Stock Pick From The Pharma Sector

HERE IS WHY:

• Recently launched products in the US markets are doing well
• DRL is a marquee name and has a consistent dividend payment history
• The company is increasing its R&D investments, promising more product launches

Defensive sectors are back in demand owing to the underperformance of growth sectors and the overall uncertainty in the markets. While the Sensex clocked a six per cent return last year the BSE Pharma index gained 21 per cent. All the leading stocks in this sector displayed a price appreciation. Realising this, we had earlier recommended Sun Pharma which is doing quite well on the bourses. In this issue, we are recommending another top company from the Pharma sector, Dr Reddy’s Laboratories (DRL).

A number of reasons make DRL a stock worth recommending. First in line is the company’s strong profitable fiscal so far. The products it launched in the US markets this year are enjoying a good market share indicating towards good numbers in FY13 as also in FY14. The company will also continue enjoying benefits of the rupee remaining at the same levels even if it does not depreciate further. Besides, the company has started investing more in research related activities which promises launches in niche segments in the near future. All these factors make a strong case for buying this stock.

DRL has two business segments - Global Generics and Pharma Services and Active Ingredients (PSAI). The Global Generics business is the largest, contributing to 75 per cent of its revenue, while PSAI brings in the rest (25 per cent) of its revenues. DRL has a sound product pipeline and growth strategies in place for both the segments which ensures that the company will not see a slowdown anytime soon.

In the domestic market, DRL is a marquee name with a market share of two per cent. Its top brands such as Omez, Nise and Stamlo are enjoying a leadership position. The company’s four year CAGR of 12 per cent in domestic revenues is lower than the industry average but the company is increasing its sales force, and launching more drugs to increase its domestic business.

Shareholding Pattern as on 31-12-2012
Promoters	55
FII	8.93
DII	1.69
Public	23.39
Bodies Corporate	10.99
GRAND TOTAL	100

DRL has geographically diversified its business and currently derives 83 per cent of its total revenues from exports. Its prominent presence is in the US markets from where it derives 36 per cent of its total revenues. The US business is already showing an improvement in performance, which is likely to continue in the future with its pipeline of 65 products including eight ‘First to File’ drugs. Among the recently launched drugs, DRL enjoys a major market share in some products and has reported a sustained market share in the products in its base business. This should be considered a good sign for its future revenues.

Besides the US markets, Russia is also a very important territory for DRL as it adds 15 per cent to the company’s topline. Except European generics (seven per cent of total revenues), all other markets are showing a good performance and there is thus no sign of worry on the growth front.

On the financial front, from FY08 to FY12, DRL’s revenues have grown at a CAGR of 11 per cent. Profitability has increased at a faster rate with the net profit margins increasing from eight per cent in FY08 to 16 per cent in FY12. For 9MFY13, DRL has reported an 18 per cent growth in its revenues. The net profit remained muted due to a high-base impact caused by the end of the 180-day exclusivity of Generic Zyprexa. This, however, is a one-off event as the company has already launched a few drugs in the US markets and is expecting higher revenues from them.

On the valuation front, at its CMP of Rs 1838, the stock is available at a TTM price to earnings multiple of 22x. We would advise an entry in the stock at its CMP with a price target of Rs 2100 in one year’s time.

Last Five Quarters (Rs/Cr)
	Dec '12	Sep '12	Jun '12	Mar '12	Dec '11
Total Income	2865.2	2880.85	2540.61	2658.45	2769.2
Operating profit	429.2	484.6	369.89	397.32	738.24
Interest	9.68	-37.1	21.16	-9.37	-19.92
Tax	82.65	156.74	36.5	83.79	261.68
Net Profit	360.18	404.6	334.08	342.7	512.96
Equity Capital	84.92	84.92	84.9	84.78	84.78