Despite positive one-offs in the US, DRL reported lacklustre 3Q interims due to a weak performance in most markets. Management guides to a stronger 4Q as it

expects strong growth in the US, although we believe this is largely priced in. 9MFY11 earnings represent only 67% of our FY11 estimate. Maintain Sell.

Lacklustre 3Q despite one-offs in the US; weak core business across most markets
Despite the contribution of several one-off products (generic (g) Prograf, gLotrel, gPrevacid, gAccolate) in the US, 3QFY11 revenues of Rs18.9bn were up just 10% yoy (6% lower than our forecast). Excluding our estimated revenue contribution from these products, total revenue growth appeared to be flat yoy, with the US core business growing just 5% (despite reporting 60% growth in North America). While weak revenue performance in Betapharm (-33% yoy) and PSAI business (-5% yoy) was largely in line with our expectations, we were surprised by the muted growth in Russia/CIS (4% yoy) and India (14% yoy).

Margin pressure surprises; management guidance of a stronger 4Q seems priced in
Gross margin expanded 393bp yoy to 54.9% due to contributions from one-off products. But SG&A expenses as a percentage of sales increased 270bp yoy to 32%, resulting in an EBIT margin of 14.4% (16.1% in 2Q). Management stated that the SG&A expense includes a US$9m one-off charge on account of one-time litigation costs in US for fexofinadine and sales and distribution-related expenses in India and Russia (on its OTC portfolio). PAT of Rs2.7bn (18% lower than our forecasts) was up 18% yoy, aided by a lower tax rate of 5.3%.Excluding our estimated revenue benefit from one-off products, earnings declined 24% yoy.Management expects a stronger 4Q due to further one-off launches that have taken place recently, plus potential upside from gAllegra D-24 and gArixtra, which we believe are largely priced in. 9MFY11 earnings represent only 67% of our FY11 estimate.

Weak business performance in markets other than the US remains a key concern; Sell
While the US (24% of 9MFY11 revenues) remains the key growth market for DRL, PSAI (26%) and Betapharm (8%) continue to face headwinds and the company faces tapering growth in its other key markets - India (16%) and Russia/CIS (15%). Maintain Sell with a TP of Rs1,460 (21.3x FY12F core EPS and Rs29 for one-offs [Para IV pipeline]). Settlement for gNexium could potentially add Rs6/sh to our fair value (not built into our estimates given the uncertainty surrounding this case)