Delay In Approvals, Muted Guidance, Expensive Valuations To Weigh On Dr Reddy’s Stock

Dr Reddy’s Laboratories Ltd. dropped despite reporting better-than-expected October to December quarter earnings as analysts advised caution on the road ahead for the drug maker.

Even as they acknowledged the positive surprise in the third quarter, brokerages raised the red flag on the management’s guidance for a softer fourth quarter and the uncertainty around certain important launches in the U.S. Expensive valuations and the U.S. Food and Drug Administration’s (FDA) re-inspection of three manufacturing facilities are also expected to remain an overhang for the stock in the near-term.

Most brokerages have retained their rating on the stock. Morgan Stanley has reduced its price target by 7.3 percent to Rs 2,883 per share, while Macquarie has raised the price target by 2.2 percent to Rs 3,500.

Here’s what leading brokerages have to say on Dr Reddy’s.

Also Read: Dr Reddy’s Beats Estimates In October To December Quarter Despite 16% Fall In Profit

Nomura

• Maintains ‘Buy’ rating. Raises price target by Rs 13 to Rs 3,858 per share.
• Delay in key launches is an overhang.
• Expects strong revival in financial year 2018-19.
• The quarter-on-quarter improvement in earnings before interest, taxes, amortisation and depreciation (EBITDA) margin despite continued pricing pressure and no significant launches in the U.S. is encouraging.
• Concerns: Delay in new product launches and lingering uncertainty around certain high-value launches in the U.S. negates margin improvement in the October to December quarter.
• Reduces earnings estimates for FY17 by 3 percent, FY18 by 12 percent and FY19 by 2 percent.

Goldman Sachs

• Retains ‘Neutral’ rating; leaves price target unchanged at Rs 2,890 per share.
• Raises 2017 EBITDA expectation by 8 percent and earnings per share estimate by 14 percent to factor in December quarter results.
• Valuation: Current valuation prices in good news.

Citi

• Retains ‘Neutral’ rating. Leaves price target unchanged at Rs 3,315 per share.
• Third quarter numbers well above expectations, but management commentary indicates possible delays in some key products including generic Gleevec and a softer fourth quarter.
• Concerns: Compliance status of key sites and delays in key launches.

Jefferies

• Maintains ‘Underperform’ rating. Leaves price target unchanged at Rs 2,800.
• Management guided for delay in key approvals.
• Part of the margin improvement is not likely to sustain.
• Reduces FY17-19 EPS by 4 percent to 2 percent.
• Near-term risk: U.S. drug regulator’s inspections. (Factoring in closure of warning letters by second quarter of FY18.)
• Valuation: The stock is expensive trading at 19.6 times FY19PE.

Shares of Dr. Reddy’s Laboratories, which have underperformed the Nifty Pharma Index in 2017 so far, traded 1.6 percent lower at Rs 3,094 as of 12:25 p.m.