Dr Reddy's Laboratories reported a significant decline in its financial performance for the first quarter, with net profit plunging 69% to Rs 443 crore and revenue from operations falling 6% to Rs 8,071 crore. The company attributed the downturn to a Rs 240 crore impact related to semaglutide API issues and increased costs due to the Middle East conflict.
The company's EBITDA margin was adversely affected by higher solvent and freight costs, while its reported RoCE was 5.3%, improving to 8% when excluding the semaglutide API impact. Despite these challenges, Dr Reddy's maintained a net cash surplus of Rs 3,058 crore. Analysts from Motilal Oswal, Systematix, and Dolat Capital have adjusted their ratings and target prices for Dr Reddy's, citing weaker-than-expected quarterly results.
Motilal Oswal maintained a Neutral rating with a target price of Rs 1,121, reflecting a 5% downside. The brokerage revised its earnings estimates for FY27 and FY28, considering higher operating expenses and moderate growth in the PSAI segment. Systematix also maintained a Hold rating with a target price of Rs 1,183, noting that North America revenue was below expectations due to the absence of generic semaglutide supplies.
Dolat Capital downgraded Dr Reddy's to Reduce from Buy, setting a target price of Rs 1,246, implying a 5% downside. The brokerage cited lower-than-expected base business margins and reduced semaglutide sales projections as reasons for the downgrade. During the quarter, Dr Reddy's received a Form 483 with seven observations following a pre-approval inspection at its biologics facility in Bachupally.
The company is working to resolve the semaglutide-related regulatory issues and aims to resume supply by November. This development, along with commercial benefits from b-abatacept expected from 4QFY27 onward, could influence future earnings.
Background
Dr Reddy's Laboratories has been navigating challenges related to its semaglutide API supplies, which have significantly impacted its financial performance. The company's efforts to address these issues are critical, as semaglutide is a key product in its portfolio. Additionally, geopolitical tensions in the Middle East have exacerbated cost pressures, affecting overall profitability.
Looking ahead, investors should monitor Dr Reddy's efforts to address the semaglutide API issues and the potential impact of geopolitical tensions on operating costs. The company's ability to navigate these challenges will be crucial for its financial recovery.
