Strong beat, positives in the price
Dr. Reddys' Q1 results beat expectations led by robust growth in PSAI and Europe business along with strong gross margin (56%, +430bps YoY). The growth outlook for PSAI business has improved as customers seek global diversification of supplies, stock higher inventories and look for reliable partners. On the gross margin front, while large part of improvement is likely to sustain, we factor some normalisation (owing to product mix variations and currency) over FY21/22. On the flip side, approval timelines for key products (gNuvaring, gCopaxone) continue to remain uncertain. The company’s tax rate has inched up from 22% to 25-27% (discontinuation of R&D deduction benefits and tax holiday on one of the plant). We increase our EPS estimates for FY21/22 by 11%/4% to factor the above. The stock trades at 27x/22x FY21/22 EPS which leaves limited room for execution miss. We maintain Reduce rating with a revised TP of Rs3,940 based on 20x FY22 EPS.
* All round beat: Revenues grew at 15% YoY at Rs44.1bn as strong growth in PSAI (+88% YoY, new launches, currency benefit, higher volumes), Emerging markets (+54% YoY, China, Vietnam led), Europe (+ 48% YoY, new launches, currency benefits) offset weakness in India (-10% YoY) and Russia (-9% YoY) due to Covid. EBIDTA margins improved to 25.5% (+576bps YoY, +386bps QoQ) largely on back of higher gross margins (56%, +437bps YoY, +457 QoQ, currency, product mix, productivity).
* 50%+ US growth hinges on two key product approvals: We forecast the US business to register 12% revenue CAGR over FY20-22e. More than 50% of the growth in this period is dependent on two assets - gNuvaring and gCopaxone. The CRL for gCopaxone is filed and for gNuvaring is delayed by few months. We factor gCopaxone launch in 2HFY21 and gNuvaring in Q4FY21. Any delay in approval/launch timelines will impact our estimates.
* Key call takeaways: a) Price erosion in US – more stable; b) gRevlimid – no visibility on trial date yet; c) India – absolute EBITDA contribution has been stable, Wockhardt business is complementary to existing portfolio; d) Net debt: Rs3.3bn, ETR at 34%; e) Guidance: Capex: Rs10bn in FY21, Tax rate - 25-27%; f) M&A opportunities – Emerging markets particularly India
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