Institutional Equities

Dr Reddy’s Laboratories (DRRD)

ACCUMULATE
Pharmaceuticals| 2QFY24 Result update
CMP: Rs5,420 | Target Price (TP): Rs5,977 | Upside: 10% October 29, 2023

Strong growth across US and Europe

Est Change Upward
Key Points
TP Change Upward
 Dr. Reddy’s Laboratories (DRL) reported 2QFY24 results largely in line with Rating Change Maintain
our estimates, led by growth across US (we believe the company clocked
~US$100mn in Revlimid sales) and Europe. Margins improved on the back Company Data and Valuation Summary
of a better product mix. Reuters: REDY.BO

 We like DRL management’s strategic decision-making ability and its Bloomberg: DRRD IN Equity
enhanced focus on the Branded business. Also, strong FCF from Revlimid Mkt Cap (Rsbn/US$bn): 900.2 / 10.8
sales is likely to be utilized for inorganic opportunities in the India branded 52 Wk H / L (Rs): 5,990 / 4,175
generic space.
Initiating Coverage

ADTV-3M (mn) (Rs/US$): 2,767.9 / 33.4

 Although strong growth is expected in the Gx segment in the near term on Stock performance (%) 1M/6M/1yr: (1.8) / 9.7 / 20.2
the back of Revlimid and stable base business performance, we remain Nifty 50 performance (%) 1M/6M/1yr: (3.2) / (3.0) / 7.1
concerned about the long-term visibility of this segment. Also, excluding
Shareholding 4QFY23 1QFY24 2QFY24
Revlimid, base business margins and return ratios are still under pressure
due to an adverse product mix and spending on complex products, Promoters 26.7 26.7 26.7

Biosimilars and Horizon II. We maintain ACCUMULATE on DRL with a DIIs 23.1 22.0 21.0

revised target price (TP) of Rs5,977, valuing it at 24x PE on Sept’25E base FIIs 27.3 27.0 28.2

EPS of Rs240 and NPV of Rs210 for the Revlimid opportunity. Others 11.7 11.8 10.1
Pro pledge 0.0 0.0 0.0
Business performance: India business grew merely by ~3% YoY to Rs11.9bn Financial and Valuation Summary
(excluding NLEM impact in mid-single digit) on account of a weak season for Particulars (Rsmn) FY23 FY24E FY25E FY26E
Acute segment. The US business was flattish QoQ at US$383mn as consolidation
Net sales 2,45,879 2,64,631 2,77,242 2,90,139
of Mayne Pharma was offset by pricing pressure in the base portfolio. Russia
EBITDA 63,873 70,315 67,581 65,732
business grew by 4% QoQ to Rs5.8bn, driven by favorable pricing. EU market
Net profit 45,067 47,787 45,782 44,131
grew by 26% YoY to Rs5.3bn on the back of new launches and tender wins while
RoW business was flat YoY at Rs12bn. PSAI business grew by 9.3% YoY to EPS (Rs) 271.5 287.9 275.8 265.8

Rs7bn with a gross margin of 18%. Overall business’ gross margin improved to EPS growth (%) 58.3 6.0 -4.2 -3.6
58.7% from 56% in 2QFY23 mainly due to continuous ramp-up in Revlimid and EBITDA margin (%) 26.0 26.6 24.4 22.7
improvement in the US base business. Consequently, EBITDA margin improved PER (x) 20.0 18.8 19.7 20.4
to 28.9% from 27% in 2QFY23. EV/Sales (x) 3.5 3.1 2.9 2.7

Outlook: We expect DRL’s Revenue/EBITDA/APAT to grow at 6.2%/2.9%/0.8% EV/EBITDA (x) 13.3 11.8 11.9 11.7
CAGR over FY23-FY25E, but excluding Revlimid, Revenue/EBITDA/APAT are RoCE (%) 19.0 18.1 15.4 13.2
expected to clock 8.4%/13.4%/10.7% CAGR. EBITDA margin is expected at ~24- RoE (%) 21.4 19.1 16.0 13.7
27% over FY24E-FY25E (excluding Revlimid at ~22%). Driven by Revlimid, the
ROIC(%) 24.4 24.4 22.1 20.8
company is expected to generate strong FCF of ~Rs70bn over FY24E-FY25E,
Source: Bloomberg, Company, Nirmal Bang Institutional Equities
which is mainly expected to be utilized for inorganic opportunities. Research

Valuation: We like DRL management’s strategic decision-making ability and its

enhanced focus on the Branded business. However, restructuring and shift in
focus from Gx to BRx markets are likely to weigh on near to medium term base
business growth. We maintain ACCUMULATE on DRL with a revised TP of
Rs5,977, valuing it at 24x PE on Sept’25E base EPS of Rs240 and NPV of Rs210
for the Revlimid opportunity.

Please refer to the disclaimer towards the end of the

document.

NBIE Research
institutional.research@nirmalbang.com
+91-022 6273 8125
 Institutional Equities

Exhibit 1: 2QFY24 consolidated performance

Particulars (Rsmn) 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24E 4Q24E FY23 FY24E
Net Sales 49,853 63,057 67,700 62,968 67,384 68,802 65,801 62,644 2,45,879 2,64,631
YoY Change (%) 1.3 9.4 27.3 19.7 35.2 9.1 -2.8 -0.5 15.6 7.6
Gross Profit 23,705 35,314 40,093 35,997 39,553 40,368 36,849 34,170 1,39,343 1,50,940
Margin (%) 47.5 56.0 59.2 57.2 58.7 58.7 56.0 54.5 56.7 57.0
EBITDA 6,937 17,010 20,562 15,289 20,439 19,861 15,792 14,223 63,873 70,315
YoY Change (%) -23.1 27.3 71.1 40.1 194.6 16.8 -23.2 -7.0 41.0 10.1
Margin (%) 13.9 27.0 30.4 24.3 30.3 28.9 24.0 22.7 26.0 26.6
Depreciation 3,050 3,125 3,405 3,190 3,583 3,790 3,492 3,103 12,636 13,968
Interest -2,349 156 139 -799 -784 -1,225 -719 -580 -2,853 -3,308
Other income 447 334 -732 281 780 1,796 678 474 5,907 3,727
Extraordinary Items 5,577 1,908 - - - - - - 7,485 -
PBT (bei) 6,777 14,203 16,346 13,255 18,463 19,134 13,785 12,334 60,367 63,716
PBT 12,354 16,111 16,346 13,255 18,463 19,134 13,785 12,334 67,852 63,716
Tax 2,779 4,983 3,875 3,663 4,438 4,334 3,584 3,573 15,300 15,929
ETR (%) 22.5 30.9 23.7 27.6 24.0 22.7 26.0 29.0 25.3 25.0
Reported PAT 9,575 11,128 12,471 9,592 14,025 14,800 10,201 8,761 52,552 47,787
Adj. PAT 5,253 9,810 12,471 9,592 14,025 14,800 10,201 8,761 46,964 47,787
YoY Change (%) -8.0 -1.1 76.5 195.6 167.0 50.9 -18.2 -8.7 81.1 1.8
Adj. EPS 31.6 59.1 75.1 57.8 84.5 89.2 61.5 52.8 282.9 287.9
Source: Company, Nirmal Bang Institutional Equities Research

Conference Call Highlights

US

 Growth in the US business was primarily led by growing momentum in the core portfolio,
Mayne integration, favorable move from foreign exchange, which was partly offset by price
erosion.
 During 2QFY24, four new products were launched in the US. Additionally, the company filed
two new ANDAs with the USFDA.
 Rituximab has undergone pre-approval inspection and it will be able to launch the same by
early FY25.
 25-30 launches are expected in FY24. 25-30 material products will be launched during FY25-
FY30.
 From FY27, there will be meaningful contributions from Biosimilar sales in the global markets.
 Price erosion has been negligible and fluctuates between high single-digit to low double-digit.

2 Dr Reddy’s Laboratories
 Institutional Equities
India
 Growth was largely driven by pricing and new launches but was partly offset by NLEM impact
and muted demand amid weak Acute season. Excluding NLEM, operational sales grew in
mid single-digit.
 India remains a priority market for the company. It is targeting areas like Cardio, Diabetes,
CNS and Oncology. Focus is on licensing and collaboration with partners. The payout in any
licensing deal is typically three years. Most deals include milestones and royalties.
 The company will be able to grow in double digits in FY24. Focused products are growing in
double digits. Cidmus genericization led to decline in sales.
 Chronic contribution is ~35% of the domestic business.
 Total MR strength stands at ~6,000.

Europe
 Growth was driven by leveraging the existing portfolio, contribution from new products and
favorable forex, which was partly offset by price erosion. The company is participating in new
tenders.
 The company launched 20 new products in Europe.

EM
 Russia decline was led by currency devaluation, excluding which growth stood at 4% YoY
and 9% QoQ. The increase was mainly driven by favorable pricing.
 Launched 32 products in 2QFY24.
 The company is filing >16 products each year in China. It will meaningfully contribute to sales
from FY25.

Margin
 The decline in gross margin was primarily due to marginal adverse price variance in certain
products and mix change offset by favorable forex benefit.
 SG&A spending increased by 13% YoY on the back of investment in sales & marketing.
 R&D spending stood at 7.9% of sales. R&D spending will keep on increasing going forward.

Others
 Capital expenditure for 2QFY24 stood at Rs3.2bn.
 ETR was lower due to lower adoption of 115BAA under the new tax regime. For FY24, ETR
guidance is at 24-25%.
 A CAR T asset was approved for clinical trial in India.
 PSAI business is expected to improve going forward. Gross profit is coming from new product
launches. The impact on PSAI gross margin was due to the replacement of new products
with old products. Gross margin stood at 18% in 2QFY24.
 The company received nine 483 observations for the Biologics plant. The observation is
addressable.
 For FY24, PLI scheme and other export incentives will be higher compared to FY23.
 Incremental cashflow will largely be used for inorganic opportunities.
 The company would be willing to leverage up to two times EBITDA for future acquisitions.

3 Dr Reddy’s Laboratories
 Institutional Equities
Exhibit 2: Actual performance vs NBIE estimates
NBIE Consensus
(Rsmn) Actual Var. (%) Var. (%)
estimate estimate
Revenue 68,802 69,031 (0.3) 68,445 0.5
EBITDA 19,861 19,385 2.5 19,146 3.7
EBITDA margin (%) 28.9 28.1 79 bps 28.0 89 bps
PAT 14,800 13,146 12.6 12,811 15.5
PAT margin (%) 21.5 19.0 247 bps 18.7 279 bps
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 3: Revised estimates

New estimates Old estimates Change (%)
(Rsmn)
FY24E FY25E FY26E FY24E FY25E FY26E FY24E FY25E FY26E
Revenue 2,64,631 2,77,242 2,90,139 2,64,103 2,76,687 - 0.2 0.2 -
EBITDA 70,315 67,581 65,732 68,380 67,304 - 2.8 0.4 -
Margin (%) 26.6 24.4 22.7 25.9 24.3 - 68 bps 5 bps -
PAT 47,787 45,782 44,131 45,716 45,005 - 4.5 1.7 -
Margin (%) 18.1 16.5 15.2 17.3 16.3 - 75 bps 25 bps -
EPS 287.9 275.8 265.8 275.4 271.1 - 4.5 1.7 -
Source: Nirmal Bang Institutional Equities Research

Exhibit 4: Segment revenue

(Rsmn) 2QFY23 1QFY24 2QFY24 YoY (%) QoQ(%)
Global Generics 55,900 60,083 61,009 9.1 1.5
US ($ mn) 344 390 383 11.4 (1.6)
Europe 4,199 5,071 5,286 25.9 4.2
India 11,500 11,482 11,860 3.1 3.3
ROW 12,200 11,552 12,163 (0.3) 5.3
PSAI 6,434 6,709 7,034 9.3 4.8
Proprietary Products & Others 677 592 684 1.0 15.5
Source: Nirmal Bang Institutional Equities Research

Valuation and Outlook

Excluding Revlimid, DRL’s revenue is expected to grow at a CAGR of 8.4% over FY23-
FY25E with EBITDA margin likely remaining at ~22%. Revenue is expected to be mainly
driven by strong growth in Branded Generics, including in India, Russia and other EMs. US
business (ex-Revlimid and Mayne acquisition) is likely to clock 6% CAGR over FY23-FY25E,
driven by new product launches, partially offset by continuous price erosion in the base
business. On the margin front, under Horizon 2, resumption of investments in the Speciality
pipeline and persistent spending on complex generics & biosimilars are likely to affect
margins. Net profit (ex-Revlimid) is expected to grow at ~11% CAGR over FY23-FY25E
mainly led by subdued operational performance.
The company is currently trading at 18.8x/19.7x PE on FY24E/FY25E and 11.8x/11.9x on
FY24E/FY25E EV/EBITDA. ROE/ROCE is expected to be 16%/15.4% in FY25E. We like
DRL management’s strategic decision-making ability and its enhanced focus on the Branded
business. However, restructuring and shift in focus from Gx to BRx markets are likely to
weigh on near to medium term growth. Also, capital allocation is still high towards DM
acquisition, complex products and the innovative pipeline. Spending on Horizon 2 opportunity
(mainly due to innovation) and Biosimilars is likely to drag DRL’s overall financials. We
maintain ACCUMULATE on DRL with a revised TP of Rs5,977, valuing it at 24x PE on
Sept’25E base EPS of Rs240 and NPV of Rs210 for the Revlimid opportunity.

4 Dr Reddy’s Laboratories
 5
10.0
20.0
30.0
40.0
50.0
60.0

0.0
Apr-14
Jul-14
Oct-14

PE
Jan-15
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Mean
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1SD

Jul-18
Exhibit 5: One-year Rolling Forward P/E Chart

Oct-18
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-1SD

Jan-20
Apr-20
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Jan-21
Source: BSE, Bloomberg, Company, Nirmal Bang Institutional Equities Research

Apr-21
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2SD

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-2SD

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Dr Reddy’s Laboratories
 Institutional Equities
Financial statements
Exhibit 6: Income statement Exhibit 7: Cash flow
Y/E March (Rsmn) FY22 FY23 FY24E FY25E FY26E Y/E March (Rsmn) FY22 FY23 FY24E FY25E FY26E
Net sales 2,12,617 2,45,879 2,64,631 2,77,242 2,90,139 PBT 32,298 45,067 63,716 61,042 58,841
% growth 12.1 15.6 7.6 4.8 4.7 Depreciation 11,872 12,636 13,968 14,129 14,849
Cost of Sales 1,00,551 1,06,536 1,13,691 1,23,270 1,31,848 Net Chg in WC (17,929) (7,855) (19,708) (4,996) (5,244)
Gross profit 1,12,066 1,39,343 1,50,940 1,53,971 1,58,291 Taxes 7,437 (10,714) (15,929) (15,261) (14,710)
% growth 8.7 24.3 8.3 2.0 2.8 Others (5,570) 20,027 1,954 1,139 1,184
R&D Expenditure 17,482 19,381 21,170 22,179 23,211 CFO 28,108 59,161 44,001 56,053 54,920
SG&A Expenditure 49,273 56,089 59,454 64,211 69,348 Capex (16,059) (18,784) (15,000) (15,000) (15,000)
Total expenditure 1,67,306 1,82,006 1,94,316 2,09,660 2,24,406 Net Investments made (11,201) (23,366) (10,000) (10,000) (10,000)
Operating Profit 45,311 63,873 70,315 67,581 65,732 Others 873 777 - - -
% growth 1.6 41.0 10.1 (3.9) (2.7) CFI (26,387) (41,373) (25,000) (25,000) (25,000)
Operating Profit margin (%) 21.3 26.0 26.6 24.4 22.7 Change in Share capital 334 368 - - -
Extraordinary Items (6,724) - - - - Change in Debts 2,735 (20,397) (6,000) (100) (100)
Other Income 2,761 5,907 3,727 3,914 4,109 Div. & Div Tax -4,146 -4,979 -10,098 -9,674 -9,325
Finance (Expense) / Income 2,119 2,853 3,308 3,327 3,482 Others (621) (1,853) - - -
Depreciation &Amortisation 11,872 12,636 13,968 14,129 14,849 CFF (1,698) (26,861) (16,098) (9,774) (9,425)
Share of Profit in Equity Total Cash Generated 23 (9,073) 2,903 21,279 20,495
703 370 333 350 367
Investments
Cash Opening Balance 14,829 14,852 5,779 8,682 29,962
Profit before tax 32,298 60,367 63,716 61,042 58,841
Cash Closing Balance 14,852 5,779 8,682 29,962 50,457
% growth 22.3 86.9 5.5 (4.2) (3.6)
Tax 8,730 15,300 15,929 14,7101: Source: Company, Nirmal Bang Institutional Equities Research
15,261 Exhibit
Exhibit 2:
Effective tax rate (%) 27.0 25.3 25.0 25.0 25.0
Reported PAT 23,568 45,067 47,787 Exhibit
45,782 3:
44,131 Exhibit 9: Key ratios
Adjusted PAT 28,475 45,067 47,787 45,782 44,131 Y/E March FY22 FY23 FY24E FY25E FY26E
% growth 10.3 58.3 6.0 (4.2) (3.6) Profitability & return ratios
EPS (Rs) 172 271 288 276 266 EBITDA margin (%) 21.3 26.0 26.6 24.4 22.7
% growth 10.3 58.3 6.0 (4.2) (3.6) Net profit margin (%) 13.4 18.3 18.1 16.5 15.2
*In IFRS format RoE (%) 15.7 21.4 19.1 16.0 13.7
Source: Company, Nirmal Bang Institutional Equities Research RoCE (%) 13.2 19.0 18.1 15.4 13.2
Working capital & liquidity
ratios
Exhibit 8: Balance sheet Receivables (days) 100 95 95 95 95
Y/E March (Rsmn) FY22 FY23 FY24E FY25E FY26E Inventory (days) 83 80 80 80 80
Equity 832 833 833 833 833 Payables (days) 42 40 40 40 40
Reserves 1,89,695 2,30,158 2,67,847 3,03,955 3,38,761 Current ratio (x) 2.6 2.8 3.6 4.0 4.4
Net worth 1,90,527 2,30,991 2,68,680 3,04,788 3,39,594 Quick ratio (x) 1.9 2.1 2.7 3.1 3.4
Net deferred tax liabilities -12,721 -6,363 -6,363 -6,363 -6,363 Leverage ratios
Short-term loans 28,099 12,194 7,194 7,194 7,194 Net Debt/Equity (x) 0.0 0.0 -0.2 -0.2 -0.3
Long-term loans 5,746 1,278 278 178 78 Net Debt/EBITDA (x) -0.2 -0.8 -1.0 -1.5 -2.0
Other non-current liabilities 2,479 2,907 2,907 2,907 2,907 Valuation ratios
Liabilities 2,14,130 2,41,007 2,72,696 3,08,704 3,43,410 EV/sales (x) 4.2 3.5 3.1 2.9 2.7
Intangible assets &goodwill 31,664 35,094 35,094 35,094 35,094 EV/EBITDA (x) 19.6 13.3 11.8 11.9 11.7
Net block 62,169 66,462 67,494 68,365 68,516 P/E (x) 31.6 20.0 18.8 19.7 20.4
Other non-current assets 8,934 6,162 6,223 6,264 6,306 P/BV (x) 4.7 3.9 3.3 3.0 2.6
Inventories 50,884 48,670 58,001 60,765 63,592 Source: Company, Nirmal Bang Institutional Equities Research
Debtors 66,764 72,485 68,877 72,159 75,516
Cash 14,852 5,779 8,682 29,962 50,457
Loans and advances 31,419 57,250 67,250 77,250 87,250
Other current assets 17,187 22,756 24,287 25,316 26,369
Total current assets 1,81,106 2,06,940 2,27,096 2,65,451 3,03,183
Creditors 25,572 26,444 12,459 13,509 14,449
Other current liabilities 44,171 47,207 50,752 52,961 55,240
Total current liabilities 69,743 73,651 63,212 66,471 69,689
Net current assets 1,11,363 1,33,289 1,63,885 1,98,981 2,33,494
Total assets 2,14,130 2,41,007 2,72,696 3,08,704 3,43,410
Source: Company, Nirmal Bang Institutional Equities Research

6 Dr Reddy’s Laboratories
 Institutional Equities
Rating Track
Date Rating Market price Target price (Rs)
10 June 2016 Buy 3,160 3,950
27July 2016 Buy 3,300 3,950
6 February 2017 Buy 3,142 3,950
15 May 2017 Buy 2,584 3,366
28 July 2017 Buy 2,620 3,020
1 November 2017 Buy 2,428 3,216
29 January 2018 Buy 2,508 3,077
23 May 2018 Buy 2,004 2,898
23 July 2018 Buy 2,059 2,898
27 July 2018 Buy 2,110 2,898
29 October 2018 Buy 2,405 3,122
4 February 2019 Accumulate 2,791 3,122
5 April 2019 Buy 2,772 3,348
20 May 2019 Buy 2,748 3,281
30 July 2019 Buy 2,653 3,281
23 September 2019 Accumulate 2,829 3,138
4 November 2019 Buy 2,755 3,138
28 January 2020 Accumulate 3,189 3,188
27 March 2020 Accumulate 2,945 3,333
23 April 2020 Sell 4,056 3,647
20 May 2020 Sell 3,911 3,647
30 July 2020 Sell 4,300 3,998
18 September 2020 Buy 4,827 5,656
23 September 2020 Accumulate 5,168 5,656
29 October 2020 Buy 4,950 5,737
27 November 2020 Buy 4,899 5,648
7 January 2021 Buy 5,292 6,231
1 February 2021 Buy 4,603 5,594
10 March 2021 Buy 4,448 5,594
5 April 2021 Buy 4,588 5,594
17 May 2021 Accumulate 5,197 5,782
28July 2021 Accumulate 4,844 5,240
26 September 2021 Buy 4,777 5,515
31 October 2021 Buy 4,670 5,644
30 January 2022 Buy 4,218 5,689
21 February 2022 Buy 4,321 5,710
31 March 2022 Buy 4,351 5,349
20May 2022 Buy 3,928 5,424
29 July 27, 2022 Buy 4,259 5,587
29 September 2022 Accumulate 4,267 4,468
29 October 2022 Accumulate 4,461 4,640
27 January 2023 Accumulate 4,200 4,745
16 March 2023 Accumulate 4,384 4,482
11 May 2023 Accumulate 4,868 4,762
19 July 2023 Accumulate 5,187 5,180
27 July 2023 Accumulate 5,437 5,788
29 October 2023 Accumulate 5,420 5,997
Coverage was transferred to Mitesh Shah with effect from 9 th October 2022

7 Dr Reddy’s Laboratories
 -
1,000
2,000
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5,000
6,000
7,000
Apr-16

8
Jul-16
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Rating Track Graph

Jan-18
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Jan-19

Covered
Apr-19
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Not Covered
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Institutional Equities

Dr Reddy’s Laboratories
 Institutional Equities
DISCLOSURES

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9 Dr Reddy’s Laboratories
 Institutional Equities
Disclaimer
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Rahul Arora CEO rahul.arora@nirmalbang.com -

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Dealing
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Nirmal Bang Equities Pvt. Ltd.

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