Dr Reddy's Q2 performance sees revenue boost, but challenges persist

Dr Reddy’s Laboratories posted a mixed performance in Q2FY25, reporting record revenue of Rs 8,038.2 crore, marking a strong 16.5 percent year-on-year rise, slightly exceeding the estimate of Rs 7,854 crore. This growth, driven by robust sales in North America, saw volume gains offsetting some price erosion. However, net profit came in at Rs 1,255.7 crore, a significant 15.3 percent decline compared to Rs 1,482.2 crore in the prior year, which also missed the forecasted Rs 1,443 crore, according to Zee Business estimates. 

EBITDA rose modestly by 7.7 percent to Rs 2,168.9 crore, below expectations of Rs 2,220 crore. EBITDA margins saw a decline, settling at 27 percent, down from 29.2 percent last year, underscoring margin pressures amid acquisition costs, government taxes, and other impairments. Management has indicated that EBITDA margins are likely to remain at these levels through FY25 as it navigates the impact of these factors.

Limited catalysts ahead; brokerages remain cautious

Despite solid revenue growth, brokerages maintain a cautious outlook on Dr Reddy's due to limited near-term catalysts. Nuvama Institutional Equities retained a 'reduce' rating, highlighting the absence of a strong drug pipeline. Dr Reddy’s has ramped up its R&D efforts, particularly in biosimilars and biologics, but has refrained from detailing significant upcoming launches. Nuvama set a target price of Rs 1,215 for the stock, and Jefferies also remains cautious, citing high SG&A costs and maintaining an 'underperform' rating with a target of Rs 1,130.

While Dr Reddy’s is eyeing opportunities in the GLP-1 and peptide segments, including a potential 2027 launch of biosimilar Abatacept, Citi remains skeptical and issued a ‘sell’ call with a target of Rs 1,110. However, Bank of America Securities sees future potential, maintaining a ‘buy’ rating with a target price of Rs 1,530, driven by Dr Reddy's strategy to fill the gap created post-Revlimid patent expiry in 2026.