Should you buy, sell or hold Dr Reddy’s post sharp fall?

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Dr Reddy’s shares continued to slide downward today as well after slipping over 10% yesterday post the Q1 earnings. At 12:51pm, the scrip traded at Rs 4704.00 apiece, down 2.90% from its previous close.

The pharma major reported a consolidated profit of Rs 570.8 crore for the quarter ended June 2021, 1.5% down from the year-ago period, hit by lower operating profit and income. Profit in the June 2020 quarter stood at Rs 579.3 crore. It’s revenue from operations grew by 11.4% year-on-year to Rs 4,919.4 crore in Q1FY22.

Overall, earnings missed analyst expectations however there was more to the results in the fine print that caused the sharp slide. The company said it had received a subpoena from the US Securities and Exchange Commission on July 6 seeking documents pertaining to certain Commonwealth of Independent States countries and was responding to the same. The company had also commenced a detailed investigation into an anonymous complaint.

This was a major reason behind the fall which led the overall Nifty Pharma index to slide over 4% yesterday and the decline continues today with the index down 0.6%

What should investors do ?

Brokerage View

Jefferies | Rating: Buy | Target: Cut to Rs 5,761 from Rs 6,209

The research firm feels that Revenue/EBITDA/PAT came in at 2%/21%/13% which was below estimates. North America revenue was flat with market share gains offsetting price erosion. It has cut FY22/FY23 EPS (excluding-Sputnik) estimates by 1%/7% .

Motilal Oswal | Rating: Neutral | Target: Rs 5,200

We lower our EPS estimates by 4% each for FY22/FY23E, reflecting price erosion in the US base portfolio, the gradual accrual of commercial benefit from niche launches. We expect a 23% earnings CAGR over FY21–23 estimated earnings. We have arrived at target of Rs 5,200 on a 12-month forward earnings basis. We maintain Neutral on a limited upside from current levels.

Morgan Stanley | Rating: Overweight | Target: Rs 5,859

New launches and operating leverage is likely to drive margin recovery soon. New health-tech initiative can create value in the medium term.

Goldman Sachs | Rating: Neutral | Target: Rs 5,110

The brokerage firm is of the view that API price erosion in the US has dented margins. It has cut FY22-24 EPS estimates by 6-13%.