JPMorgan cuts Dr. Reddy’s stock price target to INR1,060

On Monday, JPMorgan made a significant adjustment to Dr. Reddy’s Laboratories (DRRD:IN) (NYSE: RDY) stock, reducing the price target to INR1,060 from the previous INR1,230, while keeping an Underweight rating on the shares. According to InvestingPro data, Dr. Reddy’s maintains a GREAT financial health score of 3.22, with robust gross margins of 58.5% despite recent pressures. The adjustment comes after the pharmaceutical company posted its fourth-quarter results, which showed revenues meeting expectations but EBITDA falling short due to a decrease in gross margins. The decline in gross margins, adjusted for one-time items, was attributed mainly to pricing pressures in the U.S. market, particularly for the drug gRevlimid.

Dr. Reddy’s stock performance has lagged behind its peers over the past two years, with a return of 28% compared to the Nifty Pharma Index’s 68% gain. While InvestingPro analysis shows the company achieved impressive revenue growth of 16.61% in the last twelve months, JPMorgan analysts highlighted several challenges facing the company, including weaker core EBITDA margins around 18% when excluding gRevlimid and Haleon, which are lower than those of many large peers. For deeper insights into Dr. Reddy’s performance metrics and growth potential, investors can access comprehensive Pro Research Reports available exclusively on InvestingPro. Additionally, the company’s growth in India has been described as lackluster, with aspirations for double-digit growth relying on inorganic strategies.

The company’s visibility on niche product launches in the U.S. market is also limited, and initial biosimilar launches are expected to have shared economics due to partnerships. Furthermore, while the Semaglutide opportunity could be promising, the market is anticipated to be competitive. In light of these factors, JPMorgan has revised its FY26/27 earnings estimates for Dr. Reddy’s downward by 12% and 6%, respectively, to reflect lower anticipated margins and reduced contribution from gRevlimid.

In terms of valuation, Dr. Reddy’s stock is trading at approximately 27x/26x price-to-earnings ratio for FY26/27 estimates, which represents a roughly 15% premium over Lupin (NSE:LUPN) and about a 5% premium over Cipla (NSE:CIPL). Current InvestingPro data shows a P/E ratio of 17.7x, with analysis indicating the stock is currently undervalued based on its Fair Value model. Despite this, JPMorgan finds the premium unjustified given the current challenges and market conditions faced by Dr. Reddy’s. InvestingPro subscribers can access 8 additional key insights about Dr. Reddy’s valuation and growth prospects. The revised price target of INR1,060 reflects these updated earnings estimates and the maintained Underweight stance on the stock.

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