Hold Dr Reddy’s Laboratories; target of Rs 2870: ICICI Direct

ICICI Direct's research report on Dr Reddy’s Laboratories

Q3FY19 results were higher than I-direct estimates on profitability front while revenues were lower mainly due to lower US sales. Revenues were muted at Rs 3864.6 crore (I-direct estimate: Rs 4015 crore). Growth of 10% in domestic market to Rs 674.1 crore (I-direct estimate: Rs 674 crore) and 25.0% YoY growth in Russia & CIS to Rs 550 crore (I-direct estimate: Rs 550 crore) were largely offset by 7.7% fall in US sales to Rs 1483.2 crore (I-direct estimate: Rs 1600 crore) EBITDA margins remained at 20.8% YoY but came in 212 bps higher than I-direct estimates mainly due to lower R&D spend. EBITDA grew 1.5% YoY to Rs 804.6 crore Net profit grew 65.3% YoY to Rs 500.3 crore (I-direct estimate: Rs 417 crore). Delta vis-à-vis EBITDA was due to Rs 42.3 crore income from sale of API unit and lower tax rate (17.1% vs 46.2% in Q3FY18).

Outlook

Key growth drivers in the near term would be key launches in the US and clearance of Duvvada and Srikakulam API plants besides strong growth Global Generics (ex US, Europe). However, resent sharp run up in the stock has largely factored in the near term upside in the stock. We arrive at our new target price of Rs 2870 based on 18x FY21E EPS of ~Rs 159.5.

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