Despite strong Q4, Dr Reddy’s share drop

Chennai | Updated on May 21, 2020

Dr Reddy’s Laboratories Ltd

Analysts view remain mixed, as some see little headroom for pharma major’s share price

Shares of Dr Reddy’s Laboratories dropped 1.9 per cent on Thursday to close at ₹3,837.05 on the BSE, just above day’s low of ₹3,828.25, despite it came out with a ‘decent’ set of March quarter number on Wednesday. Most analysts, who until now remained negative on the stock and the sector, now have turned cautiously optimistic. While some brokerages see at least 10 per cent rise from the current stock price level, most do not see much headroom for the stock from the current level.

Pharma major Dr Reddy’s has reported a 76 per cent jump in consolidated net profit at ₹764 crore in the fourth quarter ended March 31, 2020, as against ₹434 crore in the same quarter in the previous financial year according to International Financial Reporting Standards (IFRS). Total revenue rose 10 per cent to ₹4,432 crore (₹4,016 crore).

Credit Suisse and CLSA maintained their ‘outperform’ rating on Dr Reddy’s with a price target of ₹4,300 and ₹4,450, respectively, as they expect strong show from company’s US units and better-than-expected cost control to drive its EBIDTA.

Emkay Global upgraded the target price to ₹4,100 (from earlier ₹3,424) on Dr Reddy’s though it retains its ‘hold’ rating. “Dr Reddy’s continues to exhibit strong execution, beating operating profit estimates by 5 per cent, led by strong growth in the US/EU and tight cost control. This is the second consecutive quarter of ₹35+ quarterly EPS and adds to our confidence regarding FY21 estimates,” it added.

Gains from pre-purchases

Motilal Oswal Financial said besides new launches and market share gains posted in existing products across key markets, Dr Reddy’s Lab has benefited from the pre-purchases of medicines by patients in the US market; the company is also making strides in the newer markets in Europe. This has been offset, to some extent, by price erosion in the base business, the domestic broking firm, which maintains a ‘neutral’ rating on Dr Reddy’s, said. It, however, revised its price target to ₹3,775 (from ₹3,490 earlier).

However, for HDFC Securities, it’s still not a ‘buy’. The domestic brokerage maintains its ‘reduce’ rating with a price target of ₹3,770 (up from earlier ₹3,330). According to HDFC Securities, price erosion in the US has stabilised, deflation to continue; gNuvaring and gCopaxone – CRL to be filed in few months; Wockhardt deal closure expected in Q1-FY21; and Covid impact was neutral on revenues.

Dr Reddy’s Q4 performance was largely inline with Phillips Capital estimates. “While we expect Dr Reddy’s to sustain steady growth in its key markets (despite some impact of Covid), it will see margin pressure going ahead as FY20 margins were boosted by the sale of a brand in the US.”

Also, the long-awaited drug opportunities (gCopaxone and gNuvaring) are further delayed (factor as H2 opportunity versus full year earlier), which coupled with the rising R&D spend and enhanced tax-rate guidance will likely weigh on overall earnings, said Phillips Capital, which maintains its ‘neutral’ rating with a target price of ₹3,600 (up from ₹3,300).

Published on May 21, 2020

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