Add Dr Reddy`s Laboratories Ltd For Target Rs. 5,580 - Yes Securities
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Result Highlights
* Revenue for the quarter increased by 7.2% YoY led by India (+23.5% YoY, driven by revenues from the acquired Wockhardt business and contribution from new launches), Europe (14.8% YoY), Emerging markets (+10% YoY), PSAI (+10% YoY). US again disappointed with flat QoQ and decline of 3.2% YoY‐ decline was primarily on account of higher volumes during Q4 last year due to COVID‐19 related stocking up and price erosion
* Gross margins expanded by 209 bps YoY, staff cost reduced by 50bps YoY, other expenses increased by 180bps YoY to 26.8% which led to EBITDA margin expansion by 78bps YoY to 22.1%.
* PAT for the quarter decreased by 29% YoY to Rs 5.5 bn vs. our estimate of de‐ growth of 18.7% YoY.
* R&D expenses for the quarter stood at Rs 4.1 bn (8.7% of sales).
* Capex for the quarter stood at Rs 2.9 bn (for FY21 it stood at Rs 9.7 bn).
Our view:
Dr Reddys’ US business has disappointed in the past 2 quarters though key launches like Vascepa, Remodulin (not approved yet) and spate of 30 launches would drive growth in FY22/23. Domestic business would continue to clock 9% growth on an underlying basis ex‐Wockhardt. We note the robust cost control over FY19‐21 (just 2% cagr in staff costs, flat other expenses and decline in absolute R&D) which may not be repeated over next 2 years.
Expect costs to inch up as company continues to invest in marketing and digital means; albeit, better revenue growth (compared to FY21) and decline in R&D (as % of sales) to result in ~25% margin for FY22 followed by another 100bps gain in FY23 on back of sustained US growth. Sputnik supply for 250mn doses would represent additional revenue upside not factored in our estimates. Be as it may, US growth and margin trajectory remain key catalysts. Marginally revise FY23 EPS (+2%) and hence TP to Rs5,580. ADD stays.
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