Published on 21/11/2020 11:57:07 AM | Source: HDFC Securities Ltd

Add Dr. Reddy`s Laboratories Ltd For Target Rs. 5,390 - HDFC Securities

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Good quarter, lower SG&A cost is encouraging

Dr. Reddys' Q2 Rev/PAT beat estimates by 4%/20% driven by strong growth across markets and lower tax rate. Tight control on SG&A cost (-208bps QoQ) is noteworthy given sequential increase in marketing spends and integration of Wockhardt portfolio in the quarter. The business outlook remains strong with multiple triggers such as upsides from Covid portfolio (Sputnik V vaccine, Favipiravir trial in US) and complex approvals/launches in the US (gVascepa, Copaxone, gNuvaring); however, launch timelines for these remain uncertain. We expect core business performance to remain strong aided by structural tailwinds in API business, strong launch momentum in US, traction in EU business and ramp-up in Wockhardt portfolio. Our estimates largely remain unchanged and we marginally increase our TP to Rs5,390 (from Rs5,375 earlier). Maintain ADD.


* Strong traction across markets: Revenues grew by 20% YoY led by strong growth in India (+21% YoY, Wockhardt integration, Covid drugs), PSAI (+20% YoY, services biz, currency gains), Europe (+36% YoY, new launches, currency gains) and US (+6% QoQ, new launches). EBIDTA margins were steady at 25.2% (-21bps QoQ) as lower gross margins (-211 QoQ, lower export incentive, product mix, forex) were offset by lower SG&A cost (- 208bps, productivity gains). Adjusting for one offs, PAT came at Rs8.4bn aided by lower tax rate (11%, DTA led).


* US pipeline holds promise: Limited competition products in pipeline such as gKuvan (TA in place), gVascepa (preparing for launch), gNuvaring and gCopaxone (uncertain timelines) add longer term growth visibility to the US business. US pipeline consist of 92 pending ANDA (50 Para IVs, 26 FTFs). This, along with strong launch momentum (30+ launches in FY21) will drive 15% revenue CAGR over FY20-23e.


* Key call takeaways: a) gVascepa – launch timelines not disclosed; b) Sputnik V – approval is contingent on outcome of global trials, Phase 3 trial in India (1,400 patients) to end by May 21, plans 100mn doses in a phased manner; c) Wockhardt integration – progressing well; d) Net debt: Rs1.4bn, ETR at 25% for FY21; e) Rituximab – Phase 3 trial progressing well; f) M&A opportunities - will continue to evaluate.


* Valuation and risks: We maintain ADD rating and increase our SOTP based target price to Rs 5,390. Our target price is based on 22x Sep 22 EPS and NPV of Rs384/share for gRevlimid. Key risks: delay in key approvals; higher price erosion in the US; adverse outcome on drug price fixing lawsuit in US; and delay in turnaround of Wockhardt portfolio.


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