Q1FY24 Review: Dr. Reddy's Labs: YoY comparables become tough from here

27 Jul 2023 , 01:05 PM

Dr. Reddy’s Q1 Ebitda was 27% ahead of analysts of IIFL Capital Services estimates, driven by USD50mn QoQ increase in Revlimid sales, which led to GMs expanding sequentially from 55% to 59%. Although mgmt expects GMs to hold steady at 56-59% over the next few quarters, they note that YoY comparables will become tough from Q2FY24 given that Revlimid contributed 40-45% to Dr. Reddy’s overall Ebitda over Q2Q4FY23. Analysts of IIFL Capital Services estimate that Dr. Reddy’s ex-Revlimid, ex-Mayne US sales grew 4-5% QoQ in 1Q, while the India business growth was muted at 4% YoY. They raise FY24/25/26ii Ebitda by 13/6/2% with this year’s upgrade being driven by higher margins on account of Revlimid, while they have also increased base business (exRevlimid) Ebitda margin estimates by ~100bps to ~20%. With Dr. Reddy’s perennially underperforming market growth in India and there being limited visibility on US pipeline apart from Revlimid, analysts of IIFL Capital Services find valuations expensive at ~28x FY25 core EPS (ex-Revlimid). Maintain REDUCE rating with a TP of Rs4,900 (11% downside). 

US sales (ex-Revlimid, ex-Mayne) increased 4-5% QoQ in Q1: 

US sales increased USD80mn QoQ to USD390mn in Q1; analysts of IIFL Capital Services estimate that Revlimid/Mayne acquisition/base business contributed incremental QoQ sales of USD50/20/10mn respectively. Base business growth of 4-5% QoQ was driven by Regadenoson, MS gains in Suboxone and lower price erosion, which would have been partly offset by MS loss in Kuvan and Ciprodex. Mayne’s acquired portfolio contributed from the end of Apr’23 and Mayne’s annualised sales are expected to be USD100mn going forward. 

High base of Revlimid will start hurting YoY growth from Q2FY24: 

Analysts of IIFL Capital Services estimate Revlimid has contributed USD130/145/75/125mn sales to Dr. Reddy’s over the past 4 quarters from Q2FY23-Q1FY24. With Revlimid numbers being in the base now, they expect Dr. Reddy’s overall Ebitda growth to moderate from 75% over the past 4 quarters to 7-8% going ahead. Analysts of IIFL Capital Services estimates assume Dr. Reddy’s base US business (ex-Revlimid) to grow at 6% Cagr over Q1FY24 annualised run-rate. 

India business growth was muted at 4% YoY: 

Excluding brand divestments and NLEM price reductions, Dr. Reddy’s India business grew high single digits in Q1. Although India growth was muted, Russia business grew 19% cc QoQ, which led to base business (ex-Revlimid) Ebitda margins improving to ~21.5% in Q1FY24. Analysts of IIFL Capital Services estimates assume base business margins to stay at ~20% going forward.