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North America/Russia/ROW drive earnings

Limited visibility to grow beyond the g-Revlimid opportunity

* Dr Reddy’s Lab (DRRD) delivered in-line 2QFY25 performance. DRRD exhibited robust YoY growth in North America (NA), Russia, and ROW markets and a healthy scale-up in the pharmaceutical services and active ingredients segment. This was offset by moderate YoY growth in the Europe/CIS business.

* Higher volume growth and new launches have been the key factors driving superior performance in NA, Russia, and ROW markets. Ex-Sanofi portfolio, the Indian business also delivered healthy YoY growth of 9% for the quarter.

* We largely maintain our earnings estimate for FY25/FY26/FY27. We value DRRD on an SOTP basis (22x base business earnings and add NPV of INR60 from g-Revlimid) to arrive at a TP of INR1,390.

* DRRD continues to work on building a differentiated product portfolio to suit its focus markets. Accordingly, it acquired the Nicotine Replacement Therapy (NRT) portfolio for global markets (Ex-US) and formed a JV with Nestle to expand its complimentary nutraceutical portfolio. It has complete manufacturing presence for GLP-1 products and is building a biosimilar pipeline for regulated markets. Having said that, the earnings are expected to be stable over the next two years due to competition kicking in g-Revlimid 4QFY26 onwards and some gestation period to achieve commercial benefits from the differentiated portfolio. Maintain Neutral on limited upside at current valuation.

Product mix benefits more than offset by higher SGA expenses YoY

* DRRD 2QFY25 revenues grew 16.5% YoY at INR80.2b (vs est. of INR78.1b). Sequentially, DRRD sales grew 4.5%. US sales were up 17.6% YoY to INR37.3b (~USD445m; 47% of sales). Europe sales were up 9.2% YoY to INR5.8b (7% of sales). India sales were up 17.8% YoY at INR14b (17% of sales). Emerging market sales grew 20% YoY to INR14.6b (18% of sales). The PSAI segment’s revenue grew 20% YoY to INR8.4b (10% of sales).

* Gross Margin (GM) expanded 90bp YoY to 59.6%, led by a better product mix. However, the EBITDA margin contracted 40bp YoY to 28.6% (our est: 27.8%) led by higher SG&A/R&D expenses (+20bp/+120 YoY as a % of sales).

* EBITDA grew 12.1% YoY to INR22.4b (vs est. of INR21.7b).

* DRRD had an impairment related to gNuvaring (INR924m) and acquisitionrelated one-time expense (INR562m).

* DRRD had adj. PAT of INR13.6b (our est: INR14.2b), up 2% YoY.

* In 1HFY25, the Revenue/EBITDA/PAT were up 15%/9%/2% to INR157b/INR44b/INR27b, respectively. We expect Revenue/EBITDA/PAT to grow 16.3%/25.1%/16.5% YoY to INR166b/INR47b/INR30b in 2HFY25.

Highlights from the management commentary

* Adj. for one-time acquisition cost, DRRD indicated SGA spend would be 27.5%-28% of sales for FY25.

* Ex-Sanofi portfolio, the Indian business grew 9.7% YoY for 2QFY25.

* DRRD indicated that the b-Abatacept launch is likely to be in FY27.

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