Reduce Dr. Reddy’s Labs; target of Rs 3940: HDFC Securities

HDFC Securities' research report on Dr. Reddy’s Labs

Dr. Reddys' Q1 results beat expectations led by robust growth in PSAI and Europe business along with strong gross margin (56%, +430bps YoY). The growth outlook for PSAI business has improved as customers seek global diversification of supplies, stock higher inventories and look for reliable partners. On the gross margin front, while large part of improvement is likely to sustain, we factor some normalisation (owing to product mix variations and currency) over FY21/22. On the flip side, approval timelines for key products (gNuvaring, gCopaxone) continue to remain uncertain. The company’s tax rate has inched up from 22% to 25-27% (discontinuation of R&D deduction benefits and tax holiday on one of the plant).

Outlook

We increase our EPS estimates for FY21/22 by 11%/4% to factor the above. The stock trades at 27x/22x FY21/22 EPS which leaves limited room for execution miss. We maintain Reduce rating with a revised TP of Rs3,940 based on 20x FY22 EPS.

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