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Focus on improving ESG initiatives.

We hosted Dr. Reddy’s Laboratories’ (DRL) in our ESG conference. The company was represented by Mr Parag Agarwal (CFO), Mr Thakur Pherwani (Head SHE & Sustainability) and Mr Amit Agarwal (Head – Investor Relations). The company has been able to show improvement on ESG front over past ten years and has set several targets for near to long term to improve it further.

Key takeaways from the meeting:

* Dr Reddy’s adopted environmental commitment in FY10 with certain targets for FY20. It has been able to perform better than earlier target on specific water consumption, waste reduction and hazardous waste to landfills. However, it fell short of target on specific energy consumption, increase in share of renewable energy and water neutrality. Though, the company has been able to improve on all the above parameters over the years but couldn’t achieve target on few aspects.

* The target for reducing specific energy consumption was 31% and company could achieve 22% reduction. The share of renewable energy increased by 8.8% vs target of 16.2% and attained 72% water neutrality vs target of 100%.

* The company aligns with FTSE4GOOD, CDP, UN Global Compact, Dow Jones Sustainability Indices and Science based targets for ESG purpose and has received several awards at various summits and events.

* The company’s focus has been on offering affordable & innovative medicines, environmental management, becoming an employer of choice, responsibility for product and caring for communities.

* The company has set target of achieving 100% waste circularity including plastic (India) by the year 2023. Over medium term by 2025, it is looking for 50% renewable energy, 100% water neutrality and 100% waste circularity including plastic.

* On social front, it has overall diversity of 18% among employees with 14.8% women in the management position. The focus remains on community contributions, health & wellbeing of employees and sustainable supply chain.

* Transparency and integrity defines the governance at Dr Reddy’s and the key strengths are Board structure & effectiveness with 10 directors, 2 executive directors and 8 independent directors, ethics & compliance with no incidences of bribery & corruption, and risk management.

Valuations and risks:

We remain positive on the stock considering the growth momentum in branded generics business (India & EMs) and new launches in US to continue supporting growth. DRL has launched Sputnik V vaccine in India which would provide significant upside to earnings in near term. We maintain ADD rating on the stock with a target price of Rs5,848/share based on 25xFY23E EPS, an additional Rs330/share for Revlimid and NPV of Rs144 for Sputnik V vaccine. Key downside risks: delay in launching new products, regulatory hurdles and currency volatility.

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