Sell Dr Reddy's; target of Rs 1070: Emkay Global Financial

Emkay Global Financial's research report on Dr Reddy's

Adjusted for multiple one-offs, Dr Reddy’s’ 2QFY25 PAT was in line with our and street estimates. EBITDA was marginally ahead, aided by a sales beat in Russia and other emerging markets, and lower SG&A. Our view that EBITDA margin will revert to pre-gRevlimid levels (20-21%) by FY27E is predicated on the assumption that gross margin will revert to steady-state levels (52-53%). While it is too early to conclude that gross margin could have begun its descent, the 160bps QoQ decline in gross margin in the global generics segment was a clear negative. The near double-digit growth in the core domestic business was heartening, but not sufficient to offset mix deterioration (cannot move the needle in terms of overall mix even going forward).

Outlook

We broadly maintain our earnings estimates. We retain SELL with a Sep-25E TP of Rs1,070.