Dr Reddy's Labs Q2 Preview: Margin pressures to squeeze profit despite steady US sales

Dr Reddy's Laboratories is slated to release its Q2 earnings report on November 5

Pharmaceutical major Dr Reddy's Laboratories is slated to release its July-September earnings report on November 5. While the drugmaker's sales in the US generics market is expected to remain stable, pressure on margins is likely to drag its net profit lower.

According to a Moneycontrol poll of 11 brokerages, Dr Reddy's net profit is pegged at Rs 1,397 crore, reflecting a near 6 percent de-growth from Rs 1,480 crore that it reported in the same period last fiscal. Despite lower net profit, the company's revenue is estimated to grow 12 percent on year to Rs 7,694 crore in the July-September quarter as compared to Rs 6,880 crore in the corresponding quarter last year.

However, operational performance is likely to take a major hit, which is seen as the biggest driver denting the company's bottomline. As per the forecasts collated by Moneycontrol, Dr Reddy's EBITDA margin is expected to erode sharply to 27.7 percent in Q2 as against 31.7 percent in the year ago period.

Analysts polled by Moneycontrol present a narrow 14 percent range in earnings forecasts for Dr Reddy’s. The most optimistic prediction, from Systematix Shares and Stocks, anticipates a modest 2 percent rise in net profit, while the most cautious, from Centrum Broking, projects a 12 percent decline. Except for Systematix, all brokerages expect a drop in net profit for the quarter, with a varying quantum of decline.

What factors are impacting the earnings?

The drugmaker is expected to face margin pressures in Q2 which will heavily weigh on Dr Reddy's bottomline performance. However, a positive emerging out of this is expectations of stable US sales and domestic revenue.

Margin pressure: Broking firm Philip Capital anticipates Dr Reddy's margins to correct mainly due to higher R&D spends and increased overheads despite rising Revlimid contribution, resulting in a decline in net profit.

Lack of major launches: While US sales are likely to remain stable, much of that is attributed to stronger contribution from the blockbuster cancer drug Revlimid. Excluding that, growth in Dr Reddy's base US business is expected to remain muted. It is also worth noting that Revlimid was the biggest contributor to Dr Reddy's earnings growth through FY24 and Q1 of FY25.

Strong domestic growth: The drugmaker is expected to deliver double-digit sales growth in the domestic formulations business, driven by the in-licensing deals with Sanofi and Bayer. "India business is expected to deliver healthy double digit growth during the quarter as it is expected to benefit from the promotion and distribution agreement with Sanofi Healthcare India for its vaccine portfolio, inked in March this year," Systematix said.

What to look out for in the quarterly show?

Analysts will look out for updates on Dr Reddy's potential drug approvals and launches in the
US over the next 12-18 months to gauge its earnings visibility. The status of the company's biosimilars pipeline will also be on the radar. In addition, focus will also be on the pharma major's plans for inorganic growth opportunities and margin outlook.

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