Shares of Dr. Reddy's Laboratories Ltd (DRL) plummeted 9 percent in Thursday's trade, mirroring a similar fall in its American Depository Receipt (ADR) overnight. The sharp decline was triggered by the company reporting another quarter of earnings that broadly missed analyst estimates across the board.
Key Factors Behind the Earnings Miss
Analysts pointed to several factors contributing to Dr. Reddy's Labs' underperformance in Q1 FY27:
- Lower Lenalidomide Revenue: A significant impact came from reduced sales of lenalidomide.
- Price Erosion: Both the US and European generics markets experienced notable price erosion.
- NRT Revenue Decline: Nicotine Replacement Therapy (NRT) revenue fell due to a change in its operating model post-integration.
- Semaglutide API Provision: Margin pressure was exacerbated by an inventory provision related to the semaglutide Active Pharmaceutical Ingredient (API).
- Higher Solvent Costs: Increased solvent costs, attributed to the Middle East conflict, also weighed on margins.
JM Financial noted that Dr. Reddy’s Laboratories’ Q1FY27 results were significantly below their expectations, with revenue and EBITDA missing estimates by 9 percent and 31 percent respectively. While India and Rest of World (RoW) businesses showed superior growth, this only partially offset the revenue miss from North America, Europe, and Russia.
Analyst Reactions and Outlook
The company's EBITDA margin stood at 13.3 percent, even after adjusting for a one-off semaglutide inventory write-off, which was considerably lower than analyst and Street expectations in the high-teens. Elara Securities highlighted that despite management guiding for some pick-up in H2FY27, this is still likely to fall below current market expectations.
Following the results, several brokerages revised their outlook and target prices for the stock:
- Elara Securities: Cut core earnings estimates for FY27E-29 by 7-29 percent and lowered its target price to Rs 1,222 from Rs 1,283.
- Emkay Global: Reduced its target on the stock by 8 percent to Rs 1,200 from Rs 1,300, noting the absence of a meaningful positive catalyst for a near-term downgrade cycle to ebb.
- Nuvama: Revised FY27E EBITDA and EPS estimates downwards by 11 percent and 5 percent respectively, but maintained a 'BUY' rating with a target price of INR 1,365, citing recovery dependent on new launches and semaglutide relaunch.
- MOFSL: Maintained a 'Neutral' stance with a target price of Rs 1,125, expecting earnings to decline in FY27 before reviving from FY28 onwards.
Global brokerages also offered varied targets, with Goldman Sachs suggesting a 'Sell' rating and a target of Rs 1,050, while Nomura set the highest target at Rs 1,740. Citi and Jefferies assigned the lowest target price at Rs 1,040.
Management Perspective and Future Prospects
Management stated that, excluding lower lenalidomide sales, the company’s underlying performance remained resilient, showing healthy double-digit growth across all geographies, including the US, boosted by favorable currency movements. Near-term earnings visibility, however, hinges on the resumption of semaglutide supplies and the approval for Abatacept in the December quarter.
Looking ahead, the company anticipates significant growth from the ramp-up of its semaglutide targets to previously guided levels by FY28, the Abatacept opportunity, and planned complex injectables and biosimilar launches over FY26–28E. These initiatives are expected to drive FY28E EPS of Rs 80.