Dr. Reddy's Q2 Review: Shares Gain On Earnings Beat, Analysts See Growth Ahead
Most analysts reiterate 'buy' on Dr. Reddy's Laboratories after Q2 results.
Shares of Dr. Reddy's Laboratories Ltd. rose on Monday after its second-quarter net profit beat estimates.
Most analysts maintained 'buy' ratings on the Hyderabad-based drugmaker on expectation of steady growth in India, expansion in China and improved performance in the pharma services and ingredients segment, including a pipeline of new products in the U.S.
The drugmaker’s net profit rose 12% over a year earlier to Rs 1,114 crore in the three months ended September, according to its exchange filing. That compares with the Rs 761-crore consensus estimate of analysts tracked by Bloomberg.
Dr. Reddy’s Q2 FY23 Highlights (YoY)
Revenue rose 10% to Rs 6,332 crore (Estimate: Rs 5,805 crore)
Ebitda was up 40% at Rs 1,901 crore (Estimate: Rs 1,239 crore)
Margin was at 30% vs 23.5% (Estimate: 21.3%)
Shares of the drugmaker rose 3.47% to Rs 4,614.65 apiece during opening trade on Monday while the benchmark Nifty 50 gained 0.83%.
Of the 42 analysts tracking the drugmaker, 35 recommend a ‘buy’ and six suggest a ‘hold’ and one suggests 'sell', according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 9.4%.
Here's what brokerages made of Dr. Reddy's Q2 results:
Motilal Oswal
Maintains 'buy' rating with a target price of Rs 5,180 implying a potential upside of 16%.
Better-than-expected Q2FY23 performance, led by higher g-Revlimid sales.
Excluding g-Revlimid business margins, Ebidta margin would be 20.7% [their estimate: 21.9%] for the quarter.
Maintain EPS estimates to factor in:
a) incremental sales of g-Revlimid,
b) moderation in sales/profitability of pharma service and ingredients, Europe and CIS business.
c) ongoing price erosion in the US generics base business.
Positive on the ANDA pipeline for North America and expect healthy growth prospects in India.
While the gross margin for the quarter was 57.6%, Dr. Reddy's indicated 51%-54% to be sustainable for the core business.
Adjusting for inventory provision in the PSAI segment, the gross margin is a high single digit for the quarter.
Company filed one ANDA in Q2FY23 and expects the pace of filings to improve in H2FY23.
Systematix
Maintains 'buy' rating with a target price of Rs 5,192 implying a potential upside of 16%.
Outperformed the brokerage's and consensus estimates in Q2FY23, led by higher-than-expected sales of gRevlimid in the US.
However, there was depressed performance in the PSAI business, and higher tax rate (31%) during the quarter.
With gRevlimid being a limited period opportunity, earnings outperformance will need to be driven by structural drivers like India and emerging markets.
At current market price, the company offers a good value proposition.
It has a complex ANDA pipeline to offset the contribution from gRevlimid, before it fades FY26 onwards.
Recent approval of biosimilar Pegfilgrastim in the US for its partner, Fresenius Kabi, should also start contributing going forward as company is entitled to royalties.
Expect gRevlimid to support Dr Reddy’s growth in the near to medium term.
While the company continues its efforts to strengthen foundation in India and emerging markets (including China).
The PSAI business, which has been under pressure, could witness a favorable impact of increased focus around contract research and manufacturing services.
Failure to successfully execute around these growth opportunities is the key risk.
The company witnessed benefit of Rs 193 crore from incentives flowing under the PLI scheme in Q2; these benefits are expected to recur in H2FY23 too.
Benefits partially offset by inventory write-offs and higher R&D.
The company continues to prune its India portfolio through acquisitions and divestments, to ensure profitable growth.
It remains open to any inorganic opportunities in India formulations business.
The company has maintained its guidance to deliver ebidta margin of 25% on a sustainable basis on a near-to-medium term.
The company is on track to complete the filing of biosimilar Rituximab in 2023.
Expected tax rate in FY23 is 25-26%.
Axis Capital
Maintains 'buy' rating with a target price of Rs 5,150 implying a potential upside of 15%.
Ex Revlimid/ PLI/ covid related write-off, Ebitda would be about Rs 910 crore below brokerage estimate of about Rs 1,050 crore on weak performance in other markets.
Expect upside from gRevlimid to continue in next few quarters and till FY26, which is positive as it will improve earnings/ cashflow visibility.
Gross margin at 69.4% was up led by product mix partly offset by price erosion and covid inventory provision.
Expects high single digit sales CAGR in the US over the next three years led by new launches.
Targets 20-25 filing annually.
Reiterated 25% Ebidta margin/ return on capital employed aspiration on consistent basis in medium to long term.
Expects PSAI to pick up growth in H2FY23 on new launches and traction in contract development and manufacturing.
Steady growth drivers across key markets [US, India, China] in place given rich R&D pipeline and M&A [strong balance sheet].
Steady visibility for gRevlimid and biosimilars [Peg in US] and scale-up in China intact.