Dr Reddy’s rises to 52-week high as Q1 earnings top estimate; brokerages positive but valuations a sore point

Dr Reddy’s topline as well as bottomline topped the Street’s expectations in Q1 despite a high base.

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Shares of Dr Reddy’s Laboratories rose around 2 percent to hit a 52-week high of Rs 5,577.00 in early trade on July 27 as investors cheered for the company’s better-than-expected Q1 earnings.

The drugmaker’s topline as well as bottomline topped the Street’s expectations despite a high base. Much of the growth for the drug maker in April-June was aided by a strong performance in the US business. The company also revealed that the robust growth numbers in the US were aided by strong Revlimid as well as non-Revlimid sales.

Buoyed by the company’s stellar show in the quarter gone by, several brokerages raised their estimates for Dr Reddy’s, but some also pointed towards the stock’s expensive valuations as a major hindrance in its upside trajectory.

Consequently, at 11.35 am, shares of Dr Reddy’s Laboratories were trading  1.1 percent higher at Rs 5,536.10 on the NSE.

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Analysts views

Foreign brokerage JP Morgan raised its target price for Dr Reddy’s to Rs 4,450, while retaining its ‘underweight’ call on the stock. The firm also believes that a large part of the earnings growth was driven by higher contribution from sales of the blockbuster drug, Revlimid generic.

Jefferies also raised its price target for the stock by 13 percent to Rs 6,330 and retained its ‘buy’ call on the stock. The brokerage also increased its FY24-26 EPS estimate for the company by 9-11 percent. The firm also has a robust growth outlook for Dr Reddy’s as it predicts steady US sales in the near-term for the company on the back of a favourable pricing environment. Along with that, the firm also sees steady growth in Dr Reddy’s base business.

Also Read: Dr Reddy’s Q1 Results: Net profit rises 18% to Rs 1,402 crore, beats estimates

On the other hand, even though Prabhudas Lilladher raised its FY24/25E EPS estimates by 25 percent/14 percent for Dr Reddy’s, the firm cautioned of limited near-term upside in the stock on the back of its expensive valuations. Further, the broking firm hinted at a thin US pipeline in near term as a key risk for the drugmaker. Capturing that in, the firm retained its ‘reduce’ call on the stock despite raising its price target by over 13 percent to Rs 5,100.

Motilal Oswal Financial Services seconded the view as it also believes that the expensive stock valuations of Dr Reddy’s already factors in its growth potential. On that account, the firm retained its ‘neutral’ call on the stock, with a price target of Rs 5,240.

Nuvama Institutional Equities also highlighted the lack of execution in new launches such as Lexiscan generic, lower volumes in generics of Kuvan and Ciprodex, and below-market growth in the India business. The firm raised its FY24E/25E core EPS by 3 percent/1 percent, largely on lower tax but retained its ‘reduce’ call on the stock. The firm assigned a target price of Rs 4,450 for Dr Reddy’s.

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