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Analysts were mixed on Dr Reddy’s Laboratories despite the company reporting a two-fold jump in net profit on Friday.
However, the stock, on Monday, closed 1.48 per cent higher at ₹2,795.25 on the BSE.
Dr Reddy’s Laboratories on Friday announced that its consolidated net profit doubled to ₹1,093 crore in the second quarter ended September 30, against ₹504 crore in the previous-year period. Its total revenue grew 26 per cent at ₹4,800 crore (₹3,797 crore).
However, its global revenue grew 7 per cent, primarily driven by Europe, emerging markets and India. But revenue from North America remained flat at ₹1,426 crore. Price erosion, lower volumes, the impact of a voluntary recall of Ranitidine and temporary logistics issues during the quarter adversely impacted revenue growth in North America, the company said.
According to Emkay, its Q2 adjusted EBITDA at ₹880 crore (excluding one-offs) was 10 per cent above its estimate, driven by lower R&D spends. Adjusted gross margins were flat q-o-q as a sharp recovery in PSAI gross margins was offset by lower gross margins in the generics business. However, it maintains ‘Sell’ recommendation on the stock with a target price of ₹2,580, due to potential disappointments on three key molecules — gSuboxone, gNuvaring and gCopaxone — with higher competition and approval delays. These three account for about one-third of FY21E EPS, it said.
On the other hand, IndiaNivesh Securities recommended a buy on the stock with a target price of ₹3,370. It said “for FY20E, we project US sales to come in at about $940 million with improving launch momentum (30 planned for FY20 with only 10 launched till July-19) to support revenue growth over the next few quarters. While we agree that the CRL on gNuvaring does mean that the earliest possible launch will be in mid-FY21 (with higher probability of competition), we believe Dr Reddy’s launch pipeline should help offset the base business erosion and help maintain gross margins of the US business.”
Revenue growth
Motilal Oswal Securities said the company has been progressing well in terms of revenue growth across markets, except the US, and cost reduction initiatives are also fructifying to an extent. However, it maintains ‘Neutral’ NEUTRAL rating with a price target of ₹2,590, reduced from earlier ₹2,620. “We cut our FY20/21 EPS estimate by 11 per cent/3 per cent to ₹107/₹126 to factor in product recalls/associated expenses, deferred key approvals and the delayed pick-up in the gross margin,” Motilal Oswal added.
Similalry, Morgan Stanley maintains ‘Equal Weight’ on the stock with a price target of ₹2,804, Credit Suisse reiterates its outperform stand and a price target of ₹3,055 share.
Edelweiss Securities also maintains a ‘Buy’ recommendation with a target price of Rs 3,400. “With a focused management, promising complex pipeline, 21 per cent earnings CAGR and compelling valuations, the stock remains on strong growth trajectory over FY20–21,” it said.
Above Sensex’s return
Though in the last one year, the stock gave a point-to-point return of 15.41 per cent, over three- and five-year periods, it produced a negative return of 9.16 per cent and 12.12 per cent. But on a 10-year scale, the returns are positive at 162.43 per cent, slightly better than BSE Sensex’s return of 153.28 per cent.
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