PL Stock Report: Dr. Reddy's Laboratories (DRRD IN) - Q2FY24 Result Update – In line EBITDA aided by gRevlimid and PLI incentives - REDUCE

Dr. Reddy's Laboratories (DRRD IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: REDUCE | CMP: Rs5,397 | TP: Rs5,300

Q2FY24 Result Update – In line EBITDA aided by gRevlimid and PLI incentives

Quick Pointers:

§ Margins came in at 26.6%; down 270 bps QoQ adjusted for PLI incentives.

§ India formulation grew in high single digit, adj for divestment and NLEM.

We increase our FY24/25E EPS estimates by 13.5%/7.6% aided by higher gRevlimid sales, however base business profitability continues to remain moderate. Dr. Reddy’s (DRRD) Q2FY24 EBITDA was largely in-line with our estimate, while base business margins ex of Revlimid and PLI incentives continued to remain muted below ~19-20%. Further thin US pipeline in near term remains a key risk. At CMP, DRRD is trading at expensive valuations of 24x P/E on FY25E adjusted for gRevlimid. We maintain our ‘Reduce’ rating with revised TP of Rs5,300/share (Rs5,150 earlier) as we roll forward; valuing at 23x Sept 2025E EPS for base business. Any big ticket ANDA approvals and sharp recovery in base business margins are key risks to our call.

§ Revenue growth aided by US generics: DRRD’s sales grew by 9% YoY at Rs 69bn; largely in-line with our estimate. The growth momentum continued, mainly by gRevlimid sales. US revenue came in at $384mn ($389mn in Q1FY24) vs our est of $380mn. Domestic business adjusted for divestment and NLEM price impact grew in high single digit. PSAI sales grew by 9% YoY. EU increased 26% YoY, while Russia sales declined by 2% YoY.

§ EBIDTA adjusted for PLI incentives came lower than est: DRRD reported EBIDTA at Rs 20bn; Adj for PLI incentives; EBITDA came in at Rs18.3bn; down 7% QoQ. Ex Revlimid and PLI incentives, we believe EBITDA came in at Rs9-10bn. Adj OPM for PLI incentives came in at 26.6% down 270bps QoQ, we est 29%. Segment wise PSAI margins were at 17.8% (15% in Q1FY24) and generic margins were at 63.6% (63.9% in Q1FY24).

§ Key concall takeaways: (1) US business: Filed 2 and launched 4 ANDAs in US during quarter. Guided for 25-30 new launches in FY24. The price erosion in this quarter was in single digits. Q2FY24 sales was aided by market share expansion in core portfolio and integration of Mayne acquisition. On gNuvaring market share should ramp up in coming quarters (2) Biosimilars: Overall 20-25% of R&D spend is towards biosimilar. Expect first wave of launch from FY27. Filed for Rituximab and may launch in FY25 (3) Domestic business: Mgt expects to beat the IPM growth going ahead. Chronic therapies contribute 35% of the India business. Will be partnering with innovators and have closed 10 such licensing deals with focus areas like Cardiovascular, Diabetic, CNS, and Oncology (4) Europe: Base volumes and growth from injectables and tender wins supported performance. Launched 20 products (5) Russia business declined YoY due to currency devaluation. The YoY growth in CIS and EM sales was on account of price increases. (6) PSAI: Growth was largely due to new launches. Profitability to improve as volume picks up. (7) Company expects growth to accelerate in China as approvals are picking up (8) Tax rate likely to be in range of 24-25% (9) PLI incentives to be higher for FY24. H1FY24 reported Rs2.3bn of incentives from PLI booked as reduction from COGS.

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