Reduce Dr Reddy's Ltd for the Target 1,200 by Emkay Global Financial Services Ltd
Adjusting for the Semaglutide API-related impact, 1QFY27 EBITDA margin for Dr Reddy’s (13.3%) was ~350bps lower than our estimate (second consecutive quarter of EBITDA miss of ~25% vs street/our estimates). 1Q US performance clearly indicates that the ex-gRevlimid annualized US base has settled at a figure closer to our bear case estimate ($900mn; refer to our earlier note on Dr Reddy’s’ Form 20-F disclosures). India sales growth (17% yoy) was in-line and the only silver lining in a quarter marked by a topline miss across markets. We have argued in the past that SG&A spend—a key driver of the margin miss in 1Q—has limited froth and room to be cut significantly, given that we (and the street), as of now, are not building in a yoy decline in the overall top line in FY27. Sharp consensus earnings downgrades should follow, and we do not see the current downgrade cycle ebbing in the near term, in the absence of a meaningful positive catalyst (Semaglutide and Abatacept are fairly built into street expectations – uncertainty around these opportunities notwithstanding). We cut our FY27/28 earnings estimates by ~8%/6% and revise our TP downward by ~8% to Rs1,200 from Rs1,300; retain REDUCE
Margin much weaker than expected; robust domestic performance continues
North America sales at ~$233mn were meaningfully below expectations. Domestic growth at 17% yoy was in line with organic growth remaining superlative at ~15.5%. The miss in Europe was owing to lower NRT sales which was an outcome of a change in the operating model post-integration. Adjusted EBITDA margin (13.3% vs 16.7% estimated) was materially below our/street estimates, with the miss primarily driven by higher SG&A (attributed to adverse forex + investments in the branded business). Per the management, higher freight and solvent costs impacted EBITDA margin by ~100bps
KTAs from the earnings call
1) 25-30% of the company’s US sales are manufactured by CMOs in the US.
2) The company sold ~180,000 Semaglutide pens in 1QFY27 before suspending supplies. The company has identified the root cause of the API issue and maintains its expectations of resuming supplies to OneSource after the 3 rd week of Sep-26. Demand for 6-7mn pens is backed by orders.
3) Dr Reddy’s does not anticipate any impact on Semaglutide filings pending approval, as the API specifications remain unchanged; the company expects an approval in Brazil in 2QFY27.
4) The company does not expect further price reductions in Semaglutide in Canada, as the current pricing already reflects a three-player market.
5) Dr Reddy’s has filed Abatacept IV in Europe (small market), while the subcutaneous version will be launched in Sep/Oct-28.
6) The company has responded to the FDA on the observations issued to Bachupally; it has not received any queries related to its Abatacept filing (goal date in Dec-26) and does not expect a re-inspection of Bachupally prior to approval.
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