Dr. Reddy's Is BofA's Top Pick In Indian Pharma On Earnings Visibility

BofA has chosen Dr. Reddy's Laboratories Ltd. as its top pick in the Indian pharma space, as its sees earnings visibility in the near term. Two years of outperformance-boosted valuation and gross margin tailwinds point to positive earnings momentum, BoFA said.

The brokerage has a 'buy' rating on Dr. Reddy's Laboratories Ltd. It has raised the target price to Rs 1,620 apiece, implying a 24% upside.

The pharma firm's outperformance for the past two consecutive years has taken the valuation to 17–27% premium to long-term average of the sector. This reflected the relative earnings in the near-term, compared to downside risks in other sectors. The US generic medicine pricing environment, and pipeline support in the first half of calendar year 2025 will add to the growth momentum.

However, there's limited visibility of the US generic medicine business beyond the first half of 2025, particularly with generic Revlimid. Dr. Reddy's generic Revlimid's contribution to earnings has been offset by lower revenue concentration, compared to peers in the base business.

Revlimid is an anti-cancer drug. It is taken orally to treat blood cancers such as multiple myeloma.

In the near term, less competition in generic medicine launches and contribution from new drivers will likely support growth. Dr. Reddy's Laboratories' effort to create a global over-the-counter platform should help alleviate concerns on earnings dependence on the US generic medicine business.

In the second half, Dr. Reddy's Laboratories will focus on research and development monetisation and new growth drivers to support premium valuations, BofA said in its note.

Overall, BofA remains cautious on Indian pharma stocks as margin expansion in a competitive, but slowing volume growth market could be tough. The risks include regulatory action in domestic pharma and potential policies impacting the US generic medicine business dynamics.