Pharmaceutical giant Dr Reddy’s Laboratories (DRL) saw its shares surge 4.34% on Thursday in an otherwise sluggish market, reaching an intraday high of Rs 1,330.45 following an upgrade by Nomura.
The Tokyo-based brokerage has upgraded the stock from ‘Neutral’ to ‘Buy’ with a revised target price of Rs 1,500, down from Rs 6,499, factoring in the 1:5 stock split on October 28.
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“We assess that risk-reward is favourable and thus upgrade the stock to Buy (from Neutral). We reduce FY25/26F earnings by 13%/14% to factor in higher overhead costs. Note that changes to our earnings estimates and target price are due to DRL’s 1:5 stock split,” said Saion Mukherjee and Amlan Jyoti Das, research analysts at Nomura.
They also said the relative underperformance of the stock suggests that concerns about the high contribution of generic cancer drug gRevlimid are already priced in. “We think the Street is concerned about the higher contribution from gRevlimid, which could start declining in FY26F. Further, the overheads have increased significantly in the recent past. In the first half of FY25, R&D/SG&A were higher by 29%/27% year-on-year.”
While the stock has underperformed the Nifty Pharma Index over the past five years, the upgrade reflects Nomura’s confidence in Dr Reddy’s ability to overcome near-term challenges and capitalise on future opportunities. The stock has risen only 13% over the past year, compared to the Nifty Pharma Index’s 36% growth. The underperformance persists despite a 22.6% earnings compounded annual growth rate (CAGR) expected between FY20 and FY25F and upward revisions to FY25/26 earnings estimates.
The concerns stem from the heavy reliance on gRevlimid, which may start to drop in FY26F, and rising overhead costs due to increased investments in research and development (R&D), biosimilar trials, and manufacturing infrastructure. These investments have temporarily pressured margins but are anticipated to drive major future growth.
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Furthermore, Nomura highlighted that new initiatives in Glucagon-like peptide 1 (GLP-1), a hormone that helps regulate blood glucose levels and is used to treat type 2 diabetes and obesity, and APIs (Active Pharmaceutical Ingredients), biosimilars, and injectables have not been fully factored into FY27 estimates. While earnings before interest,
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