Stock To Buy: Dr Reddy's Labs Gets Buy Call For 23% Gains, Check What's Target Price

Dr Reddy's Labs delivered in-line operational performance in 1QFY23, adjusting for the multiple non-recurring factors. Muted performances in North America, Pharmaceutical services & ingredient (PSAI) and Russia segment was offset by domestic formulation (DF) segment. Niche launches are likely to revive sales prospects for North America from 2HFY23 onwards. The report on Dr Reddy's Labs by Motilal Oswal published on 29 July 2022 suggests 'buy' the stocks of the company for a target price of Rs 5,000 apiece. Considering this if investors buy the stock of the company at the current market price would get a potential gain of 23% in 12 months.

Stock Outlook, Returns & Other Details

The stock of Dr Reddy's Labs on Friday closed at Rs 4090.35 apiece after falling 3.97%. It was opened at Rs 4182.95 apiece, while the previous close was Rs 4260.05 apiece. Currently, it is trading below Rs 436.35 from its 52 week low which was recorded in March 2022 at Rs 3654 apiece. The 52 week high was recorded last year in October at Rs 5077 apiece. On Friday, after closing it recorded a fall of 6.47% in a week.

In the past 1 month, its share has fallen 6.28% and 10.62% in 3 months, respectively. Over the last 1 year, the shares have fallen a further 12.46%. however, on a long-term investment period of 3 and 5 years, it has witnessed a gain of 54% and 65.94%, respectively.

Dr Reddy's Labs is a large cap company with a market capitalisation of Rs 68,080.20 crore. The stock's PE ratio is 2276 and the P/B ratio is 3.69, respectively. TTM EPS is Rs 179.71. Its ROE is 11.35%. Its dividend yield is 0.73% and the face value is Rs 5.

Lower opex on adjusted basis drives profitability for the quarter

Dr. Reddy's Labs received Rs 2.3b income from sale of brands to JB Chemicals and Torrent Pharma. Adjusting for the same, Dr. Reddy's Labs 1QFY23 revenue was stable YoY at Rs 50b (v/s est. of Rs 52.3b). DF sales rose 4% YoY to Rs 11b (22% of sales); Europe sales grew 4% YoY to Rs 4.1b (8% of sales); North America sales were up 2% YoY to Rs 17.8b (~USD230m; 36% of sales); and Emerging Market sales declined slightly YoY to Rs 9b (17% of sales). PSAI revenue decreased 6% YoY to Rs 7.1b. Multiple non-recurring factors (currency headwinds, elevated commodity prices, inventory-led disruption and reduced business further dragging operating leverage) adversely affected margins. Even outsourcing of 'Cidmus' (product acquired from Novartis) impacted margins negatively in 1QFY23. Adjusting for the same, Gross margin (GM) contracted 130bp YoY to 51% due to change in product mix. EBITDA margin expanded 240bp YoY to 20.7% (our est: 19.6%) on account of reduced SGA (down 310bp YoY) and lower R&D spend (down 50bp YoY). EBITDA grew 14.5% YoY to Rs 10.3b (v/s est. of Rs 10.2b). During the quarter, Dr. Reddy's Labs also recognized present value of receivables from Indivior on settlement for Suboxone to the tune of Rs 5.6b. Adjusting for the same, PAT grew 43% YoY to Rs 8.2b (our est: Rs 7b), due to higher other income and lower tax rate.

Highlights from the management commentary

G-Revlimid (Lenalidomide) launch with limited volume is expected in Sep'22. The 13% QoQ decline in North America sales to USD230m was largely because of the increased competition in g-Suboxone and g-Vasopressin injection. Russia on a constant currency (CC) basis declined 14% YoY, primarily due to political turmoil and post-stocking inventory normalization in 4QFY22. Recent sale of brands was at an Avg. EV/sales multiples 3.5x/4.0x

Buy for target price of Rs 5,000 apiece

Motilal Oswal in its report said, "We maintain our FY23/FY24 EPS estimates and expect 16% earnings CAGR over FY22-24, backed by: a) limited competition product launches (such as gRevlimid in 2HFY23), b) steady industry outperformance in DF/Russia segment, c) revival in PSAI segment (through new launches/catering newer markets) and d) better outlook in Russia business. We value DRRD at 24x 12M forward P/E multiple for its base business and add NPV of INR210 for g-Revlimid to arrive at our Target Price of Rs 5,000. Maintain BUY."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.