Buy Dr Reddys Laboratories Ltd For Target Rs. 1,418 By JM Financial Services
Mixed Q4; Sema opportunity underappreciated
DRRD reported a mixed Q4 performance, with YoY growth across Revenue, EBITDA, and Adjusted PAT of 20%, 15%, and 28%, respectively. Growth was primarily driven by the NRT acquisition and contributions from the generics portfolio. Excluding the acquisition, revenue grew 12% YoY. The topline was broadly in line with expectations. Gross margins declined 300 bps YoY to 56% due to negative manufacturing overhead leverage, severance pay, and higher milestone income recognized in the comparative period. EBITDA stood at INR 20.5bn, which was 2%/10% below JMFe/consensus estimates, while PAT exceeded street expectations by 13%, driven by higher net finance income and lower taxes. All geographies, except North America, delivered healthy double-digit growth. North America grew 9% YoY. Management has guided for double-digit growth in FY26, with margins expected to remain similar to FY25 levels. Beyond FY26, Semaglutide and Biosimilars (including Abatacept) are expected to drive business performance. DRRD plans to be present in all Semaglutide markets losing exclusivity in CY26, while Abatacept is scheduled for launch in CY27. We believe the street is underestimating the Semaglutide opportunity for Dr. Reddy’s. While it may not fully replace Revlimid sales, it could substantially mitigate the earnings decline in FY27. At an 21x PE on FY27 EPS, the stock remains attractive compared to peers. We maintain our BUY rating with a target price of INR 1,418.
* North America delivered 9% growth on a high base: The US business continue to face low single digit price erosion. Though increased volume from key products and successful new launches (eg. Beva) led to 9% YoY growth. On gRevlimid front, the company will finish their allocation a few months prior to January. There is some price erosion for the product; however, the volumes have increased. The company launched 7 new products this quarter, bringing the total to 18 for FY25. The management anticipates the new launch momentum to continue in FY26 as well. Notable highlights include - exclusive commercial rights for the Daratumumab and USFDA accepting partner’s filing of Denosumab biosimilar.
* Europe increases multi-fold post NRT acquisition: The Europe business delivered 145% YoY growth. This was predominantly because of the NRT acquisition. Excluding NRT, Europe still managed to provide a healthy 29% YoY growth driven by higher base business volume and new product launches, partially offset by pricing pressure. The company launched 10 new generic products in Europe this quarter, taking the total to 29 for FY25. The company intends to leverage the US portfolio and will launch Rituximab and Beva in Europe as well. Notable highlights include DRRD securing exclusive commercialization rights for the Daratumumab in Europe.
* Vaccine portfolio - engine behind India: Domestic business grew a healthy 16% YoY. Growth primarily driven by in-licensing vaccine portfolio, new launches and favourable pricing. Growth excl. vaccine i.e. the base business grew 6% YoY. Underperformance in Cardiac and GI, correction strategy includes addition of more MRs as well as and better LCM for their bigger brands. In addition to the Sanofi and Nestle portfolio, the company launched 23 brands during the fiscal.
* EMs remain strong: EM business delivered a 16% YoY growth, Russia posted a 27% YoY growth in constant currency. Growth driven by higher volume and new launches, partially offset by unfavourable forex. The company launched 26 products across geographies during the quarter, bringing the total to 85 for FY25. Notable highlights include exclusive agreement with Bio-Thera to commercialize Ustekinumab (bStelara) and Golimumab (bSimponi) with a primary focus on Southeast Asian markets.
* NRT integration on track: Integration of newly acquired NRT is moving forward as planned. The United Kingdom was successfully integrated at the start of the month and the Nordics’ integration in the next phase is on track. The business contributed INR 5.9bn in Q4 and INR 1.2bn in the full year.
* Biosimilars: Abatacept is deep in phase 3 with company on track for submission by CY25 end. The company intends to launch the product immediately post the patent expiry with revenue expected to flow in from CY27. The company has partnered with Shanghai Henlius to commercialise Daratumumab in USA and Europe. DRRD has also partnered with Bio-Thera for Ustekinumab and Golimumab for Southeast Asia. During the quarter, BLA acceptance has been received for Denosumab from USFDA and MA acceptance for Rituximab from UKMHRA.
* GLP-1 opportunity: The company intends to enter all the Semaglutide markets opening up in CY26. DRRD intends to be amongst the first to launch in Canada, India and Brazil with Canada approval expected before the end of CY25. Canada currently represents a 10mn pen market. This number can potentially become 5x or more. The demand surplus ensures that minimum marketing efforts would be required for the product.
* PSAI business: PSAI grew 16% YoY with the aid of increased volume contribution from new API launches and growth in CDMO business.
* Key financials: - Revenue /EBITDA/Adj. PAT for the quarter were INR 85.1bn/20.5bn/16.5bn growing 20%/15%/28+% YoY; were 4%/-2%/36% vs JMFe and 2%/-10%/13% vs street consensus; - The outperformance in topline is driven by significant jump in Europe because of NRT acquisition, supported by contribution from generics portfolio - India up 16%YoY, US 9% YoY, Europe 145% YoY, EM up 16% YoY and PSAI up 16% YoY; - Gross Margins come in at 56% (vs 59% JMFe); - EBITDA margins at 24.1% (vs 25.6% JMFe, 27.3% consensus), contraction in margins due to lower GM and elevated SG&A; - Adj. PAT of INR 16.5bn (vs INR 12.1bn/14.7bn JMFe/Street). Beat enabled by higher Net Finance income and lower taxation due to reversal of tax provisions and FCTR transfer being non-taxable
* Our View and valuation: We expect the FY26 topline to grow at 23% with EBITDA margins to remain at similar levels as FY25. We have revised our FY26E topline upwards by 8% on account of expected Revlimid sales being greater than those earlier anticipated. Beyond FY26, Semaglutide and Biosimilars (including Abatacept) are expected to drive business performance. DRRD plans to be present in all Semaglutide markets losing exclusivity in CY26, while Abatacept is scheduled for launch in CY27. We believe the street is underestimating the Semaglutide opportunity for Dr. Reddy’s. While it may not fully replace Revlimid sales, it could substantially mitigate the earnings decline in FY27. Though Canada, Brazil, India and China are the key Sema markets losing protection in CY26, a number of Emerging Market countries too are going off patent and thus we have increased our FY27E sales by 5% leading to a 6% increase in FY27E EBITDA. Further, the Indian Pharma companies are entering lower earning growth phase post FY26, thus we have reduced the 1 year forward P/E multiple by 19% to 21x. At an 21x PE on FY27 EPS, the stock remains attractive compared to peers. We maintain our BUY rating with a target price of INR 1,418.
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SEBI Registration Number is INM000010361
