Hold Dr Reddy's Lab; target of Rs 2970: Centrum

The company’s global generics business (83% of revenues) declined by 9% YoY to Rs 30.64bn from Rs 33.56bn. Sales in North America (45% of revenues) decreased 15%YoY due to pricing pressure and increased competition in the injectable business. The generics business from emerging markets (16% of revenues) declined 7% YoY due to the lack of revenues from Venezuela. DRL’s domestic business (16% of revenues) grew by 2% YoY and was impacted by price control and impact of demonetisation.

We maintain our Hold rating on Dr. Reddy’s Labs (DRL) and revise our TP to Rs 2,970 (earlier Rs 3,480) based on 21x March’18E EPS of Rs 141.4. DRL’s Q3FY17 results were higher than our expectations on marginal growth in the domestic market. The drugmaker reported a 6% YoY drop in revenues, 150bps decline in margin to 23.2% and a 16% decline in net profit. DRL is facing pricing pressure in the US market and has no major launches in the US for FY18. Key risks to our assumptions include regulatory approval for its manufacturing facilities and currency risks in Russia and other emerging markets.