HSBC upgrades Dr. Reddy's stock rating citing semaglutide prospects

HSBC upgraded Dr. Reddy’s Laboratories (RDY) to Buy with a new price target of INR1,445 (ADR target of $16.90), citing an improved outlook based on revised estimates for semaglutide and gRevlimid market dynamics. While FY26 EPS estimates were reduced by 5.1% due to increased gRevlimid competition, FY27 and FY28 EPS estimates increased by 12-13% driven by the anticipated launch of semaglutide in Canada, Brazil, and India in early FY27. HSBC's valuation now separates the base business and semaglutide, applying PE multiples of 25x and 20x, respectively.

Analysis

HSBC analysts have upgraded Dr. Reddy’s Laboratories (NYSE:RDY) to a Buy rating from Hold, increasing the price target to INR1,445 from INR1,235, and the ADR target to $16.90 from $14.44. This upgrade is underpinned by a revised outlook for the company's market dynamics, particularly concerning semaglutide and gRevlimid. HSBC now anticipates the launch of semaglutide in Canada, Brazil, and India by early fiscal year 2027, an expansion from the previous expectation of a Canadian launch in Q4 FY26. While increased competition for gRevlimid has led to a 5.1% reduction in the EPS estimate for fiscal year 2026, the EPS estimates for fiscal years 2027 and 2028 are projected to increase by 12-13%, primarily driven by the expanded semaglutide opportunity. HSBC has adopted a sum-of-parts valuation, applying a 25x price-to-earnings (PE) multiple to the base business EPS (excluding semaglutide) and a 20x PE multiple to semaglutide earnings. This methodological shift supports the revised price target and reflects a strongly positive sentiment towards RDY's future earnings trajectory, largely influenced by the anticipated contribution from semaglutide.

Key Decisions for Investors

• Investors should consider the upgraded Buy rating and increased price target from HSBC as a positive signal, reflecting enhanced earnings potential primarily from semaglutide.
• While the FY26 EPS forecast has been modestly reduced due to gRevlimid competition, the significant projected EPS growth in FY27 and FY28 suggests a favorable medium to long-term outlook.
• Monitor the execution and market penetration of semaglutide in Canada, Brazil, and India post its anticipated launch in early FY27, as this will be a key driver of future earnings.
• Evaluate the new sum-of-parts valuation approach, as it provides a clearer perspective on the drivers of Dr. Reddy's intrinsic value, separating the core business from the high-growth semaglutide segment.