Dr Reddy's Labs shares at Rs 4,200? Stock sees price target cuts as gRevlimid sales wane

Dr Reddy's Laboratories Ltd (DRL) saw a miss on Ebitda and profit, thanks to lower-than-expected gRevlimid sales and base business margin. The miss on bottom line prompted analysts cut forward earnings estimates for FY24-FY25, resulting in cuts in price targets for the stock. Analysts believe upside is capped for the stock as positives are largely factored in the price, at least in the near term. They have price targets in a wide range of Rs 4,200-5,200 level.

After plunging 6.43 per cent in Thursday’s trade, the stock was trading at Rs 4,545 on BSE. The stock is up 8 per cent year-to-date.

Elara Securities finds the stock worth Rs 4,946. With nearly half of the Dr Reddy's Labs' profits coming from gRevlimid that is set to go off in FY27, the brokerage sees little upside to valuations and stock price. Any unforeseen large product opportunity in the US will be a key upside trigger, while lower-than-expected profits from gRevlimid would be a key downside risk, it said.

Motilal Oswal Securities said while Dr Reddy's Labs delivered 39 per cent YoY earnings growth in FY23, it expect moderation in the earnings CAGR to a mere 3.6 per cent over FY23-25 due to a high base of FY23 and limited visibility of potential products to deliver growth over the next two years.

"We believe the valuation already factors in the earnings upside, hence we maintain our Neutral rating on the stock," it said while suggesting a target of Rs 4,500.

YES Securities said Revlimid is creating a base akin to what happened with Lupin and Glumetza, Sun Pharma and Gleevec) in the past, which would create an elevated peak for US sales that may take some time to surpass.

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"Hence, we perceive performance of base business ex-Revlimid becomes important as Revlimid sales might hit a peak some time in FY24. We introduce FY25 estimate and lower target PE to 19 times from 24 times earlier as super charged FY24 EPS may not be repetitive leading to cut in PE to account for the cyclicality. Downgrade to 'Neutral' as some degree of Revlimid-led boost may still be in store but difficult to catch the precise peak," it said while suggesting a target of Rs 5,150 on the stock.

Nuvama Institutional Equities said March quarter was a better indicator of Dr Reddy's Labs' core business against the second and third quarter, as gRevlimid contribution halved.

While Dr Reddy's pipeline is solid, challenges stays in key products such as gCiprodex wherein market share has slid 1200 basis points and gVascepa, gKuvan and gNuvaring, which have plateaued.

"At $950 million ex-gRevlimid base, we forecast single digit organic growth despite solid launches like gRemodulin and gLexsican. Likewise, China filings have ramped up, but regulatory situation and aggressive VBA pricing remain impediments. PSAI business remains lumpy while domestic business is growing in line with market at best. As Dr Reddy's enters a period of investments to fund its next leg of growth, core margins are likely to remain under pressure," it said. This brokerage has cut its target to Rs 4,200 on the stock.

Dolat Capital Markets said it reduced its EPS estimates by 2-5 per cent for FY24-FY25, assuming lower

than expected Ebitda margin. This brokerage has suggested a target of Rs 4,990 on the stock.

"While we are positive on structural growth story of the company, downgrade in our earnings estimates and recent sharp rally in the stock price limits upside from the current levels. We believe any major correction in stock price would offer risk reward for the investors to add the stock in their portfolio," it said.

JM Financial said Q4 earnings were below its estimates. While gRevlimid will continue being a significant opportunity for the next 3 years, quarterly volatility should be considered, it said.

"We have factored in Mayne Pharma acquisition into our estimates and expect it to be earnings accretive in FY24 itself. The US base business ex-Revlimid is around $250 million, in our view, which should see some improvement from upcoming launches (25-30 in FY24)," it said while suggesting a target of Rs 5,980 on the scrip.

Nomura India has a Buy rating on the stock with a target of Rs 5,161, Goldman Sachs finds the stock worth Rs 4,750.