Param Desai
Dr. Reddy’s (DRRD) Q3FY25 EBITDA was below our estimate. The base business margins and US sales ex of gRevlimid and one offs continued to remain weak. We have scale up base business margins from current level of 16% to 19-20% in FY27E. Our FY26E EPS stands cut by 6% as we factor in lower gRevlimid sales however FY27E EPS broadly remain unchanged. DRRD have been investing cash flow from gRevlimid to build pipeline across peptides, biosimilars and GLP products; benefits of that may take some time. Further thin US pipeline in near term and competition in certain key products remains a key risk. At CMP, DRRD is trading at valuations of 24x P/E on FY27E and factors in recovery in base business margins. We maintain our ‘Reduce’ rating with TP of Rs1,335/share; valuing at 25x FY27E EPS. Any big ticket ANDA approvals and sharp recovery in base business margins are key risks to our call.
- Revenue growth aided by consolidation of NRT portfolio: DRRD’s sales grew by 16% YoY at Rs 83.6bn. This was largely aided by consolidation of NRT business which registered Rs 6bn of revenues. Further there was Rs1.25bn of license income. Adj for NRT portfolio and licensing income, revenues grew by 6% YoY; below our estimate. US revenue came in at $401mn. ($445mn in Q2FY25) vs our est of $450mn. Domestic business increased by 14% YoY to Rs 13.5bn aided by consolidation of Sanofi vaccine brands. Adj for this growth was moderate 6%. PSAI sales grew by 5% YoY aided by new launches and increase in volumes partially offset by price movement. Russia sales increased by 19% YoY. RoW sales grew by 7% YoY while EU sales adj for NRT portfolio grew by 22% YoY.
- Ex Revlimid and license income; margins continue to remain weak: DRRD reported EBIDTA of Rs 23bn, adj for NRT business (Rs 1.5n) & licensing income; EBITDA stood at Rs 20.3bn against our est of Rs 22bn. OPM came in at 27.5%. We believe ex gRevlimid, license income & PLI grant, margins stood at 16%. Segment wise PSAI margins came at 28.6% (30% in Q2FY25) whereas generic margins were at 61.3% (63.1% in Q2FY25). Other expenses adj for one offs in Q2 were up by 5% QoQ. R&D expenses came in at Rs 6.6bn (8% of revenues), up 20% YoY. Amortisation expenses came in higher given NRT business consolidation. EPS adj for gRevlimid and license came in at Rs 8/share.
- Key concall takeaways: US business: Launched four new products with a total 11 products in 9MFY25. The QoQ decline was on account of lower sales from gRevlimid and market share loss in certain key products. Received CRL on the API side of Iron sucrose product which it intends to launch in coming quarter. Semaglutide: Generic opportunities will open from 2026 in markets like Canada, Brazil and India. Company expects to enter these markets from day one and believes they are fully integrated with API capabilities. Consolidated acquired portfolio of NRT. Launched 9 products across markets during the quarter. India: Launched 6 new products including Toripalimab and Elobixibat. Mgmt cited Nestle JV is performing well. Biosimilars: Secured the marketing authorization for Rituximab in the UK and Denosumab has been filed in both US and Europe. Russia: Benefited from increased sales volumes, price hikes, and new launches YoY, partly offset by currency fluctuations. EM’s: Launched 20 new products. R&D: Expects the investments to be in the range of 8.5-9% for FY25 with emphasis on complex generics and biosimilars. Others: Capex for the quarter was at Rs 7.1bn. Net interest expense for the quarter is ~Rs 20mn, due to unfavorable forex impact and reduced interest income after the NRT acquisition payout. SGA expense to remain at current 28% levels. Net cash stood at Rs 16bn.