📰Explained: India's Pharma Industry (Part 2)

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Welcome to the best way to stay up-to-date on India’s financial markets. Today, we’re diving deeper into the Indian pharmaceutical industry with an investigation of Dr Reddy’s Laboratory, which has an ADR trading in the New York Stock Exchange under RDY.

Then, we close with Gupshup, a round-up of the most important headlines.

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Market Update.

Diving Deeper into Pharma Part 2: Dr Reddy’s Laboratories ADR (NYSE: RDY) — A Long View.

Every Friday, Samosa Capital delivers deeply researched, long-form analysis on a timely market theme or overlooked opportunity—directly to your inbox.

Disclaimer: This is not financial advice or a recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Dr. Reddy’s Laboratories (RDY) is a compelling, underappreciated expression of both India’s macro growth story, evolving pharmaceutical industry (see our piece on Indian pharma from April 25 for more), and a bottom-up turnaround opportunity—and it’s investable on U.S. markets through its American Depositary Receipt (ADR). The decision by management to maintain an ADR is not just a formality; it’s a deliberate strategic signal. It opens the door to U.S. capital in the very market where the company earns a significant portion of its revenue, ``and reflects a leadership team attuned to global investor expectations. When emerging market management teams align incentives with global capital flows, it's often the start of an institutional-grade story worth betting on.

RDY sits at the profitable intersection of pharma trends. Its FY25 revenue will finish near $4 billion (₹334 billion), up 16 percent y-o-y, thanks to a nicotine‑replacement portfolio acquisition and organic growth in Europe. Gross margin is holding at nearly 59 percent, while management ploughs a sector‑leading 8 percent of revenue back into R&D. The balance sheet is net‑cash positive to the tune of $744 million (₹64 billion), which could result in buy-backs or dividends even with a ridiculous R&D spend. 

The rate of R&D and still large cash position make it so RDY, though smaller than current Indian rivals, has a huge growth runway. Its ROIC (return on invested capital, generally calculated as operating income ex taxes divided by any capital used for generating money) has averaged 13 percent over the last five years and is now at 16 percent for FY25. The company has a cost of capital around 12-13 percent, which is also a large positive. Cost of capital has risen in the last few years due to interest rates and risk in stocks going up, and a positive ROIC minus cost means the company is making the right decisions to continue growing. RDY is a growth company, still evidenced by its smaller market cap compared to competitors, which presents such a high ROIC as a positive indicator of future growth. 

Its specific business segments are for APIs in generics, branded generics, biosimilars, and some OTCs. The fields of gastrointestinal, cardiovascular, diabetology, oncology, pain management, and dermatology are covered, in addition to new nicotine products. Of these, expect to see growth in elective fields as Indian growth accelerates. So, pain management and dermatology products are going to grow in favor, particularly in urban areas with dermatology worth $750 million (₹64.1 billion) in India and growing at 12 percent per year. 

Finally, at 21.5× trailing earnings, RDY trades at a steep discount to Sun Pharma (45x) and Cipla (33x). A mere re‑rating to the peer median (27x) on FY26 earnings would place the ADR near $19 (₹1,615) — roughly 40 percent above today’s price.

Catalysts ahead

The FDA decision on Denosumab is expected in the second half of calendar year 2025. If approved, it unlocks a US/EU market of roughly $4 billion (₹341.6 billion); this easily adds $0.30 (₹25) to EPS by FY27.

Additionally, the newly acquired OTC nicotine line is branded, which protects against generics. Currently, most tobacco and nicotine users in India still smoke cigarettes, but RDY could be a market leader for new nicotine lines. 

Risks

An adverse FDA warning letter on the CTO‑2 sterile site or a full pass‑through of US tariffs could lop 15–20 percent off FY26 earnings. 

That being said, maintaining a 5 percent revenue growth rate (domestically achieved), 24 percent EBITDA margins, and a 12 percent cost of capital would at worst bring the stock to $11 (₹935), which is admittedly a 20 percent drop off. The risk-to-reward skew is 1-2, which still makes the trade attractive, however. Keep in mind that this skew is being calculated without the business seeing any material appreciation. This is just from the multiple re-rating to appreciate a strong ROIC and fundamental business.

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Gupshup.

Macro

• Foreign banks sold $1.2 billion (₹106.3 billion) worth of Indian sovereign debt this week. The move comes due to higher tensions with Pakistan, even with the expected interest rate cuts and liquidity provisions by the RBI. Foreign banks buy up these bonds for their clients or for their own proprietary trading desks.  

• The RBI is again intervening in FX markets due to volatility surrounding the border dispute. Traders this morning will have seen the rupee correct from around 86.50 to 85.50, which seems like an RBI move. RBI employees also said that the bank is not targeting a specific level but just wants to limit speculation and volatility. The intervention came as more of a surprise after new Governor Malhotra said he wanted to limit the use of the intervention. 

• India could ease restrictions on genetically modified crops from the US.A sticking point for the Trump administration has been India guarding its agricultural industry. The US wants to be able to export GM corn and soybeans, but India has been against the imports, fearing that they will create a supply glut and hurt farmers. Some talks involve India only importing processed animal feed and ethanol fuel.  

Equities

• Swiggy adds many stores but experiences a $128 million (₹10.8 billion) loss. It added more stores in Q4 than the last 8 quarters combined, but the highly competitive delivery industry has a price war and rising input costs, causing all companies to experience losses. 

• ​​SMBC is buying a 20 percent stake in Yes Bank for $1.6 billion (₹135 billion) in an all-stock exchange. SMBC is buying up shares at ₹21.50, which now marks the largest foreign investment ever in the banking industry. For Japanese banks, expanding internationally lets them earn higher returns. For Yes Bank, SMBC brings more stability after it had to be injected with capital loans following the pandemic. The RBI and CCI in India still need to sign off on the deal. 

• Real estate stocks are one of the biggest losers. The property cycle has not fully reversed yet, but demand has been moderating seen with the cautious guidance by large developers.    

Alts

• Vedanta's Zambian copper mining operations tapped RMB to raise $1 billion (₹85.5 billion). RMB is an African merchant bank that is now in charge of syndicating the Konkola mines loan. Vedanta has already invested $330 million (₹28.2 billion) into the mines, mostly to pay off creditors from an old dispute. The company has also had talks with commodity houses for prepayment on copper output and for IPOing the copper unit.  

• The IPL is suspending games for a week due to the ongoing Pakistan crisis. Drone attacks across northwest India have made games unsafe; the BCCI also released a statement condemning the attacks and agreeing with the Indian government’s actions. 

• Odisha expects $14.1 billion (₹1.2 trillion) worth of investment to build a petchem hub. Indian Oil Corp alone will invest half of that amount to build a new naphtha cracker, which will help create the plastic chemical. The industrial hub should elevate Odisha to become a large global exporter and boost India’s energy independence.  

• Mittal has partnered with Warburg Pincus to buy a $2 billion (₹171 billion) 49 percent stake in Haier India. Haier is one of the largest home appliance producers in the country and is still deliberating over the offer.  

Policy

• India's census authority has to figure out how to gauge caste. The caste system has been one of the biggest drivers of inequality in recent times, with upper castes protesting quota programs for lower caste individuals. Measuring castes in previous censuses has been difficult due to the hundreds of Indian languages, which have different names for the same castes. For the BJP, reaching more lower caste voters is also important to stay in office. 

• India-Pakistan hostilities enter a 3rd day. Pakistan’s military carried out aerial intrusions along the Line of Control near Kashmir to test India’s aerial defense systems. Hundreds of unmanned drones have been sent by both countries, with India mostly targeting ‘terrorist camps’. 

• SEBI wants to calculate option and future prices using delta and increase the position limits. Using a delta exposure rather than notional value would better reflect how much risk a trader has on book, but risks being very different from the rest of the world using notional exposures. The position sizing would go to $1.2 billion (₹100 billion), which is over 6x higher than the current limits.

See you Monday.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.