Dr Reddy’s Laboratories rating – Add: A stable showing by the company

Management expects to launch generic Vascepa in next two months with smooth API supplies. DRL has launched Sputnik V vaccine in India which would provide significant upside to earnings in near term. Retain Add.

Dr. Reddy’s Laboratories’ (DRL’s) reported Q4FY21 performance broadly in line with our estimates. Revenue grew 6.7% y-o-y to Rs 47.3 bn (I-Sec: Rs 48.5 bn) driven by India, EU and ROW markets. Ebitda margin at 21.5% was lower 130bps q-o-q due to lower sales. Adjusted PAT declined 13.1% to Rs 5.5 bn due to higher tax rate. US sales improved 1.7% q-o-q to $239 mn led by new launches. We expect the growth momentum in branded generics business (India & EMs) and new launches in US to continue in coming quarters supporting growth.

Management expects to launch generic Vascepa in next two months with smooth API supplies. DRL has launched Sputnik V vaccine in India which would provide significant upside to earnings in near term. Retain Add.

India remains strong, US stable: India sales grew 23.5% y-o-y with consolidation of Wockhardt products and recovery in industry growth. Adjusting for Wockhardt integration, growth stood at ~8% during the quarter and ~2% for the year. US revenue improved 1.7% q-o-q to $239 mn led by new product launches. We believe recent launch of Ciprodex and expectation of Vascepa launch in near term would help in improving revenue run-rate. PSAI business segment reported growth of 10.0% y-o-y led by better volumes. EU generics reported strong 14.8% growth. EM revenues grew 10.0% led by CIS and ROW.

Increase in cost base continued: Gross margin was sequentially stable at 53.7%, in line with estimate and it has improved by 220bps y-o-y led by improved business and product mix. However, Ebitda margin dropped 130bps q-o-q to 21.5% due to lower sales and higher R&D spend. S,G&A expenses sequentially grew ~14% in Q3FY21 and this high base has sustained in Q4FY21 led by incremental expenses post Wockhardt acquisition and higher freight charges. Gross margin has been volatile on quarterly basis but we expect it to remain at ~54-56%.

Outlook: Overall, we expect revenues and earnings to grow at 14.3% and 35.4% CAGRs, respectively, over FY21-FY23e with 610bps Ebitda margin expansion. Our estimates include upside from Revlimid in H2FY23e. The focus of the management continues to be to improve Ebitda margin to ~25% and RoCE through better capital allocation. The launch of Sputnik V in India can provide significant upside to our estimates.

Valuations and risks: We marginally raise earnings estimates by 1-3% for FY22e-FY23e to factor in higher other income. We value Sputnik V opportunity at Rs 144/share on NPV basis for next three years. Target price is revised to Rs 5,848/ share (earlier: Rs 5,528) based on 25xFY23e EPS, an additional Rs 330/share for Revlimid and NPV of Rs 144 for Sputnik V vaccine. Key downside risks: delay in launching new products, regulatory hurdles and currency volatility.