Dr. Reddy's Q1 Results: Brokerages Stay Positive Despite Profit Decline
Here’s what brokerages have to say about Dr. Reddy’s first-quarter performance:
Most analysts remained bullish on Dr. Reddy’s Laboratories Ltd., citing benefits from the launch of key generics of drugs that reduces cardiovascular risk and blood Phe level, and new products in the U.S. and EU. Still, the stock fell to the lowest in more than three months.
The drugmaker saw its profit decline by a third sequentially in the quarter ended June, dragged by a one-time settlement. Its revenue, however, rose 4% over the preceding three months. Ebitda margin contracted by 720 basis points as marketing and research expenditure increased.
While the analysts maintained their bullish investment recommendation, they remained cautious over the price erosion in the American markets, coupled with the company’s disclosure of an investigation into an anonymous complaint alleging an unfair practice in Ukraine that violates the U.S. anti-corruption laws.
The drugmaker has received a subpoena from the Securities and Exchange Commission and is in the process of responding to it.
Shares of Dr. Reddy’s fell as much as 3.48% to Rs 4,675 apiece, the lowest since April 9, 2021, in early trade on Wednesday. Of the 43 analysts tracking the stock, 33 have a ‘buy’ rating, eight suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price targets implies an upside of 16.8%.
Here’s what brokerages have to say about Dr. Reddy’s Q1 performance:
Emkay
Maintains ‘buy’ but cuts target price to Rs 5,755 from Rs 5,935 apiece.
The market’s reaction to the weak set of numbers is overdone and the brokerage sees the current price as a good entry point.
Management guided for a meaningful profitability improvement from Q2, driven by the ramp-up of recently launched products, higher growth in the branded markets and an increase in API scale.
Higher selling, general and administrative expenses are expected to continue.
Increased investment in the branded markets will be more than offset by higher growth.
Margins were down due to price erosion in the U.S. However, the company has a good U.S. pipeline visibility.
The company’s strategy of leveraging the U.S. portfolio for Europe and rest of the world is expected to drive growth and margin accretion in the medium term.
Dolat Research
Recommends a ‘buy’ with a target price of Rs 5,325 apiece.
Lower export incentive, higher price erosion (lower volumes in hospital products) impacted gross margins.
Key triggers could be monetisation of generics of Kuvan (lower blood Phe levels) and Vascepa (reduce the risk of heart attack, stroke) in FY22, gRevlimid (cancer drug) launch in the U.S. in FY23, scale up in China, Sputnik V ramp up in India and improvement in core business — improved productivity in India, scaling up injectable production for U.S. launches in FY23.
Aggressive launches in the EU by replicating U.S. dossiers likely to drive mid-teens growth.
Cost controls to drive operating performance.
Valuation multiple supported by management’s aggressive growth strategy across multiple markets.
Intention to leverage its current product portfolio, R&D capabilities and sales infrastructure.
Valuation multiple is also supported by likely prospects of value-accretive acquisitions in India and emerging markets.
Jefferies
Maintains ‘buy’ but cuts price target to Rs 5,761 from Rs 6,209.
Revenue/Ebidta/PAT below estimates.
North America revenues came in flat with market share gains offsetting price erosion
Pharmaceutical services and active ingredients business fell 5% quarter-on-quarter.
Management sounded confident that margins will recoup from Q2FY22 onwards led by improvement in PSAI revenues and U.S. launches improving profitability from next quarter.
Recent launches gVascepa and gKuvan to add high-margin revenues from Q2.
Initial take on the investigation of an anonymous complaint is that while this could be material if the Securities and Exchange Commission investigation throws up a negative finding, it shouldn’t affect their thesis on the company.
SEC probes are common in the pharma sector and are usually settled without a significant impact on company operations.
Dr. Reddy’s also discontinued factoring of receivables in the U.S. leading to lower benefits.
Morgan Stanley
Rates ‘overweight’ with a price target of Rs 5,859 apiece.
Dr. Reddy’s remains confident about returning to 25% Ebitda margin after reporting 20.7% in Q1, driven by new launches, cost improvement and operating leverage.
The company’s strong balance sheet provides opportunity for M&A, especially in India
The company doesn’t see API issues affecting its generic drug Vascepa, which helps lower fats in the blood.
It has four products in its biosimilar pipeline, which, unlike its past launches, it will be the first to market.
Dr. Reddy’s has also launched a multi-service mobile app platform that integrates doctors, diagnostics, pharmacies and insurance for out-patients; the company has first-mover advantage in this space.
Nirmal Bang
Recommends ‘accumulate’ with a target price of Rs 5,240 per share.
Revised estimates after adjusting gross margins besides revising estimates for SG&A spending.
Lowered Sputnik sales estimate to 0.5 crore doses from 17 crore doses earlier as majority of the population in India would have taken the first dose by the time Dr. Reddy’s gets enough supplies of the Sputnik vaccine, which is by September-October 2021.
Price erosion, negative forex rate and inventory provisions offset by higher revenue contribution from new product launches and higher volumes.
U.S. portfolio includes five products that contribute 30% to overall sales. Steep price erosion in one or more of these products would materially impact the revenue being generated in the U.S. market.
However, six new products launched in North America and two in Canada in Q1FY21.
Difficult to ascertain the potential implications of investigation into the anonymous complaint as of now.
Motilal Oswal
Recommends a ‘neutral’ outlook with a price target of Rs 5,200 apiece.
Q1 earnings affected by higher price erosion in North America sales, deferment of offtake by customer in the PSAI segments and quarterly lumpiness in the tender business in the Russia segment.
Reduces EPS estimate by 4%.
Delays in the ramp-up of potential launches in the U.S. market and price erosion in U.S. base portfolio.
Delays in commercial scale-up of the Sputnik vaccine.
Higher SG&A spend towards marketing for key brands (in domestic formulations) and the buildup of direct-to-consumer, nutrition, and digital health and wellness.
The current valuation adequately factors in the upside in the base business and incremental contribution from niche launches.
Awaits clarity on the further course of action post the receipt of a subpoena from the SEC.