Dr. Reddy Q4 Results: Healthy Numbers, but Brokerages Unimpressed

Despite reporting robust earnings for the fourth quarter, Dr. Reddy's Laboratories, based in Hyderabad, failed to impress brokerage firms. Analysts have raised concerns about the absence of immediate growth catalysts for the pharmaceutical company. As of 10:17 AM IST, shares of Dr. Reddy’s were trading down 3.35% at ₹6,047.95 each on the NSE. In contrast, the NSE’s Nifty 50 index had dropped by 0.16% to 22,268. Currently, Dr. Reddy’s is trading at a price to earnings ratio of 18.76 times.

At 10:17 AM, the stock of the company was trading 3.35% lower at ₹6,047.95 per share on the NSE. In comparison, the NSE’s Nifty 50 fell 0.16% at 22,268 levels. Dr Reddy’s is presently trading at a price to earnings multiple of 18.76 times.

The strong performance of the blockbuster cancer drug Revlimid significantly bolstered Dr. Reddy's earnings for the January-March period, continuing a trend seen in recent quarters. Although Dr. Reddy's is actively focusing on biosimilars and strategies to enhance its position in key markets, brokerages anticipate that the benefits of these efforts will become more apparent post-FY25.

Dr Reddy’s Laboratories Ltd (DRL) on Tuesday, May 7, reported a net profit of ₹1,307 crore for the quarter ended March (Q4FY24), rising 36% year-on-year over ₹159.2 crore in the year ago quarter. However the net profit was 5% lower sequentially compared to ₹13,738 crore seen in the December'2023 quarter.

Dr Reddy's reported earnings before interest, taxes, depreciation, and amortization (Ebitda) of ₹1,872 crore for the March quarter, translating to an Ebitda margin of 25.4%, though improved over ₹1631 crore in the year-ago quarter, it declined from ₹2110 Crore in the previous quarter. 

Dr Reddy's North America sales contributed 45% to overall revenues though grew 29% year-on-year to ₹3262.6 Crore , however the same was 5% lower sequentially.

However, the performance did not appeal much to analysts who rated the stock of the company as ‘Reduce’, post the Q4 results.

Analysts at Kotak Institutional believe that the company delivered a subdued Q4FY24, much lower than its estimates.

The miss was driven by lower Revlimid sales, muted growth across markets and higher R&D spends. While the prevailing US tailwinds provide stability, absence of any meaningful approvals for Dr Reddy’s remains a concern, analysts said. However, the efforts being put by Dr Reddy's to enhance its biosimilar portfolio and offering through partnerships, R&D, joint ventures and acquisitions are expected to become fruitful in the medium term.

Those at Nuvama, also furthered a negative view over Dr Reddy’s Labs Q4 performance, with analysts estimating that the core business EBITDA margin (excluding Revlimid) corrected 200–300 basis points Y-o-Y to 17%, implying weakness in base profitability.

The company’s complex product R&D coupled with weakness in the domestic business may keep base profitability tepid while growth initiatives would kick in beyond FY27E, said analysts. The brokerage retained ‘Reduce’ on the stock with a new target price of ₹5,028 from earlier ₹5,020.

Motilal Oswal, however remained ‘Neutral’ on the stock but said that the stock valuation adequately factors in the Q4 results and earnings growth may moderate going forward. “After delivering 30% YoY earnings growth in FY24, we expect earnings growth to moderate to a 3.5% CAGR over FY 24-26, partly due to a gradual build-up of market share of g-Revlimid. The investment in JV with Nestle and in biosimilar segment should give commercial benefits after FY26,” analysts at MOSL wrote in a report.

"Our growth and profitability in FY2024 has been driven by our performance in the US. We have also made significant progress on future growth drivers through licensing, collaboration and pipeline building," Dr Reddy's Co-Chairman and Managing Director GV Prasad said. Dr Reddy's also appointed its new chief financial officer. MV Narasimham, who is currently the deputy CFO, will take over the role from Parag Agarwal, who held the post since 2020 and will retire on July 31.

Dr Reddy's board, which met on Tuesday, recommended a final dividend of ₹40 per share of ₹5 each for the financial year 2023-24.