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In-line Q4; relatively attractive now Q4FY24

as expected

Dr Reddy`s Laboratories (DRRD IN) reported Q4FY24 revenue and EBITDA broadly in line with our estimates. PAT came in 23% ahead, helped by lower depreciation and tax and higher other income. Per our analysis, lower gRevlimid contribution was compensated for by higher base business revenue in the US and sharply higher margin in PSAI.

gRevlimid – Contribution lower; US base remains strong

gRevlimid, while continuing to be a major contributor, saw its share ebb to the region of USD 60mn, in our estimate. Base US business which saw a step jump in Q3, sustained in Q4 as well, in our estimate. We expect gRevlimid to pick up in Q1, also helped by likely higher volume share as per the terms of the settlement with the innovator. We expect the higher levels of base business also to sustain, together delivering mid-teen growth in US business in FY25.

Russia, RoW do well; Sanofi deal to help growth in India business

Russia and the CIS business grew well, but the reported growth number was hit by weak RUB. RoW business grew 40% YoY in Q4 – It has grown 13% for FY24. India growth came in better at 10.5% for Q4, but FY24 was a lackluster year with just 5.5% growth. We expect only single-digit organic growth in India in FY25; but the addition of Sanofi’s vaccine portfolio may likely push overall growth to mid-teen.

PSAI margin strong

PSAI business sustained the recently-improved gross margin at ~29%. This is the highest in several years. We expect these levels to broadly sustain and help overall core margins

Valuation:

Upgrade to Accumulate; TP raised to INR 6,981 We raise FY25E-26E core earnings by 6%. DRRD trades at 17.2x FY25E core earnings. After the large under-performance of the stock to peers in the past six months, we find the stock better valued than earlier, despite the potential profit decline in FY27 from loss of gRevlimid opportunity. So, we upgrade DRRD to Accumulate from Reduce and raise our TP from INR 6,018 to INR 6,981, which is 17.5x FY26E core earnings plus cash per share. Increased price erosion in the US generics market will be the key risk.

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