Dr Reddy’s shares fall to May levels. Should you ‘buy’ or ‘sell’? Here is HDFC Securities’ take

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Published: July 28, 2017 4:52:27 PM

Dr Reddy’s Laboratories shares were the worst performers on the both the benchmark indices after the drugmaker reported a 50% decline in the net profit for the April-June quarter of FY 2017-2018.

Dr Reddy’s Laboratories yesterday reported a decline of 53% to Rs 59.1 crore (as per IFRS) in the consolidated profit after tax for the April-June quarter. (Image: Reuters)

Dr Reddy’s Laboratories shares were the worst performers on the both the benchmark indices after the drugmaker reported a 50% decline in the net profit for the April-June quarter of FY 2017-2018. Dr Reddy’s stock lost as much as 6.5% to Rs 2,450.05 and remain the top loser on the benchmark Sensex since the morning trade.

Dr Reddy’s Laboratories yesterday reported a decline of 53% to Rs 59.1 crore (as per IFRS) in the consolidated profit after tax for the April-June quarter, compared to the profit of Rs 126.3 crore a year ago in the same period. Revenues for the first quarter was up by 3% to Rs 3,316 crore against nearly Rs 3,235 crore during the April-June quarter of FY 17.

HDFC Securities recommendation:

Dr Reddy’s Labs posted weak numbers, with the top-line growing only 3% year on year in the first quarter for the financial year 2018. This was led by a 3% decline in the US business and a 10% decline in domestic revenues. The EBITDA margin came in at 9.2%, sinking 700 bps quarter on quarter, with the gross margin plummeting to 51.5% during the quarter, said HDFC Securities.

Incremental competition in the US continues to erode the profits in the absence of new lucrative product launches. The impact of GST on the domestic business also contributed to the margin decline. PAT was Rs 59.1 crore, down 53% YoY despite the low base.

HDFC Securities added, “with the ongoing regulatory issues and low visibility on significant launches in the near/medium term, we can only expect 10% CAGR (compounded annual growth rate) in the US business, and 11% CAGR in the overall top-line over estimated earnings through FY 2017 to FY 2020.

At CMP (current market price), the stock is trading at 34 times for FY 2018 estimated earnings while at 21.2 times for FY 2019 estimated earnings, which is expensive when compared to peers. HDFC Securities said, “we have further cut our estimates for the financial years 2018, 2019, 2020 owing to the continuous and severe erosion in the base business. Till the time we have visibility on the resolution of the warning letter, which would spark a recovery in the US business, the outlook is bleak.”

HDFC Securities has downgraded to ‘sell’ with a target price of Rs 2,275 (17x Jun19E).

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