On Friday, Citi reaffirmed its sell stance on shares of Dr. Reddy's Laboratories (DRRD:IN) (NYSE: RDY), maintaining a price target of INR 5,200.00. The firm's decision follows Dr. Reddy's announcement of its acquisition of consumer healthcare brands specializing in Nicotine Replacement Therapy (NRT) from Northstar Switzerland, a Haleon group company, for GBP 500 million.
The acquired portfolio reported annual sales of GBP 217 million in the calendar year 2023, boasting an EBITDA margin of approximately 25%. Dr. Reddy's management anticipates that this move will assist in establishing a global over-the-counter (OTC) consumer healthcare business platform.
Citi's analysis suggests that while the acquisition could be roughly 1-3% accretive to Dr. Reddy's earnings per share (EPS) for the fiscal years 2026-2027, it might dilute the company's return on capital employed (RoCE). Citi highlights that the success of this acquisition will largely depend on execution, given the category's modest growth rate in the mid-single digits and what Citi perceives as limited potential for synergies.
The analyst's commentary underscores the challenges Dr. Reddy's may face in integrating the new brands and achieving growth. Citi has also issued a 90-day negative CreditWatch (CW) on the stock, indicating caution regarding Dr. Reddy's short-term creditworthiness following the acquisition announcement.
In other recent news, Dr. Reddy's Laboratories Limited announced its highest ever annual revenues and profits for the fiscal year 2024, with revenues exceeding $3.3 billion. The robust performance was largely driven by strategic partnerships and a diverse product pipeline, resulting in a net cash surplus of $775 million. The company's strong financial health was particularly bolstered by the U.S. market and improvements across various geographies.
Moreover, Dr. Reddy's has formed strategic collaborations with companies like Nestle, Sanofi (EPA:SASY) (NASDAQ:SNY), Bayer (OTC:BAYRY), Pharmazz, and Amgen (NASDAQ:AMGN). The company also plans to launch over 20 products in the U.S. next year and expects continued growth in emerging markets, particularly China.
Looking ahead, the joint venture with Nestle Health Science is projected to contribute to revenue after FY2026, and a strong pipeline of complex products and biosimilars is set to enhance earnings in FY2025 and FY2027, respectively. Despite potential challenges posed by stricter government regulations and increased outsourcing in India, the company remains optimistic about its focus on the branded generics market in India and its commitment to quality and innovation.
InvestingPro Insights
In light of the recent acquisition by Dr. Reddy's Laboratories (NYSE: RDY), analyzing the company's financial metrics can provide additional context to Citi's sell stance. According to InvestingPro data, Dr. Reddy's is currently trading at a P/E ratio of 19.05, suggesting a potentially attractive valuation relative to its near-term earnings growth. The company also maintains a robust gross profit margin of 58.61% as of the last twelve months, highlighting its profitability in the pharmaceuticals sector.
Investors considering the stock will find that Dr. Reddy's has a history of maintaining dividend payments for 24 consecutive years, which speaks to its financial stability. Additionally, the company's stock is trading near its 52-week high, with a price that is 97.01% of this peak, reflecting strong investor confidence. These attributes, coupled with a moderate level of debt, make it a prominent player in the industry.
For those seeking more in-depth analysis, InvestingPro offers further insights and additional InvestingPro Tips for Dr. Reddy's, which can be accessed at https://www.investing.com/pro/RDY. Subscribers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. Currently, there are 11 additional InvestingPro Tips available that could help investors make more informed decisions.
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