BUY

Result Update Dr. Reddy’s Target Price

1st Nov 2021 Laboratories Ltd 5,600
Pharmaceutical

Strong Momentum Across Verticals; Maintain BUY

(CMP as of Oct 29, 2021)
Dr Reddy (DRREDDY) reported good set of Q1FY22 results with revenue CMP (Rs) 4,635
growth of 17.6%, majorly driven by India (+25%, YoY) and the emerging Upside /Downside (%) 20%
markets (+51%, YoY). The US market, too, reported a strong growth of over High/Low (Rs) 5,614 / 4,135
9% QoQ. The company’s Gross Margins declined by 150bps, majorly due to Market cap (Rs Cr) 77,540
the price erosion in the US market. Its EBITDA margins, however, was Avg. daily vol. (6m) Shrs. 1,737,093
maintained on a YoY basis at 23.5%, primarily due to fall in Other Expenses. No. of shares (Cr) 16.63
On a positive note, the company’s reported PAT increased by 29 % due to
higher other income and lower tax rates.
Shareholding (%)
We believe DRREDDY has a healthy pipeline of gRevlimid in FY23E and
Mar-21 Jun-21 Sep-21
Pegfiltarism (biosimilars) in FY24E. Furthermore, revenue from
Promoter 26.7 26.7 26.7
vaccines such as Sputnik-V, Remedesiver, etc, may add to its growth
FIIs 29.0 29.0 27.8
going forward. However, the company’s Gross Margins may get
MFs / UTI 13.3 12.4 12.2
impacted due to price erosion in the US market in the upcoming
Banks / FIs 0.1 0.1 0.1
quarters. Furthermore, DRREDDY believes that the eight observations
Others 30.8 31.8 33.2
by the USFDA at the recently audited reserve site are addressable
within the stipulated time frame. Keeping this in perspective, we Financial & Valuations
recommend a BUY rating on the stock with a Target Price of Rs 5,600. Y/E Mar (Rs. bn) FY22E FY23E FY24E
Net Sales 20,814 22,954 25,537
Generic business in North America EBITDA 5,079 5,716 6,512
Dr Reddy reported $255 Mn sales (vs $234 Mn), a growth of 9% QoQ which Net Profit 3,026 3,551 4,215
stood above our expectations. The growth was driven by the launch and EPS (Rs.) 182 213 253
PER (x) 25.5 21.7 18.3
scale-up of new products (Chlordiazepoxide Hydrochloride and Clidinium
EV/EBITDA (x) 15.1 13.0 11.5
Bromide) and an increase in the volumes of certain existing products (though P/BV (x) 3.8 3.3 2.8
this was offset by the price erosion in some molecules). The company has ROE (%) 14.9 15.2 15.5
filed two new ANDAs during the quarter and cumulatively 93 generic filings
are pending approval with the USFDA. Out of these 93 pending filings, 46 Key Drivers (%) (Growth in %)
are Para IVs and 23 have 'First to File' status. Y/E Mar FY22E FY23E FY24E
Net Sales 20,814 22,954 25,537
Generic business in India & Emerging Markets EBITDA 5,079 5,716 6,512
Net Profit 3,026 3,551 4,215
India business grew by 25% and the major growth was contributed by the
Covid-19 portfolio while the base business grew at a high-single-digit rate. Relative performance
The company launched two new products Melotrp and Baricax in the last 205
185
quarter. Growth in emerging markets is driven by Russia business due to the 165
launch of new products in that region. 145
125
105
Pharmaceutical Services and Active Ingredients (PSAI) 85
65
45
PSAI business decreased by 2% YoY due to lower traction in the volumes 25
Jan-20 Aug-20 Mar-21 Oct-21
and decrease in sales price for some of the products while Covid-19 related
Dr Reddy's Labs BSE Sensex
products had added growth in the last quarter. The company had filed for
DMS in the US in the last quarter. Source: Capitaline, Axis Securities

Key Financials (Consolidated)

(Rs Cr) FY21 FY22E FY23E FY24E
Net Sales 19,048 20,814 22,954 25,537
EBITDA 4,546 5,079 5,716 6,512
Net Profit 1,951 3,026 3,551 4,215
Ankush Mahajan
EPS (Rs) 117 182 213 253 Research Analyst
PER (x) 39.5 25.5 21.7 18.3
EV/EBITDA (x) 17.3 15.1 13.0 11.5 email: ankush.mahajan@axissecurities.in

P/BV (x) 4.4 3.8 3.3 2.8

ROE (%) 11.1 14.9 15.2 15.5
Source: Company, Axis Research

1
Dr Reddy (DRREDDY) Ltd: Q2FY21 results
Particulars (Rs Crore) Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 YoY (%) QoQ (%)

Net Sales 4,911 4,942 4,768 4,945 5,787 17.8 17.0

Growth (YoY%) 20.0% 12.4% 7.2% 11.7% 17.8%

Total Expenditure 3,755 4,402 3,715 4,211 4,427 17.9 5.1

Raw Material Consumed 1,580 1,637 1,542 1,702 2,028 28.3 19.1

% of sales 32.2% 33.1% 32.3% 34.4% 35.0%

Gross margins (%) 67.8% 66.9% 67.7% 65.6% 66.3%

Employee Expenses 949 916 893 947 1,010 6.5 6.8

% of sales 19.3% 18.5% 18.7% 18.5% 18.5%

Other Expenses 1,148 1,252 1,279 1,378 1,389 21.0 0.8

% of sales 23.4% 25.3% 26.8% 27.9% 24.0%

lmpainnent Costs 78 597 2 184 0

% of sales 1.6% 12.1% 0.0% 3.7% 0.0%

R&D Expenses 440 411 400 405 0

% of sales 9.0% 8.3% 8.4% 8.2% 0.0%

EBITDA 1,156 540 1,053 735 1,360 17.6 85.1

EBITDAM (%) 23.5% 10.9% 22.1% 14.9% 23.5%

Interest 25 19 30 19 23

Depreciation 317 311 309 284 294 -7.1 3.6

Other Income 51 71 83 108 206 301.4 90.5

PBT 866 280 797 539 1,248 44.2 131.4

Tax 101 267 258 175 277 173.7 57.8

Tax (%) 11.7% 95.3% 32.4% 32.5% 22.2%

Reported PAT 765 13 539 364 971 27.0 166.9

Associate Profit 7 15 18 17 25 238.4 48.8

PAT after EoI 772 28 557 380 996 29.0 161.8

Adj. EBITDA 1,234 1,137 1,055 918 1,360 10.2 48.1

EBITDAM (%) 25.1% 23.0% 22.1% 18.6% 23.5%

Adj. PAT 772 702 557 564 996 29.0 76.5

Source: Company, Axis Securities

Revenue Breakup:
Particulars (Rs Crore) Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 YoY (%) QoQ (%)
Global Generics 3,508 3,983 4,075 3,874 4,111 4,743 19
North America 1,728 1,833 1,739 1,749 1,739 1,890 3
Europe 355 380 414 396 399 414 9
India 626 910 959 845 1,060 1,140 25
Emerging Markets 798 860 962 885 913 1,299 51
PSAI 855 850 701 792 754 837 -2
Proprietry Products &Oth. 55 62 154 63 54 183 194
Total 4,417 4,895 4,930 4,728 4,919 5,763 18
Source: Company, Axis Securities

2
Financials (Consolidated)
Profit & Loss (Rs Cr)
Y/E March FY21 FY22E FY23E FY24E
Net sales 19,048 20,814 22,954 25,537
Other operating income 0 0 0 0
Net Revenue 19,048 20,814 22,954 25,537
Cost of goods sold 6,079 6,619 7,277 8,044
Contribution (%) 31.91% 31.80% 31.70% 31.50%
Other operating costs 8,423 9,116 9,962 10,981
EBITDA 4,546 5,079 5,716 6,512
Other income 291 321 435 582
PBIDT 4,838 5,400 6,151 7,094
Depreciation 1,229 1,312 1,372 1,432
Interest & Fin Chg. 97 119 121 123
E/o income / (Expense) -677 0 0 0
Pre-tax profit 2,835 3,969 4,658 5,540
Tax provision 932 998 1,171 1,390
(-) Minority Interests 0 0 0 0
Associates 48 55 63 65
Adjusted PAT 1,951 3,026 3,551 4,215
Other Comprehensive Income 0 0 0 0
Reported PAT 1,951 3,026 3,551 4,215
Source: Company, Axis Securities

3
Balance Sheet (Rs Cr)
Y/E March FY21 FY22E FY23E FY24E
Share Capital 83 83 83 83
Reserves & Surplus 17,559 20,170 23,306 27,106
Net Worth 17,642 20,253 23,389 27,189
Total Loan funds 2,944 2,984 3,024 3,064
Deferred Tax Liability 29 2 2 2
Long Term Provisions 51 75 75 75
Other Long Term Liability 162 210 210 210
Capital Employed 26,617 29,976 33,764 38,343
Gross Block 11,737 12,437 13,237 14,037
Less: Depreciation 7,005 7,937 8,930 9,983
Net Block 4,732 4,499 4,307 4,054
Investments 1,974 2,498 2,755 3,064
Sundry Debtors 4,964 5,702 6,289 6,997
Cash & Bank Bal 1,483 3,339 5,816 5,513
Loans & Advances 186 186 186 186
Inventory 4,541 4,961 5,471 6,087
Other Current Assets 1,402 1,457 1,607 5,107
Total Current Assets 8,104 8,766 9,378 10,117
Curr Liab & Prov 14,550 18,143 22,123 26,955
Net Current Assets 6,447 9,376 12,745 16,838
Total Assets 26,617 29,976 33,764 38,343
Source: Company, Axis Securities

4
Cash Flow (Rs Cr)
Y/E March FY21 FY22E FY23E FY24E
PBT 2,883 4,024 4,722 5,605
Add: depreciation 851 933 993 1,053
Add: Interest 97 119 121 123
Cash flow from operations 3,831 5,076 5,835 6,780
Change in working capital 589 478 635 4,086
Taxes 932 998 1,171 1,390
Miscellaneous expenses 0 0 0 0
Net cash from operations 2,310 3,600 4,030 1,305
Capital expenditure (2,675) (1,079) (1,179) (1,179)
Change in Investments (69) (523) (257) (310)
Net cash from investing (2,744) (1,602) (1,436) (1,489)
Increase/Decrease in debt 1,161 40 40 40
Dividends (415) (415) (415) (415)
Proceedings from equity 0 0 0 0
Interest (97) (119) (121) (123)
Others 1,063 352 379 379
Net cash from financing 1,712 (142) (117) (119)
Net Inc./(Dec.) in Cash 1,278 1,856 2,477 (303)
Opening cash balance 205 1,483 3,339 5,816
Closing cash balance 1,483 3,339 5,816 5,513
Source: Company, Axis Securities

5
Ratio Analysis (%)

Y/E March FY21 FY22E FY23E FY24E

Sales growth 8.7 9.3 10.3 11.3

OPM 23.9 24.4 24.9 25.5

Oper. profit growth 9.6 11.7 12.5 13.9
COGS / Net sales 31.9 31.8 31.7 31.5
Overheads/Net sales 44.2 43.8 43.4 43.0
Depreciation / G. block 7.3 7.5 7.5 7.5
Effective interest rate 32.3 24.8 24.8 24.8

Net wkg.cap / Net sales 0.3 0.3 0.3 0.4

Net sales / Gr block (x) 1.6 1.7 1.7 1.8

RoCE 18.6 20.3 22.6 25.3

Debt / equity (x) 0.2 0.1 0.1 0.1
Effective tax rate 32.3 24.8 24.8 24.8
RoE 11.1 14.9 15.2 15.5
Payout ratio (Div/NP) 498.4 498.4 498.4 498.4

EPS (Rs.) 117.2 181.8 213.4 253.3

EPS Growth (3.7) 55.1 17.3 18.7
CEPS (Rs.) 191.1 260.7 295.8 339.3
DPS (Rs.) 24.9 24.9 24.9 24.9
Source: Company, Axis Securities

6
 Dr. Reddy's Price Chart and Recommendation History

(Rs)

Date Reco TP Research

08-Sep-20 BUY 5,270 Initiating Coverage
29-Sep-20 BUY 6,200 Compnay Update
01-Oct-20 BUY 6,200 Top Picks
29-Oct-20 BUY 6,200 Result Update
02-Nov-20 BUY 6,200 Top Picks
01-Dec-20 BUY 6,200 Top Picks
01-Jan-21 BUY 6,200 Top Picks
18-Jan-21 BUY 6,200 Pick of the week
01-Feb-21 HOLD 5,100 Result Update
13-Apr-21 BUY 5,700 Event Update
17-May-21 BUY 5,700 Result Update
23-Jul-21 BUY 6,000 AAA
27-Jul-21 BUY 5,600 Result Update
01-Nov-21 BUY 5,600 Result Update

Source: Axis Securities

7
About the analyst

Analyst: Ankush Mahajan

Contact Details: ankush.mahajan@axissecurites.in

Sector: Midcaps/ Pharma Sector

Analyst Bio: Ankush Mahajan is MBA (Finance) from SMVDU with over 12 years of research experience in the
Midcaps/ Pharma Sector

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the
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8
 DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

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NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

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