Buy This Pharma Stock As India Business Could See Double Digit Growth

Sharekhan has suggested buying the stock of Dr Reddy's for good returns going forward. The firm believes that the stock can achieve a price target of Rs 5550.

Strong product pipeline provides long term visibility for US

Sharekhan believes that the US revenue growth for 9MFY2022 has been slower at 3.6% y-o-y versus 9% in FY2021, largely due to price erosion, which could sustain in the near term at least.

"Further, the product approval momentum has slowed down with only 17 approvals received in FY2022 till date versus 34 in FY2021. Product pipeline is strong with 91 ANDA pending approvals and includes few Para IV and first-to-file products. It provides growth visibility over the medium to long term, while in the near term, price erosion and slower product approvals could slow down the momentum," the brokerage has said.

Adverse currency headwinds to impact Dr Reddy's Russia business

Dr Reddy's revenue from Russia accounts for 10% of overall sales. According to Sharekhan, a major chunk of sales from Russia region is from the OTC segment.

"While Russia sales in local currency have normalised, but depreciating Ruble against INR 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 brokerage has said.

India business to see strong double digit growth

The India sales have been consistently outperforming IPM growth with 15.5% y-o-y growth in FY2021 and 29% growth in 9MFY2022.

"Going ahead, management expects the double-digit growth trajectory to sustain. In India, Dr Reddy's 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/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 brokerage has said.

Buy with a price target of Rs 5550

Geopolitical stress is likely to overweigh on Dr Reddy's Russia's performance, while India business is expected to sustain double-digit growth trajectory.

"Albeit, Q4FY2022 performance is likely to be weak, given the elevated cost pressures leading to expected margin contraction. At the current market price, the stock is trading at a P/E multiple of 27.1x/20.2x/17.7x its FY2022E/ FY2023E/FY2024E EPS. With the stock price correcting 12% in the past five months, valuations are now turning reasonable. We retain our Buy recommendation with a revised price target of Rs. 5,550," the brokerage has said.

Key risks

According to Sharekhan, the adverse development on the regulatory front, including outcome of inspections, can impact earnings prospects; and currency fluctuation remains a risk.