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Dr. Reddy's Laboratories - Analyst Meet Update - Multiple growth initiatives - BUY

Posted On: 2022-06-24 12:51:31 (Time Zone: IST)

Mr. Param Desai - Research Analyst at Prabhudas Lilladher Pvt. Ltd.

Quick Pointers:

- Creating new growth avenues like CDMO, Biosimilars, Nutraceuticals and immune - oncology.

- Disciplined capital allocation and productivity enhancement will be the key focus; expect double digit revenue growth with +25% OPM and +25% RoCE.

Dr Reddy's (DRRD) management outlined its strategy to create new (Horizon 2) business models, while growing in existing spaces (Horizon 1) to drive sustainable growth. The company expects double digit revenue growth in the medium term, with aspiration of +25% OPM and 25% RoCE. Horzion 2 will focus on biosimilars, nutraceuticals, Immuno-oncology and new disease management. Most of these initiatives from financials perspective will be visible over next 3-5 years.

Our FY23E/FY24E estimates remain unchanged. We continue to expect steady earnings momentum and pick up in US generic business along with cost optimization. Also, strong pipeline/new launches will drive steady growth in India and RoW markets. We expect 13% EPS CAGR over FY22-24E (ex of Revlimid) and maintain our 'Buy' rating with TP of Rs4,900/share. At CMP, DRRD is trading at 19x P/E on FY24E adjusted for gRevlimid.

New growth avenues: Company is planning to build its Immuno-oncology in NCEs, Biologics & CGT, Nutraceuticals, CDMO, new disease management and digital services which will start contributing meaningfully from 2027. We believe, investments in these avenues will lead to overall 50-100bps increase of expenses.

India - aims to be in top 5: India market have grown by 2x in last 4 years. Currently company has 16 brands in IPM in top 300, with 15 brands having +Rs1bn revenues. DRRD aspires to be in top 5 from current rank of 10 with focus on building big brands through strong product management processes. Further multiple initiatives like nutraceuticals, OTC and inorganic route will scale up domestic formulation business.

US -robust pipeline: DRRD has robust pipeline of 175 products with 90 filed, out of which 40% are injectables/sterile products. Filings for complex products will continue to focus on +25 products across Drug-device combos, peptides and long-acting Injectables. Contribution from US has come down from 50% in FY16 to 37%. In the near term non US markets will continue to grow faster than US generics.

Other highlights: (1) China- will continue to focus on key markets- It aims to grow 2-3x in next 5 years with double digit filings annually. Currently 17 filings pending for approval. (2) API - Aim to backward-integrate 70%+ core molecules which should result in +500 bps gross margin improvement in next 5 years. Geographical diversification will be key focus area. (3) R&D cost to inch up 10-11% of sales from current level of 9%. Investments in biosimilars is around 25-30% of R&D, which will grow faster (4) Expect FTO injectable plant to be inspected in July month. (5) Biosimilar: Currently 12 products in pipeline across various stages of development, filed 1 so far with 2 assets expected to enter clinical phase by FY23. (6) EU - will be another important market for DRRD which has already grown by 2x in last 3 years. Segments like Biosimilar, complex generics and other branded generics have huge opportunities in the near future.

Shares of Dr. Reddy's Laboratories Limited was last trading in BSE at Rs. 4296.20 as compared to the previous close of Rs. 4250.60. The total number of shares traded during the day was 5376 in over 1143 trades.

The stock hit an intraday high of Rs. 4304.60 and intraday low of 4258.10. The net turnover during the day was Rs. 23030295.00.

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