Accumulate Dr. Reddy's Laboratories Ltd For Target Rs. 1,400 by Prabhudas Liladhar Capital Ltd
Weak quarter; Scale up in Sema will be key
Dr. Reddy’s (DRRD) Q4FY26 had several one offs including shelf stock adjustment of gRevlimid. Adjusted for this base business EBITDA were at INR12bn with ~15% OPM. This should pick up with Semaglutide 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 H2FY28. Domestic and Russia sales continue to be on strong footing. We have scale up base business margins from the current level of 15-16% to ~21% in FY28E. We upgrade stock from Reduce to Accumulate with revised TP of 1400/share (23x FY28E EPS). Our FY27 and FY28E EPS stands cut by 3-6%. DRRD have been investing cash flow from gRevlimid to build pipeline across peptides, biosimilars and GLP products; benefits of that should be visible from FY27. At CMP, DRRD is trading at valuations of 21x P/E on FY28E. Slower scale up in Semaglutide opportunity are key risks to our call.
Revenues remain impacted YoY, miss estimates:
DRRD’s sales stood at INR 75.2bn (- 12% YoY) vs our estimates of INR 84bn. Adj for one time shelf stock adjustment (SSA) of INR 4.5bn related to gRevlimid; revenues were down ~6% YoY. Revenues from NRT portfolio stood at INR 7bn. US revenue adj for SSA came in at USD 240mn. Price erosion in gRevlimid and SSA led to such decline QoQ. Domestic business grew by 20% YoY to INR 15.7bn aided by new launches. PSAI declined by 5% YoY. Russia sales grew 29% Yoy aided by new launches, price increase and favourable forex. Sequentially it witnessed decline due to lower volume offtake. EU sales included revenues from acquired NRT portfolio. Adj for this growth was 14% YoY.
One off’s and lower gRevlimid sales dent profitability:
DRRD reported EBIDTA stood at INR 6bn. Adj for one off EBITDA came in at INR 12bn w15% OPM. The YoY was down due to erosion in gRevlimid sales. Segment wise PSAI margins came in at 19.9% (17.3% in Q3FY26) whereas generic margins were at 48.3% (57.4% in Q3FY26). Other expenses were up 2% QoQ. This included INR 1.1bn provision related to VAT liability. R&D expenses declined 25% YoY at INR 5.5bn (7.3% of revenues). Decline was due to reduced development spends in biosimilars following completion of large part of investment in gAbatacept. Amortization expenses came in at INR 2.1bn given NRT biz consolidation while other income came in higher aided by forex gain. Resultant PAT of INR 2.2bn. Adj for one off we believe PAT came in at INR 6bn with EPS of ~8/share. Quarter Summary
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