Positive sentiment intact for Dr Reddy’s but valuations a pressure point

Poised to benefit from a recovery in the US generics, one of its biggest markets, the sentiment for Dr Reddy’s Laboratories is improving. Normalising price erosion, uptick in demand for certain drugs due to shortages and strong traction in drugs like Revlimid are some growth outliers for the drugmaker.

While analysts expect these factors to aid the Hyderbad-based firm’s earnings growth in the current financial year, they believe the stock’s current valuation will remain a hindrance in shaping out a strong upside.

Kotak Institutional Equities believes that the current valuations factor in a healthy-non-US outlook, while analysts at Motilal Oswal Financial Services say the earnings upside is priced in at the current price. As a result, both brokerages have a rather bearish outlook for the stock, anticipating negative returns over the next 12 months.

Nonetheless, the fundamental outlook for the drugmaker’s business remains robust. The company has guided for a significant increase in its biosimilars sales, with a significant EBITDA contribution to be seen in the future.

Brokerage firm Citi also highlighted that the company is bringing in innovative products to India for the first time through its in-licensing deals. Moreover, the increased price stability in the US generics business augurs well with the drugmaker’s growth prospects, brokerages believe.

Despite significant free cash flows in its balance sheet, Citi analysts remarked that the company would still like to avoid big-ticket acquisition at expensive valuations.

In its recent earnings calls, Dr Reddy’s has reiterated its focus on the India market and the Street is on the lookout for any acquisitions that the drug maker might do in the domestic pharma space.

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Another pain point for analysts is Dr Reddy’s reliance on blockbuster drugs like the generic of Revlimid, a drug used to treat multiple myeloma, in terms of its revenue contribution. Brokerages like Citi believe that the company has enough assets beyond Revlimid that can take care of its margins.

The company has also set the groundwork for robust growth in the coming years through its initiatives in FY23. The drugmaker exited FY23 on a strong note, with healthy sales growth of 13.5 percent on year, a 460 basis points margin expansion, and earnings increase of 39 percent . One basis point in one-hundredth of a percentage point.

Dr Reddy’s also optimised its product offerings in India/North America by selling select brands for Rs 500 crore and acquiring some others for Rs 1,200 crore in FY23.

The stock has 20 “buy”, “11” hold and 10 “sell” calls from the total 41 brokerages that cover the stock. The consensus price target is Rs 4,992 for the next 12-month period, reflecting a marginal downside from the closing price of around Rs 4,994 on June 23.

At 9.23 am, shares of Dr Reddy’s Laboratories were trading at Rs 4,955.50 on the National Stock Exchange, down a percent from the previous close.

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