1QFY2012 Result Update | Pharmaceutical

July 20, 2011

Dr. Reddys Laboratories

Performance Highlights
Y/E March (` cr) Net sales Gross profit EBIT Net profit 1QFY2012 1,978 932 274 262 4QFY2011 2,017 1,095 333 334 % chg (qoq) (1.9) (14.9) (17.8) (21.6) 1QFY2011 1,683 891 341 210 % chg (yoy) 17.5 4.6 (19.8) 24.9

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 26,554 0.6 1,855/1,305 36,155 5 18,502 5,567 REDY.BO DRRD@IN

`1,567 `1,920
12 months

Source: Company, Angel Research

Dr. Reddys Laboratories (DRL) reported higher-than-expected 1QFY2012 results. Net sales increased by 17.5% yoy, led by 21.0% yoy and 7.4% yoy growth across the global generics and proprietary products businesses, respectively. Net profit during the quarter, however, came higher than our estimates, on account of lower tax provision during the quarter as compared to our expectation. Overall net profit grew by 25.1% yoy to `262cr (`210cr). DRL has reinforced its FY2013 guidance of US$2.7bn, with RoCE expected to come in at 25%. We maintain our Buy recommendation on the stock. Good set of numbers: DRL reported net sales of `1,978cr (`1,683cr) in 1QFY2012, growth of 17.5% yoy, which was higher than our estimates of `1,851cr. The US market reported strong growth of 47.4% yoy, led by higher market share in its key markets. Sales from Russia grew by 18.3% yoy. The domestic market reported single-digit growth of 5.7% 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 FY201113E. 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 26.7 14.0 27.5 31.8

Abs. (%) Sensex DRL

3m (5.0) (6.5)

1yr 3.5 9.4

3yr 35.7 135.9

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 28.7 21.7 16.2 6.2 3.9 19.2

FY2011 7,469 6.3 1,104 933.6 1,076 16.8 63.8 21.0 24.6 24.2 17.7 5.8 3.8 18.0

FY2012E 8,721 16.8 1,484 34.5 1,484 37.9 87.9 25.2 17.8 28.6 23.2 4.6 3.2 12.7

FY2013E 9,584 9.9 1,620 9.2 1,620 9.2 96.0 25.1 16.3 25.2 22.0 3.7 2.8 11.2

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 | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 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

1QFY2012 1,978 19 1,997 932 47.1 539 120 274 13.8 5 288 12 276 (14.0) 262 262 15.6

4QFY2011 2,017 51 2,068 1,095 54.3 613 149 333 16.5 (7) 392 57 335 335 0 334 19.5

% chg (qoq) (1.9) (64) (3.5) (14.9) (13.2) (12.1) (19.7) (17.8) (26.5) (78.9) (17.6) (21.8) (21.6)

1QFY2011 1,683 19 1,702 891 53.0 451 99 341 20.3 18 342 36 306 0.5 210 210 12.5

% chg (yoy) 17.5 (64) 17.3 4.6 (11.0) 19.5 20.6 (19.8) (74.1) (15.9) (66.4) (10.0) 24.9 24.9 -

FY2011 7,469 112 7,581 4,026 53.9 2,369 506 1,151 15.4 19 1,244 140 1,104 0.3 1,104 28 1,076 65.0

FY2010 7,028 57 7,085 3,634 51.7 2,251 379 144 2.0 0.3 201 99 102 4.8 107 815 921 54.6

% chg 6.3 7.0 10.8 4.2 5.3 33.4 700.0 42.4 981.9 934.1 16.8 -

Exhibit 2: Actual vs. Estimates

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

Actuals 1,978 19 397 5 12 262

Estimates 1,851 19 405 9 47 245

Variation (%) 6.8 (0.2) (1.9) (48.6) (74.2) 7.0

Better-than-expected revenue growth: DRL reported net sales of `1,978cr (`1,683cr), 17.5% yoy growth, which was higher than our estimates of `1,851cr. The global generics market registered growth of 21.0% yoy, led by growth across the US and Russian markets. In terms of market performance, the US market reported strong growth of 47.4% yoy with sales of `576cr (`390cr), led by market share improvement in key products tacrolimus, lansoprazole, omeprazole Rx, omeprazole Mg OTC and fexofenadine OTC. Russia registered 18.3% yoy growth. The domestic market reported single-digit growth of 5.7% yoy. Sales from Europe declined by 1.0% yoy, as Betapharm business continued to reel under pricing pressure. During the quarter, sales from Germany declined by 9% to US$27mn.

DRL filed three ANDAs in 1QFY2012. Currently, the companys cumulative ANDA filings stand at 180, with 76 pending approvals of which 36 are Para IVs and 11 are FTFs.
July 22,2011

Dr. Reddys Laboratories | 1QFY2012 Result Update

DRL launched around 12 products in 1QFY2012. During the quarter, the domestic market grew modestly by 6% yoy. The biosimilar market reported growth of 69% yoy, representing 7% of the companys sales.

Exhibit 3: Global generic trend

1600 1400 1200 77 213 261 211 353 75 255 278 194 390 316 237 442 301 212 477 97 275 82 288 82 268 275 201 79 302 294 192 576

(`cr)

1000 800 600 400 200 0

592

4Q FY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 Others Russia & CIS India Europe North America

Source: Company, Angel Research

The PSAI segment registered 7% yoy growth, majorly led by 8.9% yoy growth in the European market. India, on the other hand, grew by 4.6% yoy.

Exhibit 4: PSAI trend

600 500 201 400 197 147 63 156 84 160 65 155 81 176 62 183 77 71 164 66 169 84

(`cr)

300 78 200 137 100 0 81

208

75

4Q FY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012 Others India Europe North America
Source: Company, Angel Research

July 22,2011

Dr. Reddys Laboratories | 1QFY2012 Result Update

OPM in-line with expectations: DRL reported gross margin of 53.4% (53.0%) during the quarter. OPM came in at 20.1% (20.3%), in-line with our estimate. The key expenditure areas R&D and S&GA grew by 20.6% and 19.5%, respectively. S&GA and R&D costs were higher by US$5mn as the company acquired GSKs penicillin facility during the quarter, which limited the increase in S&GA and R&D costs, thus limiting the margin expansion. Further, higher OTC-related marketing cost in Russia affected the margin expansion.

Exhibit 5: EBIT margin trend

20.0 16.0 16.0 12.0 11.4 14.5 14.4 14.4 16.5

(%)
8.0 4.0 0.0 4Q FY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012
Source: Company, Angel Research

Net profit grew by 25% yoy during the quarter: DRL reported net profit of `262cr (`210cr), an increase of 25.1% yoy, higher than our estimate of `245cr. Though margins are in-line with our expectations, a higher-than-expected tax outgo impacted the companys net profit growth. Tax as a percentage of PBT stood at 16% vis--vis our expectation of 4.2%.

Exhibit 6: Adjusted net profit trend

350 300 250 200 150 100 50 0 4Q FY2010 1QFY2011 2QFY2011 3QFY2011 4QFY2011 1QFY2012
Source: Company, Angel Research

307 286 210 273 262 195

July 22,2011

Dr. Reddys Laboratories | 1QFY2012 Result Update

Concall takeaways
DRL reinforced its FY2013 revenue guidance of US$2.7bn with 25% RoCE. Management believes that it can resolve the issue by October 2011. Total top-line impact for FY2012 from the import alert is expected to be US$10mn15mn. In the US market, the company expects to launch 10 products in FY2012. Management believes that business will be back on track in 2HFY2012. For the biosimilar foray, management plans to collaborate with a global company.

July 22,2011

Dr. Reddys Laboratories | 1QFY2012 Result Update

Recommendation rationale
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). DRL 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 for the last three years, DRL reported modest 15.1% growth in FY2011. Management expects the companys performance to rebound and targets to achieve 1820% 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 FY201113E. At the CMP, the stock trades at 17.8x FY2012E and 16.3x FY2013E earnings, we maintain our Buy view on the stock with a target price of `1,920.

July 22,2011

Dr. Reddys Laboratories | 1QFY2012 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 25.1 306

4.0 21.5 25.2 700

Exhibit 8: One-year forward PE chart

2,500 2,000 1,500 1,000 500 0

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company Aurobindo Pharma# Aventis* Cadila Healthcare Cipla DRL Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Neutral Buy Buy Buy Buy Neutral Buy Accumulate Buy Buy Accumulate Neutral CMP Tgt. price Upside (`) 173 2,095 882 317 1,567 89 2,302 450 335 462 240 537 502 (`) 278 1,053 377 1,920 133 658 358 593 373 593 61.2 19.4 18.9 22.5 49.5 46.3 6.8 28.5 55.4 10.3 9.0 23.3 16.8 16.8 16.3 7.6 26.5 6.8 12.2 15.6 6.4 12.0 21.3 FY2013E EV/EBITDA (x) 6.8 18.9 13.6 14.5 11.2 7.4 17.3 5.2 8.5 12.9 6.3 7.4 17.1 1.2 2.9 2.7 3.1 2.8 1.3 6.1 0.9 1.8 2.6 1.4 1.7 5.3 FY11-13E 29.5 15.6 21.6 25.2 22.7 8.6 14.6 25.8 14.8 24.0 29.6 12.2 15.8 FY2013E RoE (%) 19.0 17.1 33.4 18.5 25.2 9.2 30.7 19.3 24.9 30.8 23.4 25.9 20.4 13.8 15.8 27.3 17.0 22.0 7.4 41.0 17.6 23.3 23.9 11.7 26.8 20.2 % PE (x) EV/Sales (x) CAGR in EPS (%) RoCE (%)

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

July 22,2011

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
Price 5x 10x 15x 20x

Dr. Reddys Laboratories | 1QFY2012 Result Update

Profit & loss statement (IFRS Consolidated)

Y/E March (`cr) 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) 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 6,944 (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 7,028 56.9 7,085 2.4 5,608 2,978 2,251 379.3 1,420 (6.9) 20.2 416.0 1,004 (12.2) 14.3 37.2 36.9 3.5 4.8 1,066 6.3 860.3 205.3 98.5 48.0 106.8 815 106.8 921.4 4.1 1.5 54.6 54.6 3.8 FY2011 7,469 75.0 7,544 6.5 5,903 3,028 2,369 506.0 1,566 10.3 21.0 414.7 1,151 14.6 15.4 28.3 9.4 0.8 0.3 1,208 13.3 (37) 1,244.2 140.3 11.3 1,104 9 1,104 1,076 16.8 14.8 63.8 63.8 16.8 FY2012E 8,721 75.0 8,796 16.6 6,522 3,138 2,791 593.0 2,199 40.4 25.2 481.3 1,718 49.2 19.7 35.8 9.4 0.5 0.3 1,767 46.3 1,766.9 282.7 16.0 1,484.3 1,484.3 1,484.3 37.9 17.0 87.9 87.9 37.9 FY2013E 9,584 75.0 9,659 9.8 7,174 3,455 3,067 651.7 2,410 9.6 25.1 522.0 1,888 9.9 19.7 43.8 9.4 0.5 0.3 1,929 9.2 1,928.9 308.6 16.0 1,620.3 1,620.3 1,620.3 9.2 16.9 96.0 96.0 9.2

July 22,2011

Dr. Reddys Laboratories | 1QFY2012 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 4,206 658.4 421.7 3,126 2,004 2,202 5,901 2,478 1,549 486.7 31.0 4,832 572.9 448.2 3,811 2,276 2,556 7,100 3,016 1,183 491.6 31.0 5,477 318.8 523.3 4,635 2,475 3,002 7,725 3,164 1,183 496.5 31.0 7,228 1,557.8 575.0 5,095 2,681 4,547 9,423 84.2 4,120 4,205 1,948.3 341.1 6,494 84.4 4,207 4,292 1,465.6 143.8 5,901 84.4 4,515 4,599 2,357.2 143.8 7,100 84.4 5,702 5,787 1,793.7 143.8 7,725 84.4 6,998 7,084 2,195.5 143.8 9,423 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) 698.6 559.6 FY2010 1,065.6 416.0 (38.0) 36.9 98.5 1,308.2 (157.7) 4.8 36.9 (116.0) 0.2 (482.7) 123.3 (734.2) (1,093.4) 98.8 559.6 658.4 FY2011 1,207.7 414.7 439.0 9.4 140.3 1,911.8 (718.3) 9.4 (708.9) 891.6 221.1 (1,958.8) (1,288.3) (85.5) 658.4 572.9 FY2012E 1,766.9 481.3 700.1 9.4 282.7 2,656.3 (543.6) 9.4 (534.2) (563.5) 296.8 (1,515.9) (2,376.2) (254.1) 572.9 318.8 FY2013E 1,928.9 522.0 305.8 9.4 308.6 2,438.7 (152.9) 9.4 (143.5) 401.7 324.0 (1,134.0) (1,056.2) 1,239.0 318.8 1,557.8

July 22,2011

Dr. Reddys Laboratories | 1QFY2012 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 48.0 0.1 0.3 43.1 4.2 70 77 40 83 4.1 69 68 50 81 3.6 71 72 55 85 3.2 72 79 52 97 3.1 74 82 53 107 17.6 35.0 21.1 16.2 30.4 21.7 17.7 29.4 24.2 23.2 33.6 28.6 22.0 31.7 25.2 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 19.7 84.0 1.3 20.9 1.5 0.3 27.1 19.7 84.0 1.3 20.9 1.8 0.2 24.2 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 87.9 87.9 116.4 5.0 342.8 96.0 96.0 126.9 5.0 419.7 29.8 6.3 0.3 4.0 18.2 4.3 28.7 50.6 6.2 0.3 3.9 19.2 4.6 24.6 17.4 5.8 0.3 3.8 18.0 4.0 17.8 13.5 4.6 0.3 3.2 12.7 3.6 16.3 12.3 3.7 0.3 2.8 11.2 2.9 FY2009 FY2010 FY2011 FY2012E FY2013E

July 22,2011

10

Dr. Reddys Laboratories | 1QFY2012 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%)

July 22,2011

11