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Outlook promising with Sputnik V launch

Dr. Reddy’s Laboratories is an Indian pharmaceutical manufacturer. The company is engaged in manufacturing and marketing of 190+ medications, 60+ APIs, as well as diagnostic kits and other biotechnology products.

* Q4FY21 revenue rose 7.2% YoY but saw 3.5% QoQ decline. Downswing in the main business of Global Generics (-4.3% QoQ) offset the growth momentum in PSAI business (+12.2% QoQ).

* EBITDA grew 11.0% YoY (-7.2% QoQ) with margin expanding 70bps YoY to 22.1%. R&D cost totaled Rs. 410cr (8.7% of sales vs. 8.3% in Q3FY21).

* Excluding the effects of impairment, adj. PAT stood at Rs.559cr (-10.6% QoQ, -28.5% YoY).

* The Cost synergies from Wockhardt acquisition and strong product pipeline should help improve margins in the long term. Biosimilar products and cell therapies (for oncology patients) are expected to act as long-term growth catalysts for the company. Hence, we reiterate our BUY rating on the stock with revised target price of Rs. 6,209 based on 26x FY23E adj. EPS.

Topline driven by API business

For Q4FY21, Consolidated revenue reached Rs. 4,768cr (+7.2% YoY, -3.5% QoQ) due to contribution from portfolio acquired from Wockhardt, new product launches, improvement in volumes and favorable forex.These drivers were partly offset by the price erosion from increased competition.

By business division, Global Generics revenue totaled Rs. 3,901cr (+7.0%YoY, -4.3% QoQ) while PSAI business reached Rs. 992cr (+13.0% YoY, +12.2% QoQ). By geography, North America Generics was largely flat at Rs. 1,749cr (+0.6%QoQ). However, outlook remains strong with 6 new product launches in the region. India revenues was at Rs. 845cr (-11.9% QoQ) affected by reduced COVID drug sales and seasonality. Russia followed similar track at Rs. 400cr (-11.0% QoQ). Europe also fell to Rs. 396cr (-4.5% QoQ) with lower volumes.

Margins weighed down by acquisition integration costs

In Q4FY21, gross profit was down to Rs. 3,227cr (-2.3% QoQ, +10.6% YoY), while margin improved to 67.7% (+81bps QoQ, +209bps YoY) due to increased leverage from manufacturing overheads. Resultantly, EBITDA declined to Rs. 1,055cr (-7.2% QoQ, +11.1% YoY) with margin of 22.1% (-90bps QoQ, +70bps YoY) on account of integration costs of Wockhardt. R&D for quarter stood at Rs.410cr (8.7% of revenues)

Key concall highlights

* Sputnik V vaccine demonstrated 91.6% efficacy and received emergency use authorization in April 2021. Rights are for 250mn doses (i.e. 125mn patients).

* During Q4FY21, Dr. Reddy’s Labs launched 6/3/4/1/2 new products in North America/Germany/UK/Italy/Spain respectively.

* During the quarter, 57 drug master files, 60 formulation products, including 11 ANDAs and 1 NDA were filed in the US

Valuation

Cost synergies from Wockhardt acquisition should help improve margins over longterm. With 92 ANDAs and 3NDAs, US product pipeline remains strong. Biosimilar products and cell therapies (for oncology patients) are expected to act as long-term growth catalysts for the company. Hence, we reiterate our BUY rating on the stock with revised target price of Rs. 6,209 based on 26x FY23E adj. EPS

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