Dr. Reddy’s Stock Hits A Record High As Analysts Hike Target Prices After Q1
Here’s what brokerages have to say about Dr. Reddy’s first-quarter results.
Shares of Dr. Reddy’s Laboratories Ltd. touched an all-time high as analysts raised their target prices after the drugmaker beat estimates in a quarter marred by the coronavirus pandemic.
A healthy pipeline for the U.S. markets, renewed traction in other geographies, and sustainable gross margin have prompted analysts to remain bullish, according to their research reports.
The drugmaker’s gross margin expanded to 56% in the quarter ended June from 51.7% a year ago, aided by better productivity, an improved product mix and a favourable foreign exchange rate. The company, in a post-earnings call, said it expects gross margin to sustain in the range of 54-56%.
Its operating margin expanded to 25.3% from 19.2% a year, while its earnings before interest, tax, depreciation and amortisation rose 51% to Rs 1,121 crore, adjusting for a one-time charge last year. Dr. Reddy’s saw its revenue rise 15% year-on-year to Rs 4,426.5 crore in the quarter ended June. Its net profit, however, fell because of lower domestic sales and higher effective tax rate.
The Hyderabad-based drugmaker reported a 10% year-on-year drop in India business revenue at Rs 626 crore as sales of prescriptions drugs fell and patient footfalls in pharmacies or clinics dropped due to the Covid-19 lockdown.
Its revenue in North America—the largest market—rose, aided by new launches and a favorable forex rate. But the benefit partially offset by price erosion. Dr. Reddy's revenue from the European market, too, jumped on account of new launches.
Of the 47 analysts Dr. Reddy’s, 25 have a ‘buy’ recommendation, 14 suggest a ‘hold’ and the rest has a ‘sell’ rating. The average of 12-month Bloomberg consensus price target implies a downside of 1.6%. The stock on Thursday rose as much as 4.5% to Rs 4,495 apiece.
Here's what brokerages have to say about Dr. Reddy’s first-quarter results:
JP Morgan
- Raises target price to Rs 3,900 from Rs 3,800 apiece; maintains 'neutral' rating
- Revenue momentum should be strong over the next two years, with its pipeline for the U.S., recovery in India augmented by Wockhardt portfolio and emerging markets momentum
- Expects Ebitda margin at about 23% over FY21 to FY22, given higher spend on acquired portfolio and slower turnaround in tough domestic market
- Visibility on margin trajectory beyond 24% over medium term will drive the next leg of re-rating
Emkay Global
- Raises target price to Rs 4,550 from Rs 4,100 apiece; retains 'hold' rating on the stock
- The company continues to execute well on the cost front — selling, general and administration costs are up only 2% in the last four years
- With renewed momentum in the non-U.S. geographies and on the compliance front, the recent traction should continue for the medium term
- Values the stock at 25 times of June 2022 expected earnings per share to account for strong margin expansion
Motilal Oswal
- Hikes target price to Rs 4,600 from Rs 3,765 apiece; maintains 'neutral' stance on the stock
- Expects the company to deliver an 8% sales CAGR to $1.1 billion over financial years 2020-2022, led by continued new launches and moderate price erosion
- Pharmaceutical services and active ingredients business poised to grow as clients focus on alternative sources of raw materials to de-risk their businesses
- Domestic business to bounce back from the second quarter this year due to potential for significant upside in acquired products from Wockhardt
- Strong momentum in Europe could be sustained driven by new product launches and volume gains
Nirmal Bang Securities
- Hikes target price to Rs 3,998 from Rs 3,647 apiece; maintains 'sell' rating on the stock
- Revises the target valuation multiple to 21 times from 20 times to account for potential upside from a potential Revlimid launch beyond FY22
- Earnings performance is expected to improve led by growth across geographies
- North America can grow in high single-digit to mid-teens, depending on the timing and quality of approvals. India and PSAI businesses are poised for growth; high single-digits to low-teens
Prabhudas Lilladher
- Retains target price at Rs 4,326 apiece; downgrades the stock to 'hold' due to limited upside potential at current valuation
- The company continues to be one of the best in large-cap pharma space structurally, though there is limited headroom for further upgrade in earnings estimate and PE expansion
- Re-rating in near term could be possible with early launch of Nuvaring (prevent pregnancy) and Copaxone (multiple sclerosis), sustainable growth of pharmaceutical services and active ingredients sales, India formulations growing above 15% and favorable hearing on Revlimid (a pill for blood cancer)