Accumulat Dr Reddy's Laboratories; target of Rs 4721: Dolat Capital

Dolat Capital's research report on Dr Reddy's Laboratories

Dr Reddy’s reported a strong 1Q beating estimates across led by superlative performance in the API segment (up 88% YoY) as clients opt to de-risk supplies. This coupled with favourable pricing, better product mix (we believe higher realization in APIs and improved productivity) led to gross margins of 56% in turn leading to healthy EBITDA margins of 26.3%. While management hinted of some fluctuation in gross and EBITDA margins going ahead, it remained confident about the sustenance of its API segment performance and EBITDA margins, which we believe is a little stretched. We are concerned about the extrapolation of this quarters’ trend as expenses rise in 2HFY21. Besides, with seasonality sales (1H is the strongest) lost in India due to partial lockdown and rise in spends, performance of 2H vs 1H would be more crucial. Given Dr Reddy’s’ sustained launch momentum in the US (guided 20+ new launches in FY21), the company is on track to exceed US$1bn in US revenue by FY22 even as expectations in gNuvaring & gCopaxone are now muted. Management hinted on inorganic growth avenues through product/asset buyouts in the branded generics space, specifically India.

Outlook

Capital allocation towards digital enhancement and increased dividend distribution. With all facilities compliant, renewed API base and improving domestic formulations and strong balance sheet, we believe, Dr Reddy’s will continue to trade at a premium vs its 5-year average and hence we increase our valuation multiple to 25x from 23x earlier. Maintain Accumulate.