Vaccine approval positive for Dr Reddy’s but should you inject your portfolio with Sputnik V?

The Russian Sputnik V, after getting the Drugs Controller General of India’s (DCGI) nod has now become the third vaccine to be given the go-ahead in India.
(Image: Reuters)

With Sputnik V covid-19 vaccine getting the Emergency Use Authorisation (EUA), Dr Reddy’s Laboratories stands to benefit after having secured exclusive marketing and distribution rights for the first 250 million doses of the vaccines in India. The stock soared on Monday while the benchmark indices tanked as investors anticipated the positive news, however, on Tuesday Dr Reddy’s share price fell while Dalal Street surged higher. Dr Reddy’s has become the first domestic vaccine play but amid pricing concerns is it time for investors to buy the stock and inject their portfolio with the vaccine? Dr Reddy’s share price settled at Rs 4,780 apiece after yesterday’s trade.

Pricing dynamics remain unknown

The Russian Sputnik V, after getting the Drugs Controller General of India’s (DCGI) nod has now become the third vaccine to be given the go-ahead in India. But brokerage firms remain divided on whether the stock would perform or not. The overhang for Dr Reddy’s remains the lack of clarity on the agreement it has with Russian Direct Investment Fund (RDIF). The price Dr Reddy’s will pay to secure the said doses is not known. So far, the government has procured doses at a price of Rs 150 per dose for the already approved vaccines.

If doses of Sputnik V are procured at the same price of Rs 150 per dose, analysts at Emkay Global believe it would result in an upside of Rs 60 per share for Dr Reddy’s. “Our bull-case upside of Rs 400 share assumes pricing of Rs 750/dose as suggested by RDIF, marketing margin of 20% for Dr Reddy’s and opportunity duration of three years,” they added.

Sputnik V will become the vaccine with the highest efficacy rate, being administered in India. The vaccine had shown 91.6% efficacy in Phase 3 trial without any serious side effects, according to an interim analysis of data published in The Lancet. The efficacy rate is expected to result in strong demand for the vaccine. Edelweiss Securities model a Net present value (NPV) of Rs 70 per share assuming 190 million doses of the vaccine are sold in the first year at $3.5 per dose price. Further the pharma firm could also benefit from export opportunities as demand for vaccination picks up pace.

Vaccine to be imported initially

Initial doses of the vaccine are likely to be imported by Dr Reddy’s, according to Kotak Securities, with domestic manufacturing yet to be ramped up. Economic dynamics for Dr Reddy’s remain contingent on securing supplies from RDIF, pricing of the vaccine, scale-up of existing vaccines and approval of other vaccines over the medium term, Kotak Securities said. “Assuming sales of 250 million doses and pricing at Rs 150 per dose, a 15-20% distribution margin for DRRD translates to incremental EPS contribution of Rs 25-33 for FY2022,” they added.

Should you buy?

Emkay Global and Edelweiss Securities have a ‘Buy’ call on the stock. Emkay doesn’t believe supply will limit the use of Sputnik V with RDIF already having secured multiple manufacturing agreements locally. The brokerage firm expects the stock to surge to Rs 5,770 apiece. While, Edelweiss Securities have a target of Rs 5,815 per share. Kotak Securities has maintained a ‘Sell’ call in the stock with a fair value of Rs 4,300 amid uncertainty over pricing. Analysts at Motilal Oswal have a neutral rating with target price of Rs 5,410 apiece but have raise EPS estimates.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)