Dr. Reddy's Laboratories - Outperformance continues - ICICI Securities

Dr. Reddy's Laboratories' (DRL) has reported strong Q2FY21 performance above our estimates on all fronts. Revenue grew 20.1% YoY to Rs49.0bn (I-Sec: Rs48.0bn) driven by growth across segments. EBITDA margin at 24.9% was higher than estimated 23.7%. Adjusted PAT grew 98.5% to Rs8.3bn (I-Sec: Rs6.3bn). US grew 7.9% QoQ to $247mn led by new launches and traction in the base business. India revenue grew 21.5% YoY aided by acquisition of Wockhardt's domestic branded generics portfolio (Jun'20). We expect the growth momentum in branded generics business (India & EMs) and new launches in US to continue in coming quarters supporting growth. Hence we maintain ADD with a revised target price of Rs5,485/share.

- Growth across segments: India sales grew 20.1% YoY and 45.7% QoQ with consolidation of Wockhardt products which was completed in Jun'20. US revenue grew 7.9% QoQ to US$247mn vs estimated US$240mn led by nine new launches and traction in the base business. PSAI business segmented reported strong growth of 19.7% YoY, however, lower volumes of certain products caused a muted performance sequentially. EU generics also reported strong 35.8% growth led by new launches and high traction in volumes across markets. EM revenues grew 6.5% led by CIS and ROW with new launches and strong traction in volumes. Russia grew 21.2% as it recovers from the lows of Q1FY21 which was impacted by COVID-19.

- Margins high but decline sequentially: Gross margin stood at 53.9%, up 250 YoY but declined 200bps QoQ. Sequential decline was on account of lower export incentive and unfavourable business mix & forex movement. Subsequently EBITDA margin grew 410bps YoY but declined 30bps QoQ to 24.9%. Gross margin in global generics rose 390bps YoY to 59.4% and that in PSAI improved 220bps to 26.8%. However, these margins declined 200bps YoY and 660bps QoQ for generics and PSAI respectively. Gross margin has been quite volatile on quarterly basis and we expect it to remain ~54-56% vs 52.2% in FY20.

- Outlook: Overall, we expect revenues and earnings to grow at 14.0% and 35.5% CAGRs, respectively, over FY20-FY23E with 840bps EBITDA margin expansion. Margin expansion would be largely driven by improving revenue mix leading to higher gross margin and controlled S,G&A expenses. We expect the company to generate free cash flow of Rs 73bn over the next three years.

- Valuations and risks: We largely maintain our revenue estimates but increase EPS estimates by 4-6% for FY21E-FY23E to factor-in better margin profile and lower tax rate. We maintain ADD on the stock with a revised target price of Rs5,485/share based on 25xSep'22E EPS and an additional Rs514/share for Revlimid (earlier: Rs5,214/share). Key downside risks: delay in launching new products, regulatory hurdles and currency volatility.

Shares of DR.REDDY'S LABORATORIES LTD. was last trading in BSE at Rs.4942.45 as compared to the previous close of Rs. 4949.8. The total number of shares traded during the day was 47875 in over 5865 trades.

The stock hit an intraday high of Rs. 5041.6 and intraday low of 4892.8. The net turnover during the day was Rs. 238162680.

Source : Equity Bulls

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