Dr Reddy's drops 9% as semaglutide issues hit profit
Dr Reddy's Laboratories shares plunged 9% after a 69% drop in first-quarter profit, driven by costly regulatory setbacks in its generic semaglutide business that have prompted analysts to downgrade earnings estimates.
Dr Reddy's Laboratories reported a first-quarter net profit of Rs 443 crore, a 69% plunge from the year-earlier period, sending its shares down 9%. Revenue from operations fell 6% to Rs 8,071 crore.
The earnings deterioration was primarily driven by a Rs 240 crore hit from semaglutide API issues, which included inventory provisions and associated costs. Profitability was further squeezed by elevated solvent and freight costs tied to the Middle East conflict.
The manufacturer disclosed that certain semaglutide batches were out of specification due to an API defect. The company also received a Form 483 with seven observations following a pre-approval inspection at its Bachupally biologics facility, though it responded within the required timeline.
The operational setbacks have altered the market's outlook. Motilal Oswal maintained its Neutral rating but cut its target price to Rs 1,121, implying a 5% downside. The brokerage values the stock at 20 times 12-month forward earnings and reduced its earnings estimates by 2% for fiscal 2027 and 3% for fiscal 2028, citing higher operating expenses.
Systematix kept its Hold rating with a target price of Rs 1,183, calling the quarter materially weaker than expected. The brokerage highlighted that North American revenue missed estimates significantly because of zero generic semaglutide shipments during the period, though all other business segments performed broadly in line.
Adjusted EBITDA stood at Rs 10.9 billion, yielding a 13.5% margin that fell short of expectations. While the balance sheet remains robust with a net cash surplus of Rs 3,058 crore, reported return on capital employed dropped to 5.3%. Excluding the semaglutide impact, RoCE stood at 8%.
Investors are now looking toward a potential recovery path. Motilal Oswal projects earnings will decline in fiscal 2027 before rebounding the following year, despite headwinds from a high fiscal 2026 base. Any turnaround hinges on resolving the semaglutide regulatory hurdles and securing commercial benefits from b-abatacept expected in the final quarter of fiscal 2027. The company has stated it aims to resume semaglutide supply by November.
