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Margins traction sturdy

DRRD reported earnings below our estimates, driven by lower PSAI sales and lower other income. The EBITDA margins have been steady for the quarter despite lower contribution from PSAI, steady R&D spend and cost escalations. Gross margins have improved consistently for global generics business, Q3 improvement of 90 bps to 58% sequentially. The product mix, better market-share in key products and better capacity utilisation has contributed to the improving gross margins. PSAI segment is expected to improve in Q4 driven by covid-basket and going ahead with new launches. Overall, we believe the core business offers a strong trajectory of growth in EMs, India and the US (niche launches, gRevlimid). We expect normalized EBITDA margins (~25%), backed by new launches, ramp-up in the US, and strong growth in EMs. We maintain BUY, with a TP of Rs6,100 (26x FY23E EPS) and NPV of Rs400 from gRevlimid.

US – strong product launch outlook

US contributed Rs18.6bn (+7%YoY; -1.4%QoQ), 35% of sales. The DRRD saw double digit price erosion on the portfolio partially off-set by new product launches and market share gains in existing product basket. It launched 4 new products in Q3 including two injectable. Approval of gRevlimid offers a huge opportunity over 3-4 years’ settlement period, settlement details highlight launch post Natco’s and doesn’t specify any exit market share. the ANDAs awaiting approval are tilted towards injectable and expected to drive earnings over mid-terms.

EMs and India markets new growth driver

India accounted for 19% of sales at Rs10.2bn (up 7% YoY and -10% QoQ). Growth was driven by new product launches (4 launches in Q3) partially set off by low demand for covid drugs. The EMs accounted for 21% of sales at Rs11.5bn (up 20% YoY and -11% QoQ). The growth was supported by new launches, price increases and higher demand. DRRD expects sustainable growth at healthy double-digits, going ahead. The management guided that growth will be primarily being driven by India and EM, while US would continue to grow at lower pace than EMs.

Vaccine – Sputnik-V and covid products opportunity dependent on booster/export

The Sputnik-V opportunity in India has been weak in Q3, the company is currently working with DGCA to conduct trials to approve Sputnik light for booster shot. DRRD has received the approval to export, without restrictions, with the only hurdle being approval by local governments awaited. However, we have excluded the Sputnik-V NPV as of now given the tepid demand and supply. Also, for adolescent vaccine and booster dose, separate trials being conducted. The demand for covid drugs would pick up in Q4 amid wave 3 in India and globally.

Valuation and risk

DRRD is better poised to scout more brand acquisition deals focused in India even beyond Wockhardt, given its strong balance sheet. Its CGMP compliance status is at best levels, USFDA audited CTO7/9, and DRRD has received form 483 with 8 observations – the audit was triggered as PAI. Management remains confident of addressing the observations within stipulated timelines, CAPA has been submitted and awaiting the EIR soon. We maintain our BUY recommendation, with a target price of Rs6,100 excluding the NPV of gRevlimid. At the CMP of Rs4,256, DRRD trades at 19.1x FY23E EPS of Rs221.3 and 16.7x FY24E EPS of Rs253.2.

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