Dr. Reddy's Laboratories' (DRL) reported Q4FY21 performance broadly in-line with our estimates. Revenue grew 6.7% YoY to Rs47.3bn (I-Sec: Rs48.5bn) driven by India, EU and ROW markets. EBITDA margin at 21.5% was lower 130bps QoQ due to lower sales. Adjusted PAT declined 13.1% to Rs5.5bn (I-Sec: Rs5.4bn) due to higher tax rate.

US sales improved 1.7% QoQ to US$239mn led by new launches. We expect the growth momentum in branded generics business (India & EMs) and new launches in US to continue in coming quarters supporting growth. Management expects to launch generic Vascepa in next two months with smooth API supplies. DRL has launched Sputnik V vaccine in India which would provide significant upside to earnings in near term.

India remains strong, US stable: India sales grew 23.5% YoY with consolidation of Wockhardt products which was completed in Jun'20 and recovery in industry growth. Adjusting for Wockhardt integration growth stood at ~8% during the quarter and ~2% for the year. US revenue improved 1.7% QoQ to US$239mn vs estimated US$240mn led by new product launches. We believe recent launch of Ciprodex and expectation of Vascepa launch in near term would help in improving revenue run-rate. PSAI business segmented reported growth of 10.0% YoY led by better volumes. EU generics reported strong 14.8% growth led by new launches and traction in volumes. EM revenues grew 10.0% led by CIS and ROW with new launches and strong traction in volumes.

Increase in cost base continued: Gross margin was sequentially stable at 53.7%, in line with estimate and it has improved by 220bps YoY led by improved business and product mix. However, EBITDA margin dropped 130bps QoQ to 21.5% (I-Sec: 21.7%) due to lower sales and higher R&D spend. S,G&A expenses sequentially grew ~14% in Q3FY21 and this high base has sustained in Q4FY21 led by incremental expenses post Wockhardt acquisition and higher freight charges. Gross margin has been volatile on quarterly basis but we expect it to remain ~54-56%.

Outlook: Overall, we expect revenues and earnings to grow at 14.3% and 35.4% CAGRs, respectively, over FY21-FY23E with 610bps EBITDA margin expansion. Our estimates include upside from Revlimid in H2FY23E. The focus of the management continues to improve EBITDA margin to ~25% and RoCE through better capital allocation. The company has launches Sputnik V in India and may export it as well. This can provide significant upside in near term to our estimates.