 "Dr Reddy's shares zoom post Nicotinell acquisition; brokerages unimpressed")
On Thursday, shares of the Dr Reddy’s Laboratories zoomed up to 2.7 per cent at Rs 6,235.90 a piece on the BSE. The stock rose after the company on Wednesday acquired OTC brand Nicotinell from London based consumer healthcare giant Heleon.
The Hyderabad based pharmaceutical giant acquired one of the leading nicotine replacement therapy (NRT) brands that helps in reducing smoking for a total payout of $633 million from Haleon, a GSK and Pfizer’s consumer healthcare spin-off.
Despite the positive news, brokerages took a cautious stance on the move, calling this an ‘uncharted territory’ for the Indian drugmaker.
Analysts at Kotak Institutional Equities believed that Dr Reddy’s should ideally better utilise the multiple myeloma drug Revlimid, due to its strong impact on the company’s balance sheet.
They said, given flat to marginally declining sales of the company’s acquired portfolio in the past three years, there remains a higher execution risk as these are relatively uncharted waters for the pharma giant.
That apart, the brokerage said that Dr Reddy’s need heavily invest to create an OTC franchise to push Nicotinell’s sales across various markets
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At twelve months trailing valuation of 2.3 times enterprise value-to-sales (EV/sales) and 9.2 times EV to Ebitda stands in the high valuation category, said analysts at Kotak.
“We expect the deal to be marginally EPS-dilutive for DRRD. Retain ‘REDUCE’ with a FV of Rs5,925 (Rs5,975 earlier),” Alankar Garude, Samitinjoy Basak, Aniket Singh of KIE wrote in a report.
According to reports, the global brokerages largely stayed unimpressed with the aquistion. Nomura said that the strategic rationale of the move remians unconvincing and gave the company's stock a ‘Neutral’ rating with a target price of Rs 6,499.
Further, Jefferies contented that the OTC brands will rquire upfront investments with the impact of synergies from the aquired portfolio visibly only over FY27-28. The brokerage gave an ‘Underperform’ call to the stock with a target price of Rs 5,010.
Further, Jefferies contented that the OTC brands will rquire upfront investments with the impact of synergies from the aquired portfolio visibly only over FY27-28. The brokerage gave an ‘Underperform’ call to the stock with a target price of Rs 5,010.
Meanwhile, domestically, those at Motilal Oswal, gave a ‘Neutral’ rating to the stock as they believed the counter offers limited upside on current valuation.
However, they saw the portfolio acquisition move with optimism and raised their earnings estimates by 3 per cent for fiscal year 2024-25 factoring in the addition of NRT business. Accordingly, the brokerage revised its target price to Rs 6,430.
They said, the acquisition expands Dr Reddy’s offerings in the consumer healthcare segment and extends its OTC reach in Europe and other global markets.
“The valuation at 2.3x of CY23 sales and 9.2x EV/ CY23 EBITDA is fair, in our view, considering its expansion in nicotine replacement therapy (NRT), global outreach (excluding US) and 25 per cent Ebitda margin,” the brokerage wrote in a recent report.
At 10:19 AM; the stock of the company was 2.05 per cent higher at Rs 6,193 per share on the BSE. By comparison the BSE Sensex was down by 0.09 per cent.