Dr Reddy's Laboratories QoQ showing catches a cold on weak US sales

While pharma major has maintained its margin guidance, expensive valuations limit upside

The stock of Dr Reddy’s Laboratories (DRL’s) fell 6.9 per cent on Thursday on weak 2022-23 (FY23) January-March quarter (fourth quarter, or Q4) results. The Hyderabad-headquartered company delivered an operating miss in Q4FY23 due to lower sales across markets, except for Europe, as well as higher marketing and research and development (R&D) costs.

The company’s revenue grew 16 per cent year-on-year (YoY) and was down 7 per cent quarter-on-quarter (QoQ) at Rs 6,296 crore. The company said QoQ decline in revenue was mainly due to a decline in North America and emerging markets, partially offset by growth in Europe and India.

In Q4FY23, the company’s North America revenue grew 27 per cent YoY and declined 17 per cent QoQ to Rs 2,530 crore. The performance on-year was on account of product launches and favourable foreign exchange (forex) movement partly offset by price erosion. The sequential decline was due to fluctuations in demand for launches, said the company.

Elara Capital, however, said that the sequential dip was on account of a lower contribution of the cancer drug Revlimid in the US.

“We estimate that revenues from the generic version of Revlimid in Q4FY23 to be $50 million versus $130 million each in the July-September and October-December quarters,” said the brokerage.

The earnings before interest, tax, depreciation, and amortisation (Ebitda) margins grew 1,605 bps YoY to 24.3 per cent. However, adjusted for non-core brand sales, the margins were at 21 per cent.

Profit after tax increased 192.6 per cent YoY to Rs 952.5 crore. The US business grew 26.8 per cent YoY to Rs 2,532 crore, driven by product launches and favourable forex movement, which was partly offset by price erosion.

While the US growth rate was ahead of estimates, adjusted-India growth was in line. Europe revenues were also higher than estimates. Pharmaceutical (pharma) services and active Ingredients witnessed growth due to favourable currency movements, but were below estimates. Notwithstanding quarterly fluctuations, the company continues to deliver within its determined framework, ICICI Securities said in its note.

The brokerage firm remains positive on the company’s growth story, based on simultaneous launches across major geographies and persistent recalibration of the existing portfolio.

However, a few other brokerages are bearish or neutral on the pharma major’s prospects.

“DRL’s reported sales are in line with our estimates, with a 5 per cent miss on our Ebitda estimates due to higher selling, general, and administrative expenses (up 15 per cent YoY) and R&D (up 24 per cent YoY) costs,” observed analysts at Kotak Securities.

The miss would have been higher at 21 per cent had the company not reported income of Rs 264 crore from the divestment of a few brands in India to Eris Lifesciences, added the brokerage firm.

It has a ‘reduce’ rating, with a target price (TP) of Rs 4,700 for the stock.

The company has maintained its 25 per cent medium-term Ebitda margin guidance, but the company’s quarterly core margins have fluctuated widely between 17 per cent and 23 per cent in two years. It has also maintained its return on capital employed guidance at 25 per cent.

“Apart from peptides, we build in key launches, including generic versions of Pentasa, Copaxone, and Venofer, as well as factor sales ramp-up in the generic versions of Amitiza, NuvaRing, Remodulin, and Lexiscan into our estimates. However, on an elevated US base, given the slow pace of complex launches, we remain concerned about the company’s US growth outlook, excluding the generic version of Revlimid,” said analysts.

Analysts at Prabhudas Lilladher Research have downgraded the stock to ‘reduce’ from ‘buy’ with a revised TP of Rs 4,500 per share (from the earlier Rs 4,900).

At the current market price, DRL is trading at 24x its 2024-25 price-to-earnings estimates adjusted for Revlimid.

“Any big-ticket abbreviated new drug application approvals and sharp recovery in the base business margins are key risks to our call,” said the brokerage firm.

According to Bloomberg data, of the 26 analysts that have come out with their ratings since Wednesday, 14 have a ‘neutral’/‘hold’ or ‘reduce’/’see’/‘underweight’ on the stock. The other 12 have a ‘buy’/‘outperform’/‘add’ rating. Of these 26, at least eight have downgraded the stock.

The average one-year TP of these 26 brokerages is Rs 4,935.