PL Stock Report - Dr. Reddy's Laboratories (DRRD IN) - Q1FY24 Result Update - Another quarter of higher gRevlimid sales - REDUCE

Dr. Reddy's Laboratories (DRRD IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: REDUCE | CMP: Rs5,476 | TP: Rs5,150

Q1FY24 Result Update - Another quarter of higher gRevlimid sales

Quick Pointers:

♦ Profitability aided by higher gRevlimid sales and Mayne consolidation.

♦ India formulation grew in high single digit, adj for divestment and NLEM.

We increase our FY24/25E EPS estimates by 25%/14%, as we factor in higher gRevlimid sales. Dr. Reddy’s (DRRD) Q1FY24 EBITDA was sharply above our estimate aided by higher US sales, while base business margins ex of Revlimid continued to remain muted and below ~20%. Further thin US pipeline in near term remains a key risk. At CMP, DRRD is trading at expensive valuations of 24x P/E on FY25E adjusted for gRevlimid. We maintain our ‘Reduce’ rating with revised TP of Rs5,150/share (Rs4,500 earlier); valuing at 24x FY25E EPS for base business. Any big ticket ANDA approvals and sharp recovery in base business margins are key risks to our call.

♦ Healthy revenue growth of 29% YoY aided by US generics: DRRD’s sales grew by 29% YoY at Rs 67bn; above our estimate of Rs63bn. The beat was largely on account higher US sales. US revenue came in at $389mn ($308mn in Q4FY23) vs our est of $300mn. Domestic business adjusted for divestment and NLEM price impact grew in high single digit. PSAI sales declined by 5% YoY; below our estimate. EU increased 22% YoY, while Russia sales grew by 75% YoY.

♦ EBIDTA sharply above our estimates: DRRD reported EBIDTA of Rs20.5bn (up 29% QoQ) vs our estimates of Rs15bn. OPM came in at 30.3%; up 500 bps QoQ. We believe DRRD has booked Rs11bn EBIDTA adj for gRevlimid and Mayne portfolio with OPM of ~19-20%. Segment wise PSAI and generics reported GMs of 15% and 64% respectively.

♦ Key concall takeaways: (1) US business: Mgt guided that gRevlimid continues to remain meaningful in FY24E. In Q1, DRRD launched six new products and guided for 25-30 new launches in FY24. Expect US sales to grow in double digit despite high base. The QoQ growth in US sales was aided by Mayne portfolio consolidation, new launches and ramp up in existing products like gRevlimid. (2) Domestic business: growth was driven by base business volumes. Company has entered into trade generic segment. Mgt expects to beat the IPM growth going ahead and will continue to explore inorganic route to strengthen its portfolio (3) Strong growth in Russia business was driven by uptick in base business, price increase and biosimilars. The YoY growth in CIS and EM sales was muted given decline in base business volumes (4) PSAI: Growth was impacted, attributable to lower volume pick up by customers for some of their existing products (5) Company expects growth to accelerate in China and sales to double over next 2 years (6) Tax rate likely to be in range of 24-25% (7) Capex for Q1FY24 stood at Rs3.6bn. Net cash stands at Rs50bn as of Q1FY24 end.(8) Overall 20-25% of R&D spend is towards biosimilar. Expect first wave of launches from FY27.

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