Nomura's upgrade to 'Buy' lifts Dr Reddy's share over 4% in weak market

Nomura on Dr Reddy’s: Pharmaceutical giant Dr Reddy’s Laboratories (Dr Reddy’s Labs) shares were buzzing in trade on Thursday, December 19, 2024, as the scrip jumped as much as 4.34 per cent to hit an intraday high of Rs 1,330.45 apiece, in an otherwise weak market. 

 

However, at 12:00 noon, Dr Reddy’s share was trading 3.77 per cent higher at Rs 1,323.15 per share. In comparison, BSE Sensex was bleeding, down 1.12 per cent or 896.41 points at 79,285.79 levels.

 

The northward move in Dr Reddy’s share price came after Tokyo, Japan-based brokerage Nomura upgraded the stock to ‘Buy’ from ‘Neutral’. However, the brokerage has set a target price of Rs 1,500 (earlier Rs 6,499). The adjustment in the target price reflects Dr Reddy’s 1:5 stock split (October 28).

 

According to analysts at Nomura, the relative underperformance of the share suggests that concerns about high contribution of gRevlimid are already priced in. 

 

“We assess that risk-reward is favourable and thus upgrade the stock to Buy (from Neutral). We reduce FY25/26F earnings by 13 per cent/14 per cent to factor in higher overhead costs. Note that changes to our earnings estimates and target price are due to Dr Reddy’s 1:5 stock split,” said Saion Mukherjee and Amlan Jyoti Das, research analysts at Nomura, in a note.

 

What led Nomura to upgrade Dr Reddy’s rating?

 

Analysts at Nomura upgraded Dr Reddy's rating due to a combination of its strong long-term growth potential and the company's strategic investments in emerging markets and high-growth therapeutic areas. 

 

While the stock has underperformed the Nifty Pharma Index over the past 1-5 years, the upgrade reflects Nomura’s confidence in Dr Reddy's ability to overcome near-term challenges and capitalise on future opportunities.

 

The stock has risen only 13 per cent over the past year, compared to the Nifty Pharma Index’s 36 per cent growth. The underperformance persists despite a 22.6 per cent earnings compound annual growth rate (CAGR) expected between FY20 and FY25F and upward revisions to FY25/26 earnings estimates. 

 

Concerns stem from the heavy reliance on gRevlimid, which may start to decline in FY26F, and rising overhead costs due to increased investments in research and development (R&D), biosimilar trials, and manufacturing infrastructure. These investments have temporarily pressured margins but are anticipated to drive major future growth.

 

Furthermore, Nomura highlighted that new initiatives in GLP-1 APIs, biosimilars, and injectables have not been fully factored into FY27 estimates. While earnings before interest, tax, depreciation and amortisation (Ebitda) margins are projected to remain under pressure through FY27F (19.6 per cent), earnings growth is expected to accelerate from FY28F as these new revenue streams mature. Investments in manufacturing infrastructure, including peptide Active Pharmaceutical Ingredients (APIs) and injectables, analysts believe, will further strengthen Dr Reddy's position in these high-demand areas.

 

To reflect the company's potential for long-term growth, Nomura raised its valuation multiple from 27.5x to 32.5x, resulting in a new target price of Rs 1,500. A fair value range of Rs 1,300–1,800 was also derived using a sum-of-the-parts (SoTP) valuation, capturing the upside potential from biosimilars, GLP-1, and other emerging opportunities.

 

Triggers

 

Key catalysts for growth include sustained above-market performance in India, low-competition injectable launches in the US, and opportunities in emerging markets like India and Canada for GLP-1 APIs and formulations, analysts said. 

 

In particular, the Canadian semaglutide market, estimated at $1-1.5 billion, is expected to see limited competition after the 2026 patent expiry, presenting a significant opportunity for Dr. Reddy's.

 

Lastly, Nomura’s upgrade reflects its belief in Dr Reddy's ability to transition from a challenging near-term outlook to strong medium- and long-term growth driven by strategic investments and market expansion.