Dr. Reddy’s Q1 Results Review: Systematix Maintains ‘Hold’ Rating On Weak U.S. Performance
In its latest quarterly earnings report, Dr. Reddy’s Laboratories Ltd. (Dr. Reddy’s) announced a revenue of Rs 5,823 million, which is 5% higher year-on-year (YoY) but 8% lower quarter-on-quarter (QoQ). The company’s earnings before interest, taxes, depreciation, and amortization (Ebitda) stood at Rs 2,283 million, higher by 5% YoY but lower by 8% QoQ.
The weak performance in North America was primarily due to price erosion and lower offtake for gRevlimid. Systematix, a leading research and brokerage firm, has maintained its ‘Hold’ rating on Dr. Reddy’s stock, citing the company’s efforts to offset the erosion through multiple levers, including cost control, generic Semaglutide launch in Canada, and ramp-up in CDMO/Consumer business.
According to Systematix, the company’s cost control lever is likely to be one of the last resorts, in case the other levers fail to play out as expected. The brokerage firm estimates that normalized (ex-Revlimid) Ebitda for the quarter could be around Rs 1,300 to 1,500 crore, translating to normalized earnings per share (EPS) of around Rs 9 to 10 per share.
Systematix believes that Dr. Reddy’s needs to achieve more than 5-6 times the sales from its generic Semaglutide launch in Canada to offset the erosion from gRevlimid. The company’s biosimilar business is expected to ramp up from FY28 onwards, which could provide a significant growth driver in the long term.
In the near term, Systematix is maintaining its ‘Hold’ rating on Dr. Reddy’s stock with a price target of Rs 1,159, based on 25 times its FY27 earnings per share (EPS). The brokerage firm has also tweaked its forecasts to reflect the company’s efforts to offset the erosion.
It is worth noting that Dr. Reddy’s has made significant investments in its growth platforms over the last few years, but the horizon over which these investments are expected to pan out may be longer, potentially from FY28 onwards.
The potential approval of a high-value complex generic on the same lines as gRevlimid could be a positive surprise for Dr. Reddy’s. However, Systematix believes that the company needs to deliver on its growth strategies to offset the erosion from gRevlimid.
