27 November, 2019

Dr. Reddy’s Laboratories Ltd.

Dr. Reddy’s Laboratories Ltd.
Dr. Reddy’s Laboratories Ltd. (DRRD) has been orienting itself towards enhancing proficien-
cies across all segments. We believe that change in leadership, improving domestic business, ACCUMULATE
shift in model of the proprietary segment, focus on optimizing cost and improving productiv- Bloomberg DRRD IS
ity should take this company to elevated levels and thereby initiate with ACCUMULATE at a CMP 2966
target price of INR3,263. Target 3263
Potential Upside 10%
Investment Rationale:
Market Data
Prioritizing domestic market operations: Within India, company will be focusing on increas- Market Cap. (INR. billion) 492.08
ing sales from its key brands by improving execution, productivity and engagement. DRRD has Outstanding Shares (Mn) 165.91
set up a dedicated team for new launches in the domestic geography during the recent years. 52 Week High / Low (INR.) 2992/1873
Further, the company has entered the nutraceuticals segment with the launch of Celevida Face Value (INR.) 5.0
(diabetes nutrition drink) and expects to further dive into the consumer wellness business dur-
ing the years to come. Shareholding (%) Q2FY20
Upward trajectory in EMs + the China edge: DRRD’s relatively established position in emerg- Promoters 26.76
ing markets of Russia, CIS, Brazil and the recent entry in the tender business expanding DRRD’s DIIs 14.99
existence in China will be another key growth driver for the company. The company is now FIIs 30.05
present in this geography not only through its joint venture and subsidiary (Kunshan Rotam Others 28.20
Reddy and Dr. Reddy’s (WUXI) respectively) by producing and marketing generics, but also
Financial Ratios FY21E
through its entry in the country’s tender market.
Biosimilar pipeline to yield results: DDRD currently has six commercialized biosimilars prod- EPS 163

ucts in domestic and emerging markets. Biosimilars pipeline include rituximab for US and ritux- ROE (%) 15.6
imab and tastuzumab for Russia. We expect biosimilars to contribute meaningfully FY21 on- ROCE (%) 16.3
wards. P/E (x) 18.2
Shift in operating model for proprietary products: The company has shifted from its prior EV/EBITDA (x) 11.2
model of commercializing the products from the US oriented proprietary segment to disin-
vesting on development, thereby smoothing out net inflows from this business.
Contact us on:
Margins to expand on cost consciousness + productivity improvement: The company’s initia-
(91-22) 6651-0111
tions on reducing/capping overall cost items including materials, R&D and SG&A are expected
equity@uljk.in
to drive up margins. Disinvesting non-core assets in the recent past, changing cost structures
globally and faster scaling up of revenue as compared to marketing costs has resulted in mar-
gin improvement over FY17-19 and further improvement is expected.

Valuation and Outlook

At CMP of INR2,975, the stock is trading at 18.2x FY21E EPS. We are sanguine about the com-
pany but believe the current price factors in the positives to a certain extent. We value DRRD
at 20x its FY21E EPS and recommend ACCUMULATE at a target price of INR3,263.

(INR mn) FY18 FY19 FY20E FY21E

Net Revenues (INR mn) 142,028 153,851 174,982 186,992
EBITDA (INR mn) 21,901 30,281 37,602 42,875
PAT 9,806 18,795 28,891 27,114
Adjusted Diluted EPS (INR) 59.0 113.1 135.9 163.1
EV/EBITDA (x) 23.8 16.7 13.1 11.2
RoAE (%) 7.8 14.1 14.9 15.6
RoACE (%) 6.8 11.7 16.3 16.3
Diluted P/E (x) 50.3 26.2 21.8 18.2

Source: Company, ULJK Research

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Business overview and revenue trajectory:

DRRD is an Indian pharmaceutical company with a well-diversified portfolio and presence in India and international markets. Opera-
tions are bifurcated into three segments—Global Generics (GG), pharmaceutical services and active ingredients (PSAI) and proprie-
tary products/others. The GG segment which contributed to ~80% of the total revenue of FY19, generates revenue from the geogra-
phies of India, US, Canada, Europe, emerging markets of Russia & CIS and Rest of the World markets including Brazil, China, South
Africa. North America (US and Canada) and India account for the most important contributors to the overall revenue.

Chart 1: Revenue Contribution in FY19

Table 1: Revenue trajectory over the past five years

Revenue (INR mn) FY14 FY15 FY16 FY17 FY18 FY19
North America 55,302 63,564 75,445 63,601 59,822 59,957
Europe 6,970 6,482 7,732 7,606 8,217 7,873
India 15,713 17,870 21,293 23,131 23,322 26,179
Emerging markets 27,178 31,482 23,592 21,071 22,653 28,894
Russia & Other CIS 19,819 17,713 14,100 15,200 16,500 20,500
Rest of World 7,359 13,769 9,492 5,871 6,153 8,394
Global Generics 105,163 119,398 128,062 115,409 114,014 122,903
PSAI 23,974 25,456 22,379 21,277 21,992 24,140
Proprietary products / others 3,033 3,336 4,267 4,123 6,022 6,808
Total 132,170 148,190 154,708 140,809 142,028 153,851

Source: Company, ULJK Research

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A. Global Generics (GG)

Revenues from the GG segment were INR122,903mn for FY19, an increase of 7.8% from INR114,014mn in FY18 on the back of
27.6% growth in Emerging Markets (Russia, other countries of the former Soviet Union, Romania and RoW including South Africa,
China, Brazil and Australia) and 12.3% growth in India.

a. North America

Contribution from North America to the overall revenue has decreased from the peak of 49% in FY16 to 39% in FY19. For the US,
DRRD markets the generics portfolio in the United States through its wholly owned subsidiary, Dr. Reddy’s Laboratories, Inc.

Chart 2: Revenue trajectory in US and contribution to total revenue

Table 2: Details of filings/approvals/launches

FY18 FY19 Till Q2FY20
ANDA filings during the relevant period 19 20 2
NDA filings during the relevant period 1 0 0
Cumulative filings made 276 279 NA
of which ANDAs 272 275 NA
of which NDAs 4 4 NA
Cumulative filings pending approval 110 110 99
of which ANDAs 107 107 96
of which Para IV 63 60 55
of which FTF status 30 34 31
of which NDAs 3 3 3
Launches 14 24 14

Canada, contributing barely 1.1% to the total revenue, generates revenues from certain profit sharing arrangements with distribu-
tors who market certain of the company’s generic products and will continue to grow on a small base. As of March 31, 2019 compa-
ny had filed a cumulative total of 33 ANDS of which, 26 are approved, 2 are pending approval, and 5 were withdrawn/rejected.

Source: Company, ULJK Research

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Table 3: Launches in US year to date

Launches Brand/Company Time of launch MAT (USD)
doxercalciferol Hectorol/Sanofi Nov-19 138
lansoprazole (OTC) Prevacid/Takeda Sep-19 57
fosaprepitant Emend/Merck Sep-19 279
bupropion hcl Zyban/GSK Sep-19 5
vigabatrin Sabril/Lundbeck Aug-19 274
pregabalin Lyrica/CV Pharma (Pfizer) Jul-19 5462
ramelteon Rozerem/Takeda Jul-19 91
fexofenadine HCl; pseudoephedrine hcl (OTC) Allegra-D/Aventisub II Jul-19 44
carboprost tromethamine Hemabate/Pfizer Jul-19 55
guaifenesin; pseudoephedrine hcl Mucinex/RB Health Jul-19 71
tobramycin Tobi/ Mylan Jun-19 97
phytonadione Vitamin K1/Hospira Jun-19 47
isotretinoin (Zenatane) Accutane/Hoffman LaRoche Jun-19 525
daptomycin Cubicine/Merck Sharp & Dohme Corp May-19 641
testosterone gel Androgel/AbbVie Inc May-19 816

Management has guided for 30 launches for FY20. In April 2019, DRRD entered into a purchase agreement with Teva to acquire a
portfolio of 42 approved non-marketed ANDAs for a consideration of USD4mn and includes more than 30 generic injectable prod-
ucts that will help augment the Company’s injectables product portfolio. With company’s more than 15% market share in gSubox-
one and exit of Sandoz’s authorized generic, contribution of this drug is expected to ramp up. DRRD will be responding to the CRL
received in August pertaining to the limited competition drugs—gNuvaring and gCopaxone in the coming months.

Within biosimilars, company has filed for two new Investigational New Drugs applications – rituximab for which phase III trials are
in progress and pegfilgrastim for which DRRD has partnered with Fresenius Kabi and trials have been completed.
Out of the portfolio comprising of 8 ANDAs acquired from Teva in FY17, during H1FY20, DRRD launched tobramycin and ramelteon
and recognized an impairment charge of INR2,413mn relating to these two products on account of competition led price erosion.
Further, the company decided to drop the launch of imiquimod topical cream and impaired the entire carrying value of
INR1,138mn. Phentermine HCl/topiramate ER and metformin HCl/saxagliptin will take two to three years to commercialize.

Table 4: Trend in quarterly US revenue

Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20
North America (USDmn) 221 246 222 237 207 209 213 234 202
North America (INRmn) 14,318 16,073 14,487 15,903 14,265 14,832 14,957 16,322 14,265
YoY growth -11% -3% -6% 6% 0% -8% 3% 3% 0%

Source: Company, ULJK Research

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b. India

DRRD has laid out three key avenues of growth within the domestic market - (a) increasing sales from pillar brands by focusing on
better market execution and increasing productivity and improving the patient/doctor engagement model, (b) new products
launching for which the company has set up a dedicated team since the past two years and (c) enter the consumer wellness/
nutrition segment, the company recently launched Celevida (diabetes nutrition drink) marking its entry in the nutraceuticals seg-
ment, and expand this portfolio over the next three to five years, the company is open to inorganic opportunities within this sub
segment. The company only manufactures and markets branded generics with acute to chronic therapies sharing the ratio of 65:35
and is aiming towards stepping up the chronic portfolio.
With a dedicated team focusing on new launches for the domestic market and improving productivity, this geography is bound to
grow higher than the Indian pharmaceutical market and we expect this geography to grow at 12% over FY20E-21E

Chart 3: Revenue trajectory in India and contribution to total revenue

Chart 4: Therapy-wise contribution as per MAT Sep 2019 Chart 4: Contribution of Top 10 brands FY19 (INR bn)

Source: AIOCD, Company, ULJK Re-

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Table 5: Productivity has been increasing and is expected to improve further

FY14 FY15 FY16 FY17 FY18 FY19

Domestic formulation revenue 15,713 17,870 21,293 23,131 23,322 26,179
No. of MRs 4,863 5,176 5,662 5,778 5,680 5,050
MR productivity 3.2 3.5 3.8 4.0 4.1 5.2

Table 6: Trend in quarterly domestic revenue

Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20
India 6,370 6,126 6,138 6,074 6,864 6,741 6,505 6,960 7,511
YoY growth 2% 3% 7% 30% 8% 10% 6% 15% 9% In

India, the company has commercialized rituximab, darbepoetin alfa, filgrastim, peg-filgrastim, trastuzumab and bevacizumab.
The company expanded their biosimilars facility in Hyderabad to meet growing demand in emerging markets.

Source: Company, ULJK Research

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c. Europe:

Revenues from Europe are generated from sales in geographies including Germany, the United Kingdom, Italy, France, Spain and the
out-licensing business across Europe (Germany and UK being the principal revenue generating markets). In Germany, the company
sells a broad range of generics under the “betapharm” brand and within UK and other EU nations, products are marketed through
the UK subsidiary — Dr. Reddy’s Laboratories (U.K.) Limited. In the UK the company currently sells more than fifty products including
INN and branded generics and works closely with the Clinical Commissioning Groups to promote its branded generics focusing main-
ly on oncology, anti-infectives and HIV whereas the retail business covers a broad range of therapeutic areas.

Chart 6: Revenue trajectory in Europe and contribution to total revenue

In UK, the company is present more in retail whereas in Germany, presence in bulk/tender segment is higher. This geography, con-
tributing 5.1% to the total revenue as on FY19, has remained muted with revenue growing at a muted 2.5% over the past five years.
However during the last three quarters, the company has been improving with a double digit growth on account of higher contribu-
tion from new launches and better performing base business, partially offset by price erosion in existing products. The company has
identified that they growth in this geography will primarily be from launching new products. We expect this market to grow at 6%
over FY20E-21E on the back of existing challenges and lack of new launches.

Table 7: Trend in quarterly domestic revenue

Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20
Europe 2,424 2,006 1,711 2,016 1,915 2,030 1,912 2,404 2,764
YoY growth 36% -7% -17% -3% -21% 1% 12% 19% 44%

Source: Company, ULJK Research

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d. Emerging markets

The emerging markets segment is further bifurcated into geographies of Russia, CIS and other RoW countries primarily being, China,
South Africa and Brazil.
Russia & CIS: As per IQVIA, in FY19, DDRD was the top ranked Indian company and seventeenth in Russia with 5.8% value growth as
compared to 6.1% value growth of the Russian pharmaceutical market. Company’s top five brands in this geography include Nise,
Omez, Nasivin, Femibion and Ibuclin and accounted for 56% of company’s retail sales. In biosimilars, DRRD has already launched
rituximab in Russia and pipeline includes trastuzumab and bevacizumab. The company’s strategy in Russia is to focus on the thera-
pies including GI, pain, AI and respiratory and to build leading brands in prescription, over-the-counter and hospital sales.
DRRD has 289 MRs and 36 managers for the prescription division, 225 MRs and 30 managers for the OTC division and 42 specialists
and 17 key account managers for the hospital division.
RoW: The rest of the world segment includes significant geographies of South Africa, Australia, Brazil, Colombia and Myanmar. The
growth in the recent years is largely attributable to improving operations in Brazil, increase in volumes of existing products and
ramp-up of revenues in China.
DRRD is well-positioned to drive up growth in this segment which we believe to scale up 16% over FY20E-21E.

Chart 7: Revenue trajectory in Europe and contribution to total revenue

The China edge: The company already has a foot in the world’s second largest pharma market being China, through its JV - Kun-
shan Rotam Reddy Pharmaceuticals Co. Ltd. Incorporated and subsidiary. With H1FY20 witnessing a key event for the company on
winning the olanzapine tender and being the first Indian generic company to have prevailed the novel procurement scheme,
DRRD’s presence and scope of expansion in this geography has strengthened. Manufacturing for China is spread over India and Chi-
na, including outsourced contract based manufacturing. The company is expected to file around fifty products in the coming years
and with the established credentials, local manufacturing experience and familiarity with commercialization this geography can be
a key growth driver for DRRD.

Table 8: Trend in quarterly domestic revenue

Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20
Russia & Other CIS 4,100 4,400 3,600 4,900 5,200 5,500 4,810 5,196 5,800
YoY growth 14% 7% 6% 11% 27% 25% 34% 6% 12%
RoW 1,406 1,500 1,900 1,743 2,292 2,244 2,200 2,100 2,476
YoY growth 14% -19% -27% 29% 63% 50% 16% 20% 8%
Source: Company, ULJK Research

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B. Pharmaceutical Services and Active Ingredient (PSAI)

PSAI primarily consists of business of manufacturing and marketing APIs and intermediates, which are the main ingredients for fin-
ished pharmaceutical products. APIs and intermediates become finished pharmaceutical products when the dosages are fixed in a
form ready for human consumption such as a tablet, capsule or liquid using additional inactive ingredients. This segment also in-
cludes the contract research services business and manufacture and sale of APIs and steroids as per specific customer requirements
wherein end to end product development and manufacturing services are provided.

DRRD is one of the world’s largest manufacturer of APIs. PSAI segment grew 9.8% in the year from INR24.1bn in FY18 to INR22bn in
FY19 on account of increased API volume and customer orders. DRRD filed 82 DMFs during FY19 and and cumulatively have filed
963 DMFs as on FY19. We expect this segment to grow 10% over FY20E/21E on account of increase in volumes of existing products.

Chart 8: Revenue trend in US and its contribution to total revenue

Table 9: Therapy-wise revenue of PSAI

FY16 FY17 FY18 FY19
Cardiovascular 5,077 5,078 6,191 7,019
Pain Management 4,085 3,290 3,228 3,364
Central Nervous System 3,021 2,758 2,331 2,741
Anti-Infective 2,015 1,859 1,968 1,247
Dermatology 1,485 1,606 1,606 1,622
Oncology 2,570 1,534 1,650 2,212
Others 4,126 5,152 5,018 5,935

Table 10: Quarterly trend of PSAI revenue

Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20
PSAI 5,654 5,436 6,251 5,409 6,029 5,937 6,765 4,539 7,107
YoY growth -2% 1% 16% 16% 7% 9% 8% -16% 18%

Source: Company, ULJK Research

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C. Proprietary Product (PP) & Others

Proprietary product business operates in - New chemical entities (NCEs), specialty business and differentiated formulations business.
The differentiated formulations business in the therapeutic areas of dermatology and neurology focuses on the research, develop-
ment and commercialization which are marketed and sold through its wholly owned subsidiary, Promius Pharma, LLC. ‘Others’ in-
cludes the operations of DRRD’s wholly-owned subsidiary, Aurigene Discovery Technologies Ltd., a discovery stage biotechnology
company developing novel therapies in the fields of oncology and inflammation and which works with established pharmaceutical
and biotechnology companies in early-stage collaborations, bringing drug candidates from hit generation to pre-clinical develop-
ment. DRRD’s principal research laboratory is based in Hyderabad, India and as on FY19, company had a team of 84 scientists and
dermatology and neurology teams consisted of 109 marketing, sales, and market access and operations professionals.

Chart 9: Revenue trend in proprietary segment and its contribution to overall revenue

This segment has grown at a CAGR of 17.6% over a five year period with contribution increasing from 2.3% in FY14 to 4.4% in FY19,
and gross margin has expanded from 68% in FY17 to 79% in FY19. However, despite such high gross margins, this segment has not
been profit additive for the company on account of high marketing costs. The company has modified the operating model of this
segment from developing and commercializing the product themselves to developing and either divesting or licensing the product
to a suitable partner.

On June 14, 2019, DRRD entered into an agreement with Upsher-Smith Laboratories, LLC (Upsher-Smith), wherein the company will
sell rights for Zembrace Symtouch (sumatriptan injection) 3 mg and Tosymra (sumatriptan nasal spray) 10 mg, (DFN-02) for its U.S.
and select territory rights, which are commercialized through its wholly owned subsidiary, Promius Pharma, LLC. As per agreement,
DRRD is entitled to receive USD70mn as upfront payment and up to USD40.5mn in contingent milestone payments. The company in
Q2FY20 has recognized income of USD105mn (INR7,229mn) inclusive of the upfront consideration and discounted value of near-
term milestones.

Source: Company, ULJK Research

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Table11: Proprietary products pipeline

Compound Therapy & Indication Update
NDA was submitted in Sept. 2015 and received a CRL
Pediatrics - Treatment of head lice in pa-
DFD-11 (Xeglyze) from the USFDA in Aug. 2016. Company in process to
tients 6 months of age or older.
close out the CRL.
PPC-06 (Tepilamide Dermatology - Treatment of plaque psoriasis Phase 2b studies have been concluded and documen-
Fumarate) in patients 18 years of age or older. tation is ongoing.
Approval enabling study is ongoing. Submission of a
Hematology-Oncology: Treatment of Cuta-
E7777 (orphan drug) biologics license application to the USFDA is planned
neous T Cell Lymphoma.
in 2019.
DFD-03 (Tazarotene Lotion) Dermatology - Treatment of acne vulgaris. NDA is expected to be filed in late 2019.
DFN-15 (Celecoxib Oral So- Neurology - Treatment of migraines in adults
NDA has been accepted by USFDA.
lution) with or without aura.
XP 23829 (NCE inlicensed Dermatolgy - Treatment for moderate-to- Ph-2b study completed; Phase 3 studies being
from Xenoport) severe chronic plaque psoriasis planned.
DFD-06 (Impoyz) - Clobeta- Dermatolgy - Treatment for moderate-to-
sol propionate severe chronic plaque psoriasis Approval enabling study is ongoing
DFD-10 - Minocycline HCl Dermatology - Treatment for Acne vulgaris Ph-3 completed.
DFD-09 (Zenavod) - doxycy- Dermatology - Treatment of inflammatory
BE study
cline lesions of rosacea in adult patients

Table 12: Divestures/Out-licensing arrangements over the past years

Year Product (Compound) Consideration Sold/

Zembrace Symtouch (sumatriptan in- USD70mn as upfront payment, USD40.5mn as milestone/
Upsher Smith Labora-
jection) conditional payment and sales based royalties on a quarterly
tories LLC
Tosymra (sumatriptan nasal spray) basis
Sernivo (betamethasone dipropionate
FY20
spray)
Encore Dermatology
Promiseb Upfront payment followed by milestone payments
Inc
Trianex (Triamcinolone Acetonide Oint-
ment, USP)
FY19 Cloderm (clocortolone pivalate) Upfront payment and royalties EPI Health LLC
USD20mn as upfront payment, USD12.5mn as milestone/ Encore Dermatology
Impoyz (clobetasol propionate)
conditional payments and sales based royalties Inc
FY18
Shares worth USD30mn upon IPO or cash payment if IPO not CHD Biosciences
DFA-02
executed and milestone/ conditional payments Inc.

Table 13: Trend in quarterly revenue

Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20
Proprietary Products 1,188 2,519 1,262 1,162 1,413 1,216 3,017 914 8,086
YoY growth 10% 145% 26% 10% 19% -52% 139% -21% 472%

Source: Company, ULJK Research

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R&D

R&D expense for the company had peaked out in FY17 and we expect R&D expense as a percentage of sales to hover around 9.5%-
10% and have been reducing in absolute and percentage of sales terms on account of improving cost efficiencies and productivity
and prioritization of products.

Chart 10: R&D expense in the past five years

Table 14: Break-up of R&D expense

FY14 FY15 FY16 FY17 FY18 FY19
Employee benefits expense 2,624 4,310 5,130 4,921 4,926 4,627
Materials/consumables 2,250 2,936 3,510 3,392 4,114 2,967
Clinical trials and others 7,758 9,605 8,287 10,345 8,352 6,795
Total R&D (Ind AS) 12,632 16,851 16,927 18,658 17,392 14,389

Financial Aspects

a. Incremental capex

DRRD has been spending on organic and inorganic capex to enhance capacities and capabilities and widen the portfolio. In April
2019, DRRD entered into a purchase agreement with Teva to acquire a portfolio of 42 approved non-marketed ANDAs for a consid-
eration of USD4mn and includes more than 30 generic injectable products to help augment the Company’s injectables product
portfolio. Further, the company is creating a new site for injectables outside the Srikakulam SEZ area. Incremental organic capex
incurred by the company is primarily for creation of new facilities and up-gradation/capacity expansion of existing facilities.

Source: Company, ULJK Research

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Chart 11: Capex trend during the past years

b. Debt

DRRD has been able to reduce its net debt substantially on account of cash inflows due to divesture in non-core assets. The compa-
ny will soon be a net cash company thereby enhancing the company's free cash flows.

Chart 12: Trend in overall net debt and as a percentage of equity

c. Margins

DRRD is focusing on improving cost efficiencies and improving productivity to bring back the EBITDA margins of 25%. Gross margins
of the PSAI segment improved in FY19 on account of change in business mix and are expected to continue in the current range.
Further, change in company’s operating model for the proprietary product segment will significantly enhance margins.

Source: Company, ULJK Research

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Over the recent years, company has been able to bring down the following operating costs from their peak levels:
 Material costs from 46.3% in FY18 to 45.8% in FY19
 R&D from 13.9% in FY17 to 10.1% in FY19
 SG&A from 15.6% in FY17 to 24.4% in FY19

Chart 13: Gross margins Chart 14: EBITDA & Net profit margins

e. Free cash flows

DRRD has been generating positive free cash flows on account of increasing operating cash flows and divesture of non-core assets
and reduction in capex.

Table 15: DRRD IS generated positive cashflows in FY19 excluding capex incurred for Heinz acquisition
Free cash flow FY14 FY15 FY16 FY17 FY18 FY19
Reported Profit 21,512 22,180 20,013 12,039 9,806 18,795
Depreciation 6,475 7,599 7,351 10,266 10,772 11,348
Interest (Net of Tax) (323) (1,322) 1,991 (659) (1,406) (932)
Others (77) (360) 717 (147) (674) (185)
Changes in WC (6,575) (4,857) 7,094 (2,973) (3,626) (1,911)
Operating cash flow 21,012 23,240 37,166 18,526 14,872 27,115
Capex 13,761 12,998 21,436 37,498 11,414 7,226
Free cash flow 7,251 10,242 15,730 (18,972) 3,458 19,889

f. Cash conversion cycle

Cash conversion cycle has remained stable over the recent years and is expected to stay range bound between 175-180 days.

Source: Company, ULJK Research

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Table 16: Trend in cash conversion cycle

Profitability & liquidity ratios FY14 FY15 FY16 FY17 FY18 FY19
Inventory days 148 144 149 158 160 162
Debtors days 90 91 97 103 101 95
Payable days 72 62 67 75 82 79
Cash Conversion Cycle 165 173 179 186 179 179

g. RoE/RoCE

After four consecutive years of decline, profitability and return ratios for the company in terms of RoAE and RoACE improved to
14.1% and 11.7% respectively in FY19. Improving operating performance and reduction in debt have facilitated this improvement.
We expect returns to enhance further on the back of reduction in costs and higher inflows.

Chart 15: RoAE/RoACE trajectory

d. Dividend history

DRRD has been consistently paying out dividends with dividend per share amounting to INR20.

Table 17: Dividend record during the past five years

FY14 FY15 FY16 FY17 FY18 FY19
Dividend (INR) 3,062 3,408 3,405 3,312 3,316 3,320
DDT (INR) 520 694 693 674 676 376
Dividend Payout Ratio 14% 15% 17% 28% 34% 18%
DPS (INR) 18 20 20 20 20 20

Source: Company, ULJK Research

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4. Industry and Company Overview

a. Industry

The Indian pharmaceutical industry is the world’s third largest manufacturer of drugs by volume with revenues of about USD38bn
in FY19. Even at current rates of seven to eight percent CAGR, the industry’s annual revenues can grow to about USD80bn to
USD90bn by 2030. However, as per IPA, the industry can set bold aspirations of eleven to twelve percent CAGR, and grow to annual
revenues of about ~USD65bn by 2024 and about ~USD120bn to USD130bn by 2030 on the back of multiple growth cylinders includ-
ing accelerated growth in India driven by increased accessibility and affordability, potential breakthroughs in next generation inno-
vative products, strong growth in the US market by higher ANDA share in molecules going off patent, and potential ease in price
erosion and increased growth in large underpenetrated markets

Table 18: FY19 geography-wise revenue contribution of DRRD IS v/s. Peers

Geography-wise Revenue (INR bn) DRRD Cadila Sun Lupin Cipla ARPB GNP Torrent
India 26.2 35.3 73.5 46.4 62.7 - 27.8 32.3
% 17% 29% 26% 28% 39% 0% 29% 42%
North America 60.0 62.8 106.7 55.9 34.2 90.3 31.4 15.9
% 39% 51% 37% 34% 21% 46% 32% 21%
Europe 7.9 - - 2.3 7.0 49.6 11.2 10.1
% 5% 0% 0% 1% 4% 25% 12% 13%
Russia & CIS 20.5 - - - - - - -
% 13% 0% 0% 0% 0% 0% 0% 0%
EM/RoW 8.4 8.3 88.2 43.5 49.5 11.9 16.9 13.7
% 5% 7% 31% 27% 31% 6% 17% 18%
Others (including API, ARV) 30.9 17.4 17.3 15.6 7.0 43.8 9.5 4.7
% 20% 14% 6% 10% 4% 22% 10% 6%
Total 154 124 286 164 160 196 97 77

b. Company

DRRD is an integrated Indian pharmaceutical company having a well-diversified portfolio in the domestic market and international
markets of US, Canada, Europe, Russia, CIS and RoW including China. Operations are bifurcated into three segments—Global Ge-
nerics (GG), pharmaceutical services and active ingredients (PSAI) and proprietary products/others. The GG segment which contrib-
uted to ~80% of the total revenue of FY19, generates revenue from the geographies of India, US, Canada, Europe, emerging mar-
kets of Russia & CIS and Rest of the World markets including Brazil, China, South Africa. North America (US and Canada) and India
account for the most important contributors to the overall revenue.

c. Key risks

 Risk of delayed approval of new products and regulatory actions on account of non-compliance.
 US, being a key market for the company remains vulnerable to competition led price erosion.
 Lower growth in the domestic front
 Forex depreciation and changes in political/economic scenarios in the countries where it operates.
 Government regulations and intervention to regulate prices.

Source: Company, ULJK Research

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 DRRD IS

Table 19: List of facilities

Sr. No. Name/Location Segments Area (Sq.Ft.)
Within India
1 API Hyderabad Plant 1, Telangana, India GG & PSAI 645,995
2 API Hyderabad Plant 2, Telangana, India GG & PSAI 781,379
3 API Hyderabad Plant 3, Telangana, India GG & PSAI 644,805
4 API Nalgonda Plant, Telangana, India GG & PSAI 3,397,680
5 API Srikakulam Plant, Andhra Pradesh, India GG & PSAI 4,027,688
6 API Srikakulam Plant (SEZ), Andhra Pradesh, India GG & PSAI 9,917,739
7 Technology Development Centre Hyderabad 1, Telangana, India GG & PSAI 113,256
8 Technology Development Centre Hyderabad 2, Telangana, India GG & PSAI 68,825
9 Formulations Hyderabad Plant 1, Telangana, India GG 271,379
10 Formulations Hyderabad Plant 2, Telangana, India GG 3,207,826
11 Formulations Baddi Plant 1, Himachal Pradesh, India GG 728,234
12 Formulations Baddi Plant 2, Himachal Pradesh, India GG 381,342
13 Biologics Hyderabad, Telangana, India GG 1,242,767
14 Formulations Hyderabad Plant 3, Telangana, India GG 1,539,089
15 Formulations Srikakulam Plant 1 (SEZ), Andhra Pradesh, India GG 879,041
16 Formulations Srikakulam Plant 2 (SEZ), Andhra Pradesh, India GG 334,105
17 Formulations Srikakulam Plant 11, Andhra Pradesh, India GG 122,265
18 Formulations Visakhapatnam Plant 1 (SEZ), Andhra Pradesh, India GG 582,206
19 Formulations Visakhapatnam Plant 2 (SEZ), Andhra Pradesh, India GG 544,322
20 ADTL Hyderabad, Telangana, India Others 187,308
21 ADTL Bengaluru, Karnataka, India Others 689,216
22 Integrated Product Development Center, Bengaluru, India GG 29,500
23 Integrated Product Development Center, Telangana, India GG, PSAI & PP 103,350
Outside India
24 API Cuernavaca Plant, Mexico GG & PSAI 2,361,840
25 API Mirfield Plant, United Kingdom GG & PSAI 1,785,960
26 API Middleburgh Plant, New York, United States GG 292,000
27 Technology Development Centre, Cambridge, United Kingdom GG & PSAI 32,966
28 Technology Development Centre, OctoPlus N.V., Leiden, Netherlands GG & PSAI 56,500
29 Formulations Beverley Plant, East Yorkshire, United Kingdom GG 81,000
30 Formulations Shreveport Plant, Louisiana, United States GG 2,349,251
31 Aurigene Discovery Technologies, Malaysia Others 5,672

Table 20: Update on regulatory/inspection status

Name/Location
API Hyderabad Plant 2
API Nalgonda Plant
API Srikakulam Plant (SEZ)
Formulations Hyderabad Plant 3
Formulations Srikakulam Plant 1 (SEZ)
Formulations Srikakulam Plant 2 (SEZ)
Formulations Visakhapatnam Plant 1 (SEZ)
Formulations Visakhapatnam Plant 2 (SEZ)
ADTL Hyderabad
Formulations Shreveport Plant, Louisiana, US No observations noted. EIR issued in Oct 2019 classifying the inpection as NAI.
Latest update
5 observations noted. EIR issued in October 2019 classifying the inspection as VAI
1 observation noted. EIR issued in May 2019 classifying the inspection as VAI
4 observations noted which the company expects to address within the stipulated
timeline. Plant is still under warning letter.
11 observations noted. EIR issued in April 2019 classifying the inspection as VAI
4 observations noted. EIR issued in April 2019 indicating closure of audit.
No observations were noted. EIR issued in February 2019 indicating closure of audit.
8 observations noted for which company responded in September 2019 and is
waiting for the EIR
The U.S. FDA issued an EIR in September 2019indicating successful closure of the
audit of the oncology formulation manufacturing facility at Duvvada.
No observations noted. EIR issued in June 2019 indicating closure of audit.

Source: Company, ULJK Research

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 DRRD IS

Corporate governance snapshot

DRRD has appointed M/s. S R Batliboi & Associates LLP, Chartered Accountants, a member firm of Ernst Young network as their
statutory auditor for Indian GAAP and M/s. Ernst & Young Associates LLP as independent registered public accounting firm
(independent auditor) to audit the annual consolidated financial statements and for issuing an opinion on the financial statements
prepared in accordance with IFRS.

Table 21: Total remuneration of KMP in the past three years and ratio of remuneration of each director to the median remunera-
tion of the employees in FY19
Remuneration in % Ratio to the median
KMP Designation
FY17 FY18 FY19 Change remuneration
Mr. K Satish Reddy Chairman 72 57 86 48.9 189
Mr. G V Prasad Co-Chairman, Managing Director & CEO 98 77 124 59.9 274
Dr. Omkar Goswami Independent director 8 7 10 38.9 21
Ms. Kalpana Morparia Independent director 9 7 10 32.8 21
Mr. Prasad R Menon Independent director NA 3 9 181.3 21
Mr. Sridar Iyengar Independent director 9 8 10 30.3 23
Dr. Bruce L A Carter Independent director 9 8 10 32.8 23
Mr. Anupam Puri Independent director 10 9 11 29.1 25
Mr. Bharat N Doshi Independent director 10 9 11 28.9 24
Mr. Leo Puri Independent director NA NA 5 NA 11
Ms. Shikha Sharma Independent director NA NA 3 NA 6
Mr. Allan Oberman Independent director NA NA 1 NA 2
Mr. Saumen Chakraborty Chief Financial Officer 55 92 66 -27.9 NA
Mr. Sandeep Poddar Company Secretary 9 9 9 -0.1 NA
Total 289 287 365 27.3
PAT (Cons) 12,039 9,806 18,795 91.7
Rem as a % of PAT 2% 3% 2%
Employee Expense (Cons) 31,068 32,147 33,562 4.4
EE as a % of PAT (Ind AS) 258% 328% 179%
Revenue (Cons) 140,809 142,028 153,851 8.3
EE as a % of Revenue 22% 23% 22%

Table 22: CSR spend

CSR spend for FY19 INR mn
Average net profit of the Company for last three years 11,818
2% of the above amount 236
Amount spent 236
Amount unspent 0

Source: Company, ULJK Research

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 DRRD IS

6. Financial Statements & Ratios

Income statement FY18 FY19 FY20E FY21E Balance sheet FY18 FY19 FY20E FY21E
Net revenues 142,028 153,851 1,74,982 1,86,992 Share capital 830 830 830 830
Total operating expenses 120,127 123,570 1,37,380 1,44,118 Reserves & Surplus 125,630 139,367 162,018 183,275
Materials cost 65,724 70,421 78,742 83,025 Shareholders' funds 126,460 140,197 162,848 184,105
R&D cost 18,265 15,607 16,992 17,150 Minority interest 0 0 0 0
Selling, admin and general expenses 36,138 37,542 41,646 43,943 Long term borrowings 25,089 22,000 15,000 13,500
EBITDA 21,901 30,281 37,602 42,875 Short term borrowings 25,529 16,381 15,381 14,381
Depreciation 10,772 11,348 11,717 11,772 Total Borrowings 50,618 38,381 30,381 27,881
EBIT 11,129 18,933 25,885 31,102 Other LT Liabilities & Provisions 4,363 3,530 3,883 4,271
Less: Interest Expense (2,080) (1,117) (1,273) (1,541) Accounts Payable 16,052 14,553 17,807 14,038
Add: Other income 788 1,955 4,457 2,000 Provisions 3,732 4,166 4,374 4,593
Profit before tax 13,997 22,005 31,615 34,644 Other Current Liabilities 24,379 24,600 23,370 21,033
Less: Provision for Tax 4,535 3,648 3,161 7,968 Total current liabilities & provisions 44,163 43,319 45,551 39,664
Add: Share of profit from associates 344 438 438 438 Sources of funds 225,604 225,427 242,663 255,922
Reported Profit 9,806 18,795 28,891 27,114 Net Block 57,869 54,088 54,371 54,599
Adjusted Profit 9,806 18,795 22,591 27,114 Goodwill 3,945 3,902 3,902 3,902
No. of Shares outstanding 166 166 166 166 Intangible assets 44,665 44,367 44,367 44,367
Reported Basic EPS 59 113 174 163 Total Fixed assets 106,479 102,357 1,02,640 1,02,868
No. of Diluted shares outstanding 166 166 166 166 LT Investments 4,633 3,342 3,576 3,934
Adjusted Diluted EPS 59 113 136 163 DTA (net) 2,898 3,558 3,558 3,558
Adjusted Cash EPS 124 182 207 234 Other LT assets 1,949 1,669 1,752 1,840
Dividend per share (DPS) 20 20 31 29 Cash and cash equivalents 20,968 24,757 31,332 41,789
Dividend Payout Ratio (%) 34 18 18 18 Sundry debtors 40,617 39,869 46,424 45,792
Inventories 29,089 33,579 35,455 36,424
as % of net revenues FY18 FY19 FY20E FY21E Other Current Assets 18,971 16,296 17,926 19,718
Operating expenses 84.6 80.3 78.5 77.1
Total current assets (ex cash) 88,677 89,744 99,804 1,01,934
Materials costs 46.3 45.8 45.0 44.4
Net current assets (ex cash) 44,514 46,425 54,253 62,269
R&D costs 12.9 10.1 9.7 9.2
Uses of funds 225,604 225,427 2,42,663 2,55,922
Staff costs 0.0 0.0 0.0 0.0
Book Value per share (INR) 761 844 980 1,108
S G & A expenses 25.4 24.4 23.8 23.5
Depreciation 7.6 7.4 6.7 6.3
Cash flow metrics FY18 FY19 FY20E FY21E
Interest Expense (1.5) (0.7) (0.7) (0.8)
Operating cash flow 14,872 27,115 31,508 29,328
EBITDA margins 15.4 19.7 21.5 22.9
Financing cash flow (6,468) (4,035) (10,225) (10,151)
Net profit margins 6.9 12.2 12.9 14.5
Investing cash flow (9,732) (19,291) (14,708) (8,721)
Net cash flow (1,328) 3,789 6,575 10,456
Growth metrics (%) FY18 FY19 FY20E FY21E Capex (11,414) (7,226) (12,000) (12,000)
Net Revenues 0.9 8.3 13.7 6.9 Dividend paid 3,992 3,696 6,241 5,857
EBITDA (3.5) 38.3 24.2 14.0
PBT (2.1) 57.2 43.7 9.6 Free cash flow FY18 FY19 FY20E FY21E
Adjusted Profit (18.5) 91.7 20.2 20.0 Reported Profit 9,806 18,795 28,891 27,114
EPS (18.2) 91.6 53.7 (6.2) Add: Depreciation 10,772 11,348 11,717 11,772
Interest (Net of Tax) (1,406) (932) (1,145) (1,187)
Others (674) (185) (127) (355)
Less: Changes in WC (3,626) (1,911) (7,828) (8,016)
Operating cash flow 14,872 27,115 31,508 29,328
Less: Capex 11,414 7,226 12,000 12,000
Free cash flow 3,458 19,889 19,508 17,328

Source: Company, ULJK Research

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 DRRD IS

Profitability & liquidity ratios FY18 FY19 FY20E FY21E Operating ratios FY18 FY19 FY20E FY21E
Return on Average Equity (ROAE) (%) 7.8 14.1 14.9 15.6 Total asset turnover 0.6 0.7 0.7 0.8
Pre-tax Return on Capital Employed (ROACE) (%) 6.8 11.7 16.3 16.3 Fixed asset turnover 1.4 1.5 1.8 1.9
Inventory days 160 162 160 158 Equity turnover 1.1 1.2 1.2 1.1
Debtors days 101 95 90 90
Payble days 82 79 75 70 Du pont analysis FY18 FY19 FY20E FY21E
Cash Conversion Cycle 179 179 175 178 Net Profit Margin 6.9 12.2 12.9 14.5
Current Ratio 2.5 2.6 2.9 3.6 Total Asset Turnover Ratio 0.6 0.7 0.7 0.8
Gross Debt/EBITDA 2.3 1.3 0.8 0.7 Leverage multiplier 1.8 1.7 1.5 1.4
Gross Debt/Equity 0.4 0.3 0.2 0.2 Return on Average Equity (ROE) 7.8 14.1 14.9 15.6
Adjusted Debt/Equity 0.4 0.3 0.2 0.2
Net Debt/Equity 0.2 0.1 (0.0) (0.1)
Interest Coverage Ratio (5.4) (16.9) (20.3) (20.2)

Valuation parameters FY18 FY19 FY20E FY21E

Adjusted Diluted EPS (INR) 59.0 113.1 135.9 163.1
Y-o-Y growth (%) (18.2) 91.6 53.7 (6.2)
Adjusted Cash EPS (INR) 124.1 181.7 206.8 234.4
Diluted Price to Earnings Ratio (P/E) (x) 50.3 26.2 21.8 18.2
Price to Book Ratio (P/B) (x) 3.9 3.5 3.0 2.7
Enterprise Value / Sales (x) 3.7 3.3 2.8 2.6
Enterprise Value / EBITDA (x) 23.8 16.7 13.1 11.2
Dividend Yield (%) 0.7 0.7 1.1 1.0

Source: Company, ULJK Research

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 DRRD IS

Research Desk Tel: 022 - 6651 0127

Institutional Sales Desk Tel: 022 - 6651 0120

Disclosure Appendix

BUY: Returns>20%; ACCUMULATE: 5%<Returns<20% ; HOLD: -5%<Returns<5%, REDUCE -20%<Returns<-5% and SELL:
Returns<-20%

Analyst(s) holding in the Stock : Nil

Analyst Certification
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All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issu-
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