Dr Reddy's earnings future uncertain beyond FY27, say analysts; stock up 3%

Indian pharmaceutical major, Dr Reddy’s Laboratories share surged 3.1 per cent at Rs 1,312 a piece on the BSE in Wednesday’s intraday deals. This came after the pharma major on Tuesday recorded its highest-ever revenue from operations in the second quarter of financial year 2024-25 (Q2FY25). The revenues rose by 16.5 per cent, year-on-year (Y-o-Y) to Rs 8,016.1 crore in Q2FY25.

 

However, the company posted a 9.5 per cent Y-o-Y decline in its consolidated profit after tax (PAT) for Q2 FY25 at Rs 1,341.9 crore

 

The decline in net profit was attributed to one-time adjustments related to the acquisition of Haleon plc's global Nicotine Replacement Therapy (NRT) portfolio (excluding the US), tax adjustments, and the transfer of minority interest from the Nestlé joint venture.

 

According to analysts, Dr Reddy’s Lab higher volume growth and new launches have been the key factors driving superior performance in North America, Russia, and rest of the world (ROW) markets.  North America grew 17 per cent, Russia 19 per cent and ROW markets by 33 per cent on a Y-o-Y basis. Meanwhile, the India market grew 18 per cent Y-o-Y in Q2FY25.

 

Going forward, the company’s management expects to sustain growth in the US over the next 1-2 years led by Revlimid. Further anticipating India to see double-digit growth in FY25, led by new launches, scale-up in key therapies, and in-licensing opportunities and higher value products such as new chemical entities (NCEs), biosimilars, peptides, and specialty drugs for the global market. 

 

Analysts said the company continues to work on building a differentiated product portfolio to suit its focus markets. And accordingly expanding presence with acquisition of NRT portfolio for global markets (Ex-US) and forming a JV with Nestle to expand its complimentary nutraceutical portfolio. Further they said, it has complete manufacturing presence for GLP-1 products and is building a biosimilar pipeline for regulated markets. 

 

However, analysts at HDFC Securities are underconfident about Dr. Reddy’s outlook, as beyond Revlimid, there is insufficient pipeline visibility to sustain growth and margin momentum, raising concerns about core earnings growth. The brokerage gave a ‘Reduce’ rating to the company with a target price of Rs 1,330.

 

Others, too, agreed, with analysts at Motilal Oswal and Nuvama Institutional Equities remaining cautious over the company’s current valuation and earnings outlook due tapering of Revlimid in FY27. 

 

“The earnings are expected to be stable over the next two years due to competition kicking in g-Revlimid 4QFY26 onwards and some gestation period to achieve commercial benefits from the differentiated portfolio. Maintain ‘Neutral’ on limited upside at current valuation,” analysts at Motilal Oswal said. The brokerage gave a target price of Rs 1,390. 

 

Analysts at Nuvama, too, gave a ‘Reduce’ call on the stock with a target of Rs 1,215 on a rollover to FY27 estimates. 

  At 10:19 AM; the stock price of the company gained 2.47 per cent at Rs 1303.95 a piece. By comparison, the BSE Sensex surged 0.68 per cent at 80,020.35 level.