Dr Reddy’s Laboratories Rating- buy- Multiple issues took a toll on Q4 results

Dr Reddy’s Laboratories Rating: buy- Multiple issues took a toll on Q4 results

Q4 results were hit by one-offs, input cost inflation, US pricing pressure and seasonally lower sales in India. Reported PAT of Rs 875 m in Q4 (-75.9% y-o-y, -87.6% q-o-q) included multiple one-offs: a) provisions of Rs 983 m in SG&A related to litigation with the State of Texas; b) Rs 390 m for the sale of two non-core brands in India and Rs 1,774 m for the sale of territorial rights for two brands in Russia and CIS; and c) impairment charges of Rs 7.6 bn mainly related to PPC-06 (R&D asset) and the Shreveport plant. Adjusting for one-offs, PAT would have been Rs 5.3 bn (-1.9% y-o-y, -25.2% q-o-q).

Overall revenues of Rs 52.2 bn (+10.4% y-o-y, -1.9% q-o-q) saw the impact of elevated pricing erosion in the US base portfolio and seasonal low sales in India. Adjusted EBITDA margins at 20.2% declined 136bps y-o-y and 244bps q-o-q in Q4 on higher input costs and US pricing woes, partially offset by cost efficiencies.

Retain Buy; lower TP to Rs 4,950 (from Rs 5,685): We retain our Buy rating on DRRD, which is making consistent progress in creating a diversified business model. It remains on track for its aspirational EBITDA margin of 25% in the next 2-3 years (adjusted margins of 20.8% in FY22) on process efficiencies and operating leverage. Its calibrated R&D efforts for differentiated generics and biosimilars also support the long-term outlook. Post Q4, we adjust our estimates in line with the current outlook, mainly for near-term cost pressure, which results in EPS cuts of 3.7%/5.9% for FY23/24e. Our revised TP is Rs 4,950 (from Rs 5,685).