Dr. Reddy’s Q4 Results Review: Share Dip In Gross Margins Offset By One-Offs; 'Hold' The Stock Says Systematix

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Systematix Report

Dr. Reddy’s Laboratories Ltd. Q4 FY25 revenue was broadly inline (up 20% YoY and 2% QoQ) but Ebitda and net earnings were lower by 5% and 4% vs our expectations. Exceptional income from cash flow hedges taken on account of Haleon NRT portfolio acquisition was partially offset from one offs in their cost of sales. A strong YoY growth was led by Europe (145% YoY – NRT Portfolio).

India grew 16% YoY and was led by in licensed portfolio of drugs (Sanofi and others). North America growth was 9% YoY and led by new launches, gRevlimid market share expansion and increased volumes. Dr. Reddy's selling, general and administrative spends were higher during the year (~29% of sales) due to one-time costs from NRT portfolio acquisition, higher logistics costs and investment in commercial activities.

Over the last four years, Dr. Reddy’s SG&A and R&D spend has increased almost in line with sales and we have not witnessed a favorable impact of operating leverage from the launch of high value assets like gRevlimid.

Cash flows from these high value assets have been reinvested in building new growth platforms: consumer healthcare, biosimilars, GLP-1’s and CDMO.

We revise our estimates on Dr. Reddy's to include contribution from generic semaglutide and other limited competition assets (gVenofer and gInjectafer) in the US and build in a favorable impact of cost savings that Dr. Reddy's may look to achieve to offset impact of expected erosion in sales of gRevlimd.

We lower our price earning multiple to 25x (from 30x earlier) and arrive at target price of Rs 1,126. The lower valuation multiple is to reflect regulatory risks / competitive uncertainties related to monetization of semaglutide, commercial risks in emerging biosimilar / consumer business, lower growth potential NRT portfolio and limited longevity of the PLI income (Rs. 3,130 million in FY25). At current market price we recommend a Hold on Dr. Reddy's.

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