Shares of Dr Reddy’s Laboratories Ltd emerged as the top loser among Nifty 50 companies on Thursday, falling nearly 7% after disappointing March quarter (Q4 FY23) earnings. Its revenue was hit due to lower sales from GRevlimid and US generic portfolio, resulting in a 530 basis point sequential decline in its computed Ebitda margin for the March quarter to 25.1%.
Some analysts believe that valuations were mostly positive in the early going. So far this calendar year, the stock rose 15% ahead of its Q4 result announcement, said analysts at Antique Stock Broking. Launched gRevlimid in the US in Q2FY23 with a sales exclusivity of 180 days for the 2.5 mg and 20 mg strengths. Its lower sales in Q4 weighed on last quarter’s profitability.
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The road ahead looks tough with profit growth expected in FY24 after a strong performance in FY2023. Analysts worry that the high base of FY23 and limited visibility of potential products over the next two years could drag Dr Reddy’s earnings.
In FY23, it launched 25 new products in the US. In addition, it has a robust pipeline of 81 Abbreviated New Drug Applications, or ANDAs. While gRevlimid offers significant opportunity, its sales may fluctuate as the exclusivity period expires. Furthermore, substantial development, except for gRevlimid, may be challenging.
Among the positives, analysts at JM Financial Institutional Securities expect the acquisition of Mayne Pharma to be earnings accretive in FY24 itself. The brokerage has factored the acquisition into its estimates. Dr Reddy’s aspires to be one of the top five pharma companies in India. Its domestic business could outpace industry growth, as it explores inorganic growth based on strong cash flows. However, the fall in prices remains a matter of concern. “Competition is high in India, everyone wants a share of the older segment. This could eventually erode market share for Dr Reddy’s, said Unnati Jadhav, research analyst at Sharekhan by BNP Paribas.
The company’s management expects all key markets to grow in double digits in FY24. Thus, all eyes will be on new launches, which can maintain revenue, sales of existing products and quality on its features.
However, margin performance can be monitored. “We believe competitive intensity in the US business remains high and the lack of niche competitive products could limit its core EBITDA margins at 22-23 per cent,” said analysts at Antique.
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