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Resilient performance; Outlook promising

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.

* Q2FY22 revenue rose 17.8% YoY to Rs. 5,787cr, driven by higher revenue from Global Generics (+19.0% YoY to Rs. 4,747cr).

* As a result, EBITDA grew 10.2% YoY, although EBITDA margin contracted 160bps YoY to 23.5% due to weaker mix and higher SG&A expenses (+22.0% YoY to Rs. 1,600cr). PAT rose 29% YoY to Rs. 996cr.

* Company is expected to fare well on the back drop of continued growth in revenue along with innovation of new drugs and medications. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 5,437 using a target multiple of 23x FY23E adj. EPS.

Topline aided by new Medications

Q2FY22 revenue grew17.8% YoY to Rs. 5,787cr, driven by significant growth in Global Generics segment (+19.0% YoY to Rs. 4,747cr) and robust performance from Proprietary Products segment (Rs. 123cr vs Rs. 10cr in Q2FY21, on the account of recognition of new license fee). This was partly offset by weaker Pharma Services and Active Ingredients segment (-1.6% YoY to Rs. 1,019cr, due to lower volumes and decrease in sales price). Resultantly, EBITDA grew 10.2% YoY to Rs. 1,360cr, although EBITDA margin contracted 160bps YoY to 23.5% dragged down by low margin product mix and higher costs. PAT registered a healthy growth of 29.0% YoY to Rs. 996cr, further helped by higher other income (Rs. 206cr vs. Rs. 27cr loss in Q2FY21).

Key Financial highlights

* Shareholding of mutual funds and institutional investors increased by 34.9% QoQ to 21.7%, offset by other shareholders that reduced to 3.6% from 8.3% previous quarter.

* Revenues from Emerging Markets at Rs. 1,300cr (+50% YoY and +42% QoQ) particularly from Russia, Romania, CIS countries.

* Dr. Reddy launched two new products this quarter i.e., Melotryp and Baricax meeting the emerging needs of the market.

COVID-19 Updates

Dr. Reddy has commercialized all its COVID-19 products launched until now, including Sputnik V vaccine, Remdesivir, Avigan (Favipiravir) and 2-deoxy-D-glucose (2-DG) in India as well as overseas. Currently, the company is conducting clinical trials for Sputnik Light, Molnupiravir and is also developing several other COVID drugs for treatment ranging from mild to severe conditions.

Valuation

Dr. Reddy is expected to fare much better backed by continued growth in revenue from COVID portfolio, contribution from new product launches and increase in sales price from current products. We expect the earnings to grow at healthy 23% CAGR over FY21-23E. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 5,437 using a target multiple of 23x FY22E adj. EPS.

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