Dr Reddy's Labs sinks 7% on disappointing Q4 operating performance

Shares of Dr Reddy’s Laboratories plunged 7 per cent to Rs 4,545 on the BSE in Thursday’s intra-day after the company delivered an operating miss in January-March quarter (Q4FY23) due to lower sales across markets, barring Europe, as well as higher marketing and R&D costs.

In Q4FY23, the company’s revenue grew 18 per cent year-on-year (YoY) and was down 8 per cent quarter-on-quarter (QoQ) at Rs 5,430 crore. The company said QoQ decline in revenue was mainly due to decline in North America and Emerging Markets, partially offset by growth in Europe and India.

In Q4, the company’s North America’s revenue declined 17 per cent QoQ to Rs 2,530 crore, due to fluctuations in demand for new launches.
 

EBITDA (earnings before interest, taxes, depreciation, and amortization) margins grew 1,605 bps YoY to 24.3 per cent. However, adjusted for non-core brands sales, the margins were at 21 per cent. Adjusted profit after tax increased 192.6 per cent YoY to Rs 952.5 crore. US business grew 26.8 per cent YoY to Rs 2,532 crore, driven by new products launches and favourable forex movement, which was partly offset by price erosion.

While US growth was far ahead of estimates, adjusted India growth was in line. Europe revenues were also higher than estimates. Pharmaceutical services and active Ingredients witnessed growth due to favourable currency movements but were below estimates. Quarterly fluctuations notwithstanding, the company continue 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.

Dr Reddy’s reported sales in line with our estimates, with a 5 per cent miss on our’s EBITDA estimates due to higher SG&A (up 15 per cent YoY) and R&D (up 24 per cent YoY) costs, analysts at Kotak Securities said. The miss would have been higher at 21 per cent as the company not reported income of Rs 264 crore from the divestment of a few brands in India to Eris, the brokerage firm added.

The company has maintained its 25 per cent medium-term EBITDA margin guidance, but the company’s quarterly core margins have fluctuated widely in the 17-23 per cent range in the past two years.

Going forward, apart from the peptides, we build in key launches, including gPentasa, gCopaxone and gVenofer as well as factor in sales rampup in gAmitiza, gNuvaring, gRemodulin and gLexiscan, into our estimates. However, on an elevated US base, given the slow pace of complex launches, we remain concerned about DRRD’s ex-gRevlimid US growth outlook, analysts said.

Analysts at Prabhudas Lilladher downgrade stock to Reduce from Buy with revised target price of Rs 4,500/share (Rs 4,900 earlier). At CMP, DR Redy is trading at expensive valuations of 24x P/E on FY25E adjusted for gRevlimid. Any big ticket ANDA approvals and sharp recovery in base business margins are key risks to our call, the brokerage firm said.