Neutral Dr Reddy's Labs Ltd For Target Rs.1,180 by Motilal Oswal Financial Services Ltd
Niche launches and domestic strength drive earnings beat Earnings growth revival in FY28 hinges on select products
* DRRD delivered in-line revenue in 2QFY27, whereas EBITDA/PAT came in 30% ahead of our estimate, adjusting for the one-time income. The beat was largely driven by increased sales of limited competition products like gBosutinib in North America (NA) and superior execution in the domestic formulation (DF) segment.
* 2QFY27 was the first quarter of improved quarterly sales in NA (USD264m) after six quarters.
* DRRD showcased robust growth momentum in DF segment, driven by new brand launches, price increases, higher volumes and contribution from a recently acquired portfolio.
* The transition phase continued to impact NRT sales in 2QFY27 as well.
* We reduce our earnings estimates by 3%/2% for FY27/FY28, factoring in formulary addition-led gestation period for abatacept sales and moderate demand for Pharmaceutical Services and Active Ingredients (PSAI) segment products. We value DRRD at 20x 12-month forward earnings to arrive at a TP of INR1,180.
* FY27 would be the second consecutive year of YoY earnings decline amid increased competition in g-Revlimid, delay in scale-up of Semaglutide and slower off-take of APIs. These factors are partly offset by niche products like Bosutinib. DRRD is making efforts to revive Semaglutide off-take and receive timely regulatory approval for abatacept. Accordingly, we factor in strong 58% YoY growth in earnings in FY28E. Considering DRRD’s earnings trajectory and current valuations, we maintain our Neutral stance on the stock
Revenue, profitability decline YoY
* 2Q revenue declined 3.2% YoY to INR85.2b (vs. our estimate of INR84.7b). There was one-time revenue of INR1.5b in 2Q, which included INR529m from the sale of territorial rights related to Bendamustine HCL in US and milestone income of INR976m pertaining to biosimilars.
* Gross margin contracted 340bp YoY to 51.3%, primarily due to reduced Lenalidomide sales.
* EBITDA margin contracted 580bp YoY to 18.4% (vs. our estimate of 14.1%).
* EBITDA declined 26% YoY to INR15.6b (vs. our estimate of INR11.9b).
* Adjusted for exception income, PAT fell 47% YoY to INR8.2b (vs. our estimate of INR6.1b).
Highlights from the management commentary
* Subject to successful drug product validations, DRRD is expected to relaunch Semaglutide, both directly and to partners in Nov’26. Subsequently, DRRD would target bigger markets like Brazil in 4QFY27 and subsequently smaller markets. DRRD maintained its guidance of selling 12m-15m pens annually after the relaunch of Semaglutide.
* There has been a delay in approval for Semaglutide in export markets due to a delay in sending the samples to respective markets.
* DRRD’s CDMO business under Aurigene generated USD100m in revenue over the past 12 months.
* The goal date for biosimilar approval of abatacept is 22nd Dec’26. The ramp-up after approval would take six months, considering the time taken to add it to the formulary list. Having said this, DRRD can sell in small quantities after USFDA approval.
* In 2Q, DRRD launched six products, including g-Sugammadex, in NA.
* DRRD witnessed NRT-related stable sales for the past two quarters due to the transition of business from Haleon. DRRD expects high-single YoY growth in revenue from this business after two quarters.
Valuation and view: Reiterate Neutral
* We reduce our earnings estimates by 3%/2% for FY27/FY28, factoring in formulary addition-led gestation period for abatacept sales and moderate demand for PSAI segment products. We value DRRD at 20x 12-month forward earnings to arrive at a TP of INR1,180.
* FY27 would be the second consecutive year of YoY earnings decline amid increased competition in g-Revlimid, a delay in scale-up of Semaglutide and slower off-take of APIs. These factors were partly offset by niche products like Bosutinib. DRRD is working on reviving Semaglutide off-take and getting timely regulatory approval for abatacept. Accordingly, we factor in strong 58% YoY growth in earnings in FY28. Considering DRRD’s earnings trajectory and current valuations, we maintain our Neutral stance on the stock.
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