Dr. Reddy’s Q2 Results Review - Performance Inline With Expectations; Upgrade To 'Hold': Systematix

Systematix Research Report

Dr. Reddy’s Laboratories Ltd.'s Q2 FY25 revenue and Ebitda were largely in line with our estimates. Moderate outperformance in revenue was driven by growth in Dr. Reddy's generics business in North America (18% YOY) and India (18% YoY). India growth was led by contribution from inlicensed vaccine portfolio from Sanofi, new launches, and price increase.

Excluding the inlicensed portfolio, India growth was close to 9%. Dr. Reddy's selling, general and administrative spend was also higher during the quarter (28.7% of sales) due to increased focus on India and emerging markets and one-time costs from Haleon Acquisition, diluting the impact of a strong topline growth in Ebitda.

Research and development spend should remain elevated (8.5% to 9% of sales). Dr. Reddy's SG&A and R&D spend has increased almost 50% over the last two years as the company is in the early stages of its investment in the new growth platforms: consumer healthcare, biosimilars and CDMO. R&D spend it being targeted on biosimilars, new chemical entity oncology, and generics segments.

We expect these new business avenues to take a few years before they start contributing profitably to the consolidated performance. However, currently these investments in new businesses are meaningfully diluting the reported earnings of the company.

We revise our estimates on Dr. Reddy's and arrive at target price of Rs 1,414, based on 20 times H1 FY27E earnings per share. We upgrade the stock to Hold.

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