Broker's call: Dr Reddy’s Laboratories (Reduce)

| Updated on November 28, 2019 Published on November 28, 2019

ICICI Securities

Dr Reddy’s Laboratories (Reduce)

CMP: ₹2,965.05

Target: ₹2,544

Outlook: We maintain our estimates and expect revenues and earnings to grow at 8.4 per cent and 13.1 per cent CAGRs respectively over FY19-FY22E with 250bps EBITDA margin expansion including large product opportunities. Gross margin has remained subdued over the past few quarters with change in revenue mix and we expect this to remain at 52-53 per cent hereon, 100-200 bps lower from its historical levels of 54-55 per cent.

Dr Reddy’s Laboratories (DRL) stock price has appreciated about 10 per cent over the past few days without a discernible positive development or fundamental change. We believe the valuations now are overestimating the large product opportunities (Nuvaring, Copaxone, etc.) and the cost control benefits.

Key concerns: 1) continued delay in launch of generic Nuvaring and Copaxone; 2) pending USFDA highlighted observations and warning letter at Srikakulam API facility restrict Copaxone launch; and 3) the pending 483 observations at Duvvada facility would impede growth.

Valuation: We believe the risk-reward is unfavourable at current valuation of 24.7xFY21E earnings, which overestimates the cost control benefits and potential product opportunities. Maintain ‘Reduce’ with a target price of ₹2,544.

Published on November 28, 2019
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