Dr. Reddys Lab’s (DRL) revenue, increased by 26.4% YoY to Rs 48bn, is higher than our estimates of Rs43.3 bn, primarily due to good growth in Domestic, Europe and Emerging market and licence fees for three proprietary products. EBITDA margins were at 22.2% higher than our estimates of 20.2% on account of robust revenue and better gross margin. Net profit increased by 116.9% to Rs 10,925 mn (higher than our estimate of Rs 4,801 mn in Q2FY20).
We recommend buy rating on the stock with a new target price of Rs3,188 (from Rs3,138 earlier) which is based on 18x P/E to the base business (September FY21E EPS) with RS 50 per share risk adjusted value for the proprietary pipeline. DRL revenue and net profit should be on a secular growth trajectory as all business segments are well poised to grow. The worst around the US business is behind and it can grow in mid-to-high single digit on the current base (adjusted for base business erosion). The recent launches in the US, which are yet to scale up, can add about US$100mn to existing revenue base on an annual basis by mid FY21. The pace of erosion in DRL’s US revenue can be higher than average for the industry due to a large number of incremental launches being limited competition in nature.
Maintain ‘Accumulate’, TP marginally decrease to Rs2,910: With traction in India form ulations and revam ped portfolio of US generics along with visibility of launches of key products will bring qualitative improvement in earnings estimates.PriceerosioninUSduetochannelconsolidationhasbeen gradually stable for its portfolio of generics. The better visibility of launching gNuvaring and gCopaxone in FY21E will make its risk-return ratio favourable. We assign PE 21x on FY22E earnings and derive new TP of Rs2,910, decrease by 2% over our previous TP of Rs2,997 to reflect the teething problems in individual products. We maintain our recommendation ‘Accumulate’.
Teva’s settled with multiple litigants in opioid epidemic cases in US. A major part of the deal is long term (3 and 10 years) supply gSuboxone tablets to various state and local govt bodies. We expect the Teva supply to be utilized in the govt program of Medicare and Medicaid. Besides, a lower priced tablet would hardly encourage patient shift from sublingual films (easy operability). Unless patients are forced shift to tablet forms (through changes in formularies), there will be hardly any meaningful impact in volumes for film market. Hence DRRD, being second highest Rx share, is unlikely to be impacted from the Teva deal due to a)lower probability of patient/volume shift and b)lower competition to increase Rx share post Sandoz exit. We maintain‘Accumulate’ recommendation and retain TP at Rs2,997.
Gross margin for the quarter stood at 51.7%, which was down 70bps QoQ, however after adjusting last quarter for one time income on sale of derma brand s there is an increase of 150bps in margin. Gross margins of global generic business which stood at 57.6% was also adversely impacted 80bps due to inventory related provisions. Earnings stood at Rs6,628mn during the quarter, which showed 45.3% growth YoY and was boosted by exceptional gains from settlement income of $50mn. We have retained Buy rating on the stock with a target price of Rs3281 at 18x March FY21E EPS.
Having overcome regulatory issues at key formulations plants, the co is rapidly ramping up US revenues with key oncology and injectables launches. Additionally, biosimilar and complex generics launches in EM and reg markets, renewed focus on India, and traction gained in EU & China will support rev CAGR of ~15% over FY19-21E. We maintain BUY on DRRD following a miss on our estimates driven by temporary issues. Our TP is unchanged at Rs 3,360 (20x FY21E EPS + Rs 380/sh for niche products). A visible ramp up in the US and further cost efficiencies enable us to stay confident.
Upgrade to ‘Accumulate’, increase TP to Rs2,997: With traction in India formulations and revamped portfolio of US generics along with visibility of launches of key products will bring qualitative improvement in earnings estimates. Price erosion in US due to channel consolidation has been gradually stable for its portfolio of generics. The better visibility of launching gNuvaring and gCopaxone in CY19E-20E will make its risk-return ratio favourable. We assign PE 18x on FY21E earnings and derive new TP of Rs2,997, improved by 17% over our previous TP of Rs2,558. We upgrade our recommendation to ‘Accumulate’.
Revenues were driven by strong growth in India, Europe and RoW markets. After weeding out one-offs, exceptional items, postponements etc, the current narrative of the company remains intact- 1) focus on few remunerative products and 2) control over cost and capital. The management remains committed to working on cost rationalisation, especially on the SGN&A front and calibrating of R&D spend more towards global generics front (30+ US launches targeted in FY20) and biosimilars and lower towards proprietary products. We expect EBITDA margins to improve in FY19-21 due to key launches in the US, control on overheads and likely reduction in the regulatory spend. Overall, it is still a work in progress for the company with product/segment identification for growth and cost rationalisation drive likely to continue for the next few quarters. We arrive at our new target price of Rs 2840 based on 18x FY21E EPS of ~Rs 157.7.
Exciting times ahead; reiterate ‘BUY’ With focused management, promising complex pipeline, strong earnings revival and compelling valuations, DRRD remains a strong growth story over FY20–21. We reiterate‘BUY/SP’ with TP of INR3,400. The stock is trading at 17.3x FY20E earnings.
We marginally cut our earnings estimates by 8%/2% for FY20E/FY21E, taking into account the delay in the approval of key high value products like gCopaxone (in H1FY21 vs. H2CY19 earlier) and gNuvaring (in H2FY20 vs H1CY19). We value DRRD at 20x on FY21E earnings, with Buy rating and target price of Rs 2,880. Key risk to our call would be further delay in approval of key assets (gNuvaring and gCopaxone), regulatory hurdles and higher- than-expected pricing pressure in the base portfolio.
We downgrade our Revenues for FY20E by 1% while we upgrade by 1.2% for FY 21E. We downgrade EBITDAM by 50 bps for FY20E while we maintain our FY21E at 21.8 % mainly on account of higher R & D. We upgrade our EPS estimates for FY20E by 9.5% to Rs 135.8 mainly due to Celegene settlement income being factored in FY20E while we upgrade by 2.1% to Rs 144.9 for FY 21E. We maintain our price target at Rs 3122 based on 21.5x FY21E and maintain our HOLD rating on the stock.
The management is revamping organizational structure to make it more mobile, faster and opportunistic for cashing strategic opportunities. While there will be delay to launch gNuvaring and gCopaxone, the EIR for Duvvada plant and likely resolution of Vizag plant (TRO) will release approvals of key injectables in FY20E-21E. India formulations are also guided to increase operating efficiency of sales force, a key parameter DRRD is lagging vis-à-vis peers for long time. We increased earnings by 14% and 22% in FY20E and FY21E, though assigning PE 18x of FY21E (for new TP of Rs2,997 from Rs2,558) due to requirement of better visibility. We expect PEx to be rerated with approvals and upcoming launch of undisclosed key products as guided by DRRD. We upgraded our recommendation to ‘Hold’.