Dr Reddy’s Laboratories Initiating Coverage Report By Nirmal Bang

We initiate coverage on DRL with a Buy rating and a target price of Rs 3950 based on 21x P/E multiple on FY18E earnings. We see DRL as better poised among Indian peers to grow despite the pricing pressure in the US market. By virtue of ongoing research and development efforts, by FY-2022, the company should build a robust portfolio of value-added generics and complex generic products (sales >US$700m) that have higher endurance to competition, yield higher sales per unit capex, and have a significantly longer life cycle. We foresee DRL doubling its revenue base and trebling its net income by 2022, driven largely by its high-margin proprietary drug business. Once the manufacturing compliance issues get resolved, DRL stock should trade at a premium to its peers as the ongoing news flow on its proprietary drug pipeline should rebuild and strengthen investor confidence.