Dr. Reddy reported revenue growth of 20 per cent YoY to ₹6,297 crore and an EBITDA margin of 25 per cent in Q4FY23 results. But adjusted for divestment proceeds in the current quarter and the base quarter, the revenue growth was at 16 per cent YoY, which was in line with consensus estimates. The adjusted EBITDA margin on the other hand, without divestment income, is closer to around 22 per cent, missing the consensus expectation of a 25 per cent EBITDA margin. Despite the reported quarter being backed by a strong margin US portfolio and favourable forex movement, margins missed expectations. The stock declined by 7 per cent on the day following the results, driven by miss versus consensus and the sequential dip in gRevlimid sales.

gRevlimid uncertainty

Dr. Reddy’s US sales at $312 million was up 17 per cent YoY. But sequentially was $50 million lower than the last two quarters’ average run rate, when gRevlimid contributions started. This could be tied to volume-limited launch contracts for gRevlimid or channel destocking. Management expects stable contribution from the product in FY24.

The quarter also witnessed 16 launches in the US, and the company reported 25 launches in the year. Dr Reddy expects to sustain a similar launch momentum in FY24 as well, with stable contribution from gRevlimid driving strong growth in US markets. But the investor focus may be centred on dip in sales post FY26 when gRevlimid opportunity may sharply decline and margin performance following the dip.

Also read: Dr Reddy’s launches generic Treprostinil injection

India and pipeline

India accounts for 20 per cent of Q4FY23 revenues with US/Emerging markets/Europe accounting for 40/18/8 per cent of revenues. Dr. Reddy has been divesting non-core brands in India and in-licensing brands to restructure its India portfolio, which it considers its key market. India, excluding divestment income and Covid sales, reported 11 per cent growth YoY in the quarter. Apart from in-licensing to complement its domestic portfolio, the company plans to increase its footprint, which should gain from the focussed portfolio.

The international biosimilar portfolio is progressing as per Dr Reddy’s quarterly update. Pegfilgrastim launch by Dr Reddy’s commercial partner, Fresenius Kabi, in developed markets, filing for Rituximab in the US, Europe, and the UK and global phase-III trials for tocilizumab are in progress. The company has also in-licensed or got into a strategic partnership with others, including medical devices and CAR-T assets for trials in India in the long run.

Also read: About 25% of Dr Reddy’s products to be first-to-market by 2027: Co-chairman GV Prasad

Valuation

Post the 7 per cent dip, Dr. Reddy is trading at 18 times one year forward earnings . The valuation takes into account contribution from gRevlimid earnings in FY24 which are largely one time lumpsum gains. With the strong cash flows from US portfolio, focussed India portfolio, a start from Biosimilar revenue stream in developed markets and commercialisation of current pipeline in development, Dr. Reddy should sustain earnings even beyond gRevlimid earnings cliff in FY26. The cost of development will be reflected in muted margin growth in the meanwhile, despite strong product mix. We reiterate our accumulate rating on Dr. Reddy stock considering the strong product mix and product development underway. .

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