Dr Reddy’s Laboratories shares tanked 6.6% to Rs 4,545 today, pulling the Nifty Pharma down over 1% after the company posted a lower-than-expected EBITDA, net profit, and higher operating expenditure. Analysts attribute the weakness in net profit to the weak sales of gRevlimid medicine, a global blockbuster cancer drug. The company’s stock has fallen over 4% in the last one month while it has jumped over 7% year to date. In comparison, Nifty Pharma has jumped 3.4% in the last one month and is up nearly 1% YTD.
Overall the Indian pharmaceutical industry is expected to grow up to $130 billion in value by the end of 2030. According to estimates, in FY22 India exported pharmaceutical products worth $24.62 billion and it has been projected that exports will continue to grow in FY24. With the rise in exports, Dr Reddy is also expected to grow but analysts differ on how much the company will grow as gRevlimid demand is expected to fall in the next few years.
Will gRevlimid sales continue to hit Dr Reddy’s balance sheet?
Analysts at Elara Capital believe that the gRevlimid opportunity materially will end in FY26 and FY27E could see a 40% drop in EPS. The Revlimid drug brought in nearly $10 billion in revenue for US-based Bristol Myers last year 2022. While Dr Reddy’s gRevlimid will remain the key growth/earnings driver for the company, there is a scope for the base business in the US to improve. The company has hinted at a significant number of product launches in the US in FY24 and improvement in the pricing scenario there.
Should you buy, sell or hold Dr Reddy’s Laboratories stock?
Elara Capital: Reduce – Target Price: Rs 4946 (8.8% upside)
“DRRD trades at 18.4x FY24E core earnings. With nearly half of the profits coming from gRevlimid which is set to go off in FY27, we see little upside to valuations/stock price. Our target price of Rs 4,946 is based on 17x FY25E core earnings of Rs 263 plus cash per share of Rs 483,” said analysts at Elara Capital. The brokerage said that any unforeseen large product opportunity in the US will be a key upside trigger, while lower-than-expected profits from gRevlimid would be a key downside risk.
Nuvama: Reduce – Target Price: Rs 4200 (7.6% downside)
“We are downgrading DRRD to ‘REDUCE’ despite gRevlimid strength as i) cracks show up in core US business and new launches can drive – at best – single-digit growth; ii) consistent IPM-beating growth in India not visible despite investments,” said analysts at Nuvama Institutional Equities.
Motilal Oswal: Neutral – Target Price: Rs 4500 (1% downside)
“We expect moderation in the earnings CAGR to 3.6% over FY23-25 due to a high base of FY23 and limited visibility of potential products to deliver growth over the next two years,” said analysts at Motilal Oswal. The brokerage believes the valuation already factors in the earnings upside, and maintains a Neutral rating on the stock.
JM Financial: Buy – Target Price: Rs 5980 (39.57% upside)
“The US base business ex-Revlimid is around $250mn, in our view, which should see some improvement from upcoming launches (25-30 in FY24),” said analysts at JM Financial. Analysts maintain BUY with a Mar’24 price target of Rs 5980 (including gRevlimid NPV of Rs 300).