Dr Reddy's Labs share price to track 9% ADR fall; targets by CLSA, Nomura, Goldman Sachs, Citi, others

Shares of Dr Reddy's Laboratories Ltd are in focus on Thursday after its American Depository Receipts (ADRs) plunged 9 per cent overnight, following June quarter results that came in weaker than analysts' estimates. Brokerages said the drug maker is facing another earnings downgrade in quick succession. 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.

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.