Dr Reddy's Labs' healthy Q4 numbers could not impress brokerages as analysts warned of a lack of near-term growth triggers for the drugmaker. While Dr Reddy's remains focused on biosimilars and initiatives to strengthen its business in key markets, brokerages forecasted its benefits to play out only after FY25.
Like the previous few quarters, it was the strong contribution from the blockbuster cancer drug Revlimid that nursed the January-March earnings of Dr Reddy's. Brokerage firm Nomura attributed Revlimid's contribution to supporting the drugmaker's strong gross margin and operational performance in Q4.
Nuvama Institutional Equities also shared the same view. "The US business benefitted from yet another quarter with Revlimid contribution ($110–130 million)," the brokerage stated. Revenue from the US market makes up around 60 percent of Dr Reddy's total topline.
Dr Reddy’s Laboratories recorded a net profit of Rs 1,307 crore for the March quarter of FY24, up 36 percent from the year-ago period and also slightly above the estimated Rs 1,291 crore.
Revenue came in at Rs 7,083 crore, up 12 percent from the year-ago quarter, but below expectations of Rs 7,136 crore. Nonetheless, strong Revlimid contribution helped the company's profitability, expanding its EBITDA margin to 26.4 percent in Q4 as against 25.9 percent in the year-ago period.
While the company delivered strong profitability, as per Nuvama's calculation, the core business EBITDA margin stood at around 17 percent with a decline of 250–300 basis points on year.
Meanwhile, higher research and development costs during the quarter, which stood at 9.7 percent of total sales also dragged its base EBITDA margin.
Nuvama also anticipates higher R&D costs (as a percentage of sales) to sustain for the next couple of years due to Dr Reddy's pipeline for the Horizon 2 program, which includes biosimilars as well as complex products.
Also Read | Dr Reddy's Q4 results: Net profit up 36% to Rs 1,307 crore, Rs 40/share dividend declared
Aside from higher R&D costs, Jefferies expects the drugmaker's EBITDA margin for FY25 to also be pressurised by a weak US launch pipeline.
Moving on, Motilal Oswal Financial Services also expects earnings growth for Dr Reddy's to moderate to a 3.5 percent CAGR over FY24-26, partly due to a gradual build-up of market share of Revlimid generic.
However, the efforts being put by Dr Reddy's to enhance its biosimilar portfolio and offering through partnerships, R&D, joint ventures and acquisitions will become fruitful in the medium term.
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Confident over these measures, brokerages like Jefferies and MOFSL anticipate its positive impact to play out for Dr Reddy's from FY26. Nuvama however, expects its benefits to start showing from FY27.
Likewise, Nuvama has a 'reduce' call on the stock with a price target of Rs 5,028. Nomura and MOFSL both have a 'neutral' rating on the stock with price targets at Rs 6,499 and Rs 6,070, respectively. Jefferies has an 'underperform' call on Dr Reddy's with a price target of Rs 5,010.
Most of these price targets for the stock reflect the scope for a downside potential as the scrip, at 09.16 am, was trading at Rs 6,016.55, down around 4 percent on the NSE.
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