INDIA

HOLD Dr. Reddys Labs Pharma

Result update 6 February 2017
Target Price Rs2,970 Key Data
Headwinds in the US business, maintain Hold CMP* Rs3,145 Bloomberg Code DRRD IN
We maintain our Hold rating on Dr. Reddys Labs (DRL) and revise our TP to Downside 5.6% Curr Shares O/S (mn) 165.7
Rs2,970 (earlier Rs3,480) based on 21x March18E EPS of Rs141.4. DRLs Q3FY17 Previous Target Rs3,480 Diluted Shares O/S(mn) 165.7

results were higher than our expectations on marginal growth in the domestic Previous Rating Hold Mkt Cap (Rsbn/USDbn) 520.9/7.8
Price Performance (%)* 52 Wk H / L (Rs) 3689.9/2813.1
market. The drugmaker reported a 6% YoY drop in revenues, 150bps decline in
margin to 23.2% and a 16% decline in net profit. DRL is facing pricing pressure in 1M 6M 1Yr 5 Year H / L (Rs) 4386.6/1526.4
DRRD IN (0.5) 4.5 1.1 Daily Vol. (3M NSE Avg.) 276227
the US market and has no major launches in the US for FY18. Key risks to our
Nifty 6.8 1.4 17.6
assumptions include regulatory approval for its manufacturing facilities and
*as on 3rd February 2017; Source: Bloomberg, Centrum Research
currency risks in Russia and other emerging markets.
Shareholding pattern* (%)

Revenue declined across businesses: DRLs revenue fell 6% YoY to Rs37.23bn Dec-16 Sept-16 June-16 Mar-16
from Rs39.80bn. The companys global generics business (83% of revenues) Promoter 26.8 26.7 31.7 25.6
declined by 9% YoY to Rs30.64bn from Rs33.56bn. Sales in North America (45% of FIIs 36.3 37.2 42.6 36.0
revenues) decreased 15%YoY due to pricing pressure and increased competition in DIIs 8.2 6.6 6.9 6.1
the injectable business. The generics business from emerging markets (16% of Others 28.7 29.5 18.8 32.3

revenues) declined 7% YoY due to the lack of revenues from Venezuela. DRLs Source: BSE, *as on 3rd February 2017

domestic business (16% of revenues) grew by 2% YoY and was impacted by price Trend in EBIDTA margin (%)
control and impact of demonetisation. DRLs Pharma Services and Active 30
24.7
Ingredients (PSAI) business (14% of revenues) grew by 6% YoY to Rs5.40bn from 25 23.2
Rs5.08bn. We expect the global generics business to drive future growth. 20 17.3

EBIDTA margin set to improve: DRLs EBIDTA margin declined by 150bps YoY to 15 12.8

%
12.0
23.2% from 24.7% due to an increase in personnel cost and SG&A expenses.
10
Material cost declined by 270bps to 21.9% from 24.6% due to a change in the
product mix. Personnel cost grew by 210bps to 21.9% from 19.8% due to annual 5

increments. SG&A expenses grew 210bps to 32.9% from 30.8% due to remedial 0
measure expenses for US FDA issues at three of its manufacturing facilities. We Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17

expect the EBIDTA margin to improve, led by new launches in the US market. Source: Company, Centrum Research

Net profit set to grow: DRLs net profit declined by 16% YoY led by a drop in Earnings Revision
margins and a fall in other income. The pharma majors other income fell by 35% Particulars FY17E FY18E
YoY to Rs403mn from Rs618mn. Its tax rate declined to 22.3% from 27.1% of PBT. (Rs mn) New Old Chg (%) New Old Chg (%)

We expect profits to improve with the new launches in the US generics and Sales 1,44,632 1,63,640 (11.6) 1,59,959 1,80,644 (11.5)
domestic businesses. We expect margins to expand, driven by higher growth in EBITDA 28,537 38,588 (26.0) 33,314 43,649 (23.7)

the global generics business. EBITDA Margin (%) 19.7 23.6 (390)bps 20.8 24.2 (340)bps
PAT-adj. 15,282 23,658 (35.4) 18,944 27,449 (31.0)

Recommendation and views: We have revised our FY17E and FY18E EPS Source: Centrum Research Estimates
downwards by 35% and 31%, respectively, in view of delays in obtaining ANDA Centrum vs. Bloomberg Consensus*
approvals and pricing pressure in the US market. DRLs three manufacturing facilities FY17E FY18E
Particulars
are under US FDAs scanner and are due for re-inspection. We maintain our Hold (Rs mn) Centrum BBG Var (%) Centrum BBG Var (%)
rating, with a TP of Rs2,970 based on 21x March19E EPS of Rs141.4, and with a Sales 1,44,632 1,47,259 (1.8) 1,59,959 1,68,822 (5.3)
downside of 5.6% from CMP. EBITDA 28,537 29,996 (4.9) 33,314 41,165 (19.1)
Particulars (Rs mn) Q3FY17 Q3FY16 YoY Gr% Q2FY17 QoQ Gr% Q3FY17E % Var. PAT 15,282 15,018 1.8 18,944 23,175 (18.3)
Net sales 37,232 39,797 (6.4) 36,163 3.0 37,580 (0.9)
Raw material cost 8,159 9,803 8,674 8,970 Bloomberg Consensus* Centrum
(16.8) (5.9) (9.0)
Target Variance
Employee cost 8,146 7,893 3.2 8,161 (0.2) 8,300 (1.9) BUY SELL HOLD
Target Price Price (%)
(Rs) (Rs)
Other expenses 12,282 12,261 0.2 13,058 (5.9) 13,600 (9.7)
EBIDTA 8,645 9,840 (12.1) 6,270 37.9 6,710 28.8 12 17 17 3,141 2,970 (5.4)

EBIDTA margin (%) 23.2 24.7 17.3 18 *as on 3rd February 2017 Source: Bloomberg, Centrum Research
Depreciation 2665 2354 13.2 2622 1.6 2,800 (4.8)
Interest 164 160 2.5 126 30.2 100 64.0
Other income 403 618 (34.8) 438 (8.0) 480 (16.0)
PBT 6,219 7,944 (21.7) 3,960 57.0 4,290 45.0
Prov. For tax 1,385 2,151 (35.6) 956 44.9 970 42.8
Adj. PAT 4,923 5,857 (15.9) 3,089 59.4 3,415 44.2
Ranjit Kapadia, ranjit kapadia@centrum.co.in; 91 22 4215 9645
Source: Company, Centrum Research Estimates

E March (Rs mn) Revenue YoY (%) EBITDA EBITDA (%) Adjust. PAT YoY (%) DEPS Rs. RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)
FY15 1,50,233 12.0 34,936 23.3 23,364 19.0 141.1 24.5 17.9 21.1 15.2
FY16 1,54,708 3.0 37,195 24.0 20,013 (14.3) 120.9 16.6 14.1 26.0 17.1
FY17E 1,44,632 (6.5) 28,537 19.7 14,935 (25.4) 92.3 10.6 9.5 34.1 19.0
FY18E 1,59,959 10.6 33,314 20.8 18,504 23.9 114.4 11.5 10.8 27.5 14.9
FY19E 1,75,483 9.7 39,163 22.3 22,843 23.5 141.4 13.0 12.4 22.7 13.3
Source: Company, Centrum Research Estimates

Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

 Concall highlights
US market price erosion continues

The company has entered into a purchasing agreement with Teva to acquire a portfolio of 7
ANDAs in the US for $350mn(Rs23.8bn). Out of seven ANDAs six are Para IV.

The management indicated pricing pressure and increased competition in Valganacyclovir and
injectables in the US generic market.

During the quarter DRL launched five new products in the US namely: Aripiprazole, Lamotrigene
ODT, Fluoxetine tablets, Raloxifene HCl tablets and Nystatin-triamcinolone cream.

DRLs US generics business (45% of revenues) declined by 15% YoY during the quarter due to
competition and pricing pressure.

The management has informed that cumulative 90 ANDAs are pending approvals with US FDA, of
which 59 are Para IV of which 20 FTF opportunities. DRL has also filed 2 NDAs which are pending
approval. The company filed 9 ANDAs with US FDA during the quarter.

DRLs PSAI business in N. America grew by 21%YoY.

The management indicated ~15 new launches in the US of which 4-5 would be meaningful.

Emerging markets currency challenges

DRL derives 16% of its revenues from the global generic business in emerging markets, which fell
by 7% YoY during the quarter due to no revenues from Venezuela.

DRL had strong presence in the emerging markets of Russia and Romania. The company has
entered Columbia and plans to enter the Brazil market.

India affected by price control

DRL reported 2% growth in its domestic formulation business during Q3FY17 due to price control
imposed by NPPA. The management indicated Rs360mn impact due to price control in FY17.

The company witnessed the effect of demonetisation for two to three weeks.

The management is confident of achieving double digit growth in the domestic market in FY18.

DRL reported a 34% YoY decline in its domestic PSAI business to Rs409mn from Rs622mn due to
supply constraints.
Recovery in PSAI business

As per the management, the PSAI business revenues grew by 6% YoY during Q3FY17. The
management expects improved order flow and supply situation for this business.

There was a delay in despatches due to the remedial measures for US FDA issues at three of its
manufacturing facilities.

DRL filed 16 DMFs globally during Q3FY17, of which one was in the US. Cumulative DMF filings
were 782.

Financials

The management said that the gross profit margin of global generics business in Q3FY17 was
64.1% and that of PSAI was 28.3%. Overall, the gross margin stood at 59.1%.

The company spent Rs5.0bn (13.4% of its revenues) on R&D during the quarter and intends to
spend ~13% on R&D in FY17.

The management indicated capex of Rs3.0bn in Q3FY17.

2
Dr. Reddys Labs
 Sales composition
For Q3FY17, DRL reported 6% YoY decline in revenues to Rs37.23bn from Rs39.80bn, led by 9% decline
in its global generics business and 6%YoY growth in PSAI business. Its global generics business (83% of
revenues) declined by 9% YoY to Rs30.64bn from Rs33.56bn due to pricing pressure in the US,
increased competition in injectables and slowdown in emerging markets. The global generics business
in North America (45% of revenues) declined by 15% YoY to Rs16.60bn from Rs19.42bn, led by pricing
pressure and increased competition for Valgancyclovir. India business (16% of revenues) grew a mere
2% YoY to Rs5.95bn from Rs5.81bn due to the impact of price control and demonetisation effect. DRLs
Europe business (6% of revenues) grew by 11% YoY to Rs2.15bn from Rs1.94bn. Global generics
business in the emerging markets of Russia and Venezuela (16% of revenues) declined by 7% YoY to
Rs5.95bn from Rs6.40bn due to currency fluctuations and sales decline in Venezuela.
DRLs PSAI business (14% of revenues) grew by 6% YoY to Rs5.40bn from Rs5.08bn. Its proprietary
products (3% of revenues) declined by 1% YoY to Rs1.03bn from Rs1.04bn.
The details are as follows:
Exhibit 1: Sales composition
PARTICULARS (Rs mn) Q3FY17 Q3FY16 YoY Gr% Q2FY17 QoQ% Q3FY17E % Var.
SEGMENTWISE REVENUES (by Geography)
North America 17,854 20,454 ( 12.7) 17,269 3.4 18,430 (3.1)
Europe 3,976 3,888 2.3 3,871 2.7 3,700 7.5
India 6,356 6,427 ( 1.1) 6,826 (6.9) 7,300 (12.9)
Russia & Other CIS Countries 5,948 6,399 ( 7.0) 4,834 23.0 5,200 14.4
Others 2,931 2,511 16.7 3,057 (4.1) 2,950 (0.6)
Total 37,065 39,679 ( 6.6) 35,857 3.4 37,580 (1.4)

PARTICULARS (Rs mn) Q3FY17 Q3FY16 YoY Gr% Q2FY17 QoQ Q3FY17E % Var.
SEGMENTWISE REVENUES (by Geography)
Global Generics 30,638 33,558 ( 8.7) 28,995 5.7 30,680 (0.1)
N.America 16,595 19,417 ( 14.5) 16,134 2.9 16,880 (1.7)
Europe 2,148 1,937 10.9 1,776 20.9 1,900 13.1
India 5,947 5,805 2.4 6,251 (4.9) 6,700 (11.2)
Emerging markets 5,948 6,399 ( 7.0) 4,834 23.0 5,200 14.4
Others - - NA NA - NA
PSAI (Pharma services & active ingredients) 5,400 5,082 6.3 5,784 (6.6) 5,800 (6.9)
N.America 1,259 1,037 21.4 1,135 10.9 1,550 (18.8)
Europe 1,828 1,951 ( 6.3) 2,095 (12.7) 1,800 1.6
India 409 622 ( 34.2) 575 (28.9) 600 (31.8)
Others 1,904 1,472 29.3 1,979 (3.8) 1,850 2.9
Proprietary products & others 1,027 1,039 ( 1.2) 1,078 (4.7) 1,100 (6.6)
Total 37,065 39,679 ( 6.6) 35,857 3.4 37,580 (1.4)
Source: Company, Centrum Research

3
Dr. Reddys Labs
 Performance of major brands
As per AIOCD AWACS monthly data-December16, DRLs revenues declined by 2.7% compared to the
industry growth of 7.2%. The companys top 17 brands contributed 38% to its revenues. Four of its top
17 brands grew faster than the market growth rate of 7.2%. These were Razo-D 11.9%, Stamlo Beta
30.8%, Razo 9.7% and Atarax 29.0%. We expect these brands to drive future growth. DRLs
performance in the domestic market was affected by NPPA price control and a 2.7% drop in the price
of NLEM products due to 2.7% reduction in WPI in FY16.
The table below presents the details.
Exhibit 2: Performance of major brands
Products Therapeutic Category October'16 November'16 December'16
(Rs mn) MAT (Rs mn) Gr. Rate % MAT (Rs mn) Gr. Rate % MAT (Rs mn) Gr. Rate %
Pharma market 95,126 8.3 93,878 15.3 91,323 7.2
Company 2,159 7.3 2,154 5.2 2,192 (2.7)
Omez Gastro-intestinal 90 (20.8) 89 (22.5) 88 (26.8)
OMEZ-D Gastro-intestinal 95 2.8 93 2.2 82 (8.1)
Nise NSAID 62 (4.0) 62 ( 7.0) 72 (1.7)
Econorm Gastrointestinal 34 (35.5) 43 ( 8.1) 47 (24.3)
Razo-D Gastro-intestinal 47 3.5 51 17.7 55 11.9
Stamlo CVS 46 (22.8) 54 ( 5.3) 65 5.9
Grafeel neutropenia, HIV 41 18.2 19 ( 76.9) 32 (53.3)
Mintop baldness 28 (51.7) 31 ( 45.0) 33 (45.3)
Stamlo Beta CVS 40 0.8 44 22.5 46 30.8
Reditux anticancer 67 146.8 51 30.6 47 (14.2)
Razo Gastro-intestinal 47 9.3 51 39.5 45 9.7
Atarax anti-allergic 62 50.7 55 38.5 54 29.0
Clamp anti-infective 40 (16.5) 35 ( 21.3) 36 (26.7)
Atocor cholesterol reducer 28 (18.4) 32 ( 8.7) 30 (25.2)
Reclimet antidiabetic 34 (1.8) 37 11.0 39 2.1
Ketorol NSAIDs 36 21.0 35 21.2 34 0.7
Nootropil nerve tonic 36 19.9 34 15.3 35 (0.8)
Total 833 816 840
Source: AIOCD AWACS monthly data- October-December16

4
Dr. Reddys Labs
 Valuation and key risks
At the CMP of Rs3,145, DRL trades at 34.1x FY17E EPS of Rs92.3 and 27.5x FY18E EPS of Rs114.4 and
22.2x FY19E EPS of Rs141.4. We have revised our FY17E and FY18E EPS downwards by 35% and 31%,
respectively, in view of delay in receiving clearances for its three manufacturing facilities, delay in
receiving approvals from US FDA, and no major launches expected in FY18. Moreover, the company is
facing pricing pressure in the US market (45% of total revenues) which resulted in a 15% decline in US
revenues and marginal growth in the domestic business during Q3FY17.
Currently, DRLs three manufacturing facilities Srikakulam, Miryalaguda and Duvvada are under the US
FDA scanner and the company has completed all the remedial measures. It has requested US FDA for
re-inspection of these facilities which are scheduled to get inspected in February-March17. We
maintain our Hold rating on DRL, with a TP of Rs2,970 based on 21x March19E EPS of Rs141.4, and
with a downside of 5.6% from CMP. We recommend a switch to Aurobindo Pharma or Sanofi India.
Exhibit 3: Earning Revision
FY17E FY18E
Particulars Current Earlier Chg(%) Current Earlier Chg(%)
Sales 1,44,632 1,63,640 (11.6) 1,59,959 1,80,644 (11.5)
EBIDTA 28,537 38,588 (26.0) 33,314 43,649 (23.7)
EBIDTA margin (%) 19.7 23.6 (390)bps 20.8 24.2 (340)bps
Net profit 15,282 23,658 (35.4) 18,944 27,449 (31.0)
Source: Centrum Research

Exhibit 4: Sensitivity Analysis

Sensitivity to key variables FY17E % change % impact on EBITDA % impact on EPS
Sales 1 5.1 9.5
Material cost 1 (1.1) (2.1)
Source: Company, Centrum Research Estimates

Exhibit 5: 1 year forward EV/EBITDA chart Exhibit 6: 1 year forward P/E chart
24 46
40
20
34
16 28
22
12
16
8 10
Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Feb-15

Aug-15

Feb-16

Aug-16

Feb-17
Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

Feb-15

Aug-15

Feb-16

Aug-16

Feb-17

EV/EBITDA Mean P/E Mean

Mean + Std Dev Mean - Std Dev Mean + Std Dev Mean - Std Dev

Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates

Exhibit 7: Comparative Valuations

Mkt Cap CAGR FY16-FY18E (%) EBITDA Margin (%) PE (x) EV/EBITDA (x) RoE (%) Div Yield (%)
Sector
(Rs mn) Rev. EBITDA PAT FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E
Dr. Reddy's Labs 5,20,812 1.7 (5.4) (2.7) 24.0 19.7 20.8 26.0 34.1 27.5 17.1 19.0 14.9 16.6 10.6 11.5 0.6 0.8 1.0
Aurobindo 4,00,725 19.6 24.9 31.8 23.1 24.1 25.2 21.9 16.7 11.7 14.8 11.5 8.0 32.5 32.1 30.9 0.4 0.4 0.5
Cipla 4,88,467 15.4 18.1 16.3 18.3 17.8 19.1 33.7 28.6 24.2 20.7 16.4 14.6 13.3 12.0 13.9 0.3 0.5 0.7
Lupin 6,72,146 18.8 23.5 24.9 26.4 27.7 28.5 35.7 23.3 18.9 23.6 15.1 12.4 22.9 23.9 23.1 0.5 0.6 0.7
Source: Company, Centrum Research Estimates Prices as on 3rd February 2017

5
Dr. Reddys Labs
Quarterly financials, Operating Metrics and Key Performance Indicators
Exhibit 8: Quarterly Financials
PARTICULARS (Rs mn) Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17
Total revenues 37,522 40,207 39,797 37,734 32,447 36,163 37,232
Material cost 8,479 9,281 9,803 8,958 7,564 8,674 8,159
Personnel expenses 7,502 7,870 7,893 7,909 8,050 8,161 8,146
Other expenses 11,671 11,731 12,261 16,050 12,931 13,058 12,282
Total expenses 27,652 28,882 29,957 32,917 28,545 29,893 28,587
EBIDTA 9,870 11,325 9,840 4,817 3,902 6,270 8,645
Other income 757 724 618 850 670 438 403
PBDIT 10,627 12,049 10,458 5,667 4,572 6,708 9,048
Depreciation 2,033 2,235 2,354 2,767 2,436 2,622 2,665
Interest 281 215 160 170 148 126 164
Profit before tax 8,313 9,599 7,944 2,730 1,988 3,960 6,219
Tax provision 1,888 1,909 2,151 1,563 526 956 1,385
Net profit before minority 6,425 7,690 5,793 1,167 1,462 3,004 4,834
Minority int./ Sh of profit 49 57 64 59 73 85 89
Net profit 6,474 7,747 5,857 1,226 1,535 3,089 4,923
Growth (%)
Revenues (13.5) (10.1) (6.4)
EBIDTA (60.5) (44.6) (12.1)
Net profit (76.3) (60.1) (15.9)
Margin (%)
EBIDTA 26.3 28.2 24.7 12.8 12.0 17.3 23.2
Profit before tax 22.2 23.9 20.0 7.2 6.1 11.0 16.7
Net margin 17.3 19.3 14.7 3.2 4.7 8.5 13.2
Source: Company, Centrum Research (as per IND-AS)

Exhibit 9: Key performance indicators

Key performance indicator FY15 FY16 FY17E FY18E FY19E
Global Generics growth% 13.8 7.0 (9.2) 11.2 10.1
PSAI growth % 6.2 (12.1) (5.0) 5.8 6.9
Proprietary products growth% 1.2 39.0 (2.5) 10.0 9.0
Material cost % 24.7 21.4 22.7 21.8 21.3
Source: Centrum Research Estimates

6
Dr. Reddys Labs
 Financials -consolidated
Exhibit 10: Income Statement Exhibit 12: Balance Sheet
Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Revenues 1,50,233 1,54,708 1,44,632 1,59,959 1,75,483 Share capital 852 853 828 828 828
Material cost 37,121 33,051 32,567 34,800 37,300 Reserves & surplus 1,11,555 1,27,483 1,53,750 1,66,831 1,83,406
% of revenues 24.7 21.4 22.5 21.8 21.3 Total shareholders Funds 1,12,407 1,28,336 1,54,578 1,67,659 1,84,234
Employee cost 29,446 29,376 32,607 35,670 38,030 Total Debt 43,126 33,513 17,410 16,510 11,285
% of revenues 19.6 19.0 22.5 22.3 21.7 Minority interest 0 0 0 0 0
Other Expenses 48,730 55,086 50,921 56,175 60,990 Deferred tax Liab. (4,013) (4,230) (3,700) (3,350) (3,100)
% of revenues 32.4 35.6 35.2 35.1 34.8 Total Liabilities 1,51,520 1,57,619 1,68,288 1,80,819 1,92,419
EBIDTA 34,936 37,195 28,537 33,314 39,163
EBIDTA margin (%) 23.3 24.0 19.7 20.8 22.3 Gross Block 1,25,736 1,19,741 1,30,400 1,40,320 1,48,600
Depreciation & Amortisation 7,599 8,450 10,473 11,810 13,010 Less: Acc. Depreciation 72,086 67,255 76,738 87,448 99,028
EBIT 27,337 28,745 18,064 21,504 26,153 Net Block 53,650 52,486 53,662 52,872 49,572
Interest Expenses 1,082 2,479 623 400 270 Capital WIP 5,290 1,700 4,500 4,700 5,000
PBT from operations 26,255 26,266 17,441 21,104 25,883 Net Fixed Assets 58,940 54,186 58,162 57,572 54,572
Other income 2,741 874 1,961 2,700 3,540
PBT 28,996 27,140 19,402 23,804 29,423 Investments 22,478 40,319 36,700 52,600 59,900
Tax provision 5,632 7,127 4,467 5,300 6,580
Effective tax rate (%) 19.4 26.3 23.0 22.3 22.4 Inventory 25,699 25,578 23,180 29,450 30,070
Net profit 23,364 20,013 14,935 18,504 22,843 Debtors 41,012 41,306 35,960 47,950 46,050
Minority interest - - - - - Loans & Advances 14,928 10,090 13,810 15,060 15,950
Reported net profit 23,364 20,013 14,935 18,504 22,843 Cash & Bank Balance 18,724 4,921 24,021 12,220 20,166
Adj. Net profit 23,364 20,013 14,935 18,504 22,843 Other assets 1,563 13,845 2,170 2,530 3,010
Source: Company, Centrum Research Estimates Total Current Assets 1,01,926 95,740 99,141 1,07,210 1,15,246

Trade payable 8,673 3,161 1,500 9,600 8,300

Exhibit 11: Key Ratios Other current Liabilities 10,933 24,651 17,600 19,100 19,900
Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E Provisions 12,218 4,814 6,615 7,862 9,099
Net Current Assets 70,102 63,114 73,426 70,648 77,947
Growth Ratios (%)
Total Assets 1,51,520 1,57,619 1,68,288 1,80,819 1,92,419
Revenues 12.0 3.0 (6.5) 10.6 9.7
EBIDTA 7.5 6.5 (23.3) 16.7 17.6 Source: Company, Centrum Research Estimates
Adj. Net Profit 19.0 (14.3) (25.4) 23.9 23.5
Margin Ratios (%) Exhibit 13: Cash Flow
EBIDTA margin 23.3 24.0 19.7 20.8 22.3
PBT from operations margin 17.5 17.0 12.1 13.2 14.7 Y/E March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Adj. PAT margin 15.6 12.9 10.3 11.6 13.0 CF before WC changes 40,072 40,651 26,285 31,104 36,673
Return Ratios (%) Working Capital Changes (14,837) (175) (2,887) (8,663) 1,127
RoCE 17.9 14.1 9.5 10.8 12.4 CF from Operations 25,235 40,476 23,398 22,441 37,801
RoE 24.5 16.6 10.6 11.5 13.0
RoIC 19.2 14.8 9.4 10.7 11.9 Adj OCF (OCF-Interest) 25,263 39,897 22,775 22,041 37,531
Turnover ratios (days) Change in fixed assets (15,143) (13,795) (14,449) (11,220) (10,010)
Gross Block Turnover (x) 1.2 1.3 1.2 1.2 1.2 Adj. FCF (AOCF-Capex) 10,120 26,102 8,326 10,821 27,521
Debtors 100 97 91 109 96 CF from Investing (23,698) (23,709) (10,830) (27,120) (17,310)
Creditors 21.1 7.5 3.8 21.9 17.3
Inventory 62 60 58 67 63 CF from Financing (4,332) (17,009) (36,683) (6,762) (12,064)
Cash Conversion Cycle 141 150 145 155 141
Solvency Ratio Net change in Cash (2,795) (242) (24,115) (11,441) 8,426
Debt-Equity 0.4 0.3 0.1 0.1 0.1 Source: Company, Centrum Research Estimates
Net Debt-Equity 0.2 0.2 0.0 0.0 0.0
Current Ratio 3.2 2.9 3.9 2.9 3.1
Interest Coverage Ratio 0.0 0.1 0.0 0.0 0.0
Gross Debt/EBIDTA 1.2 0.9 0.6 0.5 0.3
Per Share (Rs)
FDEPS (adjusted) 141.1 120.9 92.3 114.4 141.4
CEPS 187.0 171.9 155.5 185.7 219.9
Book Value 659.7 752.3 933.4 1012.4 1,112.5
Dividend 20.00 20.00 25.00 30.00 35.00
Dividend Payout (%) 0.18 0.20 0.33 0.32 0.30
Valuations (x) (Avg Mkt
Cap)
PER 21.1 26.0 34.1 27.5 22.7
P/BV 4.5 4.7 3.4 3.2 2.9
EV/EBIDTA 15.2 17.1 19.0 14.9 13.3
Dividend Yield (%) 0.8 0.7 0.9 1.1 1.3
5-yr Avg AOCF/EV yield(%) 3.1 3.7 4.6 4.9 5.7
Source: Company, Centrum Research Estimates

7
Dr. Reddys Labs
Appendix A
Disclaimer
Centrum Broking Limited (Centrum) is a full-service, Stock Broking Company and a member of The Stock Exchange, Mumbai (BSE) and National Stock
Exchange of India Ltd. (NSE). Our holding company, Centrum Capital Ltd, is an investment banker and an underwriter of securities. As a group Centrum
has Investment Banking, Advisory and other business relationships with a significant percentage of the companies covered by our Research Group. Our
research professionals provide important inputs into the Group's Investment Banking and other business selection processes.
Recipients of this report should assume that our Group is seeking or may seek or will seek Investment Banking, advisory, project finance or other
businesses and may receive commission, brokerage, fees or other compensation from the company or companies that are the subject of this
material/report. Our Company and Group companies and their officers, directors and employees, including the analysts and others involved in the
preparation or issuance of this material and their dependants, may on the date of this report or from, time to time have "long" or "short" positions in, act
as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. Centrum or its affiliates do not own 1% or more in the
equity of this company Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to
our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make
investment decisions that are inconsistent with the recommendations expressed herein. We may have earlier issued or may issue in future reports on the
companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you
should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We and our Group may rely on
information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or
affiliates of Centrum. Centrum or its affiliates do not make a market in the security of the company for which this report or any report was written.
Further, Centrum or its affiliates did not make a market in the subject companys securities at the time that the research report was published.
This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy,
purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection
with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general
information of the clients of Centrum. Though disseminated to clients simultaneously, not all clients may receive this report at the same time. Centrum
will not treat recipients as clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the
particular investment objectives, financial situations, or needs of individual clients. Similarly, this document does not have regard to the specific
investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities
discussed in this report may not be suitable for all investors. The securities described herein may not be eligible for sale in all jurisdictions or to all
categories of investors. The countries in which the companies mentioned in this report are organized may have restrictions on investments, voting rights
or dealings in securities by nationals of other countries. The appropriateness of a particular investment or strategy will depend on an investor's
individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for
his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conducting
his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved
in the securities forming the subject matter of this document.
The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant
uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates
on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase
over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company.
These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accepted accounting
principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not
regard the inclusion of the projections and forecasts described herein as a representation or warranty by or on behalf of the Company, Centrum, the
authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you
should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the
assumptions underlying such projections and forecasts.
The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may
realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital
may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to
change without notice. Centrum does not provide tax advice to its clients, and all investors are strongly advised to consult regarding any potential
investment. Centrum and its affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Foreign currencies
denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from
the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk.
Certain transactions including those involving futures, options, and other derivatives as well as non-investment-grade securities give rise to substantial
risk and are not suitable for all investors. Please ensure that you have read and understood the current risk disclosure documents before entering into any
derivative transactions.
This report/document has been prepared by Centrum, based upon information available to the public and sources, believed to be reliable. No
representation or warranty, express or implied is made that it is accurate or complete. Centrum has reviewed the report and, in so far as it includes
current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in
this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change.
This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible
media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This
publication may not be distributed to the public used by the public media without the express written consent of Centrum. This report or any portion
hereof may not be printed, sold or distributed without the written consent of Centrum.
The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform
themselves about, and observe, any such restrictions. Neither Centrum nor its directors, employees, agents or representatives shall be liable for any
damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with
the use of the information.
This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything
contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you
solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The
distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves
about, and observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that
this report is accurate or complete.

8
Dr. Reddys Labs
The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking
and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this
report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.
This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its
directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its
directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or
any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection
therewith.
Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. Centrum and
affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this
report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a
merger/acquisition or some other sort of specific transaction.
As per the declarations given by them, Mr. Ranjit Kapadia, research analyst and and/or any of his family members do not serve as an officer, director or
any way connected to the company/companies mentioned in this report. Further, as declared by him, he has not received any compensation from the
above companies in the preceding twelve months. He does not hold any shares by him or through his relatives or in case if holds the shares then will not
to do any transactions in the said scrip for 30 days from the date of release such report. Our entire research professionals are our employees and are paid
a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason to
know at the time of publication of the research report or at the time of the public appearance.
While we would endeavour to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees are
under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum
from doing so.
Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable
regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other
circumstances.
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state,
country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject
Centrum Broking Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does
not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any
transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this
document may be distributed in Canada or used by private customers in United Kingdom.
The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading,
dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read Risk
Disclosure Document for Capital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian
Securities Market.

Dr. Reddys Labs price chart

5000

4000

3000

2000

1000
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Dr Reddy's Laboratories Ltd

Source: Bloomberg, Centrum Research

9
Dr. Reddys Labs

1 Business activities of Centrum Broking Limited
(CBL)
2 Details of Disciplinary History of CBL
3 Registration status of CBL:
Disclosure of Interest Statement
Centrum Broking Limited (hereinafter referred to as CBL) is a registered member of NSE (Cash, F&O
and Currency Derivatives Segments), MCX-SX (Currency Derivatives Segment) and BSE (Cash
segment), Depository Participant of CDSL and a SEBI registered Portfolio Manager.
CBL has not been debarred/ suspended by SEBI or any other regulatory authority from accessing
/dealing in securities market.
Ranjit Kapadia is registered with SEBI as Research Analyst (SEBI Registration No. INH000001352)

Dr. Reddys Aurobindo

Cipla Lupin
Labs Pharma
4 Whether Research analysts or relatives have any financial interest in the subject company
No No No No
and nature of such financial interest
5 Whether Research analyst or relatives have actual / beneficial ownership of 1% or more in
securities of the subject company at the end of the month immediately preceding the date
of publication of the document. No No No No

6 Whether the research analyst or his relatives has any other material conflict of interest
No No No No

7 Whether research analyst has received any compensation from the subject company in the
No No No No
past 12 months and nature of products / services for which such compensation is received
8 Whether the Research Analyst has received any compensation or any other benefits from the
No No No No
subject company or third party in connection with the research report
9 Whether Research Analysts has served as an officer, director or employee of the subject
company
No No No No
10 Whether the Research Analyst has been engaged in market making activity of the subject
No No No No
company.

Rating Criteria
Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn
Buy Upside > 20% Upside > 15% Upside > 10%
Hold Upside between -20% to +20% Upside between -15% to +15% Upside between -10% to +10%
Sell Downside > 20% Downside > 15% Downside > 10%

Member (NSE and BSE)

Regn No.:
CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239
CAPITAL MARKET SEBI REGN. NO.: NSE: INB231454233
DERIVATIVES SEBI REGN. NO.: NSE: INF231454233
(TRADING & CLEARING MEMBER)
CURRENCY DERIVATIVES: MCX-SX INE261454230
CURRENCY DERIVATIVES:NSE (TM & SCM) NSE 231454233

Depository Participant (DP)

CDSL DP ID: 120 12200
SEBI REGD NO. : CDSL : IN-DP-CDSL-661-2012

PORTFOLIO MANAGER

SEBI REGN NO.: INP000004383

Website: www.centrum.co.in
Investor Grievance Email ID: investor.grievances@centrum.co.in

Compliance Officer Details:

Kavita Ravichandran
(022) 4215 9842; Email ID: compliance@centrum.co.in

Centrum Broking Ltd. (CIN :U67120MH1994PLC078125)

Registered Office Address Corporate Office & Correspondence Address
Bombay Mutual Building , Centrum House
2nd Floor, 6th Floor, CST Road, Near Vidya Nagari Marg, Kalina,
Dr. D. N. Road, Santacruz (E), Mumbai 400 098.
Fort, Mumbai - 400 001 Tel: (022) 4215 9000

10
Dr. Reddys Labs