On Thursday, Nomura/Instinet changed its rating on Dr. Reddy's Laboratories (DRRD:IN) (NYSE: RDY) stock from Neutral to Buy, setting a price target of INR1,500.00. According to InvestingPro data, Dr. Reddy's maintains a "GREAT" financial health score, with strong profitability metrics and moderate debt levels. The company has demonstrated resilience with a 12.37% revenue growth in the last twelve months.
The upgrade comes amidst concerns about the company's revenue prospects and increasing overheads. In the first half of the fiscal year 2025, Dr. Reddy's Laboratories experienced a significant rise in research and development (R&D) and selling, general and administrative expenses (SG&A), with R&D and SG&A up by 29% and 27% year-over-year, respectively.
The analyst from Nomura/Instinet highlighted that the SG&A increase was driven by a substantial rise in employee expenses, which went up by 16%, legal and professional fees by 22%, selling and advertisement by 28%, and freight costs by a striking 40%. These surges are attributed to the company's new initiatives, which include clinical trials for biosimilars.
Furthermore, Dr. Reddy's has bolstered its investment in manufacturing infrastructure, with capital expenditures more than doubling to INR25 billion in the forecasted fiscal year 2025. This expansion includes new investments in peptide (GLP-1) APIs and injectables.
The analyst noted that while the Street is worried about the higher contribution from gRevlimid, which could start declining in the fiscal year 2026, the potential upside from GLP-1 and biosimilars has not been fully incorporated into the fiscal year 2027 estimates. These segments are expected to contribute significantly from the fiscal year 2028, potentially addressing the revenue-cost mismatch that the company is currently facing.
For the fiscal year 2027, the analyst has factored in an EBITDA margin of 19.6%, which is considerably lower than that of peers, due to the anticipated reduction in gRevlimid contribution, persistent high overhead spending, and revenues from new initiatives not fully materializing. However, the Nomura/Instinet analyst anticipates that earnings growth could accelerate in the fiscal year 2028.
InvestingPro's Fair Value analysis suggests the stock is currently slightly undervalued, with additional ProTips and detailed financial metrics available to subscribers. The platform's comprehensive Pro Research Report offers deeper insights into Dr. Reddy's future prospects, making it one of 1,400+ US equities covered in detail on InvestingPro.
In other recent news, Dr. Reddy's Laboratories has reported strong financial results, with consolidated revenues reaching $957 million, marking a 17% year-over-year increase. This revenue boost was supported by a gross profit margin of 59.6% and an EBITDA of $272 million, a 5% increase from the previous year. These figures were attributed to an improved product mix and strategic acquisitions.
Citi, however, has maintained a Sell rating on Dr. Reddy's stock, despite acknowledging the potential of biosimilar Abatacept becoming a significant product for the company by the fiscal year 2028. The company's generic version of Revlimid also significantly contributed to its revenue, with estimates suggesting a contribution of approximately $200-220 million in the second quarter.
In addition, Dr. Reddy's Laboratories has seen significant regional growth in North America, Europe, Emerging Markets, and India. Recent developments include the acquisition of the Nicotinell portfolio, a partnership with Nestlé India, and the launch of 22 new products in emerging markets. The company has also entered a licensing agreement with Gilead (NASDAQ:GILD) and has received multiple regulatory approvals and positive FDA inspections.
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