Reduce Dr. Reddy`s Laboratories Ltd For Target Rs. 1,225 - Prabhudas Liladhar Capital Ltd
Weak margins; scale up in base business is key
Quick Pointers:
* Adj for NRT portfolio, revenues grew by 12% YoY.
* GMs impact of 80bps due to reduced manufacturing overhead leverage and one time severance cost.
Dr. Reddy’s (DRRD) Q4FY25 EBITDA was below our estimate. The base business margins and US sales ex of gRevlimid continued to remain weak. We have scale up base business margins from current level of 16% to +20% in FY27E. Our FY27E EPS stands cut by 4-5%. DRRD have been investing cash flow from gRevlimid to build pipeline across peptides, biosimilars and GLP products; benefits of that may take some time. Further thin US pipeline in near term and competition in certain key products remains a key risk. At CMP, DRRD is trading at valuations of 23x P/E on FY27E and factors in recovery in base business margins. We maintain our ‘Reduce’ rating with TP of Rs1,225/share; valuing at 24x FY27E EPS. Any big ticket ANDA approvals and sharp recovery in base business margins are key risks to our call.
* Higher API, RoW sales and NRT consolidation aids growth: DRRD’s sales grew by 20% YoY at Rs 85bn vs our estimates of Rs83.6bn. The beat was aided by higher API and RoW sales. Further YoY growth was aided by consolidation of NRT business which registered Rs 6bn of revenues. Adj for NRT portfolio and licensing income, revenues grew by 12% YoY. US revenue came in at $411mn ($401mn in Q3FY25) largely in line with our estimate. Domestic business increased by 16% YoY to Rs 13bn aided by consolidation of Sanofi vaccine brands. Adj for this growth remained muted. PSAI sales grew by 16% YoY above our estimates. Russia sales increased by 30% YoY aided by higher volumes and contribution from new product launches. RoW sales growth was mere 4% YoY while EU sales adj for NRT portfolio was at 30%
* Lower GMs and certain one offs impacted margins: DRRD reported EBIDTA of Rs 20.5bn against our est of Rs 22bn. GM decline QoQ due to reduced manufacturing overhead leverage and one time severance cost which impacted GMs by 80 bps. We believe ex gRevlimid, one offs & PLI grant, margins stood at 16-17%. Segment wise PSAI margins came at 26.3% (28.6% in Q3FY25) whereas generic margins were at 59.3% (61.3% in Q3FY25). R&D expenses came in at Rs 7.3bn (8.5% of revenues), up 6% YoY. Amortization expenses came in higher given NRT business consolidation. Other income remained higher led by forex gain.
* Key concall takeaways: US business: Growth was largely driven by volumes and new launches. Q4FY25 had 7 new product launches with a total 18 products in FY25. Filed 10 ANDAs with USFDA in FY25. Witnessed low single digit price erosion. gRevlimid – Meaningful contribution expected until Jan 2026, company prepared for post exclusivity period. This will be offset by new biosimilar launches (eg Abatacept) and GLP-1s.
* Semaglutide (GLP-1) launch planned in early 2026 in markets such as Canada, India and Brazil. DRRD is amongst the first filers in these markets. Mgmt remains confident about achieving double digit growth post Semaglutide and other complex product launches in FY26. Mgmt cited Canda market at $1.8bn with 10mn pens.
* EU: Growth was primarily on account of acquired NRT business. Ex NRT overall business growth was at 12% YoY & 2% QoQ. On track to complete integration of Nordics. Overall, 39 product launches were made in FY25 and 10 products in Q4FY25.
* India: The vaccine portfolio in-licensed from Sanofi India, successful new product launches and price increases, partially offset by lower volumes supported performance. 7% growth YoY excluding in-licensed vaccine business. Cardiovascular & GI segments underperformed but improvement expected. Collaborated with Sanofi for Beyfortus in India. Launched Sensium (allergy immunotherapy) with ALK-Abello. Launched 23 new products in FY25.
* Biosimilars: Phase 3 trials for Abatacept ongoing with filing expected in US by end of 2025. Partnered with Shanghai Henlius Biotech, Inc. to commercialize HLX15 (daratumumab biosimilar) in the US and EU markets. Received Biologics License Application (BLA) acceptance for AVT03 (denosumab biosimilar) developed by its partner, Alvotech for the US market.
* Russia: Benefited from increased sales volumes, price hikes, and new launches YoY.
* EM’s: Launched 26 new products in Q4FY25 with total count of 85 in FY25.
* R&D: Spent Rs 27.4bn in FY25 up 20% YoY with emphasis on complex generics and biosimilars.
* ETR: Q4FY25 rates lower due to FCTR gain and past provision reversal. Higher in FY25 due to deferred tax asset reversals and land indexation adjustments. FY26 ETR expected to be like FY25
* Others: GMs were down due to one-time cost (severance at divested Shreveport plant) and higher manufacturing overheads. Also previous quarters had milestone income. SGA up on account of NRT and logistics costs. Capex for the quarter was at Rs 7.7bn. Net cash stood at Rs 24.5bn.
* Tariff: Management ready for potential US tariffs on generics. Facilities prepared for USFDA surprise inspections. Mgmt cited it remains open to acquiring an asset if opportunity arises.
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