Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities
Dr. Reddy's Q1 EBITDA/PAT missed our estimates by 16%/12% on account of muted trends in the US, PSAI and increased SG&A spends. We expect US business momentum to improve in the coming quarters, led by ramp-up in new launches (gVascepa, gKuvan). While the investments in R&D (biosimilars) and marketing spends on brands (India, EMs) have increased, they are likely to improve the longer-term growth visibility for key markets. The company is confident of achieving its long-term goal of 25% EBITDA margin (19% in Q1), led by ramp-up in the US, scale-up in API and operational efficiency. We cut our estimates by 9%/4% for FY22/23e to factor in the Q1 miss and lower gross margin. Our revised TP is INR5,210/sh. ADD.
Revenue in line, margin disappoints: Revenue, at INR49bn, grew by 11% YoY as strong growth in India (+69% YoY, low base, increase in sale of COVID drugs, price increase), EU (+12% YoY) and other EMs (+27% YoY) offset subdued performance in the US (-1% QoQ) and PSAI business (-12% YoY). EBITDA margin declined to ~19% (-612bps YoY, -342bps QoQ) on the back of lower gross margin (-380bps YoY, -142bps QoQ, price erosion, inventory provision, product mix) and increase in SG&A cost (+205bps YoY, +77bps QoQ, marketing spends, Wockhardt integration).
Muted performance in US and PSAI; growth visibility remains strong: The US revenue declined to USD235mn (-1% QoQ) as volume growth and new launches were offset by increased price erosion. We expect the ramp-up in new launches such as gVascepa and gKuvan to drive higher revenues in the coming quarters. The medium-term growth visibility remains strong with key products in the pipeline such as gCopaxone and gNuvaring awaiting approval. The PSAI business gross margin declined to 21.6% (-1,180bps YoY, - 1,010bps QoQ) due to lower prices/volumes and inventory stocking in the previous quarters. The management is confident of long-term growth prospects, given the order book visibility.
Key call highlights: (a) gVascepa: launched at the end of quarter, expects further ramp-up in the coming quarters; (b) India: locally manufactured Sputnik-V roll-out from Sept-Nov; investing in nutrition / OTC brands; (c) Filed 30 DMFs (two in the US) and 70 formulations globally in the quarter; d) WC rose by INR12bn on account of increase in inventory and receivables.
Maintain ADD, risks: We reduce our estimates by 9%/4% for FY22/23 to factor in the Q1 miss and lower gross margin and revise our TP to INR5,210. Our target price is based on SOTP of 23x FY23e EPS, NPV of INR384/sh for gRevlimid and INR89/sh for Sputnik-V. Key risks: delay in key approvals, higher price erosion, and lower-than-expected growth in EMs.
Shares of DR.REDDY'S LABORATORIES LTD. was last trading in BSE at Rs. 4730.2 as compared to the previous close of Rs. 4844.35. The total number of shares traded during the day was 179933 in over 26940 trades.
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