Buy Dr. Reddy's Laboratories; target of Rs 4200: Dolat Capital

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

DRL reported revenue decline of 10% to Rs 35.9 bn YoY. EBITDA declined by 44% to Rs 6.4 bn with margins of 17.6% Vs 28.3% YoY. PAT reported a drop of 59% to Rs 2.95 bn. The result missed our estimates. However, sequentially DRL's performance has improved with sales increased by 11% and margins expansion of 532 bps. We maintain our positive stance on DRL, and considering the key opportunities lined up from 2HFY17 onwards further supports our earnings.

DRL, in our view, continues to be one of the strongest entities having built up leads in the injectibles, biosimilars, transdermals and complex oral solids. Given the core strengths of the business in R&D and in monetizing the opportunities well, we believe the current under performance offers an opportunity to accumulate over time. Our base case earnings growth for FY16-18E at just about double digits yields 17xFY18 multiples which we believe is worth the risk. We have a BUY rating on the stock with a target price of Rs 4,200 (24x FY18E EPS). At the current market price of Rs 3200, the stock trades at 24× FY17E EPS of Rs 134 and 18x FY18E EPS of Rs 176, valuation remains attractive.