Neutral Dr Reddy's Labs Ltd For Target Rs.1,125 Motilal Oswal Financial services Ltd
Operational miss; FY27 expected to be a transition year Semaglutide production revival and b-Abatacept approval are near-term key monitorables
* DRRD delivered in-line revenue in 1QFY27; however, EBITDA came in 15% below our estimate, adjusting for the Semaglutide-related impact. The Middle East conflict partly impacted the operational profitability of DRRD.
* DRRD made provisions of INR2.4b related to inventory and other associated costs, as it found certain batches of Semaglutide to be out of specification due to issues associated with API.
* 1QFY27 was the second consecutive quarter of subdued quarterly North America (NA) sales run rate (USD236m). DRRD continues to put efforts into its complex product pipeline to revive NA sales going forward.
* DRRD showcased robust growth momentum in India segment, backed by new launches, acquired brands, and a scale-up in its innovation franchise.
* DRRD changed the operating model of NRT business temporarily, which impacted sales in 1QFY27.
* We reduce our earnings estimates by 2%/3%, factoring in increased opex due to the Middle East conflict and moderate growth in PSAI segment. We value DRRD at 20x 12-month forward earnings to arrive at a TP of INR1,125.
* Given work-in-progress for resolving the Semaglutide-related regulatory issue, commercial benefits from b-abatacept expected in 4QFY27 onward and high FY26 base, we expect earnings to decline in FY27 and then revive from FY28 onward. Considering earnings trajectory and current valuations, we maintain our Neutral stance on the stock.
Revenue, EBITDA, PAT decline YoY in 1QFY27
* Adj. for Semaglutide-related impact, DRRD’s 1QFY27 revenue declined 5.4% YoY to INR80.9b (vs. our estimate of INR82.3b).
* Gross margin contracted 750bp YoY to 49.4%, primarily due to reduced Lenalidomide sales/price erosion in the NA and EU generics businesses and elevated solvent costs on account of the Middle East crisis.
* EBITDA margin contracted 1170bp YoY to 13.5% (vs. our estimate of 15.5%).
* EBITDA declined 49% YoY to INR10.9b (vs. our estimate of INR12.7b).
* Adjusted PAT declined 54% YoY to INR6.5b (vs. our estimate of INR6.7b).
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