Buy Dr. Reddy’s Laboratories; target of Rs 5963: Sharekhan

Sharekhan's research report on Dr. Reddy’s Laboratories

Dr. Reddy’s recently announced its foray into the trade generics business in India, which is expected to drive volume growth and overall revenue growth marginally higher over FY2023-FY2025E. Although the recent quarterly market share data for key existing products such as gRevlimid, gVascepa and gVasostrict point to a marginally weak outlook for the North American market, we believe gRevlimid will continue to be a key product until January 2026, as guided by management. This coupled with the acquired prescription portfolio of 45 products from Mayne Pharma should continue to drive North America’s revenue at a ~8.2% CAGR over FY2023-FY2025E. The company’s focus on 25-30 limited competition product launches, including for injectables for the North America market in FY24E and receipt of CAD9 million (Rs. 57 crore) of litigation settlement income from Janssen Group in Q1FY2024E should help it drive its earnings growth upwards, marginally though, by ~10.2% CAGR from ~9.1% CAGR envisaged earlier over FY2023-FY2025E.

Outlook

Dr. Reddy’s Laboratories Ltd.’s (Dr. Reddy’s) stock is trading at an attractive valuation of ~18.1x/~17.1x its revised FY2024E/FY2025E EPS estimates, while offering strong ROE (~17.5%) and balance sheet proposition for the underlying business. Thus, we revise upwards the PT to Rs. 5,963 and upgrade the rating to BUY from Hold.