Prabhudas Lilladher recommended accumulate rating on Dr. Reddy's Laboratories with a target price of Rs 2997 in its research report dated July 29, 2019.
Prabhudas Lilladher's research report on Dr. Reddy's Laboratories
DRRD sales were in line with our estimates while adj. EBITDA and adj. PAT missed estimates due to significantly lower PSAI sales, one-off inventory adjustment and price erosion in key generics. Management however maintained tighter control on overhead costs (employee and SGA) with its ongoing program of rationalized assets, products and global presence. Employee costs increased by 2% while SGA and R&D costs decreased by 7% and 1% QoQ, respectively. Its adoption of new strategy with cost-benefit analysis of each operational activity helps to limit the reduction of adj. EBITDA margin only by 110bps QoQ to 19.2%, despite one-off inventory adjustment, adverse forex (USD/INR) and 33% QoQ lower PSAI sales in Q1FY19. Adjusted with one-off income of Rs3,457m, PAT missed our estimates by 28%, mainly due to ensuing effect of lower headline margins.
We assign PE 18x on FY21E earnings and derive new TP of Rs2,997, improved by 17% over our previous TP of Rs2,558. We upgrade our recommendation to 'Accumulate.
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