One-off gains lead to better than expected result
Dr. Reddy’s Laboratories is an Indian pharmaceutical manufacturer. The company is engaged in manufacturing and marketing of over 190 medications, 60+ APIs, as well as diagnostic kits and other biotechnology products.
* Revenue grew by a significant 26.1% YoY in Q2FY20 to Rs. 4,813cr, and was above street expectations.
* EBITDA margin grew 220bps YoY to 22.1% while PAT came in at Rs. 1,107cr (+113% YoY vs. Rs. 518cr in 2QFY19) on one-off tax benefit.
* 8 new products launched in North America in Q2FY20 and 99 pending approval
* We estimate earnings to grow at 12% CAGR from FY19-21E
* We assign HOLD rating on the stock with a target price of Rs 2,961 based on 20x FY21E adj. EPS
Proprietary product sales help drive revenue growth
Q2FY20 consolidated revenues grew 26.1% YoY to Rs 4,813cr, primarily led by a substantial gain in revenues from proprietary products. The global generics business, accounting for 68.2% of total sales, grew 7.3% YoY to Rs 3,284cr. Pharmaceutical services and Active ingredients (PSAI) revenue grew 10.4% YoY to Rs 860cr. Proprietary products revenue stood at Rs 743cr (+861.8% YoY), comprising of gains made during the quarter amounting to Rs. 723cr from licensing fees for three products. Revenue from other business activities was up 4.3% YoY to Rs 66cr. The company reported a 40.1% YoY increase in EBITDA to Rs 1,064cr. Key concall highlights
* New product launches – In Q2FY20, eight new products were launched, taking the total in H1FY20 to thirteen. In all, the company expects to launch thirty products in FY20.
* Europe business revenue rose +44.3% YoY to Rs. 276cr aided by strong growth across the region along with higher contribution from new launches.
* R&D expenditure currently stands at Rs. 366cr in Q2FY20, aided largely by a reduction in expenditure in the proprietary products segment.
* Management expects effective tax rate for this year to come in below ten percent owing to the recent changes in corporate tax regime; to further boost bottom line.
* As of Q2FY19, the company has 99 cumulative filings pending for approval with the USFDA (incl. 96 ANDAs and 3 NDAs). Additionally, seven drug master files were filed globally in this quarter.
China expected to be a strong counter amid swings in US business
Recently, Dr. Reddy’s became the first Indian generic company to successfully land a contract to supply olanzapine in China’s centralised drug procurement program. The management is gearing towards building a pipeline of products for the Chinese market. This can pave way for China contributing a bigger slice of the revenue pie in the future, turning into a counterweight against an unstable revenue stream from the North American region, especially the US market where the company has been subject to warnings issued by the USFDA affecting sales.
We expect earnings to grow at healthy 12% CAGR over FY19-21E. We assign HOLD rating on the stock with a target price of Rs. 2,961 using a target multiple of 20x P/E on FY21E adj. EPS.
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