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US/India drive earnings growth

Efforts underway to address regulatory concerns of BLA-Rituximab

* Dr. Reddy’s Lab (DRRD) delivered 4QFY24 revenue in line with our estimate. However, EBITDA was lower than expected due to higher SGA expenses and R&D spending. In addition to US generics/branded generics segments, DRRD is enhancing its offering through JVs/partnerships/acquisitions in nutraceuticals, vaccine, women’s health and dietary supplement space.

* We maintain our earnings estimates for FY25/FY26. We value DRRD on SOTP basis (22x 12M forward earnings for base business and INR90 per share for gRevlimid) to arrive at a TP of INR6,070.

* After delivering 30% YoY earnings growth in FY24, we expect earnings growth to moderate to a 3.5% CAGR over FY24-26, partly due to a gradual build-up of market share of g-Revlimid. The investment in JV with Nestle and in biosimilar segment should give commercial benefits after FY26.

* We believe that the valuation adequately factors in the upside in earnings. Maintain Neutral rating on the stock.

Higher share of niche products improves margins on YoY basis

* 4QFY24 revenues grew 17.4% YoY to INR70.8b (est. INR70.6b). Sequentially, sales declined 2%.

* US sales grew 28.8% YoY to INR32.6b (~USD393m; 46% of sales). Europe sales rose 5% YoY to INR5.2b (7% of sales). India sales increased 10.5% YoY to INR11.3b (16% of Sales). Emerging markets sales grew 9% YoY to INR12b (17% of sales), led by new product launches, offset by unfavorable forex. PSAI sales grew 5.5% YoY to INR8.2b (12% of sales).

* Gross margin expanded by 330bp YoY to 58.6%. Global generics/PSAI gross margins expanded 60bp/130bp on YoY basis for 4QYF24.

* EBITDA margin expanded7 310bp YoY to 24.9% (our est: 27.4%). Lower SG&A (-60bp YoY as % of sales) was offset by higher R&D spend (+80bp YoY as % of sales).

* EBITDA grew by 34% YoY to INR17.7b (est. of INR19b). R&D expenses stood at INR6.9b (9.7% of sales).

* PAT of INR12.9b (our est. INR12.2b), up 60% YoY.

* In FY24, revenue/EBITDA/PAT grew 16%/26%/32% YoY to INR279b/INR78b/ INR54b.

Highlights from the management commentary

* DRRD intends to launch 20+ products in the US generics segment in FY25.

* The meaningful benefit from the biosimilar segment will be seen in FY27, as DRRD will focus on products wherein it would be in the first wave of launches.

* DRRD received a complete response letter (CRL) for its biologic application related to Rituximab. DRRD expects to address the issues highlighted by USFDA and expects subsequent approval over the next 6-9 months.

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