Hold Dr Reddys; target of Rs 2660: Edelweiss

Edelweiss' research report on Dr Reddys
FY17 was a forgettable year for Dr. Reddy’s Laboratories (DRRD) as increased competition in key products, channel consolidation and delay in approval for new products in US (45% of business) impacted top line and bottom line by 9% and 40%, respectively. Weak business performance led to operating cash flow plummeting 48%. The company acquired 8 ANDAs from Teva for USD350mn and also bought back its shares worth INR15bn from the secondary market to boost investor sentiments in these uncertain times, which led to net debt burgeoning by INR37bn. R&D expenses increased to 14.0% of sales compared to 11.5% in FY16 and RoCE tumbled to 8.1% compared to 18.8% last year. Going forward, management’s key priorities are: (1) launch of complex pipeline like Copaxone & Nuvaring in US; and (2) remediate issues raised in the USFDA warning letter. Maintain ‘HOLD’ with TP of INR2,660.

Outlook

In our opinion, there are several downside risks to DRRD’s earnings. At CMP, the stock trades at 18.5x FY19E EPS. We maintain ‘HOLD/SP’ with TP of INR2,660

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