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Upgrade to ADD on Dr. Reddy's Labs - Improved visibility in the US business - HDFC Securities

Posted On: 2020-09-15 05:19:08

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities

We upgrade Dr Reddy's to ADD (from REDUCE) and increase TP to Rs4,670. The growth visibility of the US business has improved with the strong momentum of new launches (12 launches in YTD FY21) including niche ones such as gCiprodex (first to market). The dependence of gCopaxone and gNuvaring on FY22 earnings reduces with the new product flow and favourable ruling of gVascepa (now in our estimates). Structural tailwinds in the API business (15% of revenues) will lead to double digit growth over the next few years. We increase our EPS forecast by 7-8% for FY21/22 to factor gVascepa launch and our target multiple to 22x (from 20x earlier) to factor improved visibility in the US and API business.

Rich pipeline in the US will drive higher growth: Limited competition products such as gCiprodex, gVoltaren OTC (launched), gKuvan (settled for Oct-20 launch), gVascepa (launch likely towards end FY21) adds good growth visibility to the US revenues. We expect these assets, combined with gNuvaring and gCopaxone (uncertain timelines), to generate incremental revenues of ~USD300mn over FY20-FY22 with higher profitability. ~60 % of pending pipeline (99 ANDA, 54 P IVs and 28 FTF) consists of complex products which will drive longer term growth.

Wockhardt acquisition - productivity gains to drive value accretion: The integration of the acquired portfolio (Rs4-4.2bn, Q1FY21 annualised) is on track with July/Aug monthly sales tracking ahead of expectations. With improved serviceability of products, increased sales/promotion efforts and price hikes, we expect this business to scale up to ~Rs6bn (FY19 levels) in ~18-24 months. 5 key brands account for ~60% of the portfolio with potential to gain market share. We forecast productivity gains to drive margin expansion and add ~2% to our FY22 EPS.

Improved outlook for API business: While the Q1 revenues (Rs8.5bn, +88% YoY) witnessed stocking and spillover benefits (~10%), we expect the underlying demand trends to remain strong driven by structural tailwinds (increased enquiries from customers). The business is poised to grow in double digit over the next two years.

Upgrade to ADD, risks: Our target price of Rs4,670 is based on FY22 EPS. We increase our target multiple to 22x FY22 EPS (from 20x earlier) to factor increased visibility of niche launches in the US and improved outlook for API business. Key risks: delay in key approvals; higher price erosion in the US; adverse outcome on drug price fixing lawsuit in US; and delay in turnaround of Wockhardt portfolio.

Shares of DR.REDDY'S LABORATORIES LTD. was last trading in BSE at Rs.4443.2 as compared to the previous close of Rs. 4364.65. The total number of shares traded during the day was 73961 in over 8031 trades.

The stock hit an intraday high of Rs. 4546.8 and intraday low of 4380.8. The net turnover during the day was Rs. 331962887.

Source: Equity Bulls

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