Motilal Oswal Suggests Buy This Pharma Stock, Revenue Rose To Rs 52.2b, Announced 600% Dividend

Stock Overview

The CMP of Dr Reddy's Laboratories Ltd closed on Friday, 20 May 2022 is Rs 4,228 after gaining 7.60% in a day. As mentioned above, with the target price of Rs 4,800 set by the brokerage, investors can expect potential 14% gains in 12 months. In the last 1-year, the share price of the stocks witness a downside, however, in the last 1 week, the share price managed to stable and grow. On 04th March 2022, the stock touched the 52 week low levels of Rs 3854, whereas,  it touched the 52 week high of Rs 5,614.60 on 7 July 2021.

About the Company - Dr Reddy's Laboratories Ltd

Dr Reddy's Laboratories Ltd is a leading India-based pharmaceutical company with a market cap of Rs 70,716 crore. The company offers a portfolio of products and services, including Active Pharmaceutical Ingredients (APIs), generics, Custom Pharmaceutical Services (CPS), biosimilars and differentiated formulations.

Q4FY22 Result

Dr Reddy's Lab's 4QFY22 revenue rose 10.4% YoY to INR52.2b (v/s est. of INR55b). Growth was led by healthy performances across geographies and segments. Emerging markets (EM) sales grew 15.7% YoY to INR10b (20% of sales), led by 27% YoY growth in Russia (INR5.2b) and 20% YoY growth in CIS (INR2.3b). The ROW market declined 1% YoY to INR2.9b in 4QFY22.

The Domestic Formulation (DF) sales rose 15% YoY to INR9.7b (18% of sales), North America (NAM) sales grew 14% YoY to INR20b (~USD263m; 38% of sales), and Europe sales rose 12% YoY to INR4.4b. (8.5% of sales), while the Pharmaceutical Services and Active Ingredients (PSAI) sales declined 5% YoY to INR7.5b (14.4% of sales) in 4QFY22.  Gross margin (GM) contracted 280bp YoY to 50.9% on product mix change.  EBITDA margin contracted at a lower rate of 120bp YoY to 20.2% (our est: 23.1%) due to lower R&D spends (down 40bp as a % of sales) and lower employee costs (down 120bp YoY as a % of sales) in 4QFY22. 

EBITDA grew slightly by ~4% YoY to INR10.5b (v/s est. of INR12.7b). DRRD incurred impairment charges of: a) INR 4.3b related to lower market potential for PPC-06 and b) INR3b related to Shreveport plant assets. Higher tax expense resulted in a 34% YoY decline in Adj. PAT to INR3.1b (our est: INR7.7b) For FY22, revenue/EBITDA/Adj. PAT grew 12%/0.5%/8.4% to INR212b/ INR44.9b/INR26b, respectively.

Motilal Oswal's comments on the Company's Performance

The brokerage has said, "Dr Reddy's Labs (DRRD)'s 4QFY22 result was below our expectation due to increased price erosion in the US/EU segments, lower export benefits and higher inventory provisions. We cut our EPS estimates by 6%/8% for FY23/FY24 to factor in: a) divestment of brands in Russia/India, b) lower volume off-take and adverse price variance in key markets of the US/ROW and c) increased opex related to transportation."

It added, "We value Dr Reddy's Lab on an SOTP basis (at 24x 12M forward base business EPS of INR192 and add an NPV of INR210 for Revlimid) to arrive at our TP of INR4,800. We remain positive on the stock due to its superior execution across key markets supported by the healthy pace of launches and market share gains in existing products. The controlled cost is likely to improve operating leverage and drive better profitability over the next 2-3 years."

Brokerage recommends buy for target price of Rs 4,800

The brokerage has said, "We cut our EPS estimates by 6%/8% for FY23/FY24 to factor in: a) divestment of brands in Russia/India, b) lower volume off-take and adverse price variance in key markets of the US/ROW and c) increased opex related to transportation. We estimate 23% earnings CAGR over FY22-24, led by 16% sales CAGR in NAM, 7% in DF (adjusted for Covid-19 sales), 15% in Europe, and 13% in PSAI as well as supported by 260bp margin expansion. We value DRRD's base business EPS of INR192 at a 12M forward P/E multiple of 24x and add INR210 per share of NPV from the g-Revlimid opportunity. Accordingly, we arrive at our TP of INR 4,800 on a 12M forward earnings basis. Based on its limited-competition product pipeline in the US market, strong core therapies in DF, and the stock's attractive valuation, we maintain our BUY rating."