Analysts Call Tracker: Street remains pessimistic on Dr Reddy’s, Divi’s Labs despite positive Q1 results

Majority of brokerages have taken bearish calls for Dr Reddy's Laboratories and Divi's Laboratories.

Large-cap pharma companies Dr Reddy's Laboratories and Divi's Laboratories remained on the list of 10 Nifty 50 stocks that analysts on the Street view with most pessimism. Analysts kept bearish calls on the two stocks despite the drugmakers delivering positive results for the April-June quarter.

According to Moneycontrol's analyst call tracker, 20 out of the 27 brokerages covering Divi's Laboratories have either 'hold' or 'sell' calls on the stock, while only 7 have a 'buy' rating. As for Dr Reddy's Labs, 26 brokerages have either 'hold' or 'sell' calls on the stock, while 13 have a 'buy' rating.

A common thread of concern that has kept analysts cautious about both stocks is their high valuations despite potential upside triggers. Aside from that, analysts have also raised other concerns when it comes to the respective companies.

Absence of drug pipeline visibility dents sentiment for Dr Reddy's

Despite delivering better-than-expected earnings for the June quarter, analysts seem to be more worried about the lack of future growth triggers for Dr Reddy's Labs. Kotak Institutional Equities, which has a 'reduce' call on the stock, stated that while the prevailing US tailwinds provide stability, the absence of meaningful ANDA approvals for Dr Reddy's remains a key concern.

Systematix Shares and Stocks also pointed out that the drugmaker's initiatives towards diversifying its business may take a few years before they start contributing profitably to the consolidated performance. "However, currently these investments in new businesses are meaningfully diluting the reported earnings of Dr Reddy's," the brokerage, which holds a 'sell' call on the stock, stated.

Systematix also forecasted Dr Reddy's research and development (R&D) spending is expected to remain elevated, taking up 8-9 percent of its total sales. Dr Reddy’s SG&A and R&D expenditures have also increased by almost 50 percent over the past two years, as the company is in the early stages of investing in new growth platforms such as consumer healthcare, biosimilars, and CDMO.

Too soon to celebrate for Divi's Labs

Even though Divi's Labs reported positive earnings for the June quarter, analysts stated that the growth in numbers was largely due to a low base and was still lower than the Street's estimates.

The management also chose not to tinker with its double-digit growth guidance for FY25. Based on this, analysts at Elara Capital do not see a significant change in the forward outlook for Divi's on growth and profitability.

On top of that, Elara Capital also believes that the current valuation of Divi's reflects narratives that are unlikely to materialize at the pace of investor expectations.

"While the GLP-1 (glucagon-like peptide-1) agonist opportunity is significant, Divi's Labs is currently positioned at the lower end of the value chain," the brokerage stated. It also feels that although the US Biosecure Act implies a considerable upside for India’s CDMO companies, it may not have as substantial an impact on Divi's Labs. Elara Capital is among the brokerages that have a 'sell' call on Divi's Laboratories.

Although KIE remains optimistic about Divi's prospects in generic APIs (Active Pharmaceutical Ingredients) and custom synthesis segments over FY2025-27, the brokerage sees potential for disappointments in both topline and margins, primarily due to tepid generic sales.

Shares of both Dr Reddy's Laboratories and Divi's Laboratories have shown tepid performance over the past month, each gaining around 6 percent.

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