Maintain Reduce on Dr. Reddy's Labs - Valuations leave little room for disappointment - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities.

Dr. Reddy's Labs (Q4FY20 Results Review): Valuations leave little room for disappointment. Maintain Reduce.
(TP Rs 3, 770, CMP Rs 3, 910, MCap Rs 650 bn)

Dr. Reddys' Q4 PAT came ahead of expectations led by strong revenue growth (+15% YoY, 6% beat) and tax write back. EBIDTA margins came in line as lower gross margins were offset by lower SG&A spends. Improved growth trajectory and cost control initiatives have led to EBIDTA margin expansion (~300bps) over the last three years. Going forward, while we continue to factor cost savings, a large part (~20%) of our FY22 estimates hinges on key product approvals in the US (gNuvaring, gCopaxone), the approval timelines for which remain uncertain. Despite factoring these launches and margin expansion as per company guidance, we don't see upside from current levels. The stock trades at 27x/21x FY21/22 EPS which leaves limited room for execution miss. We maintain Reduce rating with a revised TP of Rs3,770 based on 20x FY22 EPS.

Revenue beat, margins in line: Revenues grew at 15% YoY at Rs44.3bn as strong growth in US (+13% YoY, new launches, higher volumes), Europe (+80% YoY, +11% YoY, strong performance in Germany, new markets) offset muted growth in India (+5%YoY, logistics impact). EBIDTA margins came at 21.6% (down 216bps QoQ) as lower gross margins (adverse business mix, write offs) were partially offset by lower SG&A spend (-120bps QoQ).

Major part of US growth hinges on two key product approvals: We forecast the US business to register 14% revenue CAGR over the next two years and two key assets - gNuvaring and gCopaxone account for ~50%+ of growth in the same period. We factor these high value launches, along with sustained cost savings and factor ~350bps margin expansion over FY20-22e. Any delay in approval/launch timelines will impact our estimates.

Key call takeaways: a) Price erosion in US has stabilized, deflation to continue; b) gNuvaring and gCopaxone - CRL to be filed in few months; gVascepa - no hurdles on regulatory front; expects to launch 25 products in the US; c) Wockhardt deal closure expected in Q1FY21; d) Covid impact was neutral on revenues; e) Guidance: Gross margin: 52-54% of sales, R&D spend: 9-10% of sales, Capex: Rs10bn in FY21, Tax rate: 22%

Maintain Reduce, risks: We increase our EPS estimates by 3-7% for FY21/22 and revise our TP to Rs3,770 (from Rs3,330 earlier). Our TP is based on 20x FY22 EPS. Key upside risks: Lower price erosion in the US, higher growth in India and EM markets; faster than expected approvals for key products in the US.

Shares of DR.REDDY's LABORATORIES LTD. was last trading in BSE at Rs.3910.75 as compared to the previous close of Rs. 3699.55. The total number of shares traded during the day was 137220 in over 12937 trades.

The stock hit an intraday high of Rs. 3927.8 and intraday low of 3695.1. The net turnover during the day was Rs. 524998706.

Source : Equity Bulls

Keywords