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We maintain BUY on DRRD following a miss on our estimates driven by temporary issues. Our TP is unchanged at Rs 3,360 (20x FY21E EPS + Rs 380/sh for niche products). A visible ramp up in the US and further cost efficiencies enable us to stay confident.
HIGHLIGHTS OF THE QUARTER
* Revenue grew 3% YoY/ declined 4% QoQ with a good set of numbers for the India, EU, and US segments. A sharp decline in PSAI revenues and margin driven by manufacturing issues, and product related provisions for the US hampered revenue growth and profitability. However, this has been resolved in 2QFY20.
* The mgmt maintains normalized gross margin guidance (53-56%) for the coming quarters. Healthy growth in key regulated markets and improvement in product mix with complex generics/ biosimilars (EM)/ injectables (US) launches will drive EBITDA margin recovery (+200bps over FY19-21E to ~24%).
* At US$ 233mn, US grew ~9% QoQ aided by new launches, higher volumes in the base biz, and traction gained in gSuboxone; despite persisting pricing pressure. Following regulatory clearance for key plants, the co has launched 10 products in the US FYTD and aims 30+ launches for the full year. Key launches like gNuvaring/gCopaxone in FY20/21E and a better pricing environment will drive ~19% CAGR in the US.
* In other segments, India/EU/ROW grew 15/19/28% YoY. Expect healthy growth to continue, aided by new launches, growth in the base biz, continued ramp up in China, further supply improvements in EU and Russia, and sales force effectiveness in India.
* Near-term outlook: gNuvaring launch is the key trigger.
Having overcome regulatory issues at key formulations plants, the co is rapidly ramping up US revenues with key oncology and injectables launches. Additionally, biosimilar and complex generics launches in EM and reg markets, renewed focus on India, and traction gained in EU & China will support rev CAGR of ~15% over FY19-21E. Mr Erez Israeli has now stepped up as the CEO, following a successful stint as COO with ~400bps improvement in EBITDA margin during FY19. Continued cost optimization, divestment of non-core assets, and healthy revenue growth across key geographies along with a better mix will drive ~19% PAT CAGR over FY19-21E. Considering the improving balance sheet, healthy FCF (Rs 15bn+ annually), and largely clear regulatory status, the valuations remain lucrative at 20.7/17.8x FY20/21E P/E.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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