Dr Reddy's up 15% in Dec so far; set for biggest monthly gain since Sep'20

Thus far in the month of December, Dr Reddy's share price has rallied 15%, its biggest monthly rally since September 2020, when it had surged 22%

Shares of Dr Reddy’s Laboratories are set to report their biggest monthly gain in the past 51 months, with the stock of the pharmaceutical company having rallied 15 per cent thus far in the month of December. Earlier, in September 2020, the market price of Dr Reddy’s had surged 22 per cent. In June 2023, it had gained 14.5 per cent.

 

Shares of Dr Reddy’s have moved higher by 2.4 per cent to Rs 1,387.30 on the BSE in Friday’s intra-day trade. In comparison, the BSE Sensex and the BSE Healthcare index were up 0.5 per cent at 11:54 AM. The stock had hit a record high of Rs 1,420.20 on August 21, 2024.

 

Since December 18, in the past seven trading days, the stock price of Dr Reddy’s has appreciated by 11 per cent after Nomura upgraded the stock to ‘Buy’ from ‘Neutral’ and set a target price of Rs 1,500 per share.

 

Dr Reddy’s stock has underperformed the sector over the past 1-5 years. Over the past one year, it has risen 21 per cent, compared to the BSE Healthcare index's rise of 42 per cent during the same period. This is despite strong (22.6 per cent earnings CAGR over FY20-25F) growth and upward revisions (FY25/26 consensus EPS estimates up 10-12 per cent over the past 12 months).

 

Analysts at Nomura think the Street is concerned about higher contributions from gRevlimid that could start declining in FY26F. Furthermore, the company's overheads have increased significantly in the recent past. A large part of the increase was due to new initiatives, including clinical trials for biosimilars.

 

In the near-term, the catalysts are sustaining above-average market growth in India, and low-competition in injectable launches in the US. In the medium-term, Dr Reddy’s is likely to benefit from GLP-1 opportunities in emerging markets, including India and Canada. Dr Reddy’s is an integrated player and may record upside from active ingredients (API) and formulation sales. The brokerage firm expects strong demand for Semaglutide API that has a potential market size (ex-US/EU market) of $0.5-1.0 billion and growing formulation demand. Semaglutide's market size in Canada is pegged at $1.0-1.5 billion, which may see limited competition on patent expiry in 2026.

 

Meanwhile, Dr Reddy’s management anticipates improved performance in the US business in the second half (October to March) of the financial year 2025 (H2FY25). The company has approximately 20 high-value products in its pipeline, including peptide and GLP-1 products, and has in-house capabilities to manufacture both the API and final products for these therapies. The management is confident that gRevlimid sales will remain strong through H2FY25 and into FY26.

 

Sunset of the gRevlimid opportunity will likely cause a dip in revenues and profits in FY27. Analysts at Elara Capital believe this is already priced into the stock’s valuation. The brokerage firm has retained its 'Buy' rating on the stock with a target price of Rs 1,588 (adjusted for stock split), which is 29.7x FY27E core earnings plus cash per share. Increased price erosion in the US generics market and a delay in biosimilar product approvals are key risks, the analysts said.

 

Meanwhile, Dr Reddy’s consolidated gross margin (considering only raw material) improved to 70.7 per cent in FY24 (FY23: 69.0 per cent) due to a softening of raw material costs and a better product mix. India Ratings and Research (Ind-Ra) expects the gross margin to remain between 68 per cent and 69 per cent in FY25-FY26 (FY20-FY24: average 67 per cent), driven by the better product mix and overall cost optimisation efforts undertaken by the company. 

 

The company delivered a strong improvement in Ebitda margin at 28.3 per cent in FY24 (FY23: 26.0 per cent), on account of the launch of generic Revlimid in the US market and moderation in price erosion. Ind-Ra expects the company's R&D expense to continue to be 8.5 per cent-9.0 per cent of the revenue over FY25-FY28, as against the past 10-year average spend of 10 per cent of sales.  The company aims to have a sustainable base business Ebitda margin of over 25 per cent in the next few years on account of the ongoing cost-saving measures, improved product/geography mix, and higher field force productivity in India, the rating agency said in rationale.