Buy Dr Reddy share; target of ₹ 5,160: ICICI DIRECT 


About the stock:  

Dr Reddy share portfolio includes pharmaceutical generics, APIs, custom pharmaceutical services, biosimilar and complex formulations.  

Revenue breakup:  

US (37%), India (18%), Russia and CIS (12%), Europe (8%), RoW (6%) and API (17%). 

Dr Reddy share has 9 API manufacturing facilities, 13 formulation facilities, 1 biological facility with several R&D centers around the globe. 

Q3FY22 Results:  

There was a reduction in the Covid revenue still the company gave a good set of numbers as per ICICI direct estimates. 

Sales were up 8% YoY to ₹ 5338.3 crore. 

EBITDA was at ₹ 1215.7 crore, up 125.4% YoY with margins at 22.8% [Note: base of Q3FY21 had ₹ 597.2 crore impairment cost]. 

Adjusted PAT was steady YoY at ₹ 695.8 crore. 

What should investors do?  

Dr Reddy share has grown by ~1.4x over the past five years (from ~ ₹ 3018 in January 2017 to ~ ₹ 4218 levels in January 2022).  

ICICI direct changed their view from HOLD to BUY on back of favorable risk-reward matrix as we incorporate FY24 estimates with visible ramp up in global generics and value accretive launches scheduled in FY23. 

Target Price and Valuation:  

ICICI direct value Dr Reddy share at ₹ 5160 i.e. 21x FY24E EPS of ₹ 238.4 + NPV of ₹ 154.1 for gRevlimid.  

Key triggers for future price performance:  

US pipeline: 88 ANDAs and three NDAs pending for approval; 45 are Para IV, 24 have first to file status.  

In near term, key launches of gCopaxone and gNuvaring likely drivers of growth along with gRevlimid launch in Q2FY23  

Handling of pricing pressure in US for Atrovastatin, Metoprolol, Liposomal Doxorubicin, Buprenorphine and Naloxone along with Duvvada resolution. 

Emerging Markets & India:  

New high value launches and ramp up in base business remains key to offset price erosion and loss in Covid opportunities. 

There were launches across geographies and also a focus on cost rationalization. 

Alternate Stock Idea:  

ICICI direct in healthcare likes Dr Reddy share as well as Sun Pharma. 

Dr Reddy share has received more contribution from specialty and strong domestic franchise which will help the company to move towards more remunerative business by FY23. 

BUY with a target price of ₹ 965. 

Conference Call Highlights and recent quarters Q3FY22 key takeaways: 

Steady performance: 

Revenues grew 8% YoY to ₹ 5338.3 crore driven by 45.6% YoY growth in RoW market to ₹ 440 crore and 7.6% growth in Russia & CIS markets to ₹ 710 crore.  

US revenues grew 7.2% YoY to ₹ 1864.5 crore on back of new launches and increase in base business volume.  

India business grew 7% YoY to ₹ 1026.6 crore driven by price hike in existing products and new launches while Europe revenues declined 2.1% YoY to ₹ 405.8 crore.  

PSAI segment posted growth of 3.7% YoY to ₹ 727.1 crore.  

Gross margins were flat YoY due to favorable product mix and reduction in procurement cost for certain products being offset by price erosion in base business.  

Due to reduction in expenses and employee, the EBITDA margins improved 1186 bps to 22.8%. 

Subsequently, EBITDA grew 125.4% YoY to ₹ 1215.7 crore. [Note: base of Q3FY21 had ₹ 597.2 crore impairment cost].  

Dr Reddy share’s Q3 revenues and margins were in line with ICICI direct estimates, primarily driven by new launches and higher sales volume being partially offset by price erosion in base business.  

Dr Reddy share’s management remains committed on rationalization of the cost related to SGN&A and calibration of R&D towards Global Generics and biosimilars. 

Key growth drivers in the near term would be key launches across geographies besides continuing growth momentum in Global Generics in India and Russia  

Q3FY22 Earnings Conference Call highlights:

North America:  

Driven by new launches and increase in volume of base business, which was partially offset by price erosion in some molecules. 


Driven by increase in sales volumes of existing products and contribution from new product launches amid loss of Covid sales. 

Emerging Markets:  

Russia growth was on account of increase in prices in existing products and new products launches along with a favorable forex rate o RoW growth traction due to new launches and higher sales volume in the base business. 

PSAI business: Filed two DMFs in US. Guided for sequential growth, going forward. 

Gross margins improved sequentially due to favorable product mix. 

Company in talks with government to register Sputnik as a booster dose and indicated for export opportunity for Sputnik which is still not exploited. 

R&D expense at ₹416 crores (7.8% of sales). 

SG&A expenses at ₹ 1541 crore (up 7% YoY) primarily due to investment in sales and marketing for key brands and annual increments. 


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