Brokerages bullish on DRL

Mumbai: Despite reporting nearly Rs 570-crore loss for the December quarter, Dr Reddy's Laboratories’ (DRL) has shown an improvement in third quarter (Q3) performance across geographies. Brokerages are now bullish on the second largest pharma stock by market capitalisation.

The company, in the Q3 results, included impairment charges of Rs 1,320 crore on some products forming part of Global Generics and Proprietary Products segments, leading to reporting a net loss.

Otherwise, the pharma major posted strong revenue growth of 14 per cent year-on-year to Rs 3,044 crore during the October-December quarter, largely driven by steady US business along with strong performance from India, Europe and the emerging markets.

The net profit grew 30.62 per cent YoY to Rs 521.70 crore from Rs 399.40 crore the same quarter last year.

“The Q3 result was better than estimates on all fronts with healthy growth across geographies and strongest operational (adjusted for impairment) margins in the past 20 quarters,” said report by ICICI Securities.

“The company’s revenues grew mainly due to strong growth in Europe, Russia, other CIS markets. Domestic revenues grew 13.3 per cent YoY while US revenues grew 7.9 per cent to Rs 1599.9 crore,” according to ICICI Securities.

Despite challenging years, the US remains a key driver for the company, contributing around 42 per cent to total revenues. The company has a strong pending pipeline of new drugs. We expect US sales to grow at a CAGR of around 9 per cent to Rs 7,780 crore in FY19-22 on the back of new launches, ICICI Securities said.

China could be another growth engine from FY22 onwards according to another brokerage firm.

“China revenues presently stood at $130 million, which includes $100 mn reflected as part of the JV sales. Most of the company's US products meet Chinese new product registration requirement. This would be still majorly an opportunity beyond FY21 as it requires 12-15 months to complete the registration. Product filings have been picking up, the company has seen the entry into direct market via olazipine tender recently. This market has lots of local hospital listing process post the approval of the product based on different states registration,” said a report by Centrum Research.

Japanese brokerage firm Nomura, in a note, said, “The healthy combination of strong revenue growth across markets and cost control led to the earnings beat. The company generated free cash flow of Rs 580 crore in the third quarter and is now net cash positive. We revise our financial estimates to factor in Q3 results and raise FY21/22 earnings per share by 6 per cent to 7 per cent owing to higher revenue projections. We arrive at a March 2021 target price of Rs 3,684.”

Delay in resolution of facilities, delay in appr-ovals, adverse outcome on drug price fixing lawsuit in US were the key downside risks for the company.

“Resolution of facilities is a key near-term catalyst –Srikakulam facility is under warning letter since Nov. 2015 and is currently undergoing inspection, Duvvada oncology facility received 8 observations in Aug 2019,” HDFC Securities said. “We estimate Dr Reddy’s revenues and earnings to post 12 per cent and 21 per cent CAGR in FY19-22,” HDFC Securities said.