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MOSL: DR REDDY’S LABS (Neutral)-Ex-US biz on track; Productivity improvement – the key focus

Dr Reddy’s Labs: Ex-US biz on track; Productivity improvement – the key focus 

(DRRD IN, Mkt Cap USD7.4b, CMP INR3189, TP INR3000, 6% Downside, Neutral)

 

Three-pronged strategy bodes well for medium-term growth

• The renewed strategy in the US, the enhanced focus on branded generics in emerging markets and the cost-control initiatives are promising steps that bolster DRRD’s earnings prospects.
• We raise our EPS estimate by 7.3%/8.2%/9.2% for FY20/21/22 to factor in the better outlook in India/Russia, the higher gross margin and the scope of enhancing operating leverage. However, we maintain our Neutral rating as we await a better entry point. 

Cost reduction on all operational parameters

• Revenue increased ~14% YoY to INR43.8b (our estimate: INR42.4b) in 3QFY20, driven by all business segments (except the US which grew moderately by 8% YoY to INR16b – 36% of sales).
• Pharmaceutical Services and Active Ingredients (PSAI) segment (16% of sales) grew at 16% YoY to INR6.9b. India business (17% of sales) was up 13% YoY at INR7.6b, while Europe business (7% of sales) grew by 52% YoY.
• Emerging markets (21% of sales) was up 19% YoY to INR9.2b, led by CIS (+26% YoY) and Russia (+20% YoY).
• Gross margin expanded 20bp YoY (+260bp QoQ) to 54.1% on an improved product mix. Controlled cost (SGA expense/ R&D spend down 130bp YoY/50bp YoY) led to ~200bp YoY expansion in the EBITDA margin to 23.2%. EBITDA was up ~25% YoY at INR10.2b (our estimate: INR9b).
• DRRD reported a loss of INR5.7b due to impairment of INR13.2b on account of g-Nuvaring (INR11b) and other intangibles (INR2b). Adjusting for the same, PAT came in at INR5.9b (our estimate: INR4.5b), up 23% YoY.