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Dr Reddy's hits over 3-year high as analysts remain positive, raise target post Q3 show

HSBC also maintained buy call on the stock and raised price target to Rs 3,430 (from Rs 3,230 earlier)

January 28, 2020 / 11:37 AM IST
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Shares of Dr Reddy's Laboratories hit more than three-year high intraday on January 28 as brokerage houses remained positive on the stock after strong operating performance in Q3.

The stock gained as much as 1.5 percent to hit an intraday high of Rs 3,238.15, the highest level since December 2016. It was quoting at Rs 3,229.25, up Rs 40.30, or 1.26 percent on the BSE at 1036 hours IST.

While having a buy rating on the pharma major, Ambit raised its price target to Rs 3,615 (from Rs 3,217 earlier) as the improved cost base drove 7/15 percent raise in EPS estimates for FY21/22.

"R&D expenses increase will be lower than sales movement in FY21/22 and optimal expenses will boost FY21/22 margin by 140bps/180bps," said the brokerage.

HSBC also maintained buy call on the stock and raised price target to Rs 3,430 (from Rs 3,230 earlier) as ex-impairment charge, company saw operational improvement in Q3FY20.


"Benefits of new launches and operating leverage reflected in margins. Outlook remains robust for all the focus markets, and US sales growth driven by new launches will be key to watch out for," the brokerage said.

Dr Reddy's Labs on January 27 posted a loss of Rs 569.7 crore for quarter ended December 2019 against profit of Rs 485.2 crore YoY, impacted by impairment loss of Rs 1,320 crore during the quarter.

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The company announced impairment of Rs 1,110 crore on account of women's contraceptive drug Nuvaring generic and Rs 210 crore on intangibles on other products during the quarter. After adjustment for impairment, the profit before tax stood at Rs 790 crore for the quarter.

The launch of Nuvaring generic has been delayed due to queries from USFDA, which resulted into increasing competition from another generic and authorised generic. Hence, the company decided to took an impairment charge for the drug.

Revenue during the quarter grew by 13.86 percent year-on-year to Rs 4,384 crore and operating profit jumped 24.1 percent with 200bps YoY margin expansion in Q3.

Credit Suisse has an outperform call on the stock with a target price of Rs 3,235 as strong EBITDA beat helped by near-term gains, but NuvaRing write-off was higher-than-expected.

"US sales normalised now, aided by market share gains in gSuboxone. Key trigger for the stock is Revlimid generic, where pre-trial is scheduled for June," said the brokerage.

Revenue from North America, which accounts for 36 percent of total business, grew by 8 percent YoY, and Emerging markets (EMs), which contributes 21 percent to sales, showed a 19 percent YoY growth in Q3.

India business grew by 13 percent YoY and revenue from Europe rose by 52 percent YoY during the quarter.

While having equal-weight raing on the stock and raising price target to Rs 3,236 (from Rs 2,804 earlier), Morgan Stanley said efforts to realise operating leverage benefits were showing results and overall business was moving to granular growth against a large product focus previously.

CLSA has downgraded its rating on the stock to outperform from buy, with a target price of Rs 3,450 per share as company's focus on India/EMs has been delivering, but valuation baked in positives.

"Revenue growth across all geographies was ahead of estimates. The renewed focus on India & EMs has been playing out. It continued to deliver on cost control," the brokerage said, adding future growth in the US hinged on timely approval of gNuvaring and gCopaxone.

CLSA maintained its FY21-22 EPS estimates but cut FY20 EPS estimates to build in impairment charge. Valuation offers limited room to slip, it feels.

Disclaimer: The above report is compiled from information available on public platforms. advises users to check with certified experts before taking any investment decisions.
Moneycontrol News
first published: Jan 28, 2020 11:37 am

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