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Hold Dr. Reddy`s Laboratories Ltd For Target Rs.5250

Weak margin performance dominates sentiments…

About the stock: Dr Reddy’s (DRL) portfolio includes pharmaceutical generics, APIs, custom pharmaceutical services, biosimilar and differentiated formulations.

* Revenue: US (37%), India (18%), Russia and CIS (12%), Europe (8%), RoW (6%) and API (16.8%)

* It has 13 formulation facilities, nine API manufacturing facilities, one biologics facility and several R&D centres across the globe

Q1FY22 Results: Dr Reddy’s reported weak margins in its Q1FY22 results.

* Sales were up 11.7% YoY to | 4945.1 crore

* EBITDA in Q1FY22 was at | 734 crore, down 34% YoY with margins at 15%

* Consequent PAT was at | 380.4 crore (down 36% YoY)

What should investors do?

Dr Reddy’s share price has grown by ~1.6x over the past five years (from ~| 3381 in June 2016 to ~| 5423 levels in June 2021).

* We retain our HOLD rating on the stock

Target Price and Valuation: We value Dr Reddy’s at | 5250 i.e. 25x P/E on FY23E + | 317.2 for NPV of gRevlimid and Sputnik.

Key triggers for future price performance:

* Decent US pipeline -- 93 ANDAs & 3 NDAs pending for approval; 47 are Para IV and the management believes 24 have first to file status

* Pricing pressure on some key products – Atrovastatin, Metoprolol, Liposomal Doxorubicin, Buprenorphine and Naloxone

* Near term triggers - Ramp up of Sputnik V vaccine and Revlimid launch

* Focus on cost rationalisation, especially on SG&A front and endeavour to focus on simultaneous launches across geographies.

Alternate Stock Idea: Apart from Dr Reddy’s, in healthcare we like Sun Pharma.

* US specialty segment looks promising due to robust product pipeline, steady progress

* Higher contribution from specialty and strong domestic franchise is likely to change the product mix towards more remunerative businesses by FY23

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