China and Hospital Institutional sales are expected to scale up substantially over time, according to management. India is the key focus market, where the company expects to sustain growth ahead of the broader market.
We hosted Dr Reddy’s management for a roadshow in Singapore last week. In this note, we present our key takeaways from our interaction with management. DRRD’s focus remains on appropriate capital allocation, cost control and productivity improvement.
As a base case (without product-specific upsides), the company is aiming for an Ebitda margin and RoCE of 25%. The company has changed its strategic priorities. Instead of overwhelming focus on the US market, the company intends to broaden its product offering across various other markets. Leveraging the product portfolio across markets should help reduce risk and improve return ratios.
China and Hospital Institutional sales are expected to scale up substantially over time, according to management. India is the key focus market, where the company expects to sustain growth ahead of the broader market. We have a ‘Buy’ rating on the stock. We arrive at a Nov’20 TP of Rs 3,200 based on a sum-of-the-parts valuation, the base business at Rs 2,934 based on 18x Nov’21F EPS (ex-proprietary business loss) of Rs 163; and product-specific value of Rs 266. DRRD trades at 20.7x and 17.6x FY21F and FY22F EPS of Rs 139.7 and Rs 163.9, respectively. We note that our earnings estimates don’t factor in any large product opportunity in the US and China.
The India formulation business is the most important growth market for the company. DRRD has changed its leadership team in the domestic formulation business. The company strives to consistently grow ahead of the broader market and has successfully achieved that objective in the past 1-2 years. The company is currently ranked 13 in the domestic formulation market (MAT basis, as per AIOCD AWACS).
The company believes it can get into the top 10 (No 9-10) organically. The company is open to acquisition of brands in India, provided they present synergies to existing operations. Overtime, DRRD aspires to be among top five companies in India. According to management, growth will be driven by new products, use of technology and improvement in sales force productivity. We note that DRRD’s sales force productivity at Rs 5.2 m per MR per year is lower than peers in the industry.