Neutral Dr Reddy`s Labs Ltd for the Target Rs. 1,250 by Motilal Oswal Financial Services Ltd
Earnings steady despite US pressure
Key milestones related to Semaglutide in the offing
* Dr Reddy’s Labs (DRRD) delivered slightly better-than-expected revenue/EBITDA (3%/5% beat) in 2QFY26. Higher other income and a lower tax rate led to a 14% beat in PAT.
* Except for North America, other geographies reported healthy YoY/QoQ growth in revenue, driven by steady traction in base products and new introductions.
* North America sales continued to deteriorate for the second consecutive quarter due to increased competition in g-Revlimid and other select products. This affected the gross margin as well as the overall performance.
* DRRD is gearing up for the GLP1 opportunity through capacity build-up and implementing efforts to secure timely regulatory approvals across multiple geographies.
* DRRD is also building a biologics portfolio for developed and emerging markets to offset g-Revlimid impact and further support earnings.
* We largely maintain our estimates for FY26/FY27/FY28. We value DRRD at 19x 12M forward earnings to arrive at a TP of INR1,250.
* We expect earnings to remain stable over FY25-28, as a significant reduction in g-Revlimid business (4QFY26 onward) is expected to be offset by new launches and a higher off-take of legacy products in key markets. Maintain Neutral as the current valuation adequately factors in the earnings upside.
Product mix impact marginally offset by lower R&D spending YoY
* 2Q revenue grew 9.8% YoY to INR88.1b (est. of INR85.5b).
* Europe sales jumped 1.4x YoY to INR13.8b (16% of sales), largely driven by revenue from the acquired NRT portfolio, new product launches, volume growth in existing products and favorable forex movements.
* India sales rose 13% YoY to INR15.8b (18% of Sales). Emerging market sales grew 22% YoY to INR11b (12% of sales).
* Pharmaceutical Services and Active Ingredients (PSAI) segment revenue grew 12.4% YoY to INR9.5b (11% of sales).
* NA sales fell 13% YoY to INR32.4b (~USD365m; 37% of sales) due to increased price erosion in certain key products, including Lenalidomide, partly offset by favorable forex and contributions from new product launches.
* Gross margin (GM) contracted 490bp YoY to 54.7%, largely due to lower margins in PSAI (down 1,200bp YoY) and Global Generics (down 400bp YoY).
* EBITDA margin contracted 330bp YoY to 24% (est. 23.6%) as lower GM was offset by lower expenses (R&D down 200 YoY as % of sales).
* Adj. for one-time VAT impact, EBITDA declined 3.5% YoY to INR21.3b (est. INR20.2b).
* PAT grew 13.5% YoY to INR15.4b.
* 1HFY26 revenue/PAT grew 10.6%/7.6% YoY to INR173b/INR30b, whereas EBITDA declined 1.3% to INR42b.
Highlights from the management commentary
* DRRD expects feedback on its Semaglutide application from the Canadian health authority in a few weeks. Management expects competition would be subject to approval timeline in the Canadian market.
* It remains confident of selling 12m pens of Semaglutide in global markets, including Canada, Brazil, India and other emerging markets.
* DRRD is in the process of addressing a complete response letter (CRL) related to Retuximab biosimilar.
* The company remains confident of filing Abatacept by the end of CY25. It is also exploring a CMO partner in the US for this product to add a manufacturing site and overcome any US tariffs-related issues.
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