Buy Dr Reddy's Laboratories; target of Rs 3450: Dolat Capital

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26 Aug, 2025 12:21

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

As per our expectations, earnings started picking up from Q2FY18 onwards. Revenues came ahead of our expectations, as US sales were 12% QoQ higher at USD 252mn (vs USD 224mn QoQ) with gRenvela benefits. Higher SG&A expenses and one-offs adjustment in SG&A, forex and tax line impacted bottom line.  The status on key approvals have received more clarity with some extension of timeline than expected earlier. We believe that despite TAD on Nuvaring been shifted to July’18, we might expect some early approvals possibility as the patent expires in early Apr’18. Company announced a minor CRL on gSuboxone which is expected to be responded soon (3-4 weeks) and the approval closer to 2HFY19.The management also added approval is easier however, key is the litigation. gAloxi is also another opportunity around the corner (post Teva launch). gCopaxone has received a major CRL which will take nearly 4-5 months to responded and approval mostly shifts to end of FY19E. The management has guided for improvement in the margins from these levels and indicated cost integration to accrue further benefits. In terms of compliance towards the several facilities, Company has responded to USFDA queries on Srikakulam facility post the concall with the agency. Duvadda to see re-inpsection in either 4QFY18/1QFY19.  Overall all we feel FY19E earnings to be stronger and should be a year for DRL where all compliance issues at plants being sorted. FY18-20E would be strong growth years for the company based on key assets approvals and more niche approvals coming by post clearance of plants.  Q3FY18 Financial Highlights - Sales stood at ` 38.1bn, growing 3% YoY. The fall of 2% in US generics and PSAI was supported by Propriety products (up 254% YoY). EBITDA margins contracted 265bps YoY to 20.9%. PAT stood at ` 3.3bn, declining 29% YoY.

Outlook

DRL, in our view, continues to be one of the strongest entities having built up leads in the injectables, biosimilars and complex oral solids. Given the core strengths of the business in R&D, we believe the current under performance offers an opportunity to accumulate over time. We have a BUY rating on the stock with a 20x FY20E EPS rollover target price of ` 3,450. We have revised our earning to from earlier expectations of full year impact of gNuvaring and gSuboxone to half year in FY19E. At the current market price of ` 2,504, the stock trades at 18x FY19E EPS of ` 137 and 15x FY20E EPS of ` 170.

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