Dr. Reddy's Laboratories Ltd. share price target

Dr. Reddy's Lab. (DRRD) reported mixed performance in Q1FY20, with revenue at Rs3,843Cr (vs. estimate of Rs3,931Cr), below expectation on account of softness in PSAI segment (down 33%/16% on QoQ/YoY) and Proprietary product (due to divested assets).

Having overcome regulatory issues at key formulations plants, the co is rapidly ramping up US revenues with key oncology and injectables launches. Additionally, biosimilar and complex generics launches in EM and reg markets, renewed focus on India, and traction gained in EU & China will support rev CAGR of ~15% over FY19-21E. Mr Erez Israeli has now stepped up as the CEO, following a successful stint as COO with ~400bps improvement in EBITDA margin during FY19. Continued cost optimization, divestment of non-core assets, and healthy revenue growth across key geographies along with a better mix will drive ~19% PAT CAGR over FY19-21E. Considering the improving balance sheet, healthy FCF (Rs 15bn+ annually), and largely clear regulatory status, the valuations remain lucrative at 20.7/17.8x FY20/21E P/E. We maintain BUY on DRRD following a miss on our estimates driven by temporary issues. Our TP is unchanged at Rs 3,360 (20x FY21E EPS + Rs 380/sh for niche products). A visible ramp up in the US and further cost efficiencies enable us to stay confident.

Dr. Reddys Lab (DRL) revenue, increased by 3.3% YoY to Rs 38.4 bn, is lower than our estimates of Rs 41.2 bn; primarily due to good growth in Domestic, Europe and Emerging market business.

US going through rough patch but promising launches ahead Despite a challenging time, US remains a key driver for the company, contributing ~42% to total revenues. The company has a strong pending pipeline comprising 104 (58 Para IV filings, 34 FTFs) and three NDAs under 505 (b)(2) route. We expect US sales to grow at a CAGR of 11% to | 7395...

DRRD sales were in line with our estimates while adj. EBITDA and adj. PAT Change in Estimates | Target | Reco missed estimates due to significantly lower PSAI sales, one-off inventory adjustment and price erosion in key generics. Management however...

Q1 reported 18% EBITDA miss impacted by one-offs in gross margins (PSAI & inventory write-offs in US totaling US$20mn, in my view), while adj. EBITDA was in line.

Dr. Reddy's Lab. (DRRD) demonstrated mixed performance in Q4FY19, with revenue stood at Rs 4,017cr (vs. estimate of Rs 3,840cr), beat was on the back of one-time revenue realized from the sale of derma brands of Rs180cr.

Dr. Reddys Lab's (DRL) revenue, increased by 13.6% YoY to Rs40.2 bn, ishigher than our estimates of Rs 38.9bn; primarily due to good growth inEurope and Emerging market business.

US going through rough patch but promising launches ahead Despite challenging years, the US remains a key driver for the company, contributing ~42% to total revenues. The company has strong pending pipeline comprises 110 (60 Para IV filings and 43 FTFs) including three NDAs under 505 (b)(2) route. We expect US sales to grow at a CAGR of 10% to...

Coming out of a regulatory debacle and two years of dismal operational performance, DRRD ended the year with 8/40/77% revenue/EBITDA/PAT growth respectively. With a sharp focus on cost optimization, weeding out of non-profitable businesses, largely clean regulatory slate, improving balance sheet and a major US revival, we remain constructive on DRRD. We believe it will be the best performing pharma stock in FY20E. To our surprise, DRRD is also catching up fast on biosimilar filings for developed markets (bNeulasta expected in 1HFY20). China ramp up remains another interesting opportunity. Overall, we expect 16/22/18% revenue/EBITDA/PAT CAGR over FY19-21E. At 22/19x FY20/21E EPS, the valuations remain attractive as compared to peers. We maintain BUY on DRRD despite a miss on our estimates (on account of certain one-offs). Our TP is revised to Rs 3,320/sh (20x FY21E EPS + Rs 380/sh for niche products). The focus on cost optimization and a revival in the US biz are key to our thesis.