Dr Reddy's Laboratories

Investment case

Cyclical: bought at the gRevlimid cliff

Why this business

Dr. Reddy's is a top-3 Indian pharma company (FY26 revenue Rs 33,700 cr) with generics in North America (USD 236 mn in Q1FY27, 27% of sales), Europe incl. the Haleon NRT (nicotine replacement) business, India (Rs 1,718 cr, +17%), Emerging Markets led by Russia (Rs 903 cr, ~49% of EM), PSAI (APIs) and a biosimilars pipeline (abatacept BLA pending). It was first-to-market with generic semaglutide in Canada (Jan-2026) and launched oral semaglutide in India, but is in a FY27 earnings trough as gRevlimid (lenalidomide) profits roll off.

What we believe

1. 01Trough-earnings cyclical: FY26 PAT fell to Rs 4,158 cr from Rs 5,725 cr and Q1FY27 EBITDA margin hit 12.5%; management targets ~20% EBITDA margin 'in coming quarters' and higher once semaglutide resumes.
2. 02Semaglutide relaunch: commercial supply targeted Nov-2026 with 6-7 mn pens to be supplied Nov-Mar across Canada, India and partner markets (management-assessed 80-90% probability); first-to-market position in Canada.
3. 03Ex-US engines growing double digits: India Rs 1,718 cr (+17%), Emerging Markets Rs 1,833 cr (+31%) with Russia +12% and Europe/NRT Rs 1,444 cr (+13%).
4. 04Balance sheet: net cash Rs 3,058 cr, capex trimmed to Rs 1,800 cr, dividend yield 0.7%; DIIs now 31.8% holders.
5. 05Pipeline optionality: abatacept biosimilar approval targeted Dec-2026; six NA launches in Q1 incl. bosutinib 400 mg with 180-day exclusivity.

Why now

TTM PE 29.6x is inflated by trough earnings (Q4FY26 PAT Rs 221 cr, Q1FY27 Rs 443 cr); on FY28E it is ~21x vs Axis' 20x target multiple. 5-yr average PE not sourced. EV/EBITDA computed on mcap less Rs 3,058 cr net cash over FY26 EBITDA. EV/EBITDA 14.3x; dividend yield 0.7%.

Market disagreement

• Sun Pharma: Sun is priced for its specialty franchise (innovative medicines 21.9% of sales) while DRL trades at ~21x depressed FY28E earnings; DRL is the higher-beta recovery play on semaglutide and margin normalisation, held small (0.7%) as a cyclical.
• Cipla: Cipla faces the same gRevlimid cliff (brokers modelled ~31% PAT decline in Q1FY27) without DRL's Canada semaglutide first-mover position, Russia/NRT diversification or Rs 3,058 cr net cash.

Position sizing

Cyclical Large cap  0.7% of the PMS on $31 Jul 2026 (August rank not in top 30). Satellite positions are owned for an asymmetry, sized up when the cycle rewards risk and reduced when it does not.

Catalysts

• Semaglutide API re-test in Sep-2026 and commercial supply resumption targeted Nov-2026 (6-7 mn pens by Mar-2027).
• Abatacept biosimilar US approval decision expected by Dec-2026 (Q4FY27).
• Q2FY27 results (late Oct/Nov-2026): evidence of EBITDA margin recovering toward 20%.

Risks and response

• Semaglutide API quality failure: Rs 240 cr provision already; a second failure or slower re-test (Sep-2026) would push the Nov-2026 relaunch and FY27 EPS cuts already flagged by Emkay (-5%).
• USFDA: 7-observation Form 483 at the Bachupally biologics plant (Jun-2026) could delay abatacept approval (Dec-2026 target).
• Consensus still expects downgrades: Axis SELL (TP 1,070), Goldman SELL (1,050); US base ex-Revlimid has settled near bear-case levels per Emkay.

Thesis-break conditions

Not stated separately on this page; the risk list carries the monitoring triggers.

Review history

• 8 Sep 2026 · Yash Palod · one-pager in "Why We Own What We Own" (p45) · portfolio as of $31 Jul 2026
• 31 Aug 2026 · Classification in the August top-30: —

Source: Buoyant_Why_We_Own_What_We_Own_Sep2026.pdf (portfolio as of 31 July 2026), p45. Internal; external publication of these fields is controlled by audience policy.