FY21/22e EPS up 2/5%; TP raised to Rs 3,775 from Rs 3,490; ‘Neutral’ retained as valuations capture positives
Besides new launches and market share gains posted in existing products across key markets, Dr Reddy’s Labs (DRRD) has benefited from the pre-purchases of medicines by patients in the US market; the company is also making strides in the newer markets in Europe. This has been offset, to some extent, by price erosion in the base business. We raise our EPS estimate by 2/5% for FY21/FY22 to factor in a healthy ANDA pipeline for the US market and a growing reach in the Europe markets. We further raise the PE multiple to 22x (from 21x earlier) to factor in the resolution of compliance issues at all sites of DRRD. Accordingly, we revise our price target to Rs 3,775 (from Rs 3,490 earlier). Maintain Neutral.
Revenue growth + better margins drive earnings
Revenue grew ~16% y-o-y to Rs 44.3 bn in Q4FY20, led by all businesses, except Pharma Services and Active Ingredients (PSAI). The US business (40% of sales) was up 21% y-o-y to Rs 18.1 bn ($240 m). The Europe business (8% of sales) increased 80% y-o-y. The India business (15% of sales) was up 5% y-o-y to Rs 6.8 bn. Emerging Markets (18% of sales) expanded 15% y-o-y to Rs 8 bn. The PSAI segment (16% of sales) grew at a moderate 6% y-o-y to Rs 7.2 bn.
The gross margin (GM) improved 130bp y-o-y to 51.5% owing to a better product mix. Cost optimisation (SGA expense was down 320bp y-o-y, partially offset by a slight increase in R&D spend) led to ~450bp y-o-y expansion in the Ebitda margin to 22.1%. Ebitda was up ~47% y-o-y to Rs 9.4 bn (v/s est. of Rs 10 bn). Furthermore, reported PAT was up at a higher rate of 76% y-o-y to Rs 7.6 bn owing to the recognition of MAT and creation of deferred tax assets. Adjusting for the same, PAT came in at Rs 5.7 bn for the quarter.
For FY20, DRRD saw 10/21/15.4% y-o-y growth in sales/Ebitda/Adj. PAT to Rs 167/35/20 bn, led by strong growth in Europe, an outperforming Domestic Formulation (DF) segment, and the reduced impact of price erosion in the US market.
Highlights from commentary
DRRD intends to launch 25 ANDAs in the US in FY21. It guided for the gross margin to be in the range of 52–54%. Capex would be ~ Rs 10 bn for FY21, with the focus being on injectables and biosimilars.
Valuation and view
We expect 17% earnings CAGR over FY20–22, led by new launches in the US, a better reach and increasing offerings in the EU, an outperforming Domestic Formulation segment, exercises in cost control, and improving productivity. We believe the sharp appreciation of ~50% witnessed over the past two months and the current valuation adequately factor in earnings potential over the medium term. Hence, we maintain our Neutral stance.