Intrinsic value of Dr. Reddy's Laboratories ADR - RDY

Previous Close

$33.24

  Intrinsic Value

$17.07

stock screener

  Rating & Target

sell

-49%

Previous close

$33.24

 
Intrinsic value

$17.07

 
Up/down potential

-49%

 
Rating

sell

We calculate the intrinsic value of RDY stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -8.98
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  2,108
  2,150
  2,200
  2,256
  2,320
  2,390
  2,467
  2,551
  2,642
  2,740
  2,845
  2,958
  3,078
  3,206
  3,341
  3,486
  3,638
  3,800
  3,971
  4,152
  4,342
  4,544
  4,756
  4,980
  5,215
  5,464
  5,725
  6,000
  6,290
  6,594
  6,915
Variable operating expenses, $m
 
  1,739
  1,779
  1,825
  1,876
  1,933
  1,995
  2,063
  2,136
  2,215
  2,300
  2,385
  2,482
  2,585
  2,694
  2,811
  2,934
  3,064
  3,202
  3,348
  3,501
  3,664
  3,835
  4,015
  4,205
  4,406
  4,616
  4,838
  5,072
  5,317
  5,576
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  1,906
  1,739
  1,779
  1,825
  1,876
  1,933
  1,995
  2,063
  2,136
  2,215
  2,300
  2,385
  2,482
  2,585
  2,694
  2,811
  2,934
  3,064
  3,202
  3,348
  3,501
  3,664
  3,835
  4,015
  4,205
  4,406
  4,616
  4,838
  5,072
  5,317
  5,576
Operating income, $m
  202
  411
  420
  431
  444
  457
  472
  488
  506
  525
  545
  573
  596
  621
  647
  675
  705
  736
  769
  804
  841
  880
  921
  964
  1,010
  1,058
  1,109
  1,162
  1,218
  1,277
  1,339
EBITDA, $m
  371
  581
  594
  610
  627
  646
  667
  689
  714
  740
  769
  799
  832
  866
  903
  942
  983
  1,027
  1,073
  1,122
  1,173
  1,228
  1,285
  1,346
  1,409
  1,477
  1,547
  1,622
  1,700
  1,782
  1,869
Interest expense (income), $m
  14
  16
  17
  18
  19
  20
  22
  23
  25
  27
  29
  31
  33
  35
  38
  40
  43
  46
  49
  52
  56
  60
  64
  68
  72
  77
  81
  86
  92
  97
  103
Earnings before tax, $m
  219
  394
  403
  413
  424
  437
  450
  465
  481
  498
  517
  542
  563
  586
  609
  635
  662
  690
  720
  752
  785
  820
  858
  897
  938
  982
  1,027
  1,076
  1,126
  1,180
  1,236
Tax expense, $m
  39
  107
  109
  112
  115
  118
  122
  126
  130
  135
  140
  146
  152
  158
  165
  171
  179
  186
  194
  203
  212
  221
  232
  242
  253
  265
  277
  290
  304
  319
  334
Net income, $m
  180
  288
  294
  302
  310
  319
  329
  340
  351
  364
  377
  396
  411
  428
  445
  463
  483
  504
  526
  549
  573
  599
  626
  655
  685
  717
  750
  785
  822
  861
  902

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  269
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  3,291
  3,080
  3,151
  3,232
  3,323
  3,424
  3,535
  3,655
  3,785
  3,926
  4,076
  4,237
  4,409
  4,592
  4,787
  4,994
  5,212
  5,444
  5,689
  5,948
  6,221
  6,510
  6,814
  7,134
  7,472
  7,828
  8,202
  8,596
  9,011
  9,448
  9,907
Adjusted assets (=assets-cash), $m
  3,022
  3,080
  3,151
  3,232
  3,323
  3,424
  3,535
  3,655
  3,785
  3,926
  4,076
  4,237
  4,409
  4,592
  4,787
  4,994
  5,212
  5,444
  5,689
  5,948
  6,221
  6,510
  6,814
  7,134
  7,472
  7,828
  8,202
  8,596
  9,011
  9,448
  9,907
Revenue / Adjusted assets
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
  0.698
Average production assets, $m
  1,324
  1,350
  1,381
  1,417
  1,457
  1,501
  1,549
  1,602
  1,659
  1,721
  1,787
  1,857
  1,933
  2,013
  2,098
  2,189
  2,285
  2,386
  2,494
  2,607
  2,727
  2,853
  2,987
  3,127
  3,275
  3,431
  3,595
  3,768
  3,950
  4,141
  4,343
Working capital, $m
  230
  628
  642
  659
  677
  698
  720
  745
  771
  800
  831
  864
  899
  936
  976
  1,018
  1,062
  1,110
  1,160
  1,212
  1,268
  1,327
  1,389
  1,454
  1,523
  1,595
  1,672
  1,752
  1,837
  1,926
  2,019
Total debt, $m
  736
  491
  518
  550
  585
  624
  666
  713
  763
  817
  875
  938
  1,004
  1,075
  1,150
  1,230
  1,314
  1,403
  1,498
  1,598
  1,703
  1,815
  1,932
  2,056
  2,186
  2,323
  2,468
  2,620
  2,780
  2,949
  3,126
Total liabilities, $m
  1,434
  1,189
  1,216
  1,248
  1,283
  1,322
  1,364
  1,411
  1,461
  1,515
  1,573
  1,636
  1,702
  1,773
  1,848
  1,928
  2,012
  2,101
  2,196
  2,296
  2,401
  2,513
  2,630
  2,754
  2,884
  3,021
  3,166
  3,318
  3,478
  3,647
  3,824
Total equity, $m
  1,857
  1,891
  1,935
  1,985
  2,040
  2,102
  2,170
  2,244
  2,324
  2,410
  2,503
  2,602
  2,707
  2,820
  2,939
  3,066
  3,200
  3,343
  3,493
  3,652
  3,820
  3,997
  4,184
  4,380
  4,588
  4,806
  5,036
  5,278
  5,533
  5,801
  6,083
Total liabilities and equity, $m
  3,291
  3,080
  3,151
  3,233
  3,323
  3,424
  3,534
  3,655
  3,785
  3,925
  4,076
  4,238
  4,409
  4,593
  4,787
  4,994
  5,212
  5,444
  5,689
  5,948
  6,221
  6,510
  6,814
  7,134
  7,472
  7,827
  8,202
  8,596
  9,011
  9,448
  9,907
Debt-to-equity ratio
  0.396
  0.260
  0.270
  0.280
  0.290
  0.300
  0.310
  0.320
  0.330
  0.340
  0.350
  0.360
  0.370
  0.380
  0.390
  0.400
  0.410
  0.420
  0.430
  0.440
  0.450
  0.450
  0.460
  0.470
  0.480
  0.480
  0.490
  0.500
  0.500
  0.510
  0.510
Adjusted equity ratio
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614
  0.614

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  180
  288
  294
  302
  310
  319
  329
  340
  351
  364
  377
  396
  411
  428
  445
  463
  483
  504
  526
  549
  573
  599
  626
  655
  685
  717
  750
  785
  822
  861
  902
Depreciation, amort., depletion, $m
  169
  170
  174
  178
  183
  189
  195
  201
  208
  215
  224
  227
  236
  245
  256
  267
  279
  291
  304
  318
  333
  348
  364
  381
  399
  418
  438
  460
  482
  505
  530
Funds from operations, $m
  156
  458
  468
  480
  493
  507
  523
  541
  559
  579
  601
  622
  647
  673
  701
  730
  762
  795
  830
  867
  906
  947
  990
  1,036
  1,084
  1,135
  1,188
  1,245
  1,304
  1,366
  1,432
Change in working capital, $m
  -166
  12
  14
  17
  19
  21
  23
  25
  27
  29
  31
  33
  35
  37
  40
  42
  45
  47
  50
  53
  56
  59
  62
  65
  69
  73
  76
  80
  85
  89
  94
Cash from operations, $m
  322
  446
  454
  463
  475
  487
  501
  516
  533
  551
  570
  589
  612
  636
  661
  688
  717
  747
  780
  814
  850
  888
  928
  971
  1,015
  1,062
  1,112
  1,164
  1,219
  1,277
  1,338
Maintenance CAPEX, $m
  0
  -161
  -165
  -168
  -173
  -178
  -183
  -189
  -195
  -202
  -210
  -218
  -227
  -236
  -245
  -256
  -267
  -279
  -291
  -304
  -318
  -333
  -348
  -364
  -381
  -399
  -418
  -438
  -460
  -482
  -505
New CAPEX, $m
  -184
  -26
  -31
  -36
  -40
  -44
  -48
  -53
  -57
  -62
  -66
  -71
  -75
  -80
  -85
  -91
  -96
  -102
  -107
  -113
  -120
  -126
  -133
  -141
  -148
  -156
  -164
  -173
  -182
  -191
  -201
Cash from investing activities, $m
  -277
  -187
  -196
  -204
  -213
  -222
  -231
  -242
  -252
  -264
  -276
  -289
  -302
  -316
  -330
  -347
  -363
  -381
  -398
  -417
  -438
  -459
  -481
  -505
  -529
  -555
  -582
  -611
  -642
  -673
  -706
Free cash flow, $m
  45
  258
  258
  260
  262
  265
  269
  274
  280
  287
  294
  301
  310
  320
  330
  342
  354
  367
  381
  396
  412
  429
  447
  466
  486
  507
  530
  553
  578
  604
  632
Issuance/(repayment) of debt, $m
  244
  24
  27
  31
  35
  39
  43
  46
  50
  54
  58
  62
  66
  71
  75
  80
  84
  89
  95
  100
  105
  111
  117
  124
  130
  137
  145
  152
  160
  168
  177
Issuance/(repurchase) of shares, $m
  -235
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -4
  24
  27
  31
  35
  39
  43
  46
  50
  54
  58
  62
  66
  71
  75
  80
  84
  89
  95
  100
  105
  111
  117
  124
  130
  137
  145
  152
  160
  168
  177
Total cash flow (excl. dividends), $m
  34
  282
  286
  291
  297
  304
  312
  321
  330
  341
  352
  363
  376
  390
  405
  422
  439
  457
  476
  496
  518
  540
  564
  590
  616
  644
  674
  705
  738
  773
  809
Retained Cash Flow (-), $m
  64
  -34
  -44
  -50
  -56
  -62
  -68
  -74
  -80
  -86
  -93
  -99
  -106
  -112
  -119
  -127
  -134
  -142
  -150
  -159
  -168
  -177
  -187
  -197
  -207
  -218
  -230
  -242
  -255
  -268
  -282
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  248
  242
  241
  241
  242
  244
  247
  250
  255
  260
  264
  271
  278
  286
  295
  304
  314
  325
  337
  350
  363
  378
  393
  409
  426
  444
  463
  483
  505
  527
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  238
  222
  210
  199
  188
  177
  167
  156
  146
  136
  125
  116
  106
  96
  87
  77
  68
  60
  52
  44
  38
  31
  26
  21
  17
  13
  10
  7
  6
  4
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Dr. Reddy's Laboratories Limited is a pharmaceutical company that is engaged in providing medicines. The Company operates in three segments: Global Generics, Pharmaceutical Services and Active Ingredients (PSAI), and Proprietary Products. The Global Generics segment includes manufacturing and marketing prescription and over-the-counter finished pharmaceutical products ready for consumption by the patient, marketed under a brand name (branded formulations) or as generic finished dosages with therapeutic equivalence to branded formulations (generics). PSAI segment includes the Company's business of manufacturing and marketing active pharmaceutical ingredients and intermediates (API) or bulk drugs. Proprietary Products segment focuses on the research, development and manufacture of differentiated formulations and new chemical entities. These products fall within the dermatology and neurology therapeutic areas, and are marketed and sold through its subsidiary, Promius Pharma, LLC.

FINANCIAL RATIOS  of  Dr. Reddy's Laboratories ADR (RDY)

Valuation Ratios
P/E Ratio 30.6
Price to Sales 2.6
Price to Book 3
Price to Tangible Book
Price to Cash Flow 17.1
Price to Free Cash Flow 39.9
Growth Rates
Sales Growth Rate -9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 2.2%
Cap. Spend. - 3 Yr. Gr. Rate 3%
Financial Strength
Quick Ratio 0
Current Ratio 0.1
LT Debt to Equity 4.4%
Total Debt to Equity 39.6%
Interest Coverage 17
Management Effectiveness
Return On Assets 6%
Ret/ On Assets - 3 Yr. Avg. 9.6%
Return On Total Capital 7.2%
Ret/ On T. Cap. - 3 Yr. Avg. 11.7%
Return On Equity 9.5%
Return On Equity - 3 Yr. Avg. 16.1%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 55.6%
Gross Margin - 3 Yr. Avg. 57.7%
EBITDA Margin 19.1%
EBITDA Margin - 3 Yr. Avg. 23%
Operating Margin 9.6%
Oper. Margin - 3 Yr. Avg. 15.5%
Pre-Tax Margin 10.4%
Pre-Tax Margin - 3 Yr. Avg. 15.6%
Net Profit Margin 8.5%
Net Profit Margin - 3 Yr. Avg. 12.2%
Effective Tax Rate 17.8%
Eff/ Tax Rate - 3 Yr. Avg. 21.7%
Payout Ratio 28.3%

RDY stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the RDY stock intrinsic value calculation we used $2108 million for the last fiscal year's total revenue generated by Dr. Reddy's Laboratories ADR. The default revenue input number comes from 2017 income statement of Dr. Reddy's Laboratories ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our RDY stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for RDY is calculated based on our internal credit rating of Dr. Reddy's Laboratories ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Dr. Reddy's Laboratories ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of RDY stock the variable cost ratio is equal to 80.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for RDY stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Dr. Reddy's Laboratories ADR.

Corporate tax rate of 27% is the nominal tax rate for Dr. Reddy's Laboratories ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the RDY stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for RDY are equal to 62.8%.

Life of production assets of 8.2 years is the average useful life of capital assets used in Dr. Reddy's Laboratories ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for RDY is equal to 29.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1857 million for Dr. Reddy's Laboratories ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 166.933 million for Dr. Reddy's Laboratories ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Dr. Reddy's Laboratories ADR at the current share price and the inputted number of shares is $5.5 billion.

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COMPANY NEWS

▶ Doctor Reddy's posts 3Q profit   [06:09AM  Associated Press]
▶ Dr. Reddys Q3 and 9M FY18 Financial Results   [05:51AM  Business Wire]
▶ Dr. Reddy's to release Q3 FY18 results on January 25, 2018   [Jan-16-18 03:57AM  Business Wire]
▶ Top 10 Generic Pharmaceutical Companies In 2017   [Dec-13-17 11:37AM  Insider Monkey]
▶ Doctor Reddy's posts 2Q profit   [05:04AM  Associated Press]
▶ Dr. Reddys Q2 and H1 FY18 Financial Results   [04:32AM  Business Wire]
Financial statements of RDY
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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