Dr Reddy's share price: Why this stock plunged 9% today; more downside ahead?

Shares of Dr Reddy's Laboratories Ltd (DRL) plunged 9 per cent in Thusrday's trade, broadly in line with its American Depository Receipt (ADR) fall overnight, spooked by yet another quarter of across-the-board earnings miss. Analysts said Dr Reddy's Labs growth was primarily impacted by lower lenalidomide revenue, price erosion in both US and EU generics, and NRT (Nicotine Replacement Therapy) revenue decline due to the change in operating model post-integration. 

Margin pressure arose from semaglutide API-related inventory provision and higher solvent costs arising from the Middle East conflict, JM Financial noted. 

"Dr Reddy’s Laboratories reported Q1FY27 significantly below our expectations, with revenue and Ebitda missing our estimates by 9 epr cent and 31 per cent respectively. The revenue miss was driven by North America, Europe and Russia businesses, while India and RoW businesses compensated partly with superior growth. Ebitda margin was at 13.3 per cent, adjusted for one-off Semaglutide inventory write-off, significantly below our and Street expectation in high-teens," Elara Securities said. 

This brokerage noted that the DRL management guided for some pick-up in H2FY27, but this will still likely fall below current expectations. For now, Elara cut its core earnings estimates for FY27E-29 by 7-29 per cent and lowered its target on the stock to Rs 1,222 from Rs 1,283. 

This was the second straight quarter in which Dr Reddy's missed Street margin estimates. Going ahead, analysts said near-term earnings visibility will depend on the resumption of Semaglutide supplies and approval for Abatacept in the December quarter. 

Following the development, the DRL stock fell 8.7 per cent to open at Rs 1,080.05 on BSE. It, however, cut gains and was later trading at Rs 1,134.20, still down 4.13 per cent.  

"Management highlighted that, adjusted for lower lenalidomide sales, the company’s underlying performance remained resilient, with healthy double-digit growth across all geographies, including the US, aided by favourable currency movements. In addition to the underlying strength of the base business, we expect the company to add significant growth from ramp-up of its semaglutide targets to the previously guided levels by FY28, the Abatacept opportunity, and complex injectables and biosimilar launches over FY26–28E. These could drive FY28E EPS of Rs 80," said JM Finacnial

This brokerage suggested a target of Rs 1,489 on the stock.

The lowest target price for Dr Reddy's Laboratories stands at Rs 1,040, assigned by Citi and Jefferies, while the highest target price is Rs 1,740, set by Nomura, according to Bloomberg data compiled by Business Today.

A sharp consensus earnings downgrades should follow, Emkay Global said. It said it does not see the current downgrade cycle ebbing in the near term, in the absence of a meaningful positive catalyst.

Dr Reddy's revenue, adjusted Ebitda and adjusted profit after tax missed consensus estimates by 2 per cent, 23 per cent and 14 per cent, respectively. The drug maker's North America revenue declined 42 per cent YoY to $233 million with the end of gRevlimid. Domestic business grew 17 per cent due to new launches while NRT business declined 11 per cent YoY to $69 million due to change in operating model.

Nuvama said the decline was led by reduced Lenalidomide sales, price erosion in the US and Europe, Semaglutide API related impact as indicated earlier and elevated solvent costs due to the Middle East crisis. 

It noted that adjusted margin for Dr Reddy's came in at 13.3 per cent, but the management is aiming for 20 per cent Ebitda margin ex-semaglutide. 

"We are again revising DRRD’s FY27E Ebitda  and EPS estimates downwards by 11 per cent and 5 per cent. Margin recovery depends upon the success of new launches, semaglutide relaunch and clearance to Abatacept. We retain ‘BUY’ rating with a TP of INR1,365," Nuvama aid.

Dr Reddy's Labs ADRs fell 9.39 per cent to $11.38 on NYSE.

Adjusting for the Semaglutide API-related impact, Q1 Ebitda margin for Dr Reddy’s was 350 basis points lower than Emkay Global's estimate. This was the second consecutive quarter of Ebitda miss against Street estimates. 

"Q1 US performance clearly indicates that the ex-gRevlimid annualized US base has settled at a figure closer to our bear case estimate. India sales growth (17 per cent YoY) was in-line and the only silver lining in a quarter marked by a topline miss across markets. We have argued in the past that SG&A spend—a key driver of the margin miss in 1Q—has limited froth and room to be cut significantly, given that we (and the street), as of now, are not building in a YoY decline in the overall top line in FY27," Emkay said. 

This brokerage cut its target on the stock by 8 per cent to Rs 1,200 from Rs 1,300. 

Given work-in-progress for resolving the Semaglutide-related regulatory issue, commercial benefits from b-abatacept expected in 4QFY27 onward and high FY26 base, MOFSL expects earnings to decline in FY27 and then revive from FY28 onwards. 

"Considering earnings trajectory and current valuations, we maintain our Neutral stance on the stock," it said while suggesting a target price of Rs 1,125 on Dr Reddy's Labs. 

Among global brokerages, Goldman Sachs suggested a 'Sell' on the stock with a target of Rs 1,050.  Macquarie is 'Neutral with a target of Rs 1,230. CLSA finds the stock worth Rs 1,240. Morgan Stanley set Dr Reddy's target at Rs 1,200, UBS at Rs 1,150 and JPMorgan at Rs 1,100. BNP Paribas suggested a target of Rs 1,220 and Investec at Rs 1,600.