Shares of Dr. Reddy's Laboratories Ltd. are under scrutiny following a significant 9.39% plunge in its American Depository Receipts (ADRs) to $11.38 on the NYSE. This sharp decline comes after the pharmaceutical giant reported June quarter results that fell considerably short of analysts' expectations, marking the second consecutive quarter the company missed Street margin estimates.
Disappointing Q1 Performance Triggers Downgrades
The latest financial report revealed Dr. Reddy's revenue, adjusted EBITDA, and adjusted profit after tax missed consensus estimates by 2%, 23%, and 14% respectively. A primary driver of this underperformance was a substantial 42% year-over-year decline in North America revenue, dropping to $233 million, largely attributed to the conclusion of gRevlimid sales.
While the domestic business showed a 17% growth due to new product launches, the NRT business saw an 11% year-over-year decline to $69 million, impacted by changes in its operating model. Analysts point to several factors contributing to the overall decline, including reduced Lenalidomide sales, ongoing price erosion in both the US and Europe, issues related to Semaglutide API, and elevated solvent costs stemming from the Middle East crisis.
Brokerages Revise Targets Amidst Margin Concerns
The weaker-than-expected results have prompted a wave of earnings downgrades from various brokerages. Emkay Global, for instance, cut its target price for Dr. Reddy's stock by 8% to Rs 1,200 from Rs 1,300, stating that a sharp consensus earnings downgrade should follow and that the current downgrade cycle is unlikely to abate soon without a significant positive catalyst.
Nuvama, while retaining a 'BUY' rating, revised its FY27E EBITDA and EPS estimates downwards by 11% and 5% respectively. The firm noted that Dr. Reddy's adjusted margin came in at 13.3%, significantly below the management's ambitious target of 20% EBITDA margin excluding Semaglutide. Margin recovery, according to Nuvama, hinges on the success of new launches, a Semaglutide relaunch, and regulatory clearance for Abatacept.
Other global brokerages have also weighed in with revised outlooks and price targets:
- Citi and Jefferies: Set the lowest target price at Rs 1,040.
- Goldman Sachs: Issued a 'Sell' rating with a target of Rs 1,050.
- JPMorgan: Assigned a target of Rs 1,100.
- MOFSL: Maintained a 'Neutral' stance with a target of Rs 1,125.
- UBS: Set a target of Rs 1,150.
- Morgan Stanley: Suggested a target of Rs 1,200.
- BNP Paribas: Proposed a target of Rs 1,220.
- Macquarie: Rated 'Neutral' with a target of Rs 1,230.
- CLSA: Valued the stock at Rs 1,240.
- Investec: Assigned one of the highest targets at Rs 1,600.
- Nomura: Holds the highest target price at Rs 1,740.
Analysts suggest that near-term earnings visibility for Dr. Reddy's will largely depend on the successful resumption of Semaglutide supplies and the anticipated approval for Abatacept in the December quarter. Until then, the company faces continued pressure to demonstrate a clear path to margin recovery and sustained growth.