Emkay Global Financial recommended hold rating on Dr. Reddy's with a target price of Rs 4550 in its research report dated July 29, 2020.
Emkay Global Financial's report on Dr. Reddy's
Strong growth in the API business (+88% yoy) and a sharp expansion in gross margins helped DRRD beat EBITDA estimates by 25%. Margins rose 400bps qoq to 25.2%, higher than the estimates of ~20-21%. Gross margin expansion of over 450bps qoq was broad-based with generics and API segments recording over 500bps expansion. Besides a weak base, currency tailwinds and better product mix, we believe that high spot sales also aided gross margins. As expected, India/US/Russia declined qoq due to Covid-19--related lockdowns, though ROW/EU surprised positively. DRRD’s reported numbers include 20-day integration of Wockhardt’s domestic business.
Outlook
We upgrade FY21/22/23E EPS by 15%/5%/4% and revise the TP to Rs4550, valuing the stock at 25xJune’22E EPS (vs. 24xMar’22E EPS earlier) to account for strong margin expansion. We retain Hold on rich valuations and EW in EAP.
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