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Triggers & headwinds cancel out

Result Synopsis

Dr Reddys’ management alluded to few growth drivers in H2 and FY25 namely 1) acceleration to double digit growth by Q4 exit in India followed by improved outlook next fiscal on back of in-licensing deals and 2) ramp up in acquired Mayne Pharma products like Nuvaring. Albeit two opposing forces – Revlimid peak and higher R&D in H2 may offset some of these triggers leaving margin in the same ballpark as what has been delivered in H1 FY24. Indeed, next fiscal reckon DRL could be looking at lower OPM as peak Revlimid sales and associated margin would be behind and unlikely to be offset by any such large product. What we had outlined 1-2 quarters back about all eyes on traction in ex-Revlimid growth still remains relevant where we do not notice any incremental change; ramp up of material launches as outlined in call amidst a benign pricing environment is key to better growth in US though we note nothing is likely to accrue at least over next 6-12 months. Biosimilars and China scale up also appear to be longer term triggers leaving no change to our Neutral stance on the stock with unchanged estimates, multiple and TP Rs5,580.

Result Highlights

? A largely in-line growth of 2% QoQ driven by ex-US markets

? US business flat QoQ vs expectation of modest growth; YoY growth of 13% on account of Mayne integration and FX tailwind

? Domestic business weak at +3% YoY due to now well-known muted acute season specifically gastro in our view; excluding NLEM impact, growth in mid-single digit YoY

? Russia sales down 3% YoY on currency devaluation sans which underlying growth of 4% YoY; overall EM growth tepid due to Russia impact YoY

? Europe up 26% YoY on favourable forex and contribution of new products

? Margin at 29% lower than our estimate of 31% on back of flat US business QoQ coupled with higher R&D

? Other income included Rs984mn from settlement of product litigation in UK; margin would have been lower but for Rs1.6bn in PLI grant in Q2 and Rs2.3bn in H1

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