Accumulate Dr. Reddy's Laboratories Ltd For Target Rs. 1,300 by Prabhudas Liladhar Capital Ltd
Another quarter of weak base earnings
Dr. Reddy’s (DRRD) Q1FY27 had inventory write off to the tune of INR 2.4bn related to Semaglutide API. Adjusted for this base business EBITDA was at INR 11bn with ~13% OPM; below our estimate. This should pick up with Semaglutide re-launch across key markets along with moderation of overheads which will be key for margin recovery. Further timely launches like bAbatacept can accelerate profitability from H2FY28E. Domestic and Russia sales continue to be on strong footing. Our FY27E and FY28E stands cut by 14% and 6%. We have considered base business margins from the current level of 13-14% to ~20% in FY28E.
We maintain Accumulate with revised TP of 1300/share (23x FY28E EPS). DRRD have been investing cash flow from gRevlimid to build pipeline across peptides, biosimilars and GLP products; benefits of that should be visible from H2FY27E. At CMP, DRRD is trading at valuations of 21x P/E on FY28E. Delay in re-launch of Semaglutide are key risks to our call.
In line Revenues: DRRD’s sales stood at INR 80.7bn (-6% YoY) vs our estimates of INR 79bn. US revenue stood at USD 233mn (we est USD 245mn). High base of gRevlimid reflected such decline YoY. Domestic business grew by 17% YoY to INR 17.2bn aided by new launches and portfolio acquisition. PSAI increased by 4% YoY. Russia sales grew 27% YoY to INR 9bn aided by new launches, price increase and favourable forex. EU sales included revenues from acquired NRT portfolio. NRT revenue stood at INR 6.6bn, declined YoY due to the post integration operating model, with higher distributor rebates and discounts
EBITDA miss, Adj for one off OPM at ~13%: DRRD reported GMs of 46.5%. There was inventory write off to the tune of INR 2.4bn related to semaglutide API. Adj for this GMs stood at 49.5%, down 700bps YoY. EBIDTA stood at INR 8.3bn. Adj for inventory write off EBITDA stood at INR 11bn with 13.3% OPM. (lower than our est). The YoY decline was due to high base from gRevlimid sales and higher solvent cost due to ongoing crisis in ME. Segment wise PSAI margins came in lower at 4.5% (19.9% in Q4FY26) whereas Generic margins were at 51.6% (48.3% in Q4FY26). Other expenses in Q1FY27 were up 5.7% QoQ. R&D expenses declined 8% (7.1% of revenues). Decline was due to reduced development spends in biosimilars. Other income stood at INR 845mn aided by forex gain. Resultant PAT of INR 4.4bn. Adj for one off EPS was INR ~8/share.
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