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Strong growth in Europe, India and RoW markets...

Q3 revenues grew 12.4% YoY to | 4942 crore (I-direct estimate: | 5014 crore). Domestic revenues grew 25.6% YoY to | 959 crore due to Wockhardt integration and new product launches. Europe revenues grew 33.9% YoY to | 414 crore due to new launches. US revenues grew 8.7% YoY to | 1739 crore on the back of new product launches, favourable forex rate partly offset by price erosion. Adjusting for impairment charge of | 597.2 crore in Q3FY21, | 1320 crore in Q3FY20, EBITDA margins were down 46 bps YoY at 23.0% (I-direct estimate: 23.4%) due to lower gross margins amid price erosion, higher freight charges. Hence, EBITDA grew 10.2% YoY to | 1136 crore vs. I-direct estimate of | 1172 crore. Adjusted PAT grew 7.2% YoY to | 685 crore

US, key growth driver with promising launches ahead

US remains a key driver, contributing ~37% to revenues as of FY20. DRL has a strong pending pipeline comprising 89 ANDAs (48 Para IV filings, 24 FTFs) and two NDAs under 505 (b) (2) route. We expect US sales to grow at a FY20-23E CAGR of 9% to | 8329 crore on the back of new launches.

India, Russia CIS to provide more stability

India, Russia CIS markets are more or less identical in nature (branded generics, OTC) with similar growth potential, similar kinds of risks. DRL is well versed with the dynamics of Russia by virtue of being an early mover. Notwithstanding Covid-19 related quarterly gyrations, we expect strong growth in these markets on the back of a stabilising currency, geographical expansion, robust biological portfolio, ramp up in institutional business. For India, growth may be largely from launches in oncology & biosimilar space, UCB/Wockhardt like acquisitions besides MR productivity improvement. We expect Russia & other CIS to grow at ~10% CAGR in FY20-23E to | 3118 crore with India growing at ~14% CAGR in FY20-23E to | 4275 crore.

Valuation & Outlook

Adjusting for one-time impairment charges taken in Q3, results were in line with I-direct estimates on all fronts. We draw comfort from the management’s sustained focus on cost rationalisation, especially on SGN&A front and endeavour to focus on simultaneous launches across geographies and segments besides realignment of R&D spend towards - Global Generics, Biosimilars and PSAI segment. We believe this is a welcome change from earlier stance of overemphasis on a particular market (read US). Strong FCF generation, healthy b/s are some legacy strongholds for the company. We believe the efforts taken in the last few quarters are sustainable and should support stable performances, going ahead. We maintain BUY and arrive at a target price of | 5525 (vs. | 5770 earlier), which includes a base business value of ~| 5312 (25x FY23E EPS of | 212.5) + | 213 for NPV of gRevlimid.

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