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Strong US business offset by muted Russia/CIS 

Efforts underway to scale-up JVs/integrated acquisition 

* Dr. Reddy’s Lab (DRRD) delivered better-than-expected 1QFY25 earnings, led by increased traction in the US generics segment. DRRD witnessed price erosion in the US generics, EU, and ROW markets, while it experienced an increase in prices in the Russia/CIS markets. Certain investments in newer businesses and higher freight costs hit profitability to some extent.  

* We raise our earnings estimate by 7%/8% for FY25/FY26 factoring in: a) market share gains/higher volume off-take in the US generics portfolio, b) improved prospects in the PSAI segment, and c) better operating leverage. We value DRRD at 22x 12M forward base earnings and add INR80 (NPV related to g-Revlimid) to arrive at our TP of INR7,100.

* DRRD continues to build a complex ANDA pipeline in the US market and implement efforts towards enhancing branded prescription business in the Indian market. Further, the overall earnings growth is also supported by inorganic opportunities (Heleon’s Nicotine replacement therapy portfolio), JVs (DRRD-Sanofi JV to distribute Sanofi’s vaccine products). Accordingly, we estimate 11% earnings CAGR over FY24-26. We reiterate our Neutral rating on limited upside from current levels. 

Product mix benefit offset by reduced operating leverage 

* DRRD’s 1QFY25 revenues grew 14% YoY at INR76.7b (vs. est. of INR73.9b). Sequentially, sales grew 8.3%.

* The US sales rose 20.3% YoY to INR38.4b (~USD463m; 50% of sales). Europe sales grew 3.8% YoY to INR5.3b (7% of sales). India sales rose 15.4% YoY at INR13.3b (17% of sales). Adj. for Sanofi portfolio, the base business grew mid-single digit YoY. Emerging market sales grew 3% YoY to INR11.9b (15% of sales). PSAI segment revenue rose 14% YoY to INR7.7b (11% of sales).  

* Gross margin (GM) expanded 170bp YoY to 60.4% due to YoY expansion in margins of GG and PSAI segments (up 80bp/810bp YoY).

* EBITDA margin contracted 260bp YoY to 27.7% (our est: 26.7%) led higher SG&A/R&D expenses (+370bp/+70 YoY as % of sales).  

* EBITDA grew 4% YoY to INR21.3b (vs. est. of INR19.7b).

* DRRD reported a PAT of INR13.9b (our est: INR12.7b), up 2% YoY. 

Highlights from the management commentary 

* Management guides SG&A expenses to be ~25-27% of revenue for FY25.

* DRRD expects the R&D expense to be in the range of 8.5-9.0% of revenue for FY25. About 20% of the spending was towards biosimilars.

* Management guides ETR to be 24-25% for FY25.

* DRRD indicated SG&A to be 27.5%-28.0% of sales, and this will be a sustainable run rate over the medium term.

* It expects Abatacept launch in Dec’26.

* FCF is lower for the quarter due to fluctuations in factoring. DRRD has rolled back factoring, resulting in lower FCF.

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