Published on 13/08/2019 12:05:52 PM | Source: Motilal Oswal Services Ltd

Neutral Dr Reddy`s Labs Ltd For Target Rs.2,620 - Motilal Oswal

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Hurt by stiff competition in US, lower PSAI sales

* US/Russia/CIS/PSAI drag revenues: Revenue grew moderately by 3.3% YoY to INR38.4b (our estimate: INR40.2b) in 1QFY20 due to subdued growth in US generics (+3% YoY; 42% of sales) and Russia/CIS (+4% YoY; 14% of sales) and de-growth in PSAI (-16% YoY, 12% of sales). However, the impact was partly offset by 16% YoY growth in India sales (18% of sales).

* Intensifying competition in US/manufacturing issues in PSAI hurt margins: Gross margin shrank ~400bp YoY (-70bp QoQ) to 51.7%, primarily due to stiff competition in key molecules in the US and lower PSAI sales (due to manufacturing issues). The margin contraction was particularly pronounced in global generics/PSAI (-360bp/-1,170bp YoY). However, lower R&D spend (- 180bp YoY) and flat SG&A expenses restricted EBITDA margin contraction to ~150bp YoY (18.9% v/s our estimate: 20.2%). The blip in revenue/margins meant that EBITDA of INR7.3b (-4% YoY) came in lower than our estimate of INR8.1b. DRRD received INR3.5b pursuant to the settlement with Celgene relating to g-Revlimid for the Canada market. Adjusting for the same, PAT was down 3% YoY to INR4.4b, higher than our estimate of INR4.2b.

* Key call takeaways:

(1) DRRD may have additional query related to gNuvaring.

(2) Guidance of >30 ANDA launches in the US for FY20 maintained.

(3) While R&D cost was USD52m for 1QFY20, the company indicated it would rise in coming quarters.

(4) India business momentum is expected to remain healthy led by new launches and enhanced MR effort.

* Valuation view: We cut our EPS estimate by 9%/3% to INR120/INR131 for FY20/21 to factor in the delay in key approvals for the US market and the weakness in PSAI. We continue valuing DRRD at 20x 12M forward earnings to arrive at a price target of INR2,620 (prior: INR2,700). While the company remains on track to contain operating cost and deliver broad-based growth, we believe that the current valuation adequately factors in the benefits from the same. We, thus, maintain our Neutral rating on the stock.


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