3QFY2012 Result Update | Pharmaceutical

February 3, 2012

Dr. Reddys Laboratories

Performance Highlights
Y/E March (` cr) Net sales Gross profit EBIT Net profit 2QFY2012 2,769 1,658 738 513 1QFY2012 2,268 1,221 353 307 % chg (qoq) 22.1 35.8 109.1 66.7 2QFY2011 1,899 1,041 273 273 % chg (yoy) 45.9 59.2 170.4 88.2

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 28,310 0.7 1716/1387 27,432 5 17,605 5,326 REDY.BO DRRD@IN

`1,671 `1,920
12 months

Source: Company, Angel Research

Dr. Reddys Laboratories (DRL) reported higher-than-expected 3QFY2012 results. Net sales increased by 45.9% yoy, led by 57% yoy and 12% yoy growth across the global generics and proprietary products businesses, respectively. This aided an expansion of the operating margins and subsequently a higher net profit growth during the period. Management has reinforced its FY2013 guidance of US$2.7bn, with RoCE expected to come in at 25%. We maintain our Buy rating on the stock. Results much above expectations: DRL reported net sales of `2,769cr (`1,899cr) for 3QFY2012, registering 45.9% yoy growth, which was higher than our estimate of `2,301cr. The US market reported strong growth of 122% yoy, led by new product launches like olanzapine 20mg and higher market share in its key markets. Sales from Russia grew by 15.2% yoy during the quarter. The domestic market reported single-digit growth of 15.8% yoy. Outlook and valuation: DRL has reinforced its earlier revenue guidance of US$2.7bn by FY2013E with RoCE of 25%. We expect net sales to report a 13.3% CAGR to `9,584cr and adjusted EPS to record a 22.7% CAGR to `96.0 over FY2011-13E. We maintain our Buy recommendation on the stock with a revised target price of `1,920.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 25.6 13.8 46.1 14.5

Abs. (%) Sensex Dr Reddy

3m 0.7 1.9

1yr (4.6)

3yr 92.4

4.4 281.5

Key financials (IFRS Consolidated)

Y/E March (` cr) Net sales % chg Net profit % chg Adj net profit % chg Adj. EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 7,028 1.2 107 921 4.1 54.6 20.2 30.6 21.7 16.2 6.6 4.1 20.4

FY2011 7,469 6.3 1,104 933.6 1,076 16.8 63.8 21.0 26.2 24.2 17.7 6.1 4.0 19.2

FY2012E 8,721 16.8 1,565 41.8 1,565 45.4 92.7 26.5 18.0 29.9 24.3 4.8 3.4 12.9

FY2013E 9,584 9.9 1,620 3.5 1,620 3.5 96.0 25.4 17.4 24.9 21.8 3.9 3.0 11.9

Sarabjit Kour Nangra

+91 2 39357600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Dr. Reddys Laboratories | 3QFY2012 Result Update

Exhibit 1: 2QFY2012 performance (IFRS, consolidated)

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin (%) SG&A expenses R&D expenses EBIT EBIT (%) Interest PBT Tax Net profit Share of profit/ (loss) in associates Reported net profit Exceptional items Adjusted PAT EPS (`)
Source: Company, Angel Research

3QFY2012 2,769 17 2,786 1,658 59.9 768 151 738 26.7 (17) 772 262 511 2.6 513 513 30.3

2QFY2012 2,268 23 2,291 1,221 53.8 722 146 353 15.6 5 371 63 308 308 307 18.2

% chg (qoq) 22.1 (28) 21.6 35.8 11.2 6.4 3.8 109.1 108.1 314.6 65.8 66.7 66.9

3QFY2011 1,899 20 1,918 1,041 54.9 637 131 273 14.4 5 288 15 273 273 273 16.1

% chg (yoy) 45.9 45.2 59.2 9.1 20.5 15.6 170.4 (449.4) 168.3 1,622.2 87.3 88.2 88.2 -

9MFY2012 7,015 57 7,072 3,933 56.1 2,165 417 1,351 19.3 (8) 1,416 337 1,079 4.3 1,083 1,083 63.7

9MFY2011 % chg 5,452 60 5,512 2,931 53.8 1,756 357 817 15.0 26.2 851 768 0.7 769 769 45.3 41.0 41.0 28.7 28.3 34.2 4.3 23.3 16.8 65.3 40.5

84 302.9

Exhibit 2: Actual vs. Estimates

(` cr) Net sales Other income Operating profit Interest Tax Net profit
Source: Company, Angel Research

Actual 2,769 17 738 (17) 262 513

Estimates 2,301 22 365 10 146 320

Variation (%) 20.3 (25.0) 102.3 79.2 60.2

Better-than-expected revenue growth: DRL reported net sales of `2,769cr (`2,301cr) for 3QFY2012, registering 45.9% yoy growth, which was higher than our estimate of `2,301cr. The global generics market registered growth of 56.6% yoy, led by growth across the US and Russian markets. In terms of market performance, the US market reported strong growth of 133.2% yoy with sales of `1111.4cr (`476.5cr), led by market share improvement in key products and new product launches including olanzapine 20 mg and olanzapine ODT. Russia registered 15.2% yoy growth. The domestic market reported singledigit growth of 11.1% yoy. Sales from Europe grew in single digits growing by 14.2% yoy during the quarter, as Betapharm business continued to reel under pricing pressure. During the quarter, sales from Germany were at `1,500cr. During the quarter, three ANDAs were filed. Cumulative ANDA filings as of December 31, 2012, stood at 187. The company has 79 ANDAs pending for approval with the USFDA, of which 40 are Para IVs and 10 are FTFs.

February 3, 2012

Dr. Reddys Laboratories | 3QFY2012 Result Update

During the quarter, DRL launched six products in the domestic market, which grew modestly by 11.1% yoy. The biosimilar market reported growth of 22% yoy, representing 25% of the companys sales.

Exhibit 3: Global generic trend

2500 2000 1500

332 333 288 301 212 477 268 275 201 592 4QFY2011 249 294 169 675 1QFY2012
Europe

(`cr)

227 316 155 653 2QFY2012

243

1000 500 0

1,111

3QFY2011
Others

3QFY2012

Russia & CIS

India

North America

Source: Company, Angel Research

The PSAI segment registered 11.7% yoy growth, majorly led by 9.9% yoy decline in the European market. North America posted 51.9% yoy growth. India, on the other hand, grew by 38.6% yoy during the quarter.

Exhibit 4: PSAI trend

600 500 400 176 62 183 77 3QFY2011
Others

201 164 71 208 75 4QFY2011

India

188 160 86 65 155 81 2QFY2012 165 117 3QFY2012

(`cr)

300 200 100 0

66 169 84 1QFY2012
Europe

North America

Source: Company, Angel Research

February 3, 2012

Dr. Reddys Laboratories | 3QFY2012 Result Update

EBIT margin higher than expected: DRL reported gross margin of 59.9% (54.9%) during the quarter. The companys EBIT margin came in at 26.7% (14.4%), higher than our estimate. The key expenditure areas R&D and S&GA grew by 15.9% and 20.5%, respectively.

Exhibit 5: EBIT margin trend

32.0 28.0 24.0 26.7

(%)

20.0 16.0 12.0 8.0 4.0 0.0 3QFY2011 14.4

16.5

15.6

15.6

4QFY2011

1QFY2012

2QFY2012

3QFY2012

Source: Company, Angel Research

Net profit grew by 87.7% yoy during the quarter: DRL reported net profit of `513cr (`273cr), registering an increase of 87.7% yoy, much higher than our estimate of `320cr. This was on account of higher gross and operating margins.Tax as a percentage of PBT stood at 34% vis--vis 5.0% in 3QFY2011.

Exhibit 6: Adjusted net profit trend

550 500 450 400 350 300 250 200 150 100 50 0 3QFY2011 4QFY2011 1QFY2012 2QFY2012 3QFY2012 273 307 263 287 513

Source: Company, Angel Research

February 3, 2012

Dr. Reddys Laboratories | 3QFY2012 Result Update

Concall takeaways
Management reinforced its FY2013 revenue guidance of US$2.7bn, with RoCE of 25%. Guided for higher R&D costs (7%-8%, up from current 6.5% of total sales) on account of biosimilar trials for regulated and ROW markets and filings of complex molecules in US. Proprietary products attained $100mn in sales during 9MFY2012 which is expected to double by FY2013. Management indicates that growth from biosimilars will accelerate over next 2 to 3 years to an estimated $100mn.

February 3, 2012

Dr. Reddys Laboratories | 3QFY2012 Result Update

Investment arguments
Robust growth in the US ahead: After attaining a critical mass (US$426mn with 11 new product launches in FY2011), DRL aims to scale up its business to the next orbit in the US market on the back of a strong product pipeline (75 ANDAs are pending approval, of which 36 are Para IVs and 11 are FTFs). Management has guided for one limited competition opportunity every year for the next few years. The US market is expected to be one of the key growth drivers, with strong revenue expected to come in from fexofenadine OTC, Olanzapine and Arixtra. Worst is left behind in the German market: Post the Betapharm acquisition, the German market has become a tender-based market, leading to significant price erosions. In order to remain competitive, DRL has managed to reduce its workforce by 200 to 80 employees currently, and 60% of its products at Betapharm are now vertically integrated. The company is taking several conscious efforts such as reducing work force and bidding for high-margin tenders to improve its profitability. Domestic back in focus: After a below-industry average growth on the domestic formulation front since the last three years, DRL reported modest 15.1% growth in FY2011. Management expects the companys performance to rebound and targets to achieve 18-20% growth going ahead, driven by a) field force expansion (field force stands at 3,800MRs as of FY2011) and improvement in productivity, b) new product launches (including biosimilars) and c) focus on brand building. Strategic alliances to provide long-term growth: In order to tap the emerging market opportunities, DRL entered into an alliance with GSK in FY2011 to develop and market branded formulations across emerging markets. On the biogeneric front, the company has developed nine products (four products launched in India) on mammalian cell culture with global brand sales of US$30bn. The company has also entered into a marketing agreement with Valent Pharma to market Cloderm cream in the US market. This deal is expected to provide an impetus to the proprietary products business going forward. Valuation: DRL has revised its earlier revenue guidance of US$3bn to US$2.7bn by FY2013E with RoCE of 25%. Growth would be driven by the US business, uptick in the domestic formulation and Russian markets and increased contribution from GSKs alliance. We expect the companys net sales to post a 13.3% CAGR to `9,584cr and adjusted EPS to record a 22.7% CAGR to `96.0 over FY2011-13E. At the CMP, the stock is trading at 18.0x FY2012E and 17.4x FY2013E earnings, we maintain our Buy view on the stock with a target price of `1,920.

February 3, 2012

Dr. Reddys Laboratories | 3QFY2012 Result Update

Exhibit 7: Key assumptions

FY2012E PSAI segment growth (%) Generics segment growth (%) Operating margin (%) Capex (` cr)
Source: Company, Angel Research

FY2013E 3.6 12.0 25.1 300

4.0 21.5 26.3 700

Exhibit 8: One-year forward PE chart

2500 2000 1500 1000 500 0

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Buy Sell Buy Accumulate Buy Buy Neutral Buy Buy Buy Buy Neutral Neutral CMP Tgt. price Upside (`) 39 117 2,245 658 340 1,635 52 1,963 430 323 474 174 456 543 (`) 77 166 1,937 965 369 1,920 68 583 393 593 270 #

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
Price 5x 10x 15x 20x

FY2013E EV/EBITDA (x) 4.9 6.8 20.6 11.1 15.8 11.9 7.2 14.4 6.3 6.1 13.0 5.1 5.9 16.7 5.1 8.5 25.0 13.6 18.4 17.4 4.5 22.6 7.8 9.9 16.0 4.7 8.6 21.0 0.7 1.0 3.1 2.1 3.3 3.0 1.3 5.1 1.0 1.3 2.6 1.1 1.4 5.9

FY11-13E 30.6 9.9 15.4 19.4 23.8 22.7 5.7 14.6 15.6 25.2 23.9 29.0 21.8 21.4

FY2013E RoE (%) 37.0 15.0 17.1 31.1 18.2 24.9 9.2 30.7 16.9 27.8 28.6 23.0 30.0 22.4 26.6 10.2 15.7 25.2 16.6 21.8 7.9 41.0 14.2 25.9 24.8 12.0 27.7 22.4

% PE (x) EV/Sales (x) 97.0 42.0 (13.7) 46.6 8.6 17.4 30.3 41.6 21.7 24.9 55.2 -

CAGR in EPS (%) RoCE (%)

Source: Company, Angel Research; Note: *December year ending; Calculations based on recurring EPS

February 3, 2012

Dr. Reddys Laboratories | 3QFY2012 Result Update

Profit & loss statement (IFRS Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Cost of revenues SG&A expenses R&D expenses EBITDA % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Share in profit of associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Exceptional items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg -7.4 52.6 52.6 FY2009 6,833 42.2 6,944 (25.4) 6,919 5,418 2,913 2,102 403.7 1,526 22.0 381.4 1,144 16.5 166.8 48.2 4.8 2.4 1,003 1,402.3 (399.6) 117.2 -29.3 (516.8) (516.8) 885.5 FY2010 6,883 31.6 7,028 56.9 7,085 2.4 5,608 2,978 2,251 379.3 1,420 -6.9 20.2 416 1,004 (12) 14 37 37 3 5 1,066 6.3 860 205 99 48.0 107 815 107 921 4.1 1.5 54.6 54.6 3.8 FY2011 8,451 50.7 7,469 75.0 7,544 6.5 5,903 3,028 2,369 506.0 1,566 10.3 21.0 415 1,151 15 15 28 9 1 0 1,208 13.3 (37) 1,244 140 11.3 1,104 9 1,104 1,076 16.8 14.8 63.8 63.8 16.8 FY2012E 9,830 59.0 8,721 75.0 8,796 16.6 6,413 3,125 2,695 593.0 2,308 47.4 26.5 494 1,814 58 21 36 9 1 0 1,863 54.2 1,863 298 16.0 1,565 1,565 1,565 45.4 17.9 92.7 92.7 45.4 FY2013E 11,443 68.7 9,584 75.0 9,659 9.8 7,148 3,430 3,067 651.7 2,435 5.5 25.4 547 1,888 4 20 44 9 0 0 1,929 3.5 1,929 309 16.0 1,620 1,620 1,620 3.5 16.9 96.0 96.0 3.5

February 3, 2012

Dr. Reddys Laboratories | 3QFY2012 Result Update

Balance sheet (IFRS Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Net fixed assets Goodwill /other intangibles Capital Work-in-Progress Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets
1,660 2,238 427.9 26.2 3,901 559.6 416.6 2,925 1,759 2,142 6,494 1,759 1,422 486.7 31.0 4,206 658 422 3,126 2,004 2,202 5,901 2,478 1,549 486.7 31.0 4,832 573 448 3,811 2,276 2,556 7,100 3,173 1,183 491.6 31.0 5,405 247 523 4,635 2,475 2,930 7,809 3,467 1,183 496.5 31.0 7,009 1,339 575 5,095 2,681 4,328 9,508 84.2 4,120 4,205 1,948.3 341.1 6,494 84 4,207 4,292 1,466 144 5,901 84 4,515 4,599 2,357 144 7,100 84 5,766 5,852 1,814 144 7,809 84 7,062 7,149 2,215 144 9,508

FY2009

FY2010

FY2011 FY2012E FY2013E

Cash flow statement (IFRS Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009
1,002.7 381.4 (826.7) 36.8 117.2 403.4 (450.7) 437.7 36.8 23.8 (66.2) 73.8 (573.8) (566.2) (139.0) 699 560

FY2010
1,066 416 38 37 99 1,384 (158) 5 37 (116) 0 (483) (123) (1,775) (1,169) 99 560 658

FY2011
1,208 415 (439) 9 140 1,034 (718) 9 (709) 892 (221) (1,081) (410) (86) 658 573

FY2012E
1,863 494 (700) 9 298 1,349 (700) 9 (691) (544) (313) (128) (985) (326) 573 247

FY2013E
1,929 547 (306) 9 309 1,852 (300) 9 (290) 402 (324) (548) (470) 1,092 247 1,339

February 3, 2012

Dr. Reddys Laboratories | 3QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest)
0.3 0.9 6.9 0.2 0.6 27.0 0.4 1.1 40.7 0.3 0.7 50.6 0.1 0.4 43.1 4.2 70 77 40 83 4.1 69 68 50 81 3.6 71 72 55 85 3.1 72 79 52 97 2.9 74 82 53 107 17.6 35.0 21.1 16.2 30.4 21.7 17.7 29.4 24.2 24.3 35.0 29.9 21.8 30.5 24.9 16.5 0.0 1.0 0.0 0.0 0.3 0.0 14.3 52.0 1.3 9.4 1.1 0.3 11.6 15.4 88.7 1.3 17.5 1.3 0.3 22.2 20.8 84.0 1.2 21.8 1.4 0.3 28.5 19.7 84.0 1.2 20.3 1.8 0.2 23.9 52.6 52.6 5.0 249.7 54.6 54.6 31.0 5.0 254.2 63.8 63.8 90.0 5.0 272.5 92.7 92.7 122.0 5.0 346.7 96.0 96.0 128.4 5.0 423.5 31.8 6.7 0.3 4.3 19.4 4.5 30.6 54.0 6.6 0.3 4.1 20.4 4.9 26.2 18.6 6.1 0.3 4.0 19.2 4.2 18.0 13.7 4.8 0.3 3.4 12.9 3.8 17.4 13.0 3.9 0.3 3.0 11.9 3.1

FY2009

FY2010

FY2011 FY2012E FY2013E

February 3, 2012

10

Dr. Reddys Laboratories | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Dr. Reddys Laboratories No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 3, 2012

11