Dr. Reddy’s Laboratories Rating: Purchase – Multiple Issues Affect Q4 Results

Q4 results were affected by one-off, input cost inflation, US price pressures and seasonally low sales in India. Q4 (-75.9% yoy, -87.6% qoq) The PAT of Rs. 875 m included multiple one-offs: a) provision of Rs. B) Rs 390m for sale of two non-core brands in India and Rs 1,774 million for sale of territorial rights of two brands of Russia and CIS; And c) Rs 7.6 billion in disability charges mainly related to PPC-06 (R&D assets) and Shreveport plant. Adjusted for one-off, the PAT would be Rs 5.3 billion (-1.9% yoy, -25.2% qoq).

Overall revenue of Rs 52.2 billion (+ 10.4% yoy, -1.9% qoq) has seen the impact of higher price declines in the US base portfolio and seasonal low sales in India. Adjusting to 20.2% EBITDA margin 136bps yoy and 244bps qoq in Q4 has reduced the input cost and US price problem, partially offset by cost efficiency.

Focus on improving position in key markets: DRRD expects near-term input cost pressures to continue and it expects to minimize impact through cost efficiency. It continues to build global portfolios, and focuses on better penetration and productivity across all key markets. It is actively evaluating strategic M&A opportunities to grow its portfolio. It hopes to maintain ‘above market’ growth for its sales in India with new launches and better productivity. It expects US price issues to continue and focus on new launches Despite the quarterly variability, it expects to maintain growth in the core segment. It will be organizing an investor day soon to give more updates.

Maintain purchasing; Low TP Rs. 4,950 (from Rs. 5,685): We maintain our buy rating at DRRD, which is making steady progress in building a diversified business model. It is on track for an ambitious EBITDA margin of 25% (20.8% consolidated margin on FY22) over the next 2-3 years on process efficiency and operating leverage. Its coordinated R&D efforts for differentiated generics and biosimilars support the long-term outlook. After Q4, we adjust our estimates to the current outlook, mainly for near-term cost pressures, resulting in a 3.7% / 5.9% EPS reduction for FY23 / 24e. Our revised TP is Rs 4,950 (from Rs 5,685).

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