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Dr Reddys Laboratories Ltd
Pharmaceuticals | NSE : DRREDDY
Dr Reddy’s (DRL) portfolio includes pharmaceutical generics, APIs, custom pharmaceutical services, biosimilar and complex formulations.
• Revenue breakup Q4FY23: US (41%), India (21%), Russia and CIS (12%), Europe (8%), RoW (6%), PSAI (12%)
• It owns 13 formulation facilities, nine API manufacturing facilities, one biologics facility and several R&D centres across the globe
Sales in line, margins beat. US, India, better than expected print.
• Revenues grew 15.3% YoY to ₹ 6315 crore, mainly driven by growth in the US and India market followed by improvement on the Europe front
• EBITDA margins grew 1,605 bps YoY to 24.3%
• Adjusted PAT increased 192.6% YoY to ₹ 952.5 crore
Dr Reddy’s share price has grown at 8% CAGR over the past three years.
• Maintain BUY due to 1) ramp up across geographies on the back of new launches 2) calibrated cost approach based on better product mix, 3) focus on bolt-on acquisitions and divestments for better optimisation
We value Dr Reddy’s at ₹ 5520 i.e. 21x FY25E EPS of ₹ 256.5+ NPV of ₹ 132 for gRevlimid
Apart from Dr Reddy’s, in healthcare we like Sun Pharma.
• Higher contribution from specialty and strong domestic franchise is likely to change the product mix towards more remunerative businesses by FY23
• BUY with a target price of ₹ 1225
| Particulars (₹ crore) | Amount |
|---|---|
| Market Capitalization | 104,886.8 |
| Debt (FY23) | 1,347.0 |
| Cash (FY23) | 578.0 |
| EV | 76,299.0 |
| 52 week H/L (₹) | 6,505.9/4,384.1 |
| Equity Capital | 83.3 |
| Face Value (₹) | 5.0 |
Acquisition of Mayne Pharma portfolio
• Key Risk: (i) Regulatory issues (ii) Slower ramp up in new launches
| Particulars | FY20 | FY21 | FY22 | 5 year CAGR_(FY17-22) | FY23 | FY24E | FY25E | 2 year CAGR_(FY23-25E) |
|---|---|---|---|---|---|---|---|---|
| EBITDA | 2,466.0 | 3,869.9 | 3,767.7 | 8.8 | 6,348.9 | 5,985.7 | 6,572.1 | 1.7 |
| EBITDA margins (%) | 14.1 | 20.3 | 17.5 | - | 25.7 | 22.6 | 23.0 | - |
| RoNW (%) | 9.6 | 13.1 | 12.5 | - | 23.9 | 18.8 | 21.1 | - |
| EPS (|) | 122.0 | 117.6 | 127.2 | - | 269.3 | 230.2 | 256.5 | - |
| PE (x) | 37.3 | 37.8 | 34.6 | - | 16.8 | 19.8 | 17.7 | - |
| EV to EBITDA (x) | 30.4 | 19.4 | 20.0 | - | 11.3 | 11.8 | 10.2 | - |
| RoCE (%) | 13.0 | 11.1 | 11.0 | - | 19.2 | 14.4 | 14.2 | - |
| Revenues | 17,517.0 | 19,047.5 | 21,545.2 | 8.7 | 24,669.7 | 26,537.8 | 28,626.6 | 7.7 |
| Net Profit | 2,026.0 | 1,951.6 | 2,112.2 | 10.3 | 4,470.2 | 3,820.6 | 4,258.3 | -2.4 |
Q4FY23 Results: Sales in line, margins beat. US, India, better than expected print
• Revenues grew 15.3% YoY to | 6315 crore, mainly driven by growth in the US and India market followed by improvement on the Europe front. Adjusting for divestiture of brands from both the base and current year, growth was at ~18%. Gross margins increased ~460 bps over the previous year to 69.9% mainly driven by new product sales of certain products having higher margins and through divestment of non-core brands from the portfolio. Adjusting for non-core sales, margins were still healthy at 68.6%. EBITDA margins grew 1,605 bps YoY to 24.3%. However, adjusted for noncore brands sales, margins were at 21%. Adjusted PAT increased 192.6% YoY to | 952.5 crore
• US business grew 26.8% YoY to | 2,532 crore, driven by new products launches and favourable forex movement, which was partly offset by price erosion. Europe grew 11.6% YoY to | 496 crore, driven by new product launches, increase in volumes, which was partly offset by price erosion and adverse forex rates. India revenues grew 32.5% YoY at | 1283.4 crore, driven by increase in sales prices and new product launches. However, post adjustment of brand sales from both the base and current year, growth was 9.5%. Russia and Other CIS revenues were impacted by 18.5% YoY to | 750 crore. In Russia, it declined due to divestment income and higher channel inventory in Q4FY22. In CIS, business remained flat due to favourable price movement. RoW witnessed growth of 27.6% YoY to | 370 crore, YoY growth was on account of increase in volumes led by new product launches. PSAI grew 3.2% YoY to | 780 crore, driven by favourable forex movement and increase in volumes
• While US growth was far ahead of our estimates, adjusted India growth was in line. Europe revenues were also higher than our estimates. Pharmaceutical services and active ingredients witnessed growth due to favourable currency movements but were below our estimates. Quarterly fluctuations notwithstanding, the company continues to deliver within its determined framework. We remain positive on the company’s growth story based on simultaneous launches across major geographies and persistent recalibration of the existing portfolio.
Q4FY23 Earnings Conference Call highlights:
North America:
• Sales continued to grow in the US markets with positive traction seen from new product launches such as gRevlimid, sorafenib tablets and growing market share in certain key existing products
• It managed to launch six new products in Q4FY23 namely Difluprednate, Lurasidone tablets, Lubiprostone capsules, Sunitinib capsules, Nelarabine injection and Timolol gel. In FY23, it launched 25 products
• It completed the acquisition of Mayne Pharma’s US generic prescription product portfolio for $105 mn. Approved high-value products includes women health related and cardiovascular products. As on June 30, 2022, Mayne Pharma reported total revenue of $111 mn for the acquired portfolio
Europe:
• It launched five new products during the quarter and 35 for the full year across all European markets. The launch momentum is likely to continue in FY24
India:
• It divested certain non-core brands in India to focus on strengthening the core portfolio
• It remains positive with acquisition of a Novartis cardiovascular brand Cidmus
PSAI
• It filed 12 DMFs in the US in FY23 out of which seven DMFs were launched in Q4FY23 Other highlights:
• Its R&D efforts remain inclined towards building a healthy pipeline of new products across the markets, including biosimilars. R&D percentage for the year was at 7.9%
• Higher net income was largely on account of income recognition from settlement agreement with Indivior Inc
• It also witnessed completions of Phase 1 study of biosimilar Tocilizumab while the global Phase 3 study was initiated during the period
RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts valuation for a stock
Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com ICICI Direct Research Desk, ICICI Securities Limited, Third Floor, Brillanto House, Road No 13, MIDC, Andheri (East) Mumbai – 400 093 research@icicidirect.com
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