DRRD Q3 results takeaways: Core margins decline, key data point to be critical approvals over next few months.

Key takeaways from the numbers:

1). Overall revenues while higher than estimates includes an element of one-off licensing income of Rs 1.3bn. Adjusting for the same revenues would be broadly in line with estimates of cRs36.3bn. From a geography perspective the outperformance has been in the mainstay US geography where revenues have come much stronger than our expectations. Thus while US revenues next quarter should again decline as the additional competition in gRenvela is fully reflected in numbers, we may now be close to the point where US revenues start bottoming out.

2). From the EBITDA perspective, there are multiple adjustments in overall numbers including a). Other licensing income of Rs1.3bn b). Other expense line had a onetime charge of Rs 320mn and c). impact of gRenvela launch which should fade as competition intensifies. Adjusting for these the EBITDA margins should be in the range of c15-16% which is down c200bps QoQ. Key to the margins increasing in coming days would be approvals for new products.

3). From a stock perspective, we see near term bottom at c2300-2400 levels which can also be an entry point for a near term trade given the option value of a number of filings including gCopaxone, gNuvarring, gSuboxone etc.  Note that any positive bias towards DRRD is only towards a cyclical trade in what is a long term structural downturn for the industry.                            

4) We currently have a HOLD rating with TP of 2460/share valuing DRRD at 18x PE on FY20 earnings of Rs136/share. While we do not see significant upside risks to our earnings estimates, near term as signs of bottoming out of earnings emerge, we could see market valuing company at 20x forward earnings.     

More details post concall.

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