Sell Dr Reddy's; target of Rs 2650: Axis Direct

Weak Q1; Growth, margin pressure to continue Dr Reddy’s (DRRD) Q1PAT declined 80% YoY due to negative operating leverage, as sales/ EBITDA/PAT declined by 14%/61%/80% YoY. This wasled by weak sales in higher-margin business (US: down 19% YoY in USD terms and EM: down 53% YoY)&higher remediation costs. While we expect costs to moderate (as remediation work is largely done) and Russia sales to rebound, wehighlight growth and margin challenges inits key market US (competition in key products, few approvals given USFDA issues) andVenezuela (stopped sales). We cut our FY17/18F EPS by 33%/17% and TP by 17% to Rs 2,650 (19x FY18E EPS). Despite strong R&D, we downgrade to SELL rating given increasing growth and margin challenges. Our TP on bull case scenario (USFDA resolution in FY17) at 22x FY18 stands at Rs 3,068.