Company Research. Dr Reddy s Laboratories- BUY with a Target of Rs 1,962. Investment overview- Business Overview-

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1 Date Dr Reddy s Laboratories- BUY with a Target of Rs 1,962 Investment overview- Shareholders Information Global Generics grew by 68% to Rs 70,243mn in FY12 from Rs 53,340mn in Fy11. Therefore a good growth from Global developments will be seen in future earnings. The Company has entered in a partnership with Merck KGaA of Germany to develop a portfolio of bio-similar compounds. Company has confirmed the guidance of USD 2.7bn revenue and 25% ROCE in FY13. This will include USD 900 million in revenue. Date 16-Jul-12 CMP (Rs) Year Price Var% Week High (Rs) Week Low (Rs) 1387 Industry PE Shareholding Pattern The India business grew by 17% which was led by 23 new launches in FY12. US business grew 48% to USD175mn led by launch of Geodon & Seroquel generics Business Overview- Dr. Reddy s Laboratories (DRRD) is engaged in manufacture and distribution of pharmaceutical products by way of finished dosage forms, active pharmaceutical ingredients and intermediates and biotechnology products. DRRD is also engaged in research of new molecular entities, providing customized pharmaceutical services in-licensed patented dermatology products. DRL, amongst the largest Indian pharmaceutical company, is an integrated player with presence across research, manufacturing and marketing of formulations and APIs. The company s business mix is broadly divided Stock price for the Last 1 Year

2 into three segments Global Generics (comprising of formulations 72.6% of turnover in FY12), Pharmaceutical Services and APIs (24.6%) and Proprietary Products Business (0.8% in 2012). The global generics vertical focuses on marketing and distribution of branded generics (in India, Russia, CIS and emerging markets) and generics (in US and Europe). Among Indian generics majors, DRL is one of the most formidable players in the U.S. generic space even as its performance and market position in India lags that of its peers. 25 products rank among top 3 in terms of markets developed a meaningful OTC business with revenues of $60 million. Financial Health- The revenue s of the company saw a good growth of 29.5% from Rs. 74,693mn infy11 to Rs. 96,737mn in In the Quarter ending results the company saw a growth of 32% from Rs. 20,172Mn in Q4FY11 to Rs. 26,584Mn inq4fy12. The Operating Profit saw an increase of 44.5% from Rs 12,627.6Mn in FY11 to 18,252.2Mn in FY12. In the Quarter ending results the company saw a growth of 8.5% from Rs. 3,841Mn in Q4FY11 to Rs 4,171Mn inq4fy12. The PAT of the firm saw a robust growth of 29.1% from Rs. 11,040Mn in FY11 to Rs. 14,262Mn in FY12. In the Quarter ending results the company saw a growth of 2.5% from Rs. 3,344Mn in Q4FY11 to Rs 3,427Mn inq4fy12. Y-O-Y Performance Company Research (In Rs Mn) Particulars 12-Mar 11-Mar Change in % Net Sales 96, , Other Income Total Expenses Operating Profit Profit after Tax Reserves and Surplus 56, , Reported EPS Core EBITDA margin Q-o-Q Performance (In Rs Mn) Particulars Q4 FY12 Q4 FY 11 % Change Total Income Gross Profit Operating Profit PAT Tax EPS Balance Sheet 13.0% 26.4% (Rs. Mn) Particulars FY12 FY11 % change Share Capital Reserves & Surplus 56, , Total Liabilities 119, , Investments 25, , Current Liabilities 43, , Current Assets 69, , Total Assets 119, ,

3 Revenue s in 4Q increased by 32% YOY driven by the growth in North America (+48% YOY), PSAI business (+35% YOY), Russia and CIS (+32% YOY). Industry Overview Between 2011 and 2015, patents on over 30 branded biologicals with sales of $51 bn will lose their patent exclusivity. According to various estimates, the global biosimilars market will grow from $380 mn in 2010 to $3.7 bn in 2015, based on over 30 branded biologicals with sales of $51 bn that are set to lose their patent exclusivity between 2011 and Monoclonal antibodies are currently still perceived by many to be a bigger challenge for biosimilar development than biotech drugs, such as generic epoetin. In 2009, the market for monoclonal antibodies was valued at $36 bn and is expected to increase to $62.7 bn in The emerging markets represent the fastest growing segment of the Global pharmaceutical industry. As per industry estimates, the total spending on healthcare in these markets is likely to grow from US$151 billion to $ billion by 2015 with most markets expected to grow at double digit. Apart from the developed markets, the Indian Pharma companies have also been eyeing growth opportunities in some of the other fast-growing emerging markets. Among them, in Russia, South Africa and some of the countries in Latin America (Brazil, Mexico) and South-East Asia, Indian companies have strengthened considerable presence. These emerging markets with some of them being branded generics offer strong growth prospects for Indian players given the high out of pocket expenditure on healthcare in these markets (unlike developed markets) and relatively easier regulatory pathways. During the initial phase, most of the Indian Key Ratios Particulars Mar-12 Mar-11 YOY % Earnings Per Share (Rs) EBITM (%) PATM (%) ROA (%) ROE (%) ROCE (%) Net Sales Growth (%) PAT Growth (%) Adjusted PE (x) PCE(x) Price / Book Value(x) Dividend Yield (%) EV/Net Sales(x) EV/EBITDA(x) Segment Wise Revenues (Rs Mn) Global Generics Mar-12 Mar-11 YOY % North America 31,889 18, Europe 8,259 8, India 12,931 11, Russia & CIS 13,260 10, Others 3,904 3, total 70,243 53, PSAI Business North America 8,424 7, Europe 4,272 3, India 3,586 2, Others 7,531 6, total 23,813 19, Other Business 2,682 1, Total Business 96,738 74,

4 players preferred acquisitions/in-organic investments to enter into these markets are now enhancing their presence through ramp up in product portfolio and therapy segments. In addition to direct presence, Indian companies have also been partnering with MNCs in emerging markets. Such alliances benefit from the R&D and manufacturing capabilities of the Indian partners and the extensive marketing & distribution. Segment Wise Revenues (Rs Mn) Q4FY12 Q4FY11 YOY % Global Generics North America 8,732 5, Europe 1,799 2, India 3,203 2, Russia & CIS 3,545 2, Others 1, Total 18,396 14, PSAI Business North America 1, Europe 2,777 2, India 1, Others 2,206 2, total 7,485 5, Other Business Geographical Mix-Revenues Total Business 26, , This is a chart showing how the revenue Generation Changed in the Revenues from US and Russia saw an increase while India and Europe saw a decrease while Rest of the World remained same.

5 Investment Rationale Peer Comparison- Company Name Year End Net Sales PAT Adj. EPS(Rs) PATM% ROCE% ROE% Ranbaxy Labs ,01, Lupin Dr Reddys Lab Cipla (U) Sun Pharma Inds (U) Entered into a partnership with Merck KGaA- They have entered into a partnership to develop a portfolio of biosimilar compounds in the oncology segment. This will help in expanding their presence in the Bio-similar space in select emerging markets. Launching new Generic Drug- Dr Reddy s is launching a new drug in the US to treat or prevent Osteoporosis in woman after menopause. The bio-equivalent version Boniva marked sales worth $486Mn. This is therefore a good segment to enter in and capture, in order to increase Sales. Base biz grew by 24% to Rs2.5bn led by US, India & INR depreciation- 48% growth in US which was led by generic launches such as Geodon & Seroquel Zyprexa contribution at just USD2mn came as a negative surprise (we had est. USD45mn). 17% growth in India (contr. 15%) formulations led by volume increase in key brands and oncology portfolio. 32% growth in Russia (contr. 13%) led by strong traction in OTC portfolio. 35% growth in PSAI segment (contr. 28%) led by new customer orders. Geographical-wise Revenues- DRL US Portfolio FY 13 Rev FY13 PAT Arixtra launched in July ,355 1,339 Geonden launched in March ,413 1,365 Accolate Launched Liptor Jun Propecia Jan Clarix Expecting in FY

6 US Business- Company has 81 pending ANDAs for approval of which 41 are Para IVs, with 7 FTFs. Company has guided for launch of lansoprazole OTC in FY13 and will launch Lipitor if company gets approval. India Business- During the year the company launched 23 new products. The Biosimilars segment witnessed a growth of 7%. The management believes it will be able to match industry growth rate (14-15%) from FY13. In the last few years, DRRD's focus was more on US and Europe, post the Betapharm acquisition. India was ignored and only a few products were launched. The company plans to launch more products this year. Russia, Europe and PSAI- Europe (exclude Germany) witnessed 8% growth due to new launches and out licensing revenues. The company is confident of achieving 10-15% growth in its PSAI Pharmaceutical Services and Active Ingredients) business for the next 2-3 years. Confident about achieving revenue of USD2.6b in FY13, a growth of 30% DRRD in its Con-call said that they are confident about achieving its revenue target of USD2.7b for FY13, which represents a growth of 30%. The company expects to achieve this without major inorganic growth initiatives. Dr Reddy s has strong development capabilities Dr. Reddy s has built a commendable capability in biosimilars over the past years. It has already launched four products Retuximab, Darbepoetin, filgrastim and pegfilgrastim in the domestic market and in select EMs. The biosimilar portfolio already contributes >5% of domestic revenue and is slated to grow at >20% in coming years. The deal with Merck reiterates the company s strong pipeline and development capabilities in the biosimilar space and opens up many global markets where Merck has a strong commercial presence. Valuation- Revenue generation in the US, branded formulations and PSAI (Pharmaceutical Services and Active Ingredients) businesses will drive growth over the next two years. The Revenues for FY13 is estimated to be at Rs. 11,124.8Mn and PAT for FY13 is estimated to be at Rs 1,598.3Mn. At present the company is trading at 20.4x its FY12 earnings. FY13E EPS is expected to be at Rs thus growing at 15% resulting in a price target of Rs 1,962.

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