Buy Dr Reddys Laboratories Ltd For Target Rs. 1723 By JM Financial Services
Margins maintained despite soft US
DRRD’s 3Q Revenue and EBITDA were in line while PAT missed estimates on account of higher amortization. Overall it reported 16%/14%/1% YoY growth for Revenue/EBITDA/PAT during the quarter. Within segments, the US was subdued (flat YoY) due to lower gRevlimid sales and market share loss in recently launched products. India grew 14%, however adjusted for vaccine portfolio it grew 5%YoY. Overall topline growth was supported by superior performance in both Europe and EM. Adjusted for NRT, these segments grew at 22 & 12% YoY respectively. Despite lower gRevlimid sales, EBITDA margins remained healthy at 27.5% in 3Q. During the earnings call, the company re-iterated its confidence in overcoming the gRevlimid slump post FY26 led by Semaglutide opportunity in Canada & RoW as well as Abatacept from Jan'27. Margins are likely to be maintained at ~25% with flexibility on SG&A as well as R&D spend. We believe the street is under appreciating the near term Semaglutide opportunity in Canada as well as 18 other markets which are opening up from CY26. DRRD remains best placed among generic players to benefit from this. Overall the stock remains attractive, vs. large cap peers, trading at 25x/19x FY26/27 core EPS. Post 3Q, we maintain our estimates and BUY rating with a TP of INR 1,723.
* US delivers sedate performance: US business reported tepid sales of INR 33.8bn (6% miss) flat YoY. The sedate performance was due to lower gRevlimid sales and price erosion. During the quarter, the company launched 4 new products. The company received a CRL for its Iron Sucrose product; this is likely to delay the product’s launch. As of Dec 31, 2024, 79 generic filings were approvals pending from the U.S. FDA.
* NRT integration a priority: This was the first quarter DRRD reported sales for Haleon’s global Nicotine Replacement Therapy (‘NRT’) portfolio. The company reported sales of INR 6bn for the quarter. The management will prioritise on integrating the business, post which growth could accelerate. Key growth drivers remain 1. Focus on brand building 2. Increasing geographic reach and 3. Innovation on product development and lifecycle management. Recent initiatives like Nestle JV, biosimilars, innovation, licensing deals, etc. pinpoint towards DRRD’s focus on growing its new businesses. With domestic growth catching up with market growth and Haleon brand acquisitions enhancing ex-Revlimid EPS, we believe there is an opportunity to unlock value here.
* Vaccine portfolio helps drive India growth: Domestic sales grew 14%YoY (2% miss) to INR 13.5bn. Growth was supported by the Sanofi vaccine portfolio, adjusted for the acquisition; it grew in ~5%. Organic growth was dragged by low volume pick-up in certain brands in Cardiac and GI. The management believe GI should bounce back soon, while Cardiac may need an additional quarter to recover. We believe India business will continue to deliver IPM-beating growth over the next few years (~12% CAGR). The company launched 6 new during the quarter (22 launches YTD)
* Europe stellar, EMs strong: EM grew of 12% YoY to INR 14.4bn with Russia growing 19% YoY driven by higher volumes, price increase and new product launches, partially offset by adverse forex movement. Revenue from RoW territories grew 7% YoY to INR 4.9bn driven new product launches and partially offset by adverse forex movement. Europe grew ~22% ex-NRT portfolio driven by new product launches and momentum in the base business, partly offset by price erosion. The management believe this run-rate is sustainable going ahead. PSAI grew 5%YoY to INR 8.2bn with driven by increase in volumes, new launches and favourable forex, partially offset by adverse price variance.
* Biosimilars: The biosimilars opportunity is going to be meaningful from 2027, with the launch of Abatacept (early CY27 opportunity) which is currently undergoing Phase 3 trials. This represents a significant growth opportunity for the company, with potential revenue of ~USD 100mn by FY28 and a further scale up in years after that. The company received marketing authorisation for Rituximab in UK, additionally the Denosumab has been filed in USA and Europe. The company will likely see Rituximab and Denosumab USA launch in FY26.
* Nestle JV: The management re-iterated that the deal (JV with Nestle) is one for the longterm and will see meaningful topline realisation only after a few years. This is primarily due to the time needed for the company to build scale and brand recognition for the new brands to be introduced through the JV but they believe the stickiness of this business is a key strength of the segment. The company aim to scale this business and aim to become one of the largest Nutraceutical players.
* GLP-1 opportunity: The management is confident; they can leverage the company’s superior R&D and manufacturing ability to seize the GLP-1 opportunity. They plan on being a Day-1 launch across most markets in Semaglutide. The key markets in 2026 are Canada, Brazil and India. Among these markets, Canada presents the greatest opportunity, with limited competition and a substantial TAM of around USD 2bn. We anticipate that DRRD could generate up to USD 200mn in revenue in FY27. Additionally, DRRD's backward integration, established API facilities, and formulation production capabilities will further strengthen its position as a reliable and cost-effective supplier of semaglutide.
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SEBI Registration Number is INM00001036
