Q2FY24 Review: Dr. Reddy's Labs: High base will impact growth over FY24-26

30 Oct 2023 , 02:08 PM

Despite largely flat Revlimid sales sequentially, Dr. Reddy’s Q2 gross margins/Ebitda margins (ex-PLI incentives) declined ~130/270bps QoQ to 56.4/26.6% respectively likely due to a sharp 13% currency depreciation in Russia/CIS markets and continued muted growth in the India business. While analysts of IIFL Capital Services upgrade their FY24- 26 Ebitda estimates by 8/7/4% respectively, led by higher Revlimid sales assumptions, they believe that Dr. Reddy’s lacks growth triggers over the next 18-24 months particularly, considering the company’s weak US pipeline (ex-Revlimid) and sustained underperformance in the domestic market. Owing to the high base of Revlimid, analysts of IIFL Capital Services forecast only a modest 5% Ebitda Cagr for Dr. Reddy’s over FY24-26. They maintain REDUCE rating on the stock with a TP of Rs5,040 (21.5x 2YF EPS + Rs370 Revlimid NPV). 

Weak US pipeline apart from Revlimid: 

Dr. Reddy’s US sales declined QoQ from USD389mn to USD383mn, as the full-quarter impact of Mayne acquisition would have been partly offset by a modest sequential decline in Revlimid sales from USD125mn in Q1 to USD120mn in Q2. Although Dr. Reddy’s is targeting 25-30 new launches in the US p.a., over FY24-27, analysts of IIFL Capital Services believe that most of its complex generic launches (Octreotide, Dasatinib, Teriparatide, Liraglutide, etc.) will be commercialised beyond the next 18-24 month period, thereby leading to a muted 6-7% growth for its ex-Revlimid US business over FY24-26. 

Innovative products business in India will take time to ramp up: 

Dr. Reddy’s has underperformed IPM growth over the past 6-8 quarters, with its Q2 India business growth again being only mid-single-digits adjusted for the NLEM-price cuts and brand divestments. Although mgmt is banking on in licensing deals for innovative products to accelerate company’s India growth to double-digits by the end of FY24, analysts of IIFL Capital Services note that this will take time to rampup and mgmt’s target of achieving Rs1bn annual sales per innovative product looks difficult to achieve over the next 2-3yr period. Analysts of IIFL Capital Services expect Dr. Reddy’s India business to clock only 7% Cagr over FY23-26.

Analysts of IIFL Capital Services forecast a modest 5% Ebitda Cagr over FY24-26: 

Dr. Reddy’s margin performance in Q2 was muted, considering govt. grants/PLI incentives increased QoQ from Rs675mn to Rs1.6bn. With Revlimid sales likely topping out at USD480-500mn p.a. over FY24-26, weak US pipeline and sustained underperformance in the domestic market, analysts of IIFL Capital Services expect Dr. Reddy’s overall revenue/Ebitda to clock only 5-8% Cagr over FY24-26.