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In one year, Dr Reddy’s share has surged by 37% as of March 2024, which is phenomenal for any stock, especially in the pharmaceutical industry. That’s because the healthcare or the pharmaceutical business is generally shockproof from any significant drawdowns in the economy. The overall sector remains stable and gives a healthy return to its shareholders.
However, the industry dynamics have changed after the COVID-19 pandemic, where people are now more conscious about health, which has pushed the overall growth for the entire industry.
Here is a glimpse of the annual turnover of the Indian pharmaceutical market from 2015 to 2021, with expected growth till 2030 (USD billion)
Dr Reddy’s Laboratories Ltd. is a pharmaceutical company headquartered in Hyderabad, India. Established in 1986, it has become a renowned name in the healthcare sector, dedicated to serving millions of patients with high-quality, affordable, and innovative medicines.
Dr Reddy’s share has been listed on the National Stock Exchange since 2003 and in the past 5 years Dr Reddy’s share has given a triple digit return of nearly 120% return as of March 2024. So, will it continue to deliver staggering returns to its shareholders?
In this blog, you can get the answer to this question and decide for yourself is this a good investment opportunity in the long run or not.
Company Overview
Dr Reddy’s portfolio includes pharmaceutical generics, APIs, custom pharmaceutical services, biosimilar and differentiated formulations. Company has Global Generics, Pharmaceutical Services & Active Ingredients (PSAI) and Proprietary Products & Others. Global Generic contributes to more than 80% of Total Revenue. It is the main business of the company wherein it offers 400+ high-quality generic drugs.
In June 2020, the company completed the acquisition of selected divisions of Wockhardt Ltd branded generics business in India, Nepal, Sri Lanka, Bhutan and Maldives. The company has a global presence, with more than 30% of Revenue coming from the USA.
Segment Breakup
During the quarter Q3 FY24, the revenue contribution across geographies were: North America 46%, Emerging Markets 18%, India 16%, PSAI (pharmaceutical services and active ingredients) 11%, Europe 7% and others 2%.
Financial Highlights
The company’s revenue has grown at 12% CAGR, and its Net Profit increased at 39% CAGR in the last 5 years. During FY23, revenue stood at 15% higher than in FY22.
Using StockEdge, you can view the trend of net sales growth of Dr Reddy’s with the help of bar charts as shown in the above image.
In the recent quarter of Q3 FY24, revenue from operation increased by 6.6% YoY and net profit jumped by 11% YoY. This significant jump was mainly propelled by market share gains for their existing products in North America and the ongoing expansion of business in Europe.
However, in Q3 FY24, the gross margin stood at 58.5%, showing a decrease of 73 bps YoY. The decline in margin was primarily driven by lower prices for certain products in generic markets, partially offset by improvements in the product mix and productivity.
Debt burden is not huge and the interest coverage ratio is decent. As you can see, the debt-to-equity ratio of Dr Reddy’s share is just 0.6x.
In Q3 FY24, EBITDA reached ₹2,110 crore with an EBITDA margin of 29.3%. The operating working capital stood at ₹10,810 crore, capital expenditure amounted to ₹310 crore and free cash flow was ₹20 crore.
The cash and cash equivalents as of 31st December stood at ₹7,535 crore.
SWOT Analysis of Dr Reddy’s Share
We’ll conduct a SWOT analysis of the company to gauge its strengths, weaknesses,
opportunities, and threats. This analysis will provide insights into the company’s competitive position and potential risks, aiding in making informed investment decisions
Strength
The company has geographically diversified revenue segments. The product portfolio includes branded formulations, biosimilars, API, and OTC, which contribute to the core business. The global generic business contributes more than 80% towards the revenue. It is backward integrated in the APIs to the extent of 50%. Gross Profit margin improved on account of favorable product mix owing to price erosion on the baseline. The company continued to invest in R&D of new products in its biosimilars and generics businesses.
Additionally, during this quarter of Q3 FY24, the company acquired MenoLabs branded portfolio of women’s health-focused supplements in the U.S.
Weakness
The larger portion of revenue depends on international markets; thus, the company is vulnerable to foreign exchange fluctuations. The decline in Pharmaceutical Services and Active Ingredients was mainly due to price erosion in some of its products.
Opportunity
The company has made strategic moves, including new product launches and strengthening its portfolio through acquisitions and divestments. The management’s focus on R&D investments indicates a commitment to developing a robust pipeline of new products, both in small molecules and biosimilars. This emphasis on innovation and expansion is aimed at improving the affordability and accessibility of medicines for patients globally. It expects a 25% EBITDA margin going forward. They aim to launch approximately 25-30 new products across key markets in the next three years, emphasizing their commitment to continued growth and innovation.
Threat
Any regulatory and product litigation delays will be key risks to the stock.
The Bottom Line
Dr. Reddy’s Laboratories, a prominent player in the Nifty 50, stands out for its strong geographical diversification and a robust product pipeline. The company’s strategic focus on complex and differentiated formulations, backed by substantial R&D investments, positions it ahead in the competitive pharmaceutical market. But the regulatory issues arising out of litigation will keep affecting the business until resolved. However, new launches will provide good traction going ahead. Dr Reddy’s targets to launch ~25-30 new products across its key markets in FY25 and FY26. Additionally, it aims to launch six new biosimilar products, with the timeline (by FY30) contingent upon the necessary approvals. However, the first product may be launched by CY27.
