Q3FY23 Review: Dr. Reddy's Labs: Better visibility on base biz growth remains critical

27 Jan 2023 , 01:52 PM

Dr Reddy’s Q3 results, although significantly ahead of estimates, were largely driven by Revlimid sales increasing QoQ from USD120mn to USD135mn (IIFLe). Revlimid has accounted for ~50% of company’s earnings and contributed ~950bps to overall margins over the past two quarters. While Revlimid will account for ~30% of Dr Reddy’s FY24/25 EPS, analysts at IIFL Capital Services believe there are limited triggers for the base business over the next 12-18 months as most of the company’s complex generic launches in the US market are expected to begin only from FY25.

India business has been underperforming market growth over the past two quarters, as secondary data reflects that Dr. Reddy’s India portfolio has grown only at 4-5% rate (like-for-like) vs IPM growth of 8- 10%. Utilization of existing cash balance of USD400m for domestic acquisitions remains the key upside risk, as Dr Reddy’s is currently under-indexed to the domestic IPM as compared to peers (India business accounted for only 20-25% of Dr Reddy’s overall Ebitda in FY22 vs 55- 60% for Sun/Cipla) and India acquisitions will help Dr Reddy’s to improve its business mix & resilience of the base business earnings performance.

With Dr Reddy’s India business growth also being muted at ~4-5% (ex-Cidmus) over the past few quarters, IIFL Capital Services believe the stock is unlikely to react to Revlimid-led earnings beat and instead better visibility on base business growth remains critical for the stock’s performance. 

Analysts at IIFL Capital Services downgrade their rating to ADD (from BUY) owing to limited near-term triggers apart from Revlimid with target price of Rs 4400.