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Dr Reddy's reported strong performance, with both topline and EBITDA exceeding our expectations by 5 to 6%. In 1QFY25, Revenue/EBITDA/PAT grew 14%/4%/-1% YoY respectively, driven largely by ramp-up of gRevlimid. Despite higher revenue in the US (USD 463 million, +19% YoY), the EBITDA margin of 27.6% was slightly below expectations due to a significant increase in SG&A expenses – this was led by a sharp rise in freight costs. In other segments, India posted a 15% growth, aided by Sanofi vaccine portfolio. Adjusted for Sanofi vaccines, it grew in mid-single digit. Unlike peers, Dr. Reddy's US pipeline remains relatively opaque to investors. Despite having 23 pending FTF filings and expectations for 25 annual launches, our growth expectations for the US market, excluding Revlimid, appear modest. We believe there could be potential upside here. Additionally, gRevlimid sales estimates are likely to be underestimated as DRRD could have achieved at least USD 150 mn this quarter, reflecting a ~50% QoQ increase. Given this performance, Dr. Reddy’s is expected to generate USD 650mn+ in free cash flow annually over the next three years, potentially raising its cash balance to over USD 1.5 bn by FY27. With a focus on earningsaccretive transaction (such as the recent NRT brands acquisition), we see positive potential for core earnings. At CMP, it trades at ~21-22x on FY27 EPS and remains attractive as compared to large-cap peers. Therefore, we maintain a BUY rating on the stock, valuing it based on core EPS and Rs 628 Revlimid NPV, with a target price of Rs 8,010.

* US delivers stellar performance: US business reported stellar sales of INR 38.5bn (13% beat) growing 20% YoY and 18% QoQ. The improvement was largely on account of increase in volumes, contribution from new launches, partly offset by price erosion. During the quarter, the company launched 3 new products and filed one new ANDA with the U.S. FDA. As of June 30, 2024, 80 generic filings were approvals pending from the U.S. FDA in the U.S.

* Nicotinell acquisition from Haleon: DRRD acquired Haleon’s global Nicotine Replacement Therapy (‘NRT’) OTC brands for GBP 500mn (2.3x sales) of which GBP 42mn is contingent consideration payable in CY25/26. This acquisition will help leverage customer relationships and give an opportunity to cross-sell. The acquisition alleviates concerns around managing gRevlimid cliff. 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. We highlighted additional detailis about this acquisition in our recent note

* Vaccine portfolio helps drive India beat: Domestic sales grew 15%YoY (5% beat) to INR 13.3bn. Growth was supported by the Sanofi vaccine portfolio, adjusted for the acquisition, it grew in mid-single digit. This is in line with management’s guidance of IPM outperformance. We believe India business will continue to deliver IPM-beating growth over the next few years (~12% CAGR). The company launched 13 new brands in the country, in addition to exclusive rights to promote and distribute Sanofi's vaccine brands

* Russia growth weak due to forex impact: EM revenue grew of 3% YoY/ -2% QoQ to INR 11.9bn with Russia revenues declining 2% YoY majorly due to unfavorable currency exchange rate movements, partially offset by price increases and higher base business volumes. Revenue from RoW territories grew 11% YoY largely attributable to increase in volumes of base business, contribution from new products, partly offset by price erosion. Europe grew 4% YoY (9% miss) to INR 5.3bn. PSAI gross margin came in at 23.1% (vs. 15%YoY; 28.6%QoQ)with revenue increasing 14%YoY /-7%QoQ (9% beat) to INR 7.7bn with YoY growth driven by improved volumes in base business, and contribution from new products.

* Biosimilars: The biosimilars opportunity is going to be meaningful from 2027. The management guided for Denosumab launch in next year and Abatacept launch likely by early CY27 (filing by end CY25). The company is investing in their Bachupally facility and are increasing capacity to 50kl (currently 15kl) within the next two years.

* Key financials:

* Revenue/EBITDA/APAT of INR 76.7bn/21.2bn/13.9bn grew +14%/+4%/-1% YoY respectively and were +6%/+5%/+1% vs. our expectations and +5%/+6%/+6% vs. Street expectations.

* Gross margin was 60% (vs. 59% YoY; vs. 59% QoQ) due to better product mix.

* EBITDA margin declined to 27.6% vs. 30.3% YoY/25.2% QoQ (JMFe: 27.9%).

* Capex for the quarter was INR 4.9bn while FCF was INR 2.3bn.

* The R&D expenses were at 8.1% of sales

* Net cash surplus as of 30th Jun’24 was INR 67.3bn. This cash surplus will be used to drive inorganic growth to achieve short-term and long-term objectives.

* ETR guidance remains 24-25%.

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