Hold Dr. Reddys Laboratories; target of Rs 2720: Edelweiss

Dr. Reddys’ (DRRD) earnings continued to be impacted by loss of revenue due to: (i) competition in key US products (gValcyte, gVidaza); and (ii) pause in Venezuela business. Q2FY17 revenue, EBITDA and PAT declined 10%, 47% and 59% YoY, respectively. There are structural headwinds for profit revival and unless there are new niche launches that can restore DRRD’s US portfolio, earnings will remain under pressure. We believe upcoming US launches like gGleevec are already priced in and unless the company trumps in litigations for Aloxi 505b2 or gNuvaring, upside is limited. Maintain ‘HOLD’ with TP of INR 2,720 (18x FY18E EPS).

While we believe DRRD’s complex generic pipeline could surprise positively, several issues pose downside risks to our and Street’s FY18 earnings estimates. At CMP, the stock trades at 21x FY18E EPS. We maintain ‘HOLD/SP’.