Dr Reddy's fall 5% even after Q4 net profit jumps 10-fold. Here's why

Dr Reddy's net profit for the fourth quarter lagged the Street's estimate despite the meteoric jump.

Shares of Dr Reddy's slumped 5 percent in early trade on May 11, a day after the company posted its Q4 results. The drugmaker's net profit for the quarter jumped 10-fold to Rs 959.2 crore from Rs 87.5 crore in the same period last year but still lagged the Street's estimate of Rs 1,093.6 crore. Brokerages have also flagged concerns over company's  growth path.

The net profit in the base quarter was hit by impairment charges while this quarter was aided by largely aided by a favourable base, brand deals and strong traction in the developed markets. Despite the big jump, net profit lagged the Street's estimate of Rs 1,093.6 crore.

Revenue came in at Rs 6,296.8 crore, 15.81 percent up from Rs 5,436.8 crore in the year-ago quarter. The topline beat the Street's expectation of Rs 6,090.5 crore for the quarter under review.

EBIDTA margin also expanded to 25.9 percent in January-March from 23.9 percent in the same quarter last year.

Also Read: Dr Reddy's Q4 net profit jumps to Rs 959 crore on favourable base, US launches, brand deals

Brokerages’ view

Brokerages, however, don’t seem too impressed with the numbers as subdued performance of the core business and waning of gRevlimid’s disproportionately high contribution points towards pain.

Even though the management expects gRevlimid to continue contributing to its revenue in the coming quarters, brokerages do not share the optimism.

With the contribution from gRevlimid being halved in Q4 from Q3 and Q2, Nuvama notes plateauing of gVascepa, gKuvan and gNuvaring sales as other challenges for Dr Reddy's.

Factoring that in, the brokerage has forecast single-digit organic growth at best for the Hyderabad-based drugmaker despite solid launches like gRemodulin and gLexsican.

Also Read: US sales, brand deals to seal the fortune for Dr Reddy's in Q4

Nuvama downgraded Dr Reddy's to “reduce”, while slashing its target price by 10 percent to Rs 4,200.

Prabhudas Lilladher, too, reduced its FY24E and FY25E earnings-per-stock estimates by 10 percent and 6 percent, respectively, as it factored in lower
margins ex of gRevlimid.

The brokerage has downgraded the stock to “reduce”, with an 8 percent cut in its target price to Rs 4,500.

Motilal Oswal Financial Services also expects growth to moderate in FY24, largely due to a high base of FY23 and limited visibility of potential products to deliver over the next two years.

The brokerages said valuation already factored in the earnings upside and it retained its “neutral” rating on the stock, with a target price of Rs 4,500.

Goldman Sachs also has a “neutral” call with a price target of Rs 4,750. The broking firm believes Q4 adjusted EBITDA margin for Dr Reddy's grew primarily on account of its higher gross margin.

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