Dr Reddy’s Laboratories share price has plunged 11% so far this year and despite the fact that geopolitical stress is expected to weigh on the company’s Russia performance in the near term, Sharekhan is bullish on the stock. The domestic brokerage firm expects Dr Reddy’s shares to rally up to 27% on the back of strong product pipeline, double-digit growth. “Higher costs and elevated competitive pressures in the US are near-term challenges for Dr Reddy’s, but strong opportunities in India business and likely gradual pick-up in the PSAI segment are key positives,” said analysts at Sharekhan.
Strong product pipeline provides long term visibility for US
Dr Reddy’s US revenue growth for 9MFY22 has been slower at 3.6% on-year versus 9% in FY21, largely due to price erosion, which could sustain in the near term at least. Further, the product approval momentum has also slowed down with only 17 approvals received in the last financial year versus 34 in FY21. Company’s product pipeline is strong with 91 ANDA pending approvals which provides growth visibility over the medium to long term. However, in the near term, price erosion and slower product approvals could slow down the momentum, according to analysts.
Currency headwinds to impact Russia business
The ongoing Russia-Ukraine war is a major concern for Dr Reddy’s as its revenue from Russia accounts for around 10% of overall sales. A major chunk of sales from the Russia region is from the OTC segment. While Russia sales in local currency have normalised, the depreciating Ruble against the Indian Rupee is likely to impact the region’s performance. “As the geopolitical situation is dynamic, we await further clarity to gauge the medium to long-term effect on the company’s performance. That said, near-term performance is likely to be affected by adverse currency movements,” the Sharekhan analysts said.
India business to sustain double-digit growth trajectory
Dr Reddy has been doing well in India with sales consistently outperforming IPM growth with 15.5% on-year growth in FY21 and 29% growth in 9MFY22. Going ahead, the management expects the double-digit growth trajectory to sustain. In India, the pharma company is present across chronics and acute therapy and has outperformed the industry’s growth. On MAT basis in therapy areas of gastro, cardiac, derma, anti-infective and anti-diabetes, the pain and respiratory segments have underperformed, which are now expected to pick up. “This coupled with focus to expand the geographical reach is expected to drive performance of the India business,” the analysts noted.
Dr Reddy’s stock rating: Buy
Target price: Rs 5,550; Upside 27%
Sharekhan retained Buy call on the stock with a revised target price of Rs 5,550. “Dr Reddy’s faces headwinds in the form of continued pricing pressures in the US business. This coupled with delayed product approvals could slow down US sales growth in the near term, while a strong product pipeline provides long-term visibility,” the brokerage said. However, Dr Reddy’s Q4FY2022 performance is expected to be weak, given the elevated cost pressures leading to expected margin contraction. Adverse development on the regulatory front, including outcome of inspections, can impact earnings prospects. Currency fluctuation risk remains another major concern for the pharma major.
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