Neutral Dr Reddy’s Labs Ltd For Target Rs. 5,540 - Motilal Oswal Financial Services
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NA/PSAI drive earnings
Higher working capital needs reduce free cash flow for the quarter
* Dr. Reddy’s Labs (DRRD) delivered a marginally better-than-expected performance for the quarter, led by healthy traction in the North America (NA) and Pharmaceutical Services & Active Ingredients (PSAI) segments. The India business has been witnessing moderation in YoY growth for three quarters now. DRRD continues to invest on its product pipeline, and marketing initiatives across key markets. The benefits are expected from FY25 onwards.
* We raise our earnings estimates by 7%/5%/4% for FY24/FY25/FY26 factoring in: 1) market share expansion in key products, 2) new launches, and 3) better operating leverage. We value DRRD on an SOTP basis (22x 12M forward P/E for the base business and adding NPV of INR90 for g-Revlimid) to arrive at our TP of INR5,540.
* Even after raising our earnings estimates, we expect a modest 3% earnings CAGR over FY24-26. Further, the product-specific concentration of earnings remains elevated for DRRD. Reiterate Neutral.
Higher SG&A expenses hurt margins for the quarter
* DRRD’s 3QFY24 revenue grew 7% YoY to INR72b (vs. est. of INR69b).
* The US sales rose 9% YoY to INR33.5b (~USD401m; 46% of sales), led by market share expansion in existing key products and revenue from new product launches, partly offset by price erosion. The EU sales grew 15% YoY to INR5b (7% of sales). India sales rose 5% YoY to INR12b (16% of sales). This was led by new launches. However, the EM sales declined 2% YoY to INR13b (17% of sales). The business was hit by unfavorable forex movements. PSAI segment’s revenue was flat YoY to INR7b (11% of sales).
* Gross margin (GM) contracted 70bp YoY to 58.5%, as the GG segment witnessed lower GM (down 260bp YoY as a % of sales) for the quarter.
* However, EBITDA margin contracted at a higher rate of 220bp YoY to 28% (our est: 27.8%) due to higher SG&A (+90bp YoY as a % of sales) and R&D (+60bp YoY as % of sales) expenses. EBITDA grew marginally by 2% YoY to INR20b (our est: INR19b).
* R&D expenses stood at INR5.6b (7.7% of sales).
* DRRD reported a PAT of INR13.8b (our est: INR12b), up 5% YoY.
* In 9MFY24, revenue/EBITDA/PAT grew 15%/24%/25% YoY to INR208b/ INR61b/INR41b.
Highlights from the management commentary
* DRRD expects to launch 26 products in the US over the next two years. Of these, about two products are from FTO-3.
* It aims for biosimilar product launches in the US/EU starting in CY27.
* Management expects the base business in India to grow in double digits YoY in the coming quarters.
* DRRD has strong capabilities in developing and manufacturing peptides, and the company is well-positioned to monetize GLP-1 opportunities, considering relevant patent situations.
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SEBI Registration number is INH000000412
