Dr. Reddy’s (DRRD) revenue/PAT missed consensus estimates by 3%/5%. It was a normal quarter with no major Covid contribution or one-offs. While US was in line, India and PSAI were lower than expected. Ebitda margin remained in line at 22.6%.
We believe the road ahead may not be smooth given: (i) persistent price erosion in the US; (ii) slower offtake in complex generic pipeline; (iii) uncertainty around Duvvada inspection outcome; (iv) tepid India growth; and (v) fading Sputnik opportunity. We revise our FY23/24 EPS estimates by ~15% each to factor in the challenges. We continue to maintain Hold with revised SoTP-based TP of Rs 4,675 (25x June 2023 EPS) (earlier Rs 5,105).
A normalised quarter after one-offs in Q2; margin in line: Revenue at Rs 52.2 bn grew 8% y/y, but fell 8% q/q on high Covid base and one-off gains. US ($248 mn) fell 2% q/q and was in line driven by gVascepa, gCiprodex and gSuboxone market share gains and new product launches offset by heavy price erosion in the US and gRevlimid in Canada. Domestic growth looked tepid, with lower than expected sales from Covid-related products. Gross margin at 53.8% was steady despite input cost increase driven by better product mix. DRRD turned to net cash of Rs 9 bn as against Rs 2.1 bn net debt as of 30 September 2021.
Testing times ahead with a few catalysts: The high US contribution that is exposed to price pressure and regulatory risks make the road ahead difficult for DRRD. Further, lucrative launches are limited until gRevlimid in H2FY23 and uncertainty persists on launch timelines for complex generic products. Fresenius’ potential US pegfilgrastim launch is likely to gain traction only in FY23. The Sputnik opportunity is shrinking, and its ramp-up is unlikely until clarity emerges on booster doses or Sputnik Light. While the company is confident of growing its India business, we await evidence of investments fructifying.
Outlook: Near-term uncertainties – Pipeline uncertainty, pricing pressure and regulatory risks pose a risk to our EPS estimates. We reiterate HOLD/SN.
Edelweiss
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