Buy This Pharma Stock For 20% Gains, “All Is Well” Says This Brokerage

Indian markets continue to be volatile, through the course of the week, even as the US Federal Reserve did not indicate any timeline for tapering. With the markets at near peaks, it is better to also diversify your portfolio into defensive stocks like pharma. One such stock could be Dr Reddy's Labs, which has fallen significantly this week after the company declared its quarterly results. Broking firm, Emkay Global has a "buy" call on the stock of Dr Reddy's Lab, with an upside target that is almost 120% higher from the current levels.

Buy, the stock for an upside target of Rs 5,755

Emkay Global has a buy on the stock with a price target of Rs 5,755, which is almost 20% higher than the current market price of Rs 4,733.

According to Emkay Global, the management has guided for a meaningful profitability improvement from the second quarter of FY 2021-22 and also reiterated its long-term EBITDA guidance of 25%. "While higher SG&A expenses are expected to continue, increased investment in the branded markets will be more than offset by higher growth," the brokerage has said.

The management of the company has also indicated that profitability will improve meaningfully from second quarter of FY 2021-22, driven by the ramp-up of recently launched products, higher growth in the branded markets and an increase in active pharmaceutical ingredients scale. According to Emkay Global, the management also reiterated its long-term EBITDA margin guidance of 25%.

Dr Reddy's: Long term value of the stock remains attractive

Emkay Global says that it continues to remain positive on the company as it believes Dr Reddy's Labs has good US pipeline visibility. "In addition, the company's steadfast focus on the India business continues and should drive 220 basis points growth outperformance relative to the India pharma market, along with margin expansion, as the sales force remains stable. The company's strategy of leveraging the US portfolio for Europe and ROW is expected to drive growth and margin accretion in the medium term," the brokerage has said.

The stock is trading at an attractive valuation of 24 times 1-year forward P/E vs. the historical average of 26 times, the brokerage has noted. "Our target price of Rs 5,755 represents a P/E of 21 times on FY24E core EPS (Rs246) and we have a buy on the stock," the brokerage says. The stock of Dr Reddy's was last seen trading at Rs 4744 on the BSE. The stock had plunged 10% earlier this week post the quarterly numbers that were declared, which were below street estimates. In fact, as we write the stock is also lower than the current market price mentioned in the brokerage report.

Disclaimer

The stock recommendation mentioned above is from the report of Emkay Global. However, neither the author, nor Greynium Information Technologies Pvt Ltd would be responsible for the losses incurred based on a decision from the article. Investors are advised caution given that the Indian stock markets have rallied significantly from the lows of last year. Only investors who have the appetite to take risk should buy.