Dr. Reddy’s Labs Q3 Results Review - Beat On Revenue, But Earnings Inline: Systematix

Systematix Research Report

Dr. Reddy Laboratories Ltd.'s Q3 FY24 earnings (Rs 13,789 million) were in line with expectations, but revenue was above expectations, led by strong growth in North America (5.7% QoQ and 9.6% YoY).

North America grew on back of base business (including gRevlimid). Gross margins were lower 20 bps QoQ as benefits from government grants which is deducted from the cost of sales was lower QoQ (1,140 million versus 1,598 million).

Performance in branded markets was weak. Sales growth in India was lackluster at 5% YoY. Emerging markets performance also declined 2% YoY as Russia business declined 14% YoY owing to high base and unfavorable currency movement.

Despite a strong beat on revenue, Ebitda was still in line with expectations, as company continues to ramp up investments in marketing and digitalization leading to selling, general and administration spending expanding 8% QoQ and 13% YoY.

We await these investments to fructify into higher growth in the branded markets. We have revised our forecasts and roll over our price target to FY26E earnings per share.

Our revised target price is Rs 5,725 based on 16 times FY26E EPS. We expect Dr. Reddy to deliver ~7% / 6% revenue and Ebitda compound annual growth rate over FY23 to FY26E.

We expect North America revenue to remain flattish or decline over the near to medium term owing to erosion pressures. New launches in North America may at best help Dr. Reddy's offset erosion pressures.

In branded markets, we expect the company to clock high single digit growth. Pharmaceutical services and active ingredients business should grow low single digit in line with the long-term trend.

We currently do not forecast any upside from China markets, wherein company has been consistently investing in new product filings to expand their current sales base meaningfully larger.

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