Morgan Stanley initiates coverage on Dr. Reddy's stock with Equalweight rating

Morgan Stanley initiated coverage on Dr. Reddy’s Laboratories (NYSE:RDY) with an Equalweight rating and a price target of INR1,298, reflecting a balanced outlook. The firm highlighted long-term growth potential from the company's strategic shift towards biosimilars, GLP-1, and differentiated generics, alongside its strong over-the-counter presence. However, Morgan Stanley expressed caution due to uncertainty surrounding key product launches and anticipated near-term share price pressure from generic Revlimid expiration, projecting earnings moderation in fiscal year 2026 before a recovery in fiscal year 2028.

Analysis

Morgan Stanley has initiated coverage on Dr. Reddy’s Laboratories (RDY) with an Equalweight rating and an INR 1,298 price target, reflecting a balanced risk-reward profile. The valuation is based on a 20x FY27 estimated P/E, which aligns with the company's 10-year historical average of 21x, suggesting the stock is fairly valued. The firm's analysis highlights a strategic pivot toward long-term growth drivers, including biosimilars like Bevacizumab and Rituxzumab, GLP-1 drugs such as Semaglutide, and an expanding OTC presence through its operational Nestle joint venture in India. However, this long-term potential is tempered by significant near-term headwinds. Morgan Stanley expresses caution over the uncertainty surrounding key product launches and the slow scaling of biosimilars. More critically, the impending expiration of generic Revlimid is expected to pressure the share price and lead to a moderation in earnings in fiscal year 2026 from a high base in FY25, with a recovery not anticipated until fiscal year 2028.

Key Decisions for Investors

• Given the Equalweight rating and expected near-term pressure from Revlimid's generic expiration, investors may consider holding existing positions rather than initiating new ones until there is more clarity on the earnings trajectory.
• Potential investors should weigh the company's long-term growth strategy in biosimilars and GLP-1s against the projected earnings moderation in fiscal year 2026, suggesting a patient approach is warranted.
• Traders and analysts should closely monitor the execution and timing of key product launches, particularly Semaglutide, as successful commercialization represents a primary catalyst for outperforming the current neutral outlook.