Dr. Reddy's Q4 Results Review: Shares Fall On Profit Miss, Analyst Downgrades

Shares of Dr. Reddy's Laboratories Ltd. declined after most analysts cut ratings and estimates after the company's fourth-quarter profit missed analysts' estimates. There is also limited visibility of potential products to deliver growth over the next two years, according to the analysts.

The Hyderabad-based drugmaker’s net profit rose to Rs 960 crore in the three months ended March, according to its exchange filing. That compares with the Rs 1,034 crore consensus estimate of analysts tracked by Bloomberg.

Dr. Reddy’s Laboratories Q4 FY23 Highlights (YoY)

• Revenue rose 15% to Rs 6,315 crore (Bloomberg estimate: Rs 6,248 crore).

• Ebitda was up 33% at Rs 1,588 crore (Bloomberg estimate: Rs 1,591 crore).

• Margin was at 25.1% vs. 21.8% (Bloomberg estimate: 25.5%).

Shares of the drugmaker fell 5.59% to Rs 4,595.30 apiece as of 9:30 a.m. on Thursday, while the benchmark Nifty 50 was trading flat.

Of the 41 analysts tracking the drugmaker, 25 recommend a ‘buy,’ eight suggest a ‘hold,’ and eight suggest 'sell,' according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 8.6%.

Here's what brokerages made of Dr. Reddy's Q4 results:

• Maintains 'buy' with a target price of Rs 5,161, implying an upside of 6%.

• Revenue miss was primarily due to lower U.S. generic sales.

• This was likely due to a lower contribution from gRevlimid.

• Ebidta and PAT misses could be attributed to lower contributions from high margin gRevlimid, higher overheads—SG&A and R&D—and certain one-off write-offs of Rs 54 crore.

• According to management, gRevlimid would remain a meaningful product for Dr. Reddy’s until January 2026.

• But sales could fluctuate from quarter to quarter.

• The company launched six new products in the U.S.

• Management expects new product launch momentum to sustain and plans to launch 25–30 new products in the U.S. in FY24.

• Over time, Dr. Reddy’s expects U.S. sales to grow even on the current elevated base.

• India sales grew beyond estimates due to divestment income of Rs 264 crore from a few non-core brands in Q4.

• Excluding contributions from Covid-19-related products and divestment income, management indicated the India business recorded 11% year-on-year growth.

• The company makes 15–20 filings in China each year.

• The approval process for products has commenced.

• Revenue from the products is likely to have a material contribution in FY25/26.

• The company expects double-digit growth in the PSAI segment due to new product launches (patent expiration).

• Dr. Reddy's would receive royalty income on sales of a biosimilar, pegfilgrastim, launched in the U.S.

• Management has guided FY24 R&D spending to be around 8–9% of sales.

• The company aspires to sustain a 25% Ebidta margin in the long run.

• Management stated it is pursuing deals that complement Dr. Reddy’s existing products and capabilities, including partnerships with companies.

• Maintains 'neutral' with a target price of Rs 4,500, implying a downside of 8%.

• Adjusted for the divestment of brands in the domestic formulation segment, the company recorded in-line sales in Q4FY23.

• However, it posted lower-than-expected Ebitda and PAT due to higher opex.

• It delivered the highest-ever annual earnings in FY23, led by strong traction in g-Revlimid.

• Reduce earnings estimates by factoring in higher SG&A expenses, a prolonged slowdown in the CIS business, and some price erosion in export markets.

• The company delivered 39% year-on-year earnings growth in FY23.

• Expect moderation in the earnings CAGR to 3.6% over FY23–25.

• This is due to the high base of FY23 and the limited visibility of potential products to deliver growth over the next two years.

• Believe the valuation already factors in the earnings upside, hence neutral.

• Downgrades to 'reduce' with a target price of Rs 4,200, implying a downside of 14%.

• Undershot consensus revenue/ebidta (adjusted for brand sale to Eris) due to softer India (adj. +5% YoY) and Russia/CIS (-18%).

• Estimate the core (ex-gRevlimid) gross/ebidta margin to have declined to ~51%/15%.

• As the company enters a period of investments (biosimilars, injectables, and horizon 2 assets) to fund its next leg of growth, core margins are likely to remain under pressure.

• Downgrade to reduce, despite gRevlimid strength, due to cracks showing up in core U.S. business and new launches that can drive—at best—single-digit growth; consistent IPM-beating growth in India is not visible despite investments; core margin is about 15% as per their view, and cost-saving scope is limited.

• FY24/25E 26% Ebidta margin implies 18% ex-gRevlimid margin with limited upside.

• Downgrades rating to 'reduce' from 'add' with a target price of Rs 4,100, cut from Rs 4,400 earlier, implying a downside of 16%.

• The stock’s 15% rally year-to-date seems to be out of sync with continued muted trends in the base business (ex-Revlimid).

• Base business Ebitda margins (exRevlimid) of ~15% in Q4 and ~17% in FY23 have undershot expectations of ~20% margins.

• This is thereby driving a miss of 20–25% on Q4 Ebitda versus expectations.

• A key concern for Dr. Reddy’s has been its thin U.S. pipeline, apart from Revlimid, as most of its critical US launches are lined up only for 2025/26.

• The company has also struggled to outperform Indian pharma market growth in India.

• Margins are unlikely to improve without visibility into base business growth.

• Further cut base business margin estimates from ~20% to ~18%, thereby leading to 9% EPS cuts for FY24/25.

• Assumptions still factor in base business EPS increasing from Rs 110 in FY23 to Rs 160 in FY25.

Watch Dr. Reddy's MV Ramana's interview below