Published on 29/10/2020 10:58:44 AM | Source: Yes Securities Ltd

Add Dr Reddys Laboratories Ltd For Target Rs.5.270 - Yes Securities

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Our View

* Traction in US can persist on back of 30 launches in FY21 and niche/complex launches beyond next fiscal; healthy growth in Europe and other geographies  

* Commendable control over costs in past 3 years and we expect a moderate 4‐6% rise in ex‐COGS & R&D costs; any structural savings in SG&A (ex‐R&D) can lead to surprise on margins  

* India business to benefit from COVID drugs in FY21 plus as yet unquantified vaccine opportunity; albeit export markets will continue to be key driver of revenues and reason behind margin sustaining ~25‐26% in FY22

* We raise FY22 estimates by 12% and include Rs300/share Revlimid NPV in our revised TP of Rs5,270 (earlier stock under review with last TP Rs2,850 ex‐Revlimid); ascribe ADD rating



* Dr Reddys’ reported a beat on revenues and margin; sales growth of 2% yoy, +11% qoq driven by US, India and Europe. Robust US growth driven by currency tailwind (+6% yoy), volume rise in base business and new launches including Dexamethasone  

* India sales included Wockhardt portfolio and strong seasonality as well as Avigan (Favipiravir) and Remdesivir tailwinds; API sales flat qoq

* Gross margin declined 240bps qoq per IND AS on product mix; margins flat qoq on slower rise in staff and other expenses; R&D at Rs4.4bn ~9% of sales


Risk To Our Call

* Any lag in US performance due to rise in competitive intensity or pricing will have a disproportionate impact on margin


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