Dr Reddy’s Laboratories (DRL) stock price has appreciated ~10% over the past few days without a discernible positive development or fundamental change. We believe the valuations now are overestimating the large product opportunities (Nuvaring, Copaxone, etc.) and the cost control benefits.
We believe the risk-reward is unfavourable at current valuation of 24.7xFY21E earnings, which overestimates the cost control benefits and potential product opportunities. Maintain ‘reduce’ with a target price of Rs 2,544.
Prolonged delay in key product opportunities: Generic Revlimid, Copaxone, Nuvaring and Suboxone are the key high-value product opportunities for DRL. However, there has been constant delay in their launches due to additional queries pertaining to the filings and litigation. Suboxone was launched in Q4FY19, with slow ramp-up in market share. We expect launch of Nuvaring and Copaxone in H2FY21, with a combined EPS contribution of all three products at 10.3/12.1/16.4% of total EPS in FY20E/FY21E/FY22E.
Cost control benefits already priced in: Company has successfully implemented efficient cost control measures resulting in 170bps EBITDA margin improvement over FY17-FY19. We estimate an additional improvement of ~100bps over FY19-FY22E in the base business from current efforts.
Outlook: We maintain our estimates and expect revenues and earnings to grow at 8.4% and 13.1% CAGRs respectively over FY19-FY22E with 250bps EBITDA margin expansion including large product opportunities.
Valuations and risks: We maintain our REDUCE rating on the stock with a target price of Rs 2,544/share.