Dr Reddy’s Labs faces FY27 transition as Semaglutide recovery and b-Abatacept approval loom
Dr. Reddy's Laboratories Ltd.
HOLD
₹1,183
₹1,165
₹1,125
4.90%
Investment View: FY27 Transition Year
In its July 23, 2026 1QFY27 results update, Motilal Oswal Financial Services Ltd. maintained a Neutral rating on Dr Reddy’s Labs. The broker characterises FY27 as a transition year, as the resolution of Semaglutide API quality issues and the commercial benefits from b-Abatacept are expected to take time.
Motilal Oswal expects earnings to decline in FY27 before reviving from FY28, given the high FY26 base, current valuation and near-term execution uncertainty. The target price is Rs 1,125, based on 20 times 12-month forward earnings.
1QFY27 Financial Performance
Dr Reddy’s Labs reported 1QFY27 revenue of Rs 80.9 billion, down 5.4 per cent year-on-year after adjusting for the Semaglutide-related impact. Revenue was broadly in line with Motilal Oswal’s estimate of Rs 82.3 billion.
| Metric | 1QFY27 Reported | Year-on-year change | Motilal Oswal estimate |
|---|---|---|---|
| Revenue | Rs 80.9 billion | Down 5.4 per cent | Rs 82.3 billion |
| EBITDA | Rs 10.9 billion | Down 49 per cent | Rs 12.7 billion |
| EBITDA margin | 13.5 per cent | Down 1,170 basis points | 15.5 per cent |
| Adjusted PAT | Rs 6.5 billion | Down 54 per cent | Rs 6.7 billion |
EBITDA was 15 per cent below the broker’s estimate, while adjusted PAT was near estimates. Gross margin fell 750 basis points year-on-year to 49.4 per cent, reflecting lower Lenalidomide sales and price erosion in North America and Europe generics, as well as elevated solvent costs linked to the Middle East conflict. Management indicated that the conflict affected EBITDA margin by around 1 per cent.
Segment Performance and North America Trends
North America revenue declined 35 per cent year-on-year to Rs 22 billion, accounting for 27 per cent of sales, owing largely to low Lenalidomide sales. The quarterly North America sales run rate was US$236 million, marking the second consecutive subdued quarter.
Dr Reddy’s Labs launched six products, filed five ANDAs and one NDA, and had 76 pending filings, including 24 first-to-file opportunities. Bosutinib was launched in the United States as a first-to-market generic with 180-day exclusivity for the 400mg strength. Its first-quarter contribution was limited because the company had less than a month of supply, but management said it carries above-company-average margins.
Excluding North America, operating trends were stronger across most businesses:
- Europe: Revenue rose 14 per cent year-on-year to Rs 14.4 billion, supported by launches and favourable currency, partly offset by generic pricing pressure.
- India: Revenue grew 17 per cent to Rs 17.2 billion, driven by innovative and acquired brands, price increases and volumes. Seven new brands and oral Semaglutide were launched.
- Emerging markets: Revenue grew 31 per cent to Rs 18.3 billion, led by Russia and Rest of World growth.
- PSAI: Revenue increased 4 per cent to Rs 8.5 billion, as CDMO momentum and currency benefits offset lower API volumes.
- NRT: Revenue declined 2 per cent to Rs 6.6 billion after a temporary operating-model change.
Key Monitorables: Semaglutide and b-Abatacept
Semaglutide API Quality Issues
Semaglutide was the principal near-term risk and monitorable. Dr Reddy’s Labs provided Rs 2.4 billion for inventory and associated costs after certain API-linked Semaglutide batches were found out of specification.
Management said commercial supply is expected to resume by November 2026. The company had sold 180,000 pens before halting production and remains on track to sell 6-7 million pens in FY27.
b-Abatacept Development
For b-Abatacept, management awaits a Bacchupally plant inspection for the intravenous version and continues work on the subcutaneous version. The USFDA goal date remains mid-December 2026. Motilal Oswal expects commercial benefits from b-Abatacept from 4QFY27 onward.
Earnings Forecasts and Valuation
Motilal Oswal cut its FY27E and FY28E earnings estimates by 2 per cent and 3 per cent, respectively, because of higher Middle East-related operating costs and moderate PSAI growth.
| Financial year | Sales estimate | EBITDA estimate | Adjusted PAT estimate |
|---|---|---|---|
| FY27E | Rs 346.5 billion | Rs 55.6 billion | Rs 31.1 billion |
| FY28E | Rs 388.1 billion | Rs 83.9 billion | Rs 50.1 billion |
The broker’s forecasts imply FY26-28E sales CAGR of 15 per cent for India, 14 per cent for emerging markets and 8 per cent for PSAI. North America sales are expected to decline at a 4 per cent CAGR over the same period.
The Rs 1,125 target price is based on 20 times 12-month forward earnings, compared with the CMP of Rs 1,183.
Key Risks to the Thesis
- Delays in restoring Semaglutide production.
- Regulatory or commercial delays affecting b-Abatacept.
- Weak North America sales and generic price erosion.
- Subdued PSAI API demand.
- Prolonged Middle East-related cost pressure.
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