Hold Dr Reddy's Laboratories Ltd For Target Rs.5,170 - ICICI Direct
Russia, India, RoW markets drive Q2 growth…
About the stock: Dr Reddy’s (DRL) portfolio includes pharmaceutical generics, APIs, custom pharmaceutical services, biosimilar and differentiated formulations.
* Revenue breakup: US (37%), India (18%), Russia and CIS (12%), Europe (8%), RoW (6%) and API (17%)
* It has 13 formulation facilities, nine API manufacturing facilities, one biologics facility and several R&D centres across the globe
Q2FY22 Results:
Dr Reddy’s reported robust Q2FY22 results.
* Sales were up 17.8% YoY to | 5786.9 crore
* EBITDA was at | 1359.8 crore, up 17.6% YoY with margins at 23.5%
* Consequent PAT was at | 965.7 crore (up 25.1% YoY)
What should investors do? Dr Reddy’s share price has grown by ~1.4x over the past five years (from ~| 3381 in June 2016 to ~| 4670 levels in Oct 2021).
* Maintain HOLD as we keep track on ex-Covid launches momentum
Target Price and Valuation: We value Dr Reddy’s at | 5170 i.e. 24x P/E on FY23E + | 269.3 for NPV of gRevlimid and Sputnik.
Key triggers for future price performance:
* Decent US pipeline -- 90 ANDAs & three NDAs pending for approval; 46 are Para IV and the management believes 23 have first to file status
* Handling of pricing pressure in the US on some products – Atrovastatin, Metoprolol, Liposomal Doxorubicin, Buprenorphine and Naloxone
* Sputnik V vaccine acceptance, Revlimid launch and Duvvada resolution
* 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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