Dr Reddy’s Laboratories rating: Buy | Healthy financials should aid growth

Continuing its efforts to improve its product portfolio, DRRD entered several deals in FY22: 1) the sale of certain non-core brands in India, Russia and CIS; 2) the acquisition of Nimbus Health in Germany to enter niche space of medicinal cannabis; and 3) the divesting of rights for two proprietary products (PP)-ELYXYB and E7777. In June 2022, it acquired a portfolio of branded and generic injectables from Eton Pharma in the US and divested four non-core brands in India.

Rising branded generics footprint: Revenue from the US market was ~36% of the total in FY22 (vs 43% in FY18) while the revenue share for branded generics markets (including India and Russia) moved up to ~40% (vs 33% in FY18), indicating progress on its goal of a diversified business model. India sales (~20% of FY22 revenues) rose ~2x between FY18 and FY22. It aims to enter top-5 league in the Indian market over next few years (from its rank of 11th now), which would require it to grow its India sales by 35-40%. Its supplies to Russia (~9% of FY22 revenues) are normal so far despite the ongoing conflict with Ukraine although it has seen higher logistic costs and longer lead times needed by suppliers. Russia remains a strategic market where it continues to focus on growth opportunities.

Healthy financials should support future growth: As of 31 March 2022, DRRD has working capital of Rs 87.8 bn (including cash and equivalents of Rs 14.8 bn and investments of Rs  29.3 bn in term deposits, bonds and mutual funds) vs Rs 66.6 bn in FY21. Net debt/equity was -0.08x. DSO (days of sales outstanding) were at 108 days in FY22 vs 91 days in FY21 (FY21 had gains from invoice factoring). It spent Rs 14.7 bn in capex in FY22 and expects capex of Rs 15-17 bn for FY23e, mainly for injectable plant at Srikakulam (FTO 11). As of FY22, it had CWIP of Rs 13.5 bn and capital commitments of Rs 7.8 bn, mostly for FTO 11 (which it aims to complete by FY23/24e). It plans to fund capex projects and any other growth drivers mostly through internal cash accruals (free cash of Rs 25.1 bn in FY22). It has 11 formulations plants (it sold plant in Beverley, UK, in FY22) and eight APIs plants as of FY22, all of which uphold cGMP compliance status.

Retain Buy rating and target price of Rs 4,950: We like DRRD’s well-defined growth goals for key segments like the US, India, emerging markets and biosimilars as well as its relentless focus on productivity and environmental, social and governance (ESG) metrics, which were highlighted during its investor day in June 2022.



Author: Howard Caldwell