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Strong numbers (adjusted); beat on all fronts…
Revenues grew 13.8% YoY to | 4397.1 crore, mainly due to strong growth in Europe, Russia, other CIS markets. Domestic revenues grew 13.3% YoY to | 763.6 crore. US revenues grew 7.9% YoY to | 1599.9 crore. EBITDA margins (excluding impairment charges) expanded 263.4 bps to 23.5% mainly due to lower R&D and employee expenses. EBITDA grew 28.2% YoY to | 1031.3 crore. Adjusted PAT grew 56.2% YoY to | 781.6 crore. Delta visà-vis EBITDA was mainly due to lower tax outgo and interest cost offset by lower other income.
US going through rough patch but promising launches ahead
Despite challenging years, the US remains a key driver for the company, contributing ~42% to total revenues. The company has a strong pending pipeline comprising 99 ANDAs (53 Para IV filings, 32 FTFs) and two NDAs under 505 (b) (2) route. We expect US sales to grow at a CAGR of ~9% to | 7780 crore in FY19-22E on the back of new launches.
Russia, CIS, India to provide more stability
These two markets are more or less identical in nature (branded generics and OTC) with similar growth potential and similar kinds of risks. Dr Reddy’s is well versed with the dynamics of Russia by virtue of being an early mover. We expect strong growth in these markets on the back of a stabilising currency, geographical expansion, robust biological portfolio and ramp up in institutional business. For India, growth is expected to be largely from launches in the oncology and biosimilars space and UCB like acquisitions besides an improvement in productivity. We expect Russia & other CIS to grow at a CAGR of 12.4% during FY19-22E to | 2913 crore whereas India is likely to grow at a CAGR of ~12% during FY19-22E to | 3987 crore.
Valuation & Outlook
Excluding impairment charges, the Q3 result was better than I-direct estimates on all fronts with healthy growth across geographies and strongest operational (adjusted for impairment) margins in the past 20 quarters. Sustained cost rationalisation, especially on the SGN&A front and calibrating of R&D spend are some continuing hallmarks. Despite recent product related setbacks in the US, the company remains focused on the US market but will be calculative and plans to push only those products with better EBITDA profile. We expect a continuum in operational improvement due to strong growth from branded markets, control on overheads and reduction in regulatory spend. Overall, it is still a work in progress for the company with product/segment identification for growth and cost rationalisation drive likely to continue for the next few quarters. We arrive at our target price of | 3255 based on 18x FY22E EPS of ~| 180.9.
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