Sell Dr. Reddy’s Labs; target of Rs 2275: HDFC Securities

HDFC Securities research report on Dr. Reddy’s Labs

Dr. Reddy’s Labs (DRRD) posted weak numbers, with the top-line growing only 3% YoY in 1QFY18. This was led by a 3% decline in the US business and a 10% decline in domestic revenues.  The EBITDA margin came in at 9.2%, sinking 700bps QoQ, with the gross margin plummeting to 51.5% during the quarter.  Incremental competition in the US continues to erode profits in the absence of new lucrative product launches. The impact of GST on the domestic business also contributed to the margin decline. PAT was Rs 591mn, down 53% YoY despite the low base.

Outlook

At CMP, the stock is trading  at 34x FY18E/21.2x FY19E, expensive when compared  to  peers.  We have further cut our FY18/19/20 estimates owing to the continuous and severe erosion in the base business. Till the time we have visibility on the resolution of the warning letter, which would spark a recovery in the US business, the outlook is bleak. Downgrade to SELL with a TP of Rs 2,275 (17x Jun19E).