Q3FY24 Review: Dr. Reddy's Laboratories: Weak India & US profit conc. Warrant caution

31 Jan 2024 , 11:32 AM

Dr. Reddy Laboratories’ (Dr. Reddy) Q3 performance (EBITDA down 2% over the year-ago quarter) was in-line with IIFL’s expectations, as topline-beat driven by the US, Russia and CIS business was offset by ~100 basis points miss on EBITDA margins owing to higher SG&A spends. While Dr. Reddy’s has been investing to accelerate growth for its India business, the company has underperformed IPM growth by ~100 basis points over CY20-23 led by slower-than-market growth for its top-4 therapies in the domestic market. 

Additionally, analysts at IIFL Capital Services estimate that Dr. Reddy’s base US business (ex-Revlimid, ex-Mayne) has grown only 7% cc in 9MFY24 despite the pricing respite this year. With sustained underperformance in India and concentrated profit pool from the US business (US business, including Revlimid, accounts for ~65% of Dr. Reddy’s FY24 EBITDA, per IIFL estimates). Analysts at IIFL Capital Services believe Dr. Reddy’s deserves to trade at a lower valuation multiple compared to other large-cap peers such as Sun Pharma and Cipla. Accordingly, they value Dr. Reddy’s at ~22x FY26 core EPS (ex-Revlimid, versus ~25x for Cipla) to arrive at their Target Price of ₹5,480.