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Dr. Reddy's Q3 Review: Shares Gain On Earnings Beat, Most Analysts Maintain 'Buy'

Most analysts maintained 'buy' ratings on the Hyderabad-based drugmaker

<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

Shares of Dr. Reddy's Laboratories Ltd. rose on Friday after third-quarter profit surged 75% year-on-year, beating estimates.

Most analysts maintained "buy" ratings on the Hyderabad-based drugmaker based on gRevlimid's contribution and opportunity, new launches in the U.S., India businesses, and enhanced focus on specialty projects including new chemical entities, biosimilars, and merger and acquisition.

The drugmaker’s net profit rose to Rs 1,244 crore in the three months ended December, according to its exchange filing. That compares with the Rs 908-crore consensus estimate of analysts tracked by Bloomberg.

Dr. Reddy’s Q3 FY23 Highlights (YoY)

  • Revenue rose 27% to Rs 6,790 crore (Estimate: Rs 6,096 crore)

  • Ebitda was up 60% at Rs 1,952 crore (Estimate: Rs 1,547 crore)

  • Margin was at 28.7% vs 22.9% (Estimate: 25.4%)

Shares of the drugmaker gained 2.75% to Rs 4,320 apiece as of 9:30 a.m. on Friday while the benchmark BSE Sensex declined 0.53%.

Of the 42 analysts tracking the drugmaker, 34 recommend a ‘buy’ and six suggest a ‘hold’ and two suggest 'sell', according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 17.5%.

Here's what brokerages made of Dr. Reddy's Q3 results:

Morgan Stanley

  • Maintains 'overweight' with a target price of Rs 5,099 implying an upside of 21%.

  • Sales were up, driven by broad-based growth across all segments.

  • US sales were up 63.9% year-on-year due to gRevlimid sales and new launches.

  • Brokerage estimates gRevlimid contribution to be $110- 120 million in Q3.

  • Management expects a meaningful contribution from gRevlimid to continue in the coming quarters (competitive market after January 31, 2026).

  • Net profit exceeded expectations, owing primarily to higher-than-expected gRevlimid sales.

  • Management guided to double-digit growth in India, driven by new partnerships and innovation (specialty, digital capabilities).

  • It guided mid-single-digit growth for the U.S. business on the current high base (~$ 370 million in Q3, including gRevlimid).

  • US growth will be driven by new launches.

  • The company targets 25-30 new launches in FY24, which should be of better quality than those in FY23.

  • The complex generics pipeline is in various stages of filing, and approvals should start in FY25.

  • Biosimilars remain a key focus area, especially for emerging markets.

  • For China, it continues with double-digit filings per annum. Approval time is roughly 18 months.

  • China sales is growing at double digits and should accelerate from H2FY24.

  • Russia sales grew due to biosimilars, new launches and favorable forex

  • Pharmaceutical services and active ingredients showed a gross margin of 18.2% since inventory issues were resolved.

  • Management maintained its twin objectives of 25% Ebidta margin (29.1% in Q3) and 25% return on capital employed.

  • Free cash flow generation will continue, which should be used for inorganic opportunities.

Phillip Capital

  • Maintains a "buy" rating with a target price of Rs 5,500 implying a potential upside of 31%.

  • A positive surprise in Q3 performance, although primarily led by a robust contribution from gRevlimid in the U.S.

  • In line with strong margins and operating performance, the core profit was 55% ahead of their estimates.

  • The brokerage believes Dr. Reddy's will benefit the most from gRevlimid among Indian peers.

  • Management expects the contribution from gRevlimid to fluctuate quarterly, although it will remain meaningful on an annual basis.

  • Ex-gRevlimd U.S. business of the company is expected to continue single-digit growth.

  • India sales grew by 10% year-on-year in Q3 largely driven by a price hike and two new products, which were partly offset by volume contraction in certain molecules.

  • Indian businesses can sustain double-digit growth through organic routes, innovation in products, investments in marketing to maximise return, and divestment of legacy brands.

  • This upgrades the mid-long-term outlook of the company qualitatively, led by an enhanced focus on specialty projects including new chemical entities, biosimilars, and merger and acquisition.

  • Positive near-term outlook amidst industry challenges, raising estimates.

  • Guidance for Dr. Reddy's is to target double-digit revenue growth, an Ebitda margin and RoCE of 25%, incremental capital allocation towards Horizon 2 business (both capex and R&D), and inorganic growth driven by Revlimid cash flow. 

Nomura

  • Maintains a 'buy' rating with a target price of Rs 5,161 implying a potential upside of 23%.

  • Third-quarter results were ahead of estimates.

  • North America, Russia, and PSAI sales were ahead of their estimates.

  • Growth in India and the rest of the world was lower than expectations.

  • In global generics, the contribution from new launches increased significantly in Q2/Q3FY23 due to gRevlimid.

  • The annual sales contribution from new launches ex-gRevlimid was healthy.

  • Launch intensity in emerging markets is high, with 25–30 launches per quarter.

  • Price pressure is lower in FY23 vs FY22 based on company disclosures.

  • Gross margin was high but recorded a slight dip quarter-on-quarter on lower government grants.

  • Sales, general and advertising, and research and development spends are rising.

  • SG&A spend was higher than estimates, even after adjusting for one-off charges.

  • The company is investing in Horizon 2 initiatives.

  • Management expects gRevlimid to remain meaningful, though it will fluctuate quarter-on-quarter; U.S. generics can grow even on a high base as the intensity and quality of new launches improves; and improved growth rate in PSAI and EM/India.

  • Raise estimates by factoring in gRevlimid contribution.

  • Base business valuation expected to range between 20-25x supported by investment in non-US businesses and strong balance sheet.

Motilal Oswal

  • Downgrades to 'neutral' with a revised target price of Rs 4,400, implying a potential upside of 5%.

  • Higher-than-expected December-quarter earnings, led by strong traction in North America and Russia segment.

  • Excluding g-Revlimid (brokerage assumed 85% margin on an assumed g-Revlimid sales contribution of $110 million), the sales, Ebitda, Ebitda margin would be Rs 5,900 crore, Rs1,300 crore, 22% for the quarter, respectively.

  • Improvement in profitability of PSAI also aided margin uptick.

  • During the quarter, company recognised a loss on sales of assets in Netherlands to the tune of Rs 99.1 crore.

  • Raise earnings estimate to factor:

    a) the strong off-take of niche products, such as g-Revlimid,

    b) Optimisation of the operating expenses and

    c) superior execution in Russia.

  • While the pipeline of abbreviated new drug applications for the US market and product distribution in markets of DF/Russia remains promising, brokerage expect moderation in earnings growth over the next two years.

  • Also, with limited upside potential, downgraded the stock to neutral.