Dr. Reddy's Q2 Results Review: Brokerages Maintain Cautious Stance As US Challenges Loom

Dr. Reddy’s Laboratories Ltd.'s net profit fell 9% year-on-year in the second quarter, falling short of analysts' expectations, as continued weakness in the US market countered strong growth across emerging markets. This mixed performance has led brokerages to maintain cautious ratings on the stock, pointing to persistent challenges in its US business and a reliance on future product pipelines for growth.

Citi retained its ‘sell’ rating with a revised target price of Rs 1,110 per share, highlighting concerns over ongoing difficulties in Dr. Reddy’s US market. The brokerage noted that while non-US markets, including India, Russia, and Europe, showed strong momentum, US sales continued to struggle due to inventory adjustments and pricing pressures on key products. Citi noted that adjusted gross margins slipped slightly, reflecting these US challenges. 

Despite the company’s increasing investment in R&D—particularly in biosimilars and GLP-1 peptide products—Citi remains cautious, pointing to limited new US launches in recent years. The brokerage indicated that, although the company’s biosimilar Abatacept has potential, it won’t reach the market until fiscal 2028, posing a longer wait for tangible results.

Nuvama also retained its cautious stance, with a ‘reduce’ rating and a target price of Rs 1,215 apiece. The brokerage said it appreciates Dr. Reddy’s focus on expanding into high-value segments like GLP-1 peptides and complex generics. However, the brokerage expressed reservations about the company’s near-term growth prospects.

While revenue and Ebitda growth slightly beat consensus, Nuvama noted that profit margins have been impacted by operational costs and only modest growth in core US sales. Although Dr. Reddy’s emerging markets division saw impressive growth—driven by robust sales in Russia and other regions—sustained improvement will be essential as contributions from the US market taper, the brokerage said.

Both brokerages pointed out that Dr. Reddy's reliance on generic Revlimid—a key revenue driver—may decline in coming years, adding further pressure on the company’s need to diversify its revenue streams. Dr. Reddy's has also made strategic investments in biosimilars and complex generics to strengthen its position, particularly as competition heats up from other players in the US market.

• Revenue up 16.5% at Rs 8,038.2 crore versus Rs 6,902.6 crore (Bloomberg estimate: Rs 7,717 crore).

• Ebitda up 3% at Rs 2,076.5 crore versus Rs 2,008.3 crore (Bloomberg estimate: Rs 2,159 crore).

• Ebitda margin at 25.8% versus 29.1% (Bloomberg estimate: 28%).

• Net profit down 9% to Rs 1,341.9 crore versus Rs 1,482.2 crore (Bloomberg estimate: Rs 1,427 crore).

Shares of the company closed 0.31% lower at Rs 1,272.20 per share, compared to a 0.91% advance in the NSE Nifty 50. The stock has risen 19.16% year-to-date and 9.71% over the past 12 months.

Thirteen of the 40 analysts tracking Dr. Reddy's have a 'buy' rating on the stock, 11 recommend a 'hold' and 16 suggest a 'sell', according to Bloomberg data. The average of 12-month analysts' price target implies a potential upside of 5.1%.