Buy Dr Reddys Laboratories; target of Rs 3500: Edelweiss

Edelweiss' research report on Dr Reddys Laboratories

Dr Reddy’s Laboratories (DRRD) has been under dark clouds - delays in approvals, regulatory overhangs and intensifying competition, culminating in a sharp 46% dip in FY17 earnings. We believe these clouds should now be lifting, following: a) A big & rising Complex Generics’ pipeline in the US (20% 2-year revenue CAGR): we detail here major and hitherto unanalysed opportunities; b) 3x jump in Biosimilars’ revenues (USD150mn) over FY18-20E: we spent a day at the lab; and c) Resultant 53% EPS CAGR over FY18-20: with upside potential. We upgrade DRRD to ‘BUY’. We also raise our TP to INR3,500 (20x FY20E EPS), 51% upside.

Outlook

A promising complex generics’ pipeline, strong earnings revival with 53% CAGR over FY18-20E and compelling valuations at 13x FY20E EPS/US business valuation at 1x sales render DRRD a prime rerating candidate. Hence, we upgrade to ‘BUY/SP’ from ‘HOLD/SP’ with revised TP of INR3,500 (INR2,520 earlier).