PSAI stands for Pharmaceutical Services and Active Ingredients.
Exhibit 2: Event Calendar

Year 1984 1986 1987 1988 1991 1999 2000 2001 2005 2006 2007 2008 2009 2010 2011 2012 Key events DRL established by Mr K Anji Reddy Goes public and enters international markets with exports of Methyldopa Obtains its first USFDA approval for Ibuprofen API Acquires Benzex Laboratories Formulation exports to Russia commence Acquires American Remedies in India Establishes Reddy US Therapeutics Inc in the US Obtains first-ever 180-day market exclusivity for a generic drug (Fluoxetine 40mg cap) in the US Acquires Roche's API business in Mexico Acquires Betapharm in Germany Launches Reditux (Rituximab) the world's first monoclonal antibody biosimilar Acquires BASFs formulation manufacturing unit at Shreveport, Lousiana, US Acquires DowPharmas small molecules business at Mirfield & Cambridge, UK Enters into a strategic alliance with GSK for emerging markets Launches darbepoetin alfa in India under the brand name Cresp GSK and DRL agree to the sale of US penicillin facility and products Enters into a JV with FUJIFILM for promoting generic drugs in Japan Crosses US$2bn in revenues Signs deal with Merck Serono to develop and commercialise biosimilars globally
Source: Company, Ambit Capital research
Dr Reddys Labs Exhibit 3: SWOT analysis for DRL

Strengths Weaknesses
DRL enjoys a strong formulation and drug development capability,

which is reflected in the wide number of complex APIs and the steadily expanding portfolio of biogenerics. The company has been able to develop a broad generic portfolio in the US market (DRLs largest geography) to capitalise on the significant patent expiries in the past two years. In India, the focus on the fast-growing oncology and biogenerics segment has clearly given the company an early mover advantage In the CIS markets, DRL has been able to capitalise on the strong growth rates in recent times by investing in the geography during downturns when most Indian companies scaled back their operations This has enabled the company to establish its brands and in turn enjoy higher-than-market growth rates, because the OTC business has largely helped offset any impact of price caps in the prescription business The company has a strong financial profile with low leverage and strong FCF generation, which clearly reflects the strength of the underlying businesses and also enables the company to sustain investments in long gestation technologies/segments.
In India, DRL has been steadily losing market share, because the
company has been unable to offset the slower growth in its traditional portfolio completely. Hence, DRL has been unable to fully leverage its strong recall and acceptability amongst medical practitioners to build a presence in the faster-growing therapeutic segments (diabetes, CNS, etc) in India. In CIS region, DRLs current brands are largely in house brands. However, the company will have to enlarge the basket of brands to expand the business further. Whilst the company has inlicenced brands, these are yet to emerge as key growth drivers.
Opportunities
Threats
In the CIS region, the next stage of growth for the company is likely
to emerge from more complex products. The companys plans to launch biogenerics could be a key growth driver in the future. The new drug pricing regime would have a minimal impact on DRLs earnings. Potential for industry reconsolidation could enable DRL to claw back some of the lost market share. In the US generics space, whilst near-term growth appears muted, we see several interesting opportunities beyond FY14. In Biosimilars DRL has a head start over most Indian pharma majors. With sales in several emerging markets including India and tie up with Merck for product development for developed markets, DRL could have a significant first mover advantage in the space. Source: Company, Industry, Ambit Capital research
The key threat in CIS remains regulatory changes and their

impact on product pricing. Proposed regulations to encourage indigenisation and local manufacturing are risks, however we believe they are surmountable. The proposed drug price changes in India could have an impact on reference listed prices in export markets. Whilst the domestic market remains a source for significant longterm growth, given the slowdown in GDP growth, a lower nearterm growth in formulations is inevitable. Hence, managing growth in such an environment would be a challenge for the entire Indian pharma industry and more so for DRL
Dr Reddys Labs
Investment summary
FY14, a transitional year for DRLs US generics business
The US market is still DRLs key revenue driver, accounting for ~33% of overall revenues in FY12. However, FY14 is likely to be a relatively muted year for the US generics business (6% in FY14 vs 14% in FY13) owing to the combined impact of the high base effect and lower number of patent expiries. A significant number of products went off patent in the US generics space in FY12 and FY13 (amounting to US$19.4bn and US$35.6bn, respectively). As a result, DRL enjoyed a revenue growth of 68% in FY12 in its US generic business, and we expect revenue growth of 14% in FY13. The average market size of the addressable products was also large at ~US$1.3bn in FY12 and ~US$1.9bn in FY13. On the other hand, a fewer number of drugs would go off patent in FY14, which coupled with the high competitive intensity would result in lower overall core earnings growth for the year (13% in FY14 vs 42% in FY13). However, despite a mellow FY14, we expect the year to be largely transitional, and we expect significantly better growth from FY15 onwards (16% in FY15 vs 6% in FY14). The reason for our optimism for FY15 and beyond stems from our analysis of DRLs DMF (Drug Master Filing) profile. Whilst the known launches in FY15 amount to ten products with a value of US$9.9bn, we see potential for a further number of interesting opportunities from other product filings as well (refer to Exhibit 26 on page 17). In addition, we are also likely to see more clarity on product filings from the proposed acquisition of OctoPlus, an injectable technology company based in the Netherlands. We expect further development in DRLs biogenerics business to come from: (1) more filings in the CIS region (primarily Russia); and (2) progress on the tie-up with Merck for their biogenerics partnership for developed markets. All of these could be important stock catalysts. The visibility on the biogenerics business would improve on getting better clarity on future pathways.
Earnings growth and margins could be muted in FY14; expect a step up from FY15 onwards
We expect FY14 to be a transitional year for the business, and we expect growth to pick up only from FY15 onwards (revenue growth: FY12 22%, FY13E 21%, FY14E 11%, FY15E 15%). Thus, we model 15% revenue CAGR over FY12-15E and 26% earnings growth over the same period. These assumptions exclude the impact of one-offs and exclusivities. A slowdown in the US generics business in FY14 would result in moderate overall revenue growth of 11%, which is likely to increase to 15% in FY15 on the back of interesting opportunities from other product filings. The domestic market, after a muted FY12, is likely to stabilise in FY14 and FY15 (Indian revenue growth: FY12 11%, FY13E 13%, FY14E 13%, FY15E 14%) and record 13% CAGR over FY12-15E as the proportion of slower-moving categories further declines from current level of 24%. In the CIS business, we assume growth rates to slow down to ~12-14% over FY13-15E, owing to the high base and steep growth in recent years. We expect core earnings growth of 42% in FY13, which is likely to taper down to 13% in FY14 mainly on account of lower product launches during the year and also due to a high base effect. As highlighted earlier, we believe FY15 is likely to present interesting opportunities for DRL from other product filings (25% core earnings growth).
Dr Reddys Labs
Exhibit 4: After a muted FY14, DRLs margins to pick up

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 FY10 FY11 FY12 FY13E FY14E FY15E Rs mn % 26.0 25.0 24.0 23.0 22.0 21.0 20.0
Exhibit 5: New product launches and opportunities will lead to earnings growth for DRL in FY15
60% 50% 40% 30% 20% 10% 0% -10% FY10 FY11 FY12 FY13E FY14E FY15E
FY15E 21,853 (6,500) 15,353 (18,149)
Global Generics Others

PSAI EBITDA margin - RHS
Core EBITDA growth
Core EPS growth
Source: Company, Ambit Capital research. Note: Core growth excludes exclusivities and one-offs
Strong financial profile

1) A problem of plenty: DRL enjoys a strong balance sheet and cash flow generation. Overall debt levels of the company continue to be at manageable levels, with overall debt of `32bn and net debt:equity of 0.2x as at end-FY12. The company has achieved a comfortable leverage level despite high capex intensity in recent years (overall capex of `11.5bn in FY11 and `8.5bn in FY12, including smaller strategic acquisitions made during these years). Going ahead, capex intensity is likely to be high (~`7bn annually), partly owing to DRLs focus on the biogenerics business (which has a long gestation period); however, we expect overall debt levels to moderate further with strong FCF generation of `12bn-15bn annually over FY13-15E. Given the significant cash flow generation, DRL may undertake smaller-sized acquisitions to enter new geographies or to acquire new technologies. We currently do not model any such acquisitions in our estimates; however, given the strong financials we do not see this as a key risk.
Exhibit 6: Strong cash flow generation to continue for DRL
` mn CFO Net capex FCF Net debt FY10 13,226 (4,222) 9,004 4,511 FY11 8,009 (11,258) (3,249) 17,810 FY12 16,150 (8,421) 7,729 14,058 FY13E 20,967 (9,520) 11,447 5,263 FY14E 20,431 (6,500) 13,931 (5,992)
2) Strong return ratios: Despite sub-industry growth rates in India, strong presence in high margin Russian market coupled with higher growth from the more competitive US generics space, return ratios are high as compared to similar sized peers. This, we believe, is indicative of: (a) a strong underlying US generic business characterised by higher focus on limited competition products, (b) traction in the CIS region despite regulatory changes, and (c) good chemistry skills resulting in a superior cost structure. Over FY09-12, DRLs RoAs and RoEs have expanded whilst key peers have seen either flat or falling return ratios. Given the increasing investments in longer gestation businesses like biogenerics, we expect return ratios to moderate in the medium term. The scope for improvement in return ratios would improve after FY14 along with the improvement in the launch visibility on a few key filings.
Dr Reddys Labs
Exhibit 7: DRLs RoEs have been amongst the best in the industry
(%) Cadila Sun Pharma Dr Reddy's Lupin Cipla FY10 35.7 18.2 22.6 34.1 19.6 FY11 36.9 21.0 25.0 29.5 15.8 FY12 FY13E 27.5 23.9 28.3 23.8 16.4 28.6 23.9 26.1 23.8 16.0 FY14E 27.3 22.9 22.9 25.3 18.2 FY15E 28.6 20.9 22.4 23.0 17.3
Exhibit 8: DRLs
(%) Cadila Sun Pharma Dr Reddy's Lupin Cipla
RoAs
FY10 18.5 17.5 15.5 20.5 17.4
to
FY11 22.2 19.6 17.4 20.2 15.3
bottom
out
in
FY14
FY15E 19.1 19.1 17.4 13.9 14.3
FY12 FY13E 15.3 22.0 18.3 16.5 15.8 15.6 24.6 17.2 14.4 15.8
FY14E 16.6 23.3 16.4 14.8 14.3
Source: Company, Ambit Capital research. Note: We have considered Bloomberg consensus estimates for all the companies except Cadila and Dr Reddys for FY13, FY14 and FY15
Source: Company, Ambit Capital research. Note: We have considered Bloomberg consensus estimates for all the companies except Cadila and Dr Reddys for FY13, FY14 and FY15
Stock de-rating seems to be over

DRLs stock has underperformed its peers in the past few quarters, owing to continued concerns over the product launch profile beyond FY13 as well as the flagging Indian formulations business. As a result, the stock has gradually de-rated (refer to Exhibit 9). Even whilst we factor in weaker earnings growth and gross margin profile in FY14, we believe that earnings visibility in FY15 would be significantly better on account of interesting opportunities from other product filings. Furthermore, overall clarity on the timelines of a host of filings for commercialisation would emerge over the next three quarters, which should also help support earnings growth beyond FY15. We also highlight the re-rating potential from the biogenerics business, which the company continues to identify as a key asset. Thus, whilst the biogenerics business may not emerge as a material earnings driver in the next two years, clarity especially on the tie-up with Merck for the biogenerics portfolio is likely to help rerate the stock.
Exhibit 9: DRLs 12-month stock price performance has lagged that of its peers
160 150 140 130 120 110 100 90 80 Mar-12 May-12 Jan-12 Apr-12 Jun-12 Jul-12 Aug-12 Sep-12 Feb-12 Oct-12 Nov-12 Dec-12 Jan-13 DRL Cipla Cadila Sun Lupin
Source: Bloomberg, Ambit Capital research. Note: We have indexed the stock prices for all the companies indicated above to 100.
Dr Reddys Labs
Strong traction in emerging markets

DRLs key revenue growth driver is its Emerging Market (EM) business, which recorded a sales CAGR of 19.5% as against the overall core sales CAGR of 17% over FY08-12. Beyond India, DRL has a presence in markets such as Venezuela, South Africa, Vietnam, and the CIS markets. Within emerging markets, the CIS region has emerged as a strong business geography, accounting for 15% of overall core revenues in FY12. The Indian businesss share in overall revenues is declining, but this business remains an important market (14% of overall core revenues in FY12 for the company). In recent years, DRL, like other major Indian pharma companies, has also restructured its operations in EMs by winding up its operations from a number of smaller countries so as to focus on the larger markets within a particular region.
CIS region remains at the heart of DRLs EM business

The CIS region has been the key growth driver for DRL within the EM space. Hence, whilst the EM business recorded 19.5% revenue CAGR over FY08-12, revenues from Russia and the CIS expanded by 24.5% over the same period. The company has traditionally had a strong presence in Russia and its neighbouring states as compared to most other Indian companies. DRLs management has managed to leverage this efficiently.
Exhibit 10: Snapshot of revenue growth across emerging markets
Revenues (` mn) FY10 Core branded generics Emerging Markets India Russia and CIS Russia CIS (excl Russia) RoW Core revenues 45,730 22,151 10,158 9,119 7,232 1,887 2,874 67,401 FY11 53,340 25,913 11,690 10,858 8,942 1,916 3,365 74,693 FY12 64,888 30,095 12,931 13,260 11,024 2,236 3,904 91,383 % contribution to core revenues FY10 67.8 32.9 15.1 13.5 10.7 2.8 4.3 100.0 FY11 71.4 34.7 15.7 14.5 12.0 2.6 4.5 100.0 4-year FY12 (FY08-12) 71.0 20.1 32.9 14.2 14.5 12.1 2.4 4.3 100.0 19.5 12.5 24.5 28.3 11.2 34.4 17.3 % CAGR 3-year (FY09-12) 14.9 18.6 15.1 20.3 23.8 7.1 25.8 13.6 FY12 growth 21.6 16.1 10.6 22.1 23.3 16.7 16.0 22.3
Russia an attractive bet

Within the CIS region, Russia has emerged as the key market, accounting for nearly 83% of overall regional revenue. Russia is DRLs second-largest market after the US market. The company has consistently gained market share in the region and was ranked 13th in FY12 by Pharmexpert, a market research company in Russia. DRL has increasingly focused on the OTC market and is the market leader in segments such as gastrointestinal and pain therapeutics, The company also has a strong presence in segments such as anti-infectives, dermatology, cardiovascular medicine and gynaecology. The company is also expanding its presence in oncology and is planning a launch of its biosimilar products. Currently, the Russian pharma market is valued close to US$23bn and has enjoyed a revenue CAGR of 21% over CY06-11. Although the market growth has slowed in recent years (due to the imposition of price caps as a part of regulatory changes), recent trends indicate a revival in growth because the impact of the price caps has now been fully absorbed by the market. Independent external research estimates show that the Russian pharmaceutical market is likely to record 13% revenue CAGR to reach US$37bn in 2015. DRL is likely to benefit from key government initiatives such as investment up to ~Euro11bn in public healthcare, improved qualitative pharmaceutical treatments, increasing personal income leading to rising healthcare expenditure.
Dr Reddys Labs
Exhibit 11: After price cuts in 2010, the Russian pharma market has rebounded
800 700 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 CAGR of 21%
Exhibit 12: Average retail prices for the OTC segment have increased the most despite structural changes
180 170 160 150 140 130 120 110 100 90 CY07 Non-VEP CY08 VEP CY09 OTC CY10 CY11 Prescription
RUR bn
Source: Pharmstandard CY11 Annual report
Source: Industry. Note: Prices have been indexed to 100.
Increased focus on brands - DRLs strong competitive advantage

Exhibit 13: OTC contribution to overall Russia revenues has increased substantially
30% 25% 20% 15% 10% 5% 0% FY08 FY09 FY10 FY11 FY12
OTC portfolio contribution
Russia is the largest OTC market (in the Central and European region) and has registered 23% growth in per capita OTC expenditure. Of the total Russian pharma market, a high proportion of sales happen through the OTC segment 50% by value and 73% by volume. DRL has gradually increased the OTC business revenue contribution to overall revenue in the Russian market from ~8% in FY08 to nearly 30% in FY12, a CAGR of 77% over FY08-12. Revenue growth in the OTC business in FY12 alone was at 39% (higher than the 24% growth registered in the overall Russian business). DRLs focus on expanding its business through its established brands in Russia has given the company a strong competitive advantage vs other Indian peers. Moreover, this has also enabled DRL to expand its footprint at a much faster pace than even local competitors. A comparison of revenue growth of local Russian peers (Pharmstandard and Gedeon Richter) with DRL indicate that DRLs growth in the Russian market has remained fairly stable and in most cases DRL has seen the highest growth rate amongst these companies. Against this backdrop and the expected growth in the Russian pharma market, we believe DRLs revenues from the Russia business will record 13% CAGR over FY13-15E and its contribution to overall revenues will marginally increase from 14% in FY12 to 15% by FY15.
Exhibit 15: Russia business growth to remain close to 13% over FY13-15E
25,000 20,000 15,000 10,000 5,000 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Rs mn 40% 35% 30% 25% 20% 15% 10% 5% 0%
Exhibit 14: Russia/CIS growth for DRL has remained robust

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Russia/CIS sales (Rs mn)

growth - RHS
Formulations - Russia/CIS - LHS growth Contribution to generics business
10
Dr Reddys Labs
We have the following concerns about the CIS markets: 1. OTC products may not be entirely out of regulatory price caps Commentary from Pharmstandard, which is one of Russias largest domestic pharma companies, indicates that OTC products may not entirely be outside the ambit of price caps imposed through the list of drugs under VEP (Vital and essential products). The Russian company highlighted that the prescription market (Rx) drugs enjoyed a much higher growth than segments of the OTC market in CY11 especially when certain OTC were included in VEP schedules. More importantly, it appears that due to the earlier round of price restrictions, the share of the OTC segment is increasing, with the OTC market growing much faster than the overall pharma market. Against this backdrop, higher regulatory scrutiny of pricing in the OTC market is a possibility. 2. MNCs dominate the local market Whilst the Russian pharma market is extremely fragmented, with the top-10 companies accounting for ~35% of the overall market in value terms, closer scrutiny indicates that most of the top-ten players are foreign companies. Hence, recent legislation has been enacted to encourage greater participation of domestic companies and to enhance local pharmaceutical production. Whilst DRL has a tieup with a local company for the manufacture of products, we believe that the overall regulatory regime would increasingly favour domestic companies.
11
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Exhibit 16: Domestic therapeutic segments revenue break-up (FY12)

Segment Gastrointestinal CVS Pain Anti -Infective Derma Anti -diabetic Others % contribution 25 20 10 9 7 6 23
India market growth Not as weak as perceived

The branded formulations business in India accounted for 13.6% of DRLs overall revenues in 1HFY13 (vs 16% in FY08). Over FY09-12, the company recorded 15% revenue CAGR revenue from the segment. DRL has maintained its focus on therapeutic segments such as gastro-intestinal, cardiovascular, pain management and oncology. Over the past few years, DRLs revenue growth in India has lagged industry growth, given that a large part of its product portfolio is focused on acute therapies, which are expanding at a slower pace than the market.
Exhibit 17: DRLs growth has lagged domestic industry growth
25% 2.4% 20% 15% 10% 5% 0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 Dr Reddy's India business growth Market share - RHS
Source: Industry, Company, Ambit Capital research
2.5% 2.4% 2.3% 2.3% 2.2% 2.2% 2.4% 2.3% 2.2% 2.1% 2.1% 2.0% Indian Pharma industry growth
From 4QFY11, the domestic formulations business has seen single-digit growth owing to: (1) the decline in industry growth rates (particularly in the acute therapy segment), and (2) DRLs acute-dominated portfolio. However, from 4QFY12, DRLs domestic growth rates have started to pick up, owing to the recovery in industry growth. However, our analysis suggests that whilst DRLs overall growth rates may have lagged industry growth, DRLs growth outside of its traditional portfolio has actually been in line with industry growth. In the Exhibit below, the others category i.e. largely the non-traditional portfolio (including new extensions of older brands) have enjoyed a CAGR of nearly 18% over FY07-12 as against an overall India formulation growth of ~13% and industry growth of 14%. Hence, we believe that even as the share of the older portfolio of drugs continues to decline, from 37% in FY07 to 24% in FY12, DRLs overall growth rates should converge closer to market rates.
Exhibit 18: Key brands have seen relatively subdued growth over the past several years
Brands Omez Nise Stamlo Atocor Razo Mintop Key brands Others India Source: Company, Ambit Capital research Category Gastro Pain Hypertension Cardio Gastro Hairloss Market Share 51% 47% 19% 5% 13% NA Revenue (` mn) FY07 830 873 370 189 211 119 2,592 4,372 6,964 FY08 763 626 403 269 214 150 2,425 5,635 8,060 FY09 776 605 422 269 214 172 2,458 6,020 8,478 FY10 928 690 473 274 247 196 2,808 7,350 10,158 FY11 1,065 700 507 278 285 209 3,044 8,646 11,690 FY12 1,089 596 566 317 306 225 3,099 9,832 12,931 5-year (FY07-12) 5.6 (7.3) 8.9 10.9 7.7 13.6 3.6 17.6 13.2 CAGR (%) 3-year (FY09-12) 12.0 (0.5) 10.3 5.6 12.7 9.4 8.0 17.8 15.1 FY12 growth 2.3 (14.9) 11.6 14.0 7.4 7.7 1.8 13.7 10.6
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We also expect the proposed new drug pricing policy of capping the prices of drugs based on a simple average method, to be potentially beneficial over the longer run for established players like DRL. Our discussion with industry experts indicates that unintentionally, the Government may have set in motion a process of restructuring of the pharma industry. Until now smaller pharma companies with lower pricing points survived due to their pricing differential as compared to the bigger companies. However, with the difference between price points narrowing, such companies would likely see gradual business erosion over time. Hence, an extremely fragmented industry would consolidate more structurally over time. DRL, despite its steady erosion of market share in recent years, still remains extremely well regarded amongst the medical fraternity. Overall, over FY13-15E, we estimate revenue CAGR of 13% in the domestic formulation segment given the increased focus on newer therapeutic segments. Based on these growth rates, we expect the declining share of the domestic business to DRLs overall growth rates to stabilise at the current levels.
Exhibit 19: Contribution declining
14,000 12,000 10,000 8,000 6,000 4,000 2,000 FY07 FY08 FY09 FY10 FY11 FY12 Others - LHS Key brands - LHS Key Brands to overall revenues
of
key
brands
has
been
40% 38% 36% 34% 32% 30% 28% 26% 24% 22% 20%
Exhibit 20: Domestic business growth to remain close to 13% over FY13-15E
20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Rs mn 25% 20% 15% 10% 5% 0% FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Rs mn
Formulations - India - LHS growth Contribution to generics business
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Dr Reddys Labs
Less-than-stellar performance from other EMs

As highlighted earlier, apart from India and Russia, DRL has a strong presence in other emerging markets such as Brazil, Venezuela, South Africa and Vietnam. Whilst the contribution from these markets to overall revenues remains low at 4.9% in 1HFY13 (vs 4% in FY12), revenues from these markets have recorded a CAGR of 25.8% over FY08-12. In FY12, these markets expanded by 16% to `3.9bn mainly driven by strong growth in South Africa, Australia and other south Asian markets. However, muted growth in Venezuela (impacted by currency devaluation) restricted a further increase in revenues. We believe that despite having a small base, growth can be delivered from this segment through more product launches, and hence we build in revenue CAGR of 22% over FY13-15E
Exhibit 21: RoW revenues to increase at 22% over FY13-15E
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Rs mn 70% 60% 50% 40% 30% 20% 10% 0% FY09 FY10 FY11 FY12 FY13E FY14E FY15E
Formulations - RoW - LHS
growth
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Dr Reddys Labs
Biosimilars offer opportunities

further
growth
In FY08, DRL expanded its biogeneric portfolio in India with the launch of Reditux (generic: Rituximab). Subsequently, the company launched two more biosimilar products in India. Now, DRLs biogenerics portfolio consists of the following drugs: Rituximab (Brand: Rituxan) used for treating rheumatoid arthritis and cancer; Cresp (Brand: Aranesp) used for the treatment of anaemia; Grafeel (Brand: Neupogen) used for treating leukapheresis; and PegGrafeel (Neulasta) used in cancer therapy.
In addition, DRL continues to invest in widening the portfolio, and the company has planned more launches in India over the next 2-3 years. Reditux remains the key product in the biogeneric portfolio with annual sales of nearly US$10mn and the product is among the top-5 products in the Indian market. DRL has also entered into an agreement with Merck Serono whereby both the companies would jointly develop biosimilars in the oncology space. DRL would undertake drug development until phase 1. After validation, Merck would take over the trials from Phase 2, with Merck retaining the manufacturing once the product is commercialised. The agreement also defines the marketing geographies for both the companies, with DRL being responsible for India & Russia whilst Merck would retain Europe and a few other EMs. In the US, the products would be commercialised jointly. Whilst the venture is an important landmark for DRLs entry in the biosimilar space, at least for the next 3 years, this is unlikely to result in material upsides to earnings. After the companies lead the drug through the necessary trials in the next 18-24 months, we are likely to see more clarity on potential launch timelines. In the medium term, Reditux could be launched in the Russian market, which would also help validate the potential for the product.
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US Time for a breather

The North American business accounted for nearly 35% of overall revenues in FY12. Over FY09-12, this business has enjoyed much stronger growth rates at 17% than DRLs overall revenue growth at 12%. Moreover, the core business (excluding one-offs and exclusivities) expanded at a much faster rate of 28%. In fact, in FY12, the business recorded amongst the highest growth rates amongst Indian companies.
Exhibit 22: DRLs core business has in the past shown superlative performance
35,000 30,000 25,000 20,000 15,000 10,000 5,000 FY08 Core FY09 FTF FY10 FY11 FY12 Rs mn 120% 100% 80% 60% 40% 20% 0% Core business growth - RHS
Exhibit 23: FY12 core US sales growth for DRL has been the second highest amongst Indian generic players
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Lupin Sun DRL Cadila Ranbaxy Glenmark 7% 19% 21% 14% 30% 38%
Patent expiry drying up In the US, DRL launched 15 products in FY12 and 19 products in FY13, catering to a market of ~US$19bn and ~US$36bn, respectively. One of the key reasons for the high number of new launches in the recent past has been the increasing brand value of drugs that are going off-patent (worth ~US$70bn from 2010 to 2012). Whilst a few interesting product launches would continue in the medium term (2HFY13), which would help maintain the growth momentum, we believe this opportunity is likely to shrink beyond FY13. After a strong US pipeline in FY13 (two 180-days exclusivities, two settlements and four limited competition products), the pipeline for FY14 is relatively weak with only one visible 180-days FTF launch and one limited competition product launch. Also, in FY14, the pipeline of patent expiry is substantially lower than the earlier years, which should result in a slowdown in growth momentum for FY14. Both these factors will result in a muted growth for FY14 for the US generics business. We believe incremental revenues would only come from increasing market share of existing products and traction on launches of complex generics.
Exhibit 24: Product launches for DRL to taper off in FY14
Description Number of launches during the year Market size (US$ mn) Avg market size (US$ mn) FY11 FY12 FY13E FY14E FY15E
Exhibit 25: 2013 patent expiries significantly lower

40.0 35.0 30.0 US$ mn 35.6
10
15
19
12
10
25.0 20.0 15.0 15.0 15.5 15.8 14.9
19.4 14.5 15.5 13.5
6,410
19,086
36,322
14,000
9,901
10.0 5.0 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
641.0 1,272.4 1,911.7 1,166.7
990.1
Total brand value of drugs losing patents
Source: Industry
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Dr Reddys Labs
However, interesting launch opportunities from FY15 onwards Whilst the product pipeline until FY14 appears weak, DRLs DMF filings over the past couple of years indicate opportunities through FY15 and beyond. Apart from the known launches of at least ten products through FY15 (brand value of US$9.9bn), Exhibit 26 also indicates the potential products that could be commercialised beyond FY14 and FY15.
Exhibit 26: Likely opportunities for DRL
Generic Name Linezolid Bromfenac Brand Name Zyvox Bromday Form Tablet, injectable Solutions Powder Capsule Tablet Tablet; ER Injectable Injectable Injectable Tablet Capsule, Tablet Size Patent expiry (US$ mn) 680 100 200 240 NA 150 500 200 350 700 70 Nov-14/Jan-21 off patent Off patent but exclusivity till Mar15 from Jul-14 to Oct-27 June-15/Apr-26 Off patent but exclusivity till Oct14 Dec-14/Jul-28 Off patent but exclusivity till May-13 Off patent Dec-13 Nov-24/Feb-25 Major DMF filers Alembic, Teva, Glenmark, Apotex None Hetero drugs Teva None Cipla, Lupin, Torrent, Mylan, Apotex, Glenmark Sun, Teva Fresenius Kabi Teva Sun, Cadila, Cipla, Apotex, Hetero drugs Glenmark, Ranbaxy, Apotex
Bendamustine HCL Treanda Lubiprostone Asenapine Paliperidone Bivalirudin Decitabine Azacitidine Capecitabine Amitiza Saphris Invega Angiomax Dacogen Vidaza Xeloda
Trospium Chloride Sanctura
Source: Orange Book, Industry, Ambit Capital research. Note: NA indicates Not Available
Acquisition of OctoPlus also strengthens the injectable franchise In October 2012, DRL agreed to buy OctoPlus, which is a company based in the Netherlands. The company has specific expertise in high-end injectables. Its capabilities lie in making improved injectable pharmaceuticals based on proprietary drug delivery technologies. The company also focuses on medicine ingredients that are difficult to formulate. This would complement DRLs existing capabilities. Whilst the transaction is likely to be completed within six months, we believe this acquisition gives a further fillip to DRLs efforts to target more niche opportunities in the US generic space.
Exhibit 27: Summary of products that could be filed in the next three years
Generic Name Medroxyprogesterone Acetate Etonogestrel Paliperidone Palmitate Brand Name Form injectable Size (US$ mn) 370 120 240 14 800 1400 NA Patent expiry Jul-15 Off patent Off patent From Dec-12 to Nov-18 From Jan-13 to Dec-16 From Jul-13 to Jul-16 Off patent Major DMF filers None None None Dr. Reddy's Teva, Bachem, Takeda, Mallinckrodt Sun, Teva, Wockhardt Ranbaxy, Excella
Triptorelin Pamoate Trelstar
Depo-Provera injectable Implanon Invega Sustenna Implant Suspension Injectable Injectable Implant
Leuprolide Acetate Lepron Depot Octreotide Acetate Sandostatin Ganciclovir Vitrasert
Source: OctoPlus, Company, Ambit Capital research
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Key assumptions and estimates

Exhibit 28: Key assumptions and estimates
Particulars FY12 FY13E FY14E FY15E Comments Muted growth in the US (the largest contributor to global 100,059 generics) will result in lower FY14 growth. However, interesting opportunities from other product filings will 14.8 lead to growth in FY15 and beyond. FY14 likely to be a relatively muted year for the US 44,562 generics business, owing to the combination of a high base effect and lower number of patent expiries in the 16.0 US. Given the increased competitive intensity in these 8,664 markets and marginal pick up in Betapharm revenues, we expect subdued overall growth rates, with revenue 6.0 CAGR of 5% over FY13-15E. 18,661 Even as the share of the older portfolio of drugs continues to decline, overall growth rates from this 13.0 segment should be closer to market growth rates. 20,037 Due to the increased focus on the OTC segment and the expected growth in the Russian pharma market, we 14.0 expect 15% revenue CAGR over FY12-15E from this geography. 8,134 Increased product launches will lead to growth and we expect 28% CAGR over FY12-15E from other emerging 25.0 markets. 35,915 Muted growth in domestic market and Europe will lead 10.0 to this segment expanding at ~15% over FY12-15E. 4,453 We expect this segment to record a CAGR of ~18% over 20.0 FY12-15E. Revenue growth to remain muted for FY14 given the 141,027 lower number of launches and exclusivities. However, growth in the US business from FY15 onwards will lead 13.7 to overall revenue growth for the company. 52.5 22.1 22.1 Margins are expected to remain flat in FY14 on account of lower revenue growth. However, FY15 onwards, we model in expansion in margins. Segment revenue breakup (` mn unless specified) Global Generics Growth (%) US Growth (%) Europe Growth (%) India Growth (%) Russia & CIS Growth (%) RoW Growth (%) PSAI Growth (%) Proprietary Products & Others Growth (%) Financials (` mn unless specified) Revenues Growth (%) Gross margin (%) EBITDA margin (%) Core EBITDA margin (%) Depreciation Net Interest expense Adjusted PBT Adjusted PBT margin (%) Tax rate (%) Adj consolidated PAT Adj consolidated PAT margin (%) EPS (`) Core EPS (`) Source: Company, Ambit Capital research 97,139 29.0 58.1 24.9 21.6 5,214 166 18,763 19.3 22.8 14,613 15.0 85.9 60.8 113,443 16.8 53.3 23.0 21.7 5,721 (568) 20,887 18.4 20.8 16,657 14.7 97.9 86.5 124,046 9.3 52.5 22.1 21.5 6,222 (865) 22,071 17.8 20.1 17,706 14.3 104.0 97.7 70,243 31.7 31,889 67.9 8,259 (2.0) 12,931 10.6 13,260 22.1 3,904 16.0 23,813 21.2 2,682 57.3 79,756 13.5 36,241 13.6 7,785 (5.7) 14,615 13.0 15,693 18.4 5,423 38.9 29,525 24.0 3,313 23.5 87,188 9.3 38,415 6.0 8,174 5.0 16,515 13.0 17,577 12.0 6,507 20.0 32,653 10.6 3,711 12.0
6,636 Strong cash flow generation to limit debt requirement and keep interest levels and interest rates lower in the (1,374) future. 25,884 Declining EBITDA margins and lower non-operating income to keep PBT margins stable in FY14, after which 18.4 we expect a marginal pick up. PAT to remain stable because we believe FY14 will be 20,769 the transitional year for the company. Growth in margins is expected beyond FY15. 14.7 122.0 Core EPS growth over FY12-15E is expected to be much higher than overall growth mainly due to product 122.0 launches picking up from FY15 onwards. 20.0
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Dr Reddys Labs
Ambit vs consensus
Exhibit 29: We are above consensus due to growth momentum beyond FY15
Consensus Revenue (` mn) FY2013 FY2014 FY2015 EBITDA (` mn) FY2013 FY2014 FY2015 PAT (` mn) FY2013 FY2014 FY2015 16,594 18,199 19,846 16,657 17,706 20,769 0.4% In FY14, higher-than-consensus depreciation results in divergence at the PAT level. For FY15, the positive impact on -2.7% margins due pick up in launches will flow down to the 4.7% bottomline. 24,696 26,897 27,903 26,039 27,428 31,147 We are marginally ahead of consensus on EBITDA in FY14. 2.0% Significantly higher-than-consensus revenues have resulted in considerable divergence in FY15. 11.6% 5.4% 114,301 126,306 133,910 113,443 124,046 141,027 -0.8% We are marginally lower than consensus in FY14 as we expect fewer launches during the year which will keep growth in FY14 -1.8% muted. However, we expect FY15 is likely to have interesting opportunities from other product filings which will result in 5.3% significant growth in FY15. Ambit Divergence Comments
Source: Bloomberg, Ambit Capital research
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Dr Reddys Labs
Key risks
The key risks for DRL stems from: (a) Changes in regulations governing foreign players in the CIS region, (b) Delays in progress in the biosimilar pipeline, and (c) growth slowdown in the Indian pharma market. Changes in regulations in the key CIS markets The high growth in the Russian market over the years and the rising healthcare costs have prompted the government to: (a) cap rising drug prices and (b) encourage more participation from local companies. In the past, DRL has managed its growth through greater participation in the OTC market. The OTC market would invite greater regulatory attention, when the markets share increases. The regulatory changes for encouraging domestic production are, in our view, manageable through manufacturing tie-ups with local companies. DRL already has a tie-up with R-Pharm (entered in December, 2010) though the extent of the dependence on the partner is not clear. Delays in progress in the biosimilar pipeline DRLs expanding pipeline of biosimilars is a critical asset for future business growth. The regulatory pathways for proving necessary bioequivalence in regulated markets are still not clearly spelt out. Biosimilars would require necessary clinical trials, which are time consuming. Thus, poor visibility is an inherent risk. Whilst such delays may not impact earnings, they would likely cloud sentiment and impact valuations. Along similar lines, delays in US FDA approvals for expected product launches in the coming years may impact earnings and valuations. Slowdown in GDP growth has the potential to decrease pharma growth Whilst the Indian formulations market has seen healthy revenue CAGR of 14% over CY04-11, most of the growth appears to be back-ended and has come in later years (16% CAGR over CY08-11). This period not only coincides with the high GDP growth rates but a renewed government emphasis on rural spending, which in turn had led to improved spending power on healthcare. With GDP growth slowing (our Economist expects 6.3% GDP growth for FY13) and the ongoing fiscal crunch capping the Governments ability to increase spending on various rural projects, we believe that in the short term, growth rates for domestic formulations could suffer. The pharma sector is thus likely to see more subdued growth rates over the next 12-18 months.
Exhibit 30: The Indian pharma market has expanded at ~1.7x GDP growth
12 11 10 9 8 7 6 5 4 CY05 CY06 CY07 CY08 CY09 CY10 CY11 Pharma market US$bn - LHS GDP growth (%) 21 19 17 15 13 11 9 7 5 Pharma market growth (%)
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Dr Reddys Labs
Catalysts
US generic launches could surprise on the upside: While the launch profile over FY14 and FY15 in number of new product launches is well articulated, we believe there exists further opportunities which the street may not be anticipating at this point of time. We expect FY14 to be a year when further clarity emerges on the generic drug launch profile in FY15 and beyond. Further stock catalyst would also be the progress on the venture with Merck for making biogenerics for the global markets. Strong growth in India formulations: Indian geography has been DRLs Achilles heel given the sub-industry growth in the past few years. As the share of the older generation products in overall India formulations declines, we expect Indian growth to more closely mirror the industry growth rates. With the new drug pricing regime likely to lead to greater consolidation of market shares amongst the established pharma names, we expect DRL to also benefit given its strong brand recall.
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Dr Reddys Labs
Valuation and recommendation

We have valued DRL using a three-stage DCF model. Our FCFE model has three distinct phases: FY14-17: We model each year and broadly assume 13% revenue CAGR and core EBITDA margins to improve by 63bps to 22% by FY17. FY18-21: We fade the revenue growth gradually so that by FY21 the revenue CAGR for the period is 9%, whilst EBITDA margins decline to 20.9% in FY21. FY22-24: We expect revenue growth over this period to remain flat at 9% CAGR but margins to increase to 22.4% in FY24. Based on the assumptions shown above and assuming: (a) WACC at 12% (cost of equity at 12.9%, post-tax cost of debt at 4%, long-term debt/capital employed of 10%, and three-year adjusted beta at 0.7x), (b) terminal growth at 4%. Our FCFE model values DRLs business at ` 2,230/share (implied P/E multiple of 21.4x on FY14E EPS and EV/EBITDA of 14.1x), implying a 18% upside. Our positive view on the stock is based on: We see enough in the product pipeline to justify a faster pace of launches and revenue growth beyond FY14. Any slow down in the key US geography is likely be transitory. Clarity on product filings from the proposed acquisition of OctoPlus. Healthy balance sheet, generating strong FCF, enables the company to keep investing in the necessary asset creation in the long term. Attractive valuations 1-year forward P/E of 19.2x is at a 11% discount to its three-year average.
Exhibit 32: DCF-based value is `2,230/share
20% 18% 16% 14% 12% 10% 8% FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E
Implied equity value (` bn) 378.1 Less: net debt at Mar-13 (` bn) 5.3 Terminal value (` bn) 212.4 PV of FCF for forecasting period (FY14-FY24) (` bn) 170.9
Exhibit 31: FCF profile

18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 Rs mn
Enterprise value (` bn)
383.3
PV of FCFF (LHS)
WACC
RoCE
Implied equity value (`/share)
2,230
Source: Company, Ambit Capital research Note: (a) All financials pertain to consolidated entity
Source: Company, Ambit Capital research Note: (a) All financials pertain to consolidated entity
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Dr Reddys Labs
Cross-cycle valuation
On a cross-cycle comparison, DRL is trading at 19.2x 12-month forward core net earnings, which implies a 11% discount to the historical three-year average. We highlight that the stock has underperformed (vis--vis its peers), owing to continued concerns over the product launch profile beyond FY13 as well as the flagging Indian formulations business. We believe the stock should trade at a higher multiple as overall clarity on the timelines of a host of filings for commercialisation would emerge over the next three quarters, which should also help support earnings growth beyond FY15. On EV/EBITDA, DRL is currently trading at 12.3x, which implies a 8% discount to the historical three-year average.
Exhibit 33: On EV/EBITDA, DRL currently trades at a 8% discount to its historical average
18 17 16 15 14 13 12 11 10 Mar-10 Mar-11 Dec-09 Mar-12 Dec-10 Sep-10 Jun-10 Dec-11 Sep-11 Jun-11 Dec-12 Sep-12 Jun-12
Exhibit 34: On P/E, DRL currently trades at a 11% discount to its historical average
31 29 27 25 23 21 19 17 15 Dec-09 Dec-10 Sep-10 Jun-10 Dec-11 Sep-11 Jun-11 Mar-10 Mar-11 Mar-12 Dec-12
49 18 26 35 16 11 31 1 8 17
23
DRRD 1-yr fwd EV/EBITDA
Avg 1-yr fwd EV/EBITDA
DRRD 1-yr fwd P/E
Avg 1-yr fwd P/E
Source: Bloomberg, Company, Ambit Capital research. Note: We have considered core EBITDA (excluding one-offs and exclusivities) for the purpose of calculation of the EV/EBITDA multiple
Source: Bloomberg, Company, Ambit Capital research Note: We have considered core EPS (excluding one-offs and exclusivities) for the purpose of calculation of the P/E multiple
Relative valuation of Indian pharma companies

As indicated in the Exhibit below, DRL trades at a 10-12% discount to peers on P/E and 13-14% discount on EV/EBITDA. Whilst we do not see this discount to peers as justified, we believe focus on a weaker FY14 growth has resulted in this discount. However, we see this valuation gap narrowing as pipeline visibility emerges over the next few quarters.
Exhibit 35: Pharma - Valuation snapshot
CMP Companies ` Sun Pharma DRL Cipla Lupin Ranbaxy GSK Pharma Cadila Average Mcap US$ mn Adv CAGR Price performance EV/EBITDA (x) P/E (x) EV/Sales (x) ROE (%) 3m (FY12-14E) (%) US$ FY13E FY14E FY13E FY14E FY13E FY14E EBITDA EPS FY13E FY14E 1m 3m 6m 1 yr mn 10.7 11.0 13.7 8.9 6.9 1.3 2.0 17.1 13.4 15.4 14.7 9.1 19.4 15.8 15.0 16.3 12.4 14.3 12.4 11.2 17.4 12.9 13.8 25.0 19.6 22.2 22.7 13.9 27.3 25.0 22.3 23.0 17.8 20.5 18.9 16.8 24.8 19.3 20.2 7.2 2.9 4.0 3.1 1.7 6.2 3.2 4.1 6.5 2.6 3.6 2.7 1.8 5.6 2.7 3.6 19 4 14 24 -7 10 19 14 18 21 28 NA 32 21 23 26 18 25 38 33 26 21 23 17 25 25 34 27 6 3 3 (0) 1 6 6 9 11 16 5 (3) 12 10 17 15 29 10
744 13,920 1,888 5,797 424 599 512 2,182 899 6,164 4,847 3,914 3,343 3,331
Source: Bloomberg, Company, Ambit Capital research. Note: (a) Valuations and financials for all the companies are based on consensus numbers; (b) Ranbaxy and GSK are Dec-ending companies, hence FY13E=CY12E.
Sep-12
Jun-12
Dr Reddys Labs
Accounting analysis
Exhibit 36: Revenue recognition
Company/Metric DRL Cipla Sun Pharma Lupin Ranbaxy * Cadila Healthcare Average(ex-Dr.Reddy's) Divergence Pre-tax CFO as a % of EBITDA FY09 39% 35% 125% 78% -3% 57% 59% -19% FY10 103% 93% 70% 86% 11% 96% 71% 32% FY11 59% 94% 120% 88% 117% 81% 100% -41% FY12 68% 123% 79% 60% 52% 60% 75% -6% YoY change in CFO as a % of EBITDA (bps) FY10 (4,420) 95 4,997 180 10,602 (1,416) 2,892 (7,312) FY11 953 2,907 (4,116) (2,709) (6,504) (2,183) (2,521) 3,474
Source: Company, Ambit Capital research. Note (a) * indicates Dec-ending company hence CY08=FY09 and so on; (b) all financials pertain to consolidated entity
DRL has typically had a below-average pre-tax CFO/EBITDA ratio for the years under consideration. In FY09, CFO remained depressed because of a spurt in debtors (increased 114% to ` 15bn), resulting in significantly lower CFO/EBITDA ratio. In FY10, whilst EBITDA decreased by 6%, CFO increased by 146% (one of the highest in the peer group) mainly because of lower working capital. Debtors declined by 18% to `11.9bn and current liabilities increased by 25% to `18.9bn, resulting in an improvement in CFO. After declining in FY11 (due to significant increase in debtors and inventory), pre-tax CFO as a percentage of EBITDA has improved.
Exhibit 37: Working capital cycle
Company/Metric DRL Cipla Sun Pharma Lupin Ranbaxy * Cadila Healthcare Average (excluding Dr.Reddy's) Divergence Average debtor days FY09 56 113 98 78 70 51 82 (26) FY10 69 111 94 77 76 46 81 (12) FY11 72 88 73 75 70 49 71 1 FY12 81 79 69 77 83 57 73 8 Average inventory days FY09 64 88 75 82 89 68 80 (16) FY10 69 94 93 72 91 67 84 (15) FY11 71 99 82 68 82 62 78 (7) FY12 67 98 81 76 86 66 81 (15)
DRLs average debtor days have been deteriorating, contrary to the trend seen in the peer average. DRL has typically maintained debtor days that are below the peer average. A major reason for the spurt in debtor days appears to be the launch of Sumatriptan (the generic version of Imitrex) in the US in November 2008, because the company may have pushed sales to maximise the benefit from the exclusive marketing period. This may have resulted in a bunching up of debtors in FY09 (debtors increased 114% in FY09 to `15bn). Average debtor days in FY10 have increased significantly despite 18% decline in debtors mainly on account of high base. We highlight that the year-end debtors for FY11 have declined to 62 days from 76 days in FY10. We do not see any concerns on this front given that DRL has historically enjoyed lower-than-peer average debtor days and over the past two years the company is realigning itself with industry trend. The average inventory days for Dr Reddys has remained fairly stable for the years under consideration and have consistently remained lower than the peer average.
24
Dr Reddys Labs Exhibit 38: Depreciation analysis

Company/Metric DRL Cipla Sun Pharma Lupin Ranbaxy * Cadila Healthcare Average(ex-Dr.Reddy's) Divergence Average depreciation rate FY09 5.6% 6.2% 6.6% 5.3% 4.2% 5.3% 5.5% 0.1% FY10 5.6% 6.0% 6.8% 6.0% 4.3% 5.5% 5.7% -0.2% FY11 5.1% 7.7% 6.0% 6.9% 5.7% 4.7% 6.2% -1.1% FY12 5.7% 7.0% 5.8% 7.2% 5.6% 4.6% 6.1% -0.3% YoY change in depreciation rate (bps) FY11 (52) 168 (89) 92 144 (82) 47 (98) FY12 66 (62) (12) 25 (11) (10) (14) 80
Depreciation rates are broadly in line with peer average over FY09-12. We do not have any significant concerns about this.
Exhibit 39: Loans and advances analysis
Company/Metric Loans and advances as a % of networth FY10 DRL Cipla Sun Pharma Lupin Ranbaxy * Cadila Healthcare Average(exDr.Reddy's) Divergence 14.5% 20.7% 10.8% 18.5% 20.9% 19.2% 18.0% -3.5% FY11 16.6% 17.0% 13.0% 20.1% 22.7% 20.9% 18.7% -2.1% FY12 13.1% 13.1% 13.0% 20.5% 49.8% 22.5% 23.8% -10.7% Loans and % of loans and advances advances to to related related parties parties as a % of (FY12) net worth (FY12) 0.0% 0.0% 0.1% 0.0% 0.0% 2.6% 0.5% -0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.6% 0.1% -0.1%
DRLs loans and advances as a percentage of net worth have remained lower than the peer average for FY09-12. In FY11, loans and advances as a percentage of net worth increased by 215bps mainly because of a 23% increase in loans and advances. This increase can be attributed to export benefits receivable, which doubled in FY11. A sharp decline in this ratio in FY12 widened the divergence from the peer average. However, in FY12, whilst loans and advances decreased marginally, net worth increased by 25% resulting in lower loans and advances as a percentage of net worth. The decrease again is attributed to export benefits receivable, which declined 16% in FY12.
25
Dr Reddys Labs Exhibit 40: Investment income analysis

Investment income as a % of cash and marketable investments FY09 DRL Cipla Sun Pharma Lupin Ranbaxy * Cadila Healthcare Average(exDr.Reddy's) Divergence 5.5% 15.3% 7.6% 2.1% 7.9% 4.4% 7.5% -2.0% FY10 3.7% 12.7% 4.5% 0.2% 8.6% 4.8% 6.1% -2.4% FY11 2.2% 5.2% 4.8% 0.7% 6.6% 4.1% 4.3% -2.1% FY12 4.5% 6.7% 5.4% 2.2% 3.3% 9.3% 5.4% -0.9% Change in investment income as a % of cash and marketable investments (bps) FY11 (153) (743) 32 47 (202) (71) (188) 35 FY12 232 148 67 155 (323) 528 115 117
Company/Metric
Source: Company, Ambit Capital research. Note (a) * indicates Dec-ending company hence CY08=FY09 and so on; (b) all financials pertain to consolidated entity; (c) Investment income comprises interest income, dividend income, and profit/loss on sale of investments; (d) Investments comprise marketable/current investments.
DRLs investment income as a percentage of cash and marketable investments has remained volatile over FY09-12 and has always remained lower than the peer group average. We highlight that the current investments made by the company have remained volatile over the years under consideration. In FY10, dividend and profit on sale of investments dropped by 65%, resulting in a 38% decline in investment income. In addition, current investments in that year increased to `3.6bn from `530mn, resulting in a decline in investment income as a percentage of cash and marketable investments. In FY11, current investments declined to `33mn, resulting in a variation in the ratio in FY11 because of the high base in FY10.
Exhibit 41: Contingent liabilities not provided for by DRL
Description Guarantees issued by banks Letters of credit outstanding Contingent consideration payable in respect of subsidiaries Income tax matters Excise matters, under dispute Custom matters, under dispute Sales tax matters, under dispute Estimated amount of contracts remaining to be executed on capital account and not provided for Commitment under Export Promotion Capital Goods scheme Total disclosed disputed liabilities Contingent liabilities (` mn) FY11 119 432 12 431 127 170 2,353 9,054 12,698 FY12 154 714 432 250 97 237 3,460 3,982 9,326 Contingent liabilities as % of networth FY11 0.3% 1.1% 0.0% 1.1% 0.3% 0.0% 0.4% 5.8% 22.5% 31.5% FY12 0.3% 1.4% 0.0% 0.9% 0.5% 0.2% 0.5% 6.9% 8.0% 18.7%
Source: Company, Ambit Capital research. Note: all financials pertain to consolidated entity;
Whilst the net worth has increased by 24% in FY12, disclosed disputed liabilities have decreased by 27% in FY12, resulting in the contingent liability as a percentage of net worth decreasing to 18.7% in FY12. The main components in the contingent liabilities are the: (a) Commitment under Export Promotion Capital Goods Scheme (4% of the total contingent liabilities for FY12), which have decreased by 56% in FY12 and (b) estimated amount of contracts left to be executed on the capital account and not provided for (37% of the total contingent liabilities for FY12), which has increased by 47% in FY12. We recommend investors to seek further details regarding the nature of such disputed liabilities from the management. Whilst the ratio has been declining, it remains very high.
26
Dr Reddys Labs Exhibit 42: Explanation for the flags on cover page
Field Score Comments In our forensic analysis of 337 companies, DRL scores in line with the pharma industry average (comprising of 26 companies). DRL scores high on ratios of: (a) Debtor days; (b) CWIP to gross block; (c) other loans and advances as a percentage of net worth; (d) selling and distribution expenses as % of sales; and (e) provision for doubtful debts as a percentage of debtors However, DRL has weaker scores on: (a) change in depreciation rates; (b) CFO/EBITDA; (c) gross block to gross turnover; and (d) audit fee CAGR to revenue CAGR. Overall, the management has made timely announcements in their earnings calls, meetings and interviews regarding product filings, acquisitions and business outlook. FY14 EBITDA and EPS estimates have been upgraded by 1-4% and FY15 EBITDA and EPS estimates have been upgraded by 5-6% over the past three months.
Accounting
AMBER
Predictability Earnings momentum Source: Ambit Capital research
AMBER GREEN
27
Dr Reddys Labs
Balance sheet
Year to March (` mn) Share capital Reserves and surplus Total Networth Loans Deferred tax liability (net) Sources of funds Net block Capital work-in-progress Investments Cash and bank balances Sundry debtors Inventories Other current assets Total Current Assets Current Liabilities Provisions Current liabilities and provisions Net current assets Application of funds FY11 846 45,144 45,990 22,788 87 68,865 38,891 5,997 346 5,729 17,615 16,059 7,649 47,052 22,066 1,355 23,421 23,631 68,865 FY12 848 56,596 57,444 34,033 (833) 90,644 39,507 7,268 11,141 7,379 25,339 19,352 7,519 59,589 24,888 1,973 26,861 32,728 90,644 FY13E 848 69,476 70,324 34,033 (833) 103,524 44,074 6,500 11,243 16,174 25,486 21,135 8,857 71,652 27,972 1,973 29,945 41,706 103,524 FY14E 848 83,641 84,489 28,939 (833) 112,595 45,102 5,750 11,305 22,335 27,868 23,110 9,685 82,997 30,587 1,973 32,560 50,438 112,595 FY15E 848 99,841 100,689 26,130 (833) 125,986 45,716 5,000 11,367 31,683 31,683 26,273 11,010 100,650 34,774 1,973 36,747 63,903 125,986
Source: Company, Ambit Capital research, Note: All financials pertain to IFRS consolidated accounts
Income statement
Year to March (` mn) Revenue yoy growth Total expenses EBITDA yoy growth Net depreciation EBIT Interest and financial charges Other income Adj PBT Provision for taxation Consolidated adj PAT yoy growth Consolidated reported PAT EPS basic (`) EPS diluted (`) DPS (`) FY11 75,289 6% 59,031 16,258 11% 4,148 12,110 305 692 12,497 1,403 11,097 16% 11,040 65.6 65.3 13.1 FY12 97,139 29% 72,996 24,143 48% 5,214 18,929 1,067 901 18,763 4,204 14,613 32% 14,262 86.2 85.9 13.1 FY13E 113,443 17% 87,404 26,039 8% 5,721 20,319 304 872 20,887 4,201 16,657 14% 16,100 98.3 97.9 19.0 FY14E 124,046 9% 96,617 27,428 5% 6,222 21,206 618 1,483 22,071 4,427 17,706 6% 17,706 104.5 104.0 20.9 FY15E 141,027 14% 109,880 31,147 14% 6,636 24,510 257 1,631 25,884 5,177 20,769 17% 20,769 122.6 122.0 26.9
28
Dr Reddys Labs
Cash flow statement

Year to March (` mn) PAT Depreciation Others Interest paid (net) CFO before change in WC Change in working capital Direct taxes paid CFO Net capex Net investments Interest received CFI Proceeds from borrowings Change in share capital Interest & finance charges paid Dividends paid CFF Net increase in cash FY11 11,040 4,148 908 200 16,296 (6,738) (1,549) 8,009 (11,258) 3,642 127 (8,658) 3,599 29 (366) (3,063) (377) (1,026) FY12 14,262 5,214 5,289 690 25,455 (8,960) (345) 16,150 (8,421) (10,576) 332 (18,665) 7,054 6 (1,109) (2,216) 3,735 1,220 FY13E 16,100 5,721 (974) 304 21,151 (183) 20,967 (9,520) 872 (8,648) (0) (304) (3,220) (3,524) 8,795 FY14E 17,706 6,222 (1,544) 618 23,002 (2,571) 20,431 (6,500) 1,483 (5,017) (5,094) (0) (618) (3,541) (9,253) 6,161 FY15E 20,769 6,636 (1,693) 257 25,970 (4,117) 21,853 (6,500) 1,631 (4,869) (2,809) (257) (4,569) (7,635) 9,348
Ratio analysis
Year to March (%) Revenue growth EBITDA growth PAT growth EPS norm (dil) growth EBITDA margin EBIT margin Net margin RoCE RoIC RoE FY11 6.5 11.1 15.6 15.4 21.6 16.1 14.7 17.8 20.2 25.0 FY12 29.0 48.5 31.7 31.5 24.9 19.5 15.0 19.2 22.7 28.3 FY13E 16.8 7.9 14.0 14.0 23.0 17.9 14.7 17.3 21.2 26.1 FY14E 9.3 5.3 6.3 6.3 22.1 17.1 14.3 16.8 20.0 22.9 FY15E 13.7 13.6 17.3 17.3 22.1 17.4 14.7 17.5 20.4 22.4
Valuation parameters
Year to March (` mn) P/E (x) P/B(x) Debt/Equity(x) Net debt/Equity(x) EV/Sales(x) EV/EBITDA(x) FY11 28.9 6.9 0.5 0.4 4.5 20.7 FY12 22.0 5.6 0.6 0.2 3.4 13.8 FY13E 19.3 4.6 0.5 0.1 2.9 12.6 FY14E 18.1 3.8 0.3 (0.1) 2.7 11.9 FY15E 15.5 3.2 0.2 (0.2) 2.3 10.5
29
Dr Reddys Labs
Institutional Equities Team

Saurabh Mukherjea, CFA Head of Equities Research Analysts Aadesh Mehta Achint Bhagat Ankur Rudra, CFA Ashvin Shetty Bhargav Buddhadev Chhavi Agarwal Dayanand Mittal Gaurav Mehta Harshit Vaid Jatin Kotian Karan Khanna Krishnan ASV Nitin Bhasin Nitin Jain Pankaj Agarwal, CFA Pratik Singhania Parita Ashar Rakshit Ranjan, CFA Ritika Mankar Mukherjee Ritu Modi Shariq Merchant Utsav Mehta Sales Name Deepak Sawhney Dharmen Shah Dipti Mehta Parees Purohit, CFA Pramod Gubbi, CFA Sarojini Ramachandran Production Sajid Merchant Joel Pereira Production Editor (022) 30433247 (022) 30433284 sajidmerchant@ambitcapital.com joelpereira@ambitcapital.com Regions India / Asia India / Asia India / Europe / USA USA India / Asia UK / USA Desk-Phone (022) 30433295 (022) 30433289 (022) 30433053 (022) 30433169 (022) 30433228 +44 (0) 20 7614 8374 E-mail deepaksawhney@ambitcapital.com dharmenshah@ambitcapital.com diptimehta@ambitcapital.com pareespurohit@ambitcapital.com pramodgubbi@ambitcapital.com sarojini@panmure.com Industry Sectors Banking / NBFCs Cement Technology / Telecom / Media Automobile Power / Capital Goods Construction / Infrastructure Oil & Gas Strategy / Derivatives Research Power / Capital Goods Metals & Mining / Healthcare Strategy / Derivatives Research Banking Construction / Infrastructure / Cement Technology NBFCs Real Estate / Retail Metals & Mining / Telecom Consumer / Real Estate Economy / Strategy Cement / Infrastructure / Healthcare Consumer Telecom / Media Desk-Phone (022) 30433239 (022) 30433178 (022) 30433211 (022) 30433285 (022) 30433252 (022) 30433203 (022) 30433202 (022) 30433255 (022) 30433259 (022) 30433261 (022) 30433251 (022) 30433205 (022) 30433241 (022) 30433291 (022) 30433206 (022) 30433264 (022) 30433223 (022) 30433201 (022) 30433175 (022) 30433292 (022) 30433246 (022) 30433209 E-mail aadeshmehta@ambitcapital.com achintbhagat@ambitcapital.com ankurrudra@ambitcapital.com ashvinshetty@ambitcapital.com bhargavbuddhadev@ambitcapital.com chhaviagarwal@ambitcapital.com dayanandmittal@ambitcapital.com gauravmehta@ambitcapital.com harshitvaid@ambitcapital.com jatinkotian@ambitcapital.com karankhanna@ambitcapital.com vkrishnan@ambitcapital.com nitinbhasin@ambitcapital.com nitinjain@ambitcapital.com pankajagarwal@ambitcapital.com pratiksinghania@ambitcapital.com paritaashar@ambitcapital.com rakshitranjan@ambitcapital.com ritikamankar@ambitcapital.com ritumodi@ambitcapital.com shariqmerchant@ambitcapital.com utsavmehta@ambitcapital.com (022) 30433174 saurabhmukherjea@ambitcapital.com
30
Dr Reddys Labs
Explanation of Investment Rating

Investment Rating Expected return (over 12-month period from date of initial rating) >5% <5%
Buy Sell
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2013-01-08 500124 in (Ambit Capital) DR Reddy's Labs (BUY, 18% Upside) - The Strong Gets Stronger - Initiation.61911183

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2013-01-08 500124 in (Ambit Capital) DR Reddy's Labs (BUY, 18% Upside) - The Strong Gets Stronger - Initiation.61911183

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Pharmaceuticals

January 08, 2013

Accounting: AMBER Predictability: AMBER Earnings Momentum: GREEN

The strong gets stronger

Stock Performance (%)

1-yr fwd EV/EBITDA

Source: Bloomberg, Ambit Capital research

Please refer to the Disclaimers at the end of this Report.

Ambit Capital Pvt Ltd

Snapshot of Company Financials

Balance Sheet (consolidated)

Cash Flow (consolidated)

Strong FCF despite high capex

DRL has witnessed significant de-rating in the past year

DRRD 1-yr fwd P/E

Avg 1-yr fwd P/E

Source: Bloomberg, Company, Ambit Capital research

Ambit Capital Pvt Ltd

Exhibit 2: Event Calendar

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

Dr Reddys Labs Exhibit 3: SWOT analysis for DRL

DRL enjoys a strong formulation and drug development capability,

The key threat in CIS remains regulatory changes and their

Ambit Capital Pvt Ltd

Ambit Capital Pvt Ltd

Exhibit 4: After a muted FY14, DRLs margins to pick up

Global Generics Others

PSAI EBITDA margin - RHS

Core EBITDA growth

Core EPS growth

Strong financial profile

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

FY14E 16.6 23.3 16.4 14.8 14.3

Stock de-rating seems to be over

Ambit Capital Pvt Ltd

Strong traction in emerging markets

CIS region remains at the heart of DRLs EM business

Source: Company, Ambit Capital research

Russia an attractive bet

Ambit Capital Pvt Ltd

Source: Pharmstandard CY11 Annual report

Source: Industry. Note: Prices have been indexed to 100.

Increased focus on brands - DRLs strong competitive advantage

Source: Company, Ambit Capital research

Exhibit 14: Russia/CIS growth for DRL has remained robust

Russia/CIS sales (Rs mn)

Formulations - Russia/CIS - LHS growth Contribution to generics business

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

Ambit Capital Pvt Ltd

Exhibit 16: Domestic therapeutic segments revenue break-up (FY12)

India market growth Not as weak as perceived

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

Formulations - India - LHS growth Contribution to generics business

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

Less-than-stellar performance from other EMs

Formulations - RoW - LHS

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd