Dr Reddy's Labs' strong Q4 results failed to impress brokerages, with analysts warning of a dearth of near-term growth catalysts for the drugmaker. While Dr Reddy's continues focused on biosimilars and steps to boost its business in key areas, brokerages expect the advantages to materialize only after FY25.
Dr Reddy's January-March earnings were driven by the breakthrough cancer medicine Revlimid, as they had been in prior quarters. Brokerage firm Nomura highlighted Revlimid's contribution to the drugmaker's good gross margin and operational performance in the fourth quarter.
Nuvama Institutional Equities held the same viewpoint. "The US business benefitted from yet another quarter with Revlimid contribution ($110-130 million)," said the brokerage. Revenue from the US market accounts for almost 60% of Dr Reddy's overall revenue.
Dr Reddy's Laboratories reported a net profit of Rs 1,307 crore for the March quarter of FY24, up 36 percent from the previous year and slightly higher than the projected Rs 1,291 crore.
Revenue was Rs 7,083 crore, up 12 percent from the previous quarter but lower than expected at Rs 7,136 crore. Nonetheless, Revlimid's substantial contribution boosted the company's profitability, increasing its EBITDA margin to 26.4 percent in Q4 from 25.9 percent the previous year.
While the company produced significant profitability, according to Nuvama's calculations, the core business EBITDA margin was around 17 percent, down 250-300 basis points year on year. Meanwhile, greater R&D spending during the quarter, which accounted for 9.7 percent of total sales, reduced the company's base EBITDA margin.
Nuvama also expects greater R&D costs (as a proportion of sales) to continue for the next few years as a result of Dr Reddy's pipeline for the Horizon 2 initiative, which includes both biosimilars and complicated pharmaceuticals. Aside from increasing R&D expenses, Jefferies anticipates a weak US launch pipeline to put pressure on the drugmaker's EBITDA margin in FY25.
Moving on, Motilal Oswal Financial Services forecasts Dr Reddy's earnings growth to decrease to a 3.5 percent CAGR in FY24-26, owing in part to the gradual increase in market share of the Revlimid generic. However, Dr Reddy's attempts to strengthen its biosimilar portfolio and offering through partnerships, R&D, joint ventures, and acquisitions will pay dividends in the medium term.
Brokerages such as Jefferies and MOFSL are confident in these efforts and expect them to have a favorable impact on Dr Reddy's starting in FY26. Nuvama, on the other hand, expects its benefits to begin in fiscal year 27.
Similarly, Nuvama has a'reduce' rating on the stock, with a target price of Rs 5,028. Nomura and MOFSL have 'neutral' ratings on the stock, with price targets of Rs 6,499 and Rs 6,070, respectively. Jefferies rates Dr Reddy's as 'underperform', with a price target of Rs 5,010.
The majority of these price forecasts for the stock imply the possibility of a decline, since the stock was trading at Rs 6,016.55 on the NSE at 09.16 am, down roughly 4%.
