Dr Reddy's may underperform on growth, margin worries after muted Q1

North America weakness, lower margins, uncertainty over key launches weigh on earnings outlook

Pharmaceutical major Dr Reddy’s Laboratories reported a muted first quarter (April-June/Q1) of 2026–27 (FY27), with operational performance coming in well below estimates. While the top line declined 6 per cent, operating profit and net profit fell a steep 56 per cent and 69 per cent, respectively. Growth was primarily hit by its North American operations, while profitability was affected by inventory provisions and higher solvent costs due to the conflict in West Asia.

 

The weak Q1 performance led to earnings downgrades for FY27 and 2027–28 (FY28). The stock, which hit its 52-week low on Thursday, was down 1.4 per cent in trade and has lost about 10 per cent over the past month. Given the weak Q1 performance and uncertainties around key launches and growth, most brokerages remain cautious and have a ‘sell’ or ‘hold’ rating on the stock.

 

The company’s revenue growth was affected by lower sales of cancer drug lenalidomide (the generic version of Revlimid), price erosion in the US market, and a decline in nicotine replacement therapy revenue due to a change in its operating model.

 

According to the company, this was related to rebates and discounts offered to distributors, compared with sales previously managed by seller Haleon during the transition.

 

A 35 per cent year-on-year (Y-o-Y) decline in sales in North America, its largest market by revenue, weighed on overall growth. The decline was primarily due to lower lenalidomide sales following the loss of exclusivity and a lower-than-expected contribution from new launches. Excluding lenalidomide, the company said its base business continued to post double-digit growth, supported by product launches, including cancer drugs bosutinib and nintedanib, and favourable product timing.

 

However, Equirus Securities analysts Bharat Celly and Vinay Jain point out that the company’s underlying US business has remained flat at an annualised run rate of under $1 billion over the past four years despite multiple launches, reflecting sustained pricing pressure and a lack of high-value, complex product introductions. While they estimate $150 million in revenue from arthritis drug abatacept in FY28, delays cannot be ruled out given the product’s complexity and recent US Food and Drug Administration observations at the company’s facility, they add. The brokerage has a target price of ₹1,039.

 

The India business continued to outperform the domestic pharmaceutical market, registering 17 per cent Y-o-Y growth, driven by its innovation franchise, launches, price increases, and volume growth. During the quarter, the company launched seven new brands, commercialised oral semaglutide, and its cancer drug toripalimab crossed the ₹100 crore sales mark within two years of launch. Brokerages expect the India business to post growth of more than 10 per cent going forward, supported by launches and price hikes.

 

Operating performance remained weak, with gross margins falling 750 basis points (bps) Y-o-Y to 49.4 per cent, primarily due to lower lenalidomide sales, price erosion in the North American and European Union generics businesses, and elevated solvent costs arising from the West Asia crisis. Operating profit margin declined 1,170 bps Y-o-Y to 13.5 per cent, largely due to higher selling, general and administrative expenses, including adverse foreign exchange movements, and investments in the branded business. The company said higher freight and solvent costs alone reduced margins by 100 bps.

 

Nirmal Bang Research analyst Niharika Agarwal has turned cautious on the company following the semaglutide manufacturing disruption, which has materially reduced near-term earnings visibility. While the company retains a strong India franchise, a resilient ex-US business, and a promising biosimilars pipeline, the brokerage believes the market is underestimating the impact of delayed semaglutide commercialisation, lower manufacturing utilisation, and slower margin recovery. It has retained a ‘sell’ rating and revised its target price to ₹1,098 from ₹1,335 earlier.